Q2 2020 Earnings Call
Thank you for standing by and welcome to the water.
Inc. second quarter.
Full year 2020 Ernie.
At this time I would like to inform you that this call this be according to work.
That all participants are in English.
Following the presentation will be invited to participate any question and answer session.
Joining us today from the company are Mr., Tom Gingerly, Chairman and Chief fixing Executive Officer.
Mr., Bob Weber, Vice Chairman and Chief Financial Officer.
Mr done because Arnaud Vice president of Investor Relations and Treasurer.
I would now like to turn the call over to Mr. concern.
Okay.
Thank you operator, we would like to welcome all of you to Woodward second quarter fiscal year 2020 earnings call.
Today's call Tom will comment on our markets and related strategies and Bob will then discuss financial results as outlined in our earnings release at the end of her presentation, we will take questions.
For those who have not seen today's earnings release, you can find it on our web site at Woodward Dot 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 may 18 2020.
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 referred to and highlight our cautionary statement as shown on slide three as always elements of this presentation or forward looking for based on our current outlook in assumptions for the global economy, and our business is more specifically, including the ongoing cobot maintained endemic and related.
Your thinking by individuals government and private industry.
Those elements can and do frequently change please consider a comment in light of the risks and uncertainties surrounding those elements, including the risks we identify in or 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 it really didn't schedules.
We believe this additional financial information, we're hoping to understanding our results.
Now turning to our results for the second quarter.
Net sales for the second quarter fiscal 2020 were $720 million compared to $759 million for the prior year quarter.
Greece with 5%.
Net earnings were $91 million or one dollar and 41 cents per share compared to $78 million or $1.20 cents per share for the prior year quarter.
Adjusted net earnings were $104 million were $1.61 cents per share compared to adjusted net earnings of $90 million or $1.40 cents per share for the prior year quarter.
Net cash generated from operating activities for the first half of fiscal 2020 was $52 million compared to $141 million for the prior year.
Free cash flow was $23 million, an adjusted free cash flow was $55 million for the first half of 2020.
Now I will turn the call over to Tom to comment further on our results strategies and markets.
Thank you Don and good afternoon, everyone.
Before jumping into our business performance I'd first like to take a moment. Thank our exceptional Woodward team for their hard work flexibility and dedication over the past three months as we collectively navigate through one of the most challenging times our company has seen over 150 year history.
Our team acted swiftly in the face of a growing global pandemic, we implemented rigorous health and safety protocols within our global facilities to ensure the highest protection for our employees to enable us to continue delivering essential products and services to our customers.
We also transitioned the majority of our office team members to a remote work environment.
On behalf of myself and the entire Woodward management team. Thank you.
As with previous downturns Woodward has weathered we have taken quick decisive actions to mitigate negative impacts on our business.
These actions include communicate daily both internally and externally with suppliers and customers.
Proactively revising demand and supply plans in accordance with changing market conditions and ticket numerous cost cutting and cash preservation steps such as implemented layoffs and furloughs, reducing customer company directors retainers and officers salary through 2020.
Eliminating 2020 annual bonuses decreasing our dividend restricting capital expenditures and reducing nonessential costs in working capital among other items.
Additionally on April six we announced the mutual termination of our merger with Hexcel Corporation.
Disappointing.
Mutual decision by Hexcel see CEO, Nick Stanage myself and our respective board has made in the spirit of doing what's best for individual businesses as well as our employees customers and shareholders.
<unk> in order to focus on managing through this unprecedented crisis.
We also made the decision to ship Bob Levered back to the role of Vice Chairman and Chief Financial Officer.
As an industry veteran with deep knowledge of our business in end markets I'm confident that Bob will help us matters through these challenging conditions.
But taking these necessary steps were able to focus on what matters. Most of these uncertain times, which is protecting the health and safety of our team members ADMET and maintaining our financial strength.
Now moving to Woodward second quarter.
Our performance was largely inline with expectations before beginning to experience impacts related to the global disruption caused by cobot 19.
Over the past three months, however, we have seen increasing uncertainty as our markets react to frequent and significant disruptions.
Including global sheltered place orders.
Worldwide Air travel in the near standstill. It historically weak oil prices, which are pressing pressure in several of our end markets.
In commercial aerospace largest impact in the second quarter continued to be the ground, even 77, Max which affected both OEM sales and initial provisioning.
Legacy commercial aftermarket in the quarter remains strong.
Some closed the quarter, we began to see passenger and cargo traffic decreased significantly as a result of restrictions associated with the global spread of covert 19.
In April we self build rates declined as a result plant closures in the anticipated longer term impacts the ongoing pandemic.
We expect commercial aerospace to be a challenging and uncertain environment in coming quarters.
In defense OEM and aftermarket continues to be strong.
Military demand remained healthy, particularly for fixed wing platforms in defense aftermarket activity.
Historically defenses remained strong during economic down cycles I mean, we believe this will hold true through this crisis.
Turning to our industrial markets.
Dr markets were mixed during the quarter in power generation industrial gas turbine market continue to recover as global power demand improved and end user upgrade initiatives increased.
On April Thirtyth, we closed on the previously announced divestiture of our renewable power systems and related businesses.
And transportation.
Cold in 19 related plant shutdowns in China at the beginning of the calendar year negatively affected the production and demand for natural gas trucks and the second quarter.
Marine was negatively impacting the quarter by decrease crews and container ship utilization and reduced global transportation of goods.
Oil and gas markets continue to soften with weak customer demand in excess supply, resulting in a steep decline in oil prices.
In a corresponding reduction in capital expenditures.
For industrial we anticipate negative impacts and almost all of our markets due to the covert 19 pandemic the sharp decline in oil and gas prices.
However, in China continued focus on emissions related regulations remains favorable for natural gas trucks. As a result, we're seeing a recovery in demand is economic activity in China improves.
We will continue to closely monitor developments in this market as well as all of our other markets.
In summary, although performance in the second quarter 2020, largely met our expectations.
We anticipate significant weakness in the second half.
As we continue to match through the managed through this time of uncertainty we're confident that we're taking the necessary steps to preserve woodward's long term growth opportunities in our financial strength.
We have a strong balance sheet substantial available liquidity.
Disciplined cash management.
And a seasoned management team and a success had successfully navigated through previous downturns.
We will continue to develop to invest in world class technologies operational excellence and strategic growth to deliver superior shareholder value and emerge even stronger than before.
Now I'd like to welcome Bob back to the team and turn the call over to him discuss the financials in detail.
Thank you Tom.
Im pleased to be back in the CFO role CFO role at Woodward.
And while I wish you were in a better environment I have the up most confidence in our team's ability to successfully navigate through this time of uncertainty.
Do that we're highly focused on maintaining the financial strength of the company throughout this downturn and have already taken prudent actions to realign our cost structure and maximize cash flow.
Now turning to our second quarter performance I'd like to first point up the earnings for the quarter benefited from our decision to eliminate annual bonus payments for 2020.
This resulted in the reversal this quarter of the annual bonus expense recorded in the first quarter of 2020.
Speaking to our segments.
Space segment sales for the second quarter fiscal 2020 were $474 million, it's 2% decrease from the prior year quarter.
The lower segment sales were primarily the result of the prolonged 737, much production halt and related decline initial provisioning.
Commercial aftermarket sales were down 4% in the second quarter 2020, as compared to the prior year quarter as a result of the decline in initial provisioning.
Legacy commercial aftermarket growth remained strong in the quarter.
Defense OEM sales growth in the quarter was driven by solid demand guided weapons and fixed wing aircraft defense aftermarket activity was strong due to ongoing military spending supporting us defense initiative to improve to combat readiness of U.S. fleet and global upgrade programs.
Aerospace segment earnings for the second quarter of 2020 were $118 million or 24.8% of segment sales compared to $102 billion or 21.1% of segment sales for the second quarter of 2019.
Segment earnings benefited from the impact of eliminating the annual bonuses for 2020, which was partially offset by the lower sales volume.
Turning to industrial.
Industrial segment sales for the second quarter fiscal 2020 were $246 million compared to $276 million in the prior year period, a decrease of 11%.
Industrial segment sales declined primarily as result of expected ongoing weakness.
Oil and gas and the effect early on the quarter of coal that 19 on natural gas truck sales in China.
The sales decline was partially offset by improved sales in industrial gas turbines and renewables.
Industrial segment earnings and adjusted Industrial segment earnings for the second quarter, 2020, or $26 million or 10.6% of segment sales.
Industrial segment earnings were 27 million or 9.8% of segment sales for the second quarter of 2019.
Adjusted Industrial segment earnings for the second quarter of 2019 were $36 million or 13.1% of segment sales.
The decrease in adjusted Industrial segment earnings was primarily due to the lower sales volume, partially offset by the impact of eliminating the annual bonus for 2020.
Non segment <unk> expenses were $28 million for the second quarter of fiscal 2020 compared to $27 million for the same period of prior year.
Adjusted non segment expenses for the second quarter of 2020 were $11 million compared to $18 million for the same quarter last year.
Reported and adjusted non segment expenses benefited from the impact of eliminating the annual bonus for 2020 [noise].
Adjusted non segment expenses for the second quarter of 2020 excluded transaction cost related primarily to the now terminated merger agreement was XL Corporation.
So the second quarter of 2019, adjusted non segment expenses excluded Duarte move related costs.
At the Woodward level R&D spending for the second quarter of 2020 was 5% of sales compared to 6% for the prior year quarter.
The decline in R&D expense was primarily related to the impact of eliminating the annual bonus for 2020 in the current quarter.
The effective tax rate for the second quarter, 2020 was 14.8% compared to 14% in the second quarter 2019.
Adjusted effective tax rate was 16.2% for the second quarter 2020, compared to 16.7% for the second quarter of 2019.
Looking at cash flows.
Net cash generated by operating activities for the first half of fiscal year, 2020 was $52 million compared to $141 million for the prior year period.
Capital expenditures were $29 million for the first half of 2020 compared to $54 million for the prior year period.
Free cash flow from the first half of 2020 was $23 million compared to free cash flow of $87 million for the prior year period.
For the first half of 2020, adjusted free cash flow, which removes the M&A transaction expenses and includes the proceeds from the sale of the first parcel of the door to property was $55 million.
The decrease in free cash flow was primarily the result of higher working capital.
With regard to our financial position going forward. Our focus is clearly on cash flow as we manage through this challenging environment.
We currently anticipate positive free cash flow in the second half the fiscal 2020.
I'm throughout this downturn.
We also have a strong balance sheet at the end of the second quarter. Our leverage was 1.1 0.9 times EBITDA, leaving significant headroom to our debt covenant of 3.5 times EBITDA.
With almost $1 billion of available liquidity, primarily through cash on hand, and revolver capacity. We are confident that were we will remain financially secure through the challenging environment ahead of us.
Lastly, turning to our fiscal 2020 outlook.
As we announced in our April six press release, we have withdrawn our full year 2020 guidance due to the unpredictable nature of the evolving cold in 19 pandemic and it's unknown impact on our customers and suppliers.
While correct conditions have made accurate forecasting extremely difficult at this time, we will continue to evaluate our ability to generate an outlook for 2020 as the broader economic and industry specific impacts of this pandemic become clearer.
Operator, we're now open for questions.
Thank you.
The question and answer session.
Hi.
If you are speakerphone, please pick up the handset before pricing any number.
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Your question will be taken in the order it is for C.
Please stand by for your first question Sir.
Your first question comes from the line of Robert Spingarn.
Please state your question.
Good afternoon.
Hey.
[music].
I wanted to ask about aftermarket I think you said legacy aftermarket was pretty strong in the quarter.
Provisioning not so much but the traditional aftermarket how has that trend how did that trend through the quarter.
And how is that trended so far through April.
Commercial aftermarket.
Right through through the quarter.
Yeah, the legacy aftermarket was strong that it.
The thing that was down with initial provisioning primarily tied to the Max not coming back to service.
As we moved into April as they ever is well aware of with the.
Parking of aircraft and the lack of flying aftermarket has started to drop significantly.
We did have work in progress.
For.
For example for controls for engines that were in shop and were being completed but we are seeing a every week and further drop and demand for aftermarket activities, mainly just tied to the airlines aren't flying.
Tom is there way.
Algorithmically to tie what you expect your.
Production cadence in aftermarket to be relative to either a SK.
Or our PK declines.
Rob right now I take it.
So those statistics normally we would look at and primarily we look at the fleet and the flying hours are you on aircraft that we we have significant content on a right now some of the traditional looks I think just aren't relevant today I'm not until we get.
Yeah, we get through and start paying the airlines going back into service.
Yeah with reasonable number the aircraft so.
This is one of the reasons why we did suspend guidance, it's just incredibly difficult to make any correlations right now.
Right.
Well Bob welcome back. Thank you if I could if I could just asking a quick margin question. How should we think about decremental margins at least once we get an idea what the what the revenues going to do going to do both in.
Aerospace for I guess incremental margins have trended in the low twentys.
Industrial harder to see just because it's moved around a lot. So you know as we're looking forward how should we think about decremental margins in the two businesses.
Thanks.
Sure.
Most well talk to the aerospace side first and we've kind of used guideline or we've we've talked to you in the past about kind of a 30% up and down and this will probably have more of an impact on the aftermarket. So the decrementals, maybe a little bit more on the downside as we go forward on the arrow.
On the industrial they're very similar overall as I think we've mentioned them a fast.
And we probably don't see the same impact in terms of having this on the aftermarket side and aftermarket isn't as pronounced in industrial.
We have the impacts of transportation for corporate banking and the impacts of oil and gas on investment there and capex and those will be similar to that 30%.
Okay. Thank you both.
Our next question comes from the line up Pete Skibitski.
Please state your question.
Hi, guys I Trust everyone's healthy and Bob I'm, sorry, your retirement was so sure.
Thanks Pete.
[laughter] just just on working capital it was obviously a pretty pronounced use of cash in both a second quarter in the first half in general.
Here, what you're saying about free cash flow is the just basically that you guys are just kind of you know cut production pretty severely in the second half and just kind of you know deliver from inventory. So we'll see a big.
No big Spike in cash maybe by the fourth quarter and I don't know if that gets you to onetimes free cash conversion or not but maybe you could maybe could speak to that.
Yeah.
Maybe I'll start off and let Bob jump in as well.
The first thing you know when you look at the working capital increase we were we're ramping up and you know and our aircraft market and we were also ramping up on the industrial side as we.
[music].
Started fiscal year, and then you've got hit with the oil.
Price collapse and they got hit with Cowen 19 on Aerospace side. We have you had what I wanted to highlight as what we've done is as soon as we saw this happening we've gone through and Weve.
Where we had customer input we use their input where we didn't have customer, but we used our own projections what the market was doing we re ran.
All of our production schedules and significantly reduce the amount of inventory will be taken in going into the second half of the year.
And then also as we move into 2021.
So that's where we said we're going to make a make up the working capital that we were over.
And I think we're in that align with the scenarios that we believe are going to happen in our markets. So.
We do expect second half to have.
Improved cash flow, but we do have a fair amount uncertainty as to when we start seeing.
Some of our markets pick up and when we start seeing airlines fly. So there's still a lot of uncertainty, but we have I think effectively.
Reduce the inventory that's coming in and we've also.
Ben working hard on collecting receivables and managing payables, you know with the reduced inventory.
Bob I don't know if you want to.
Add to that yeah, Yeah, no I think you covered it though.
I appreciate guys just one last one for me just Tom on I know its soon kind of post txcell, but.
As you think about things and you're gonna have your handful. Obviously you know operationally the next two or three quarters, but in the back of your mind.
Do you guys think about you know at some point looking at M&A again, just in general or you know is or even a thought to maybe a year from now you know if things are healthier maybe you could revisit the heck. So you know topic again I'm just wondering how you're thinking about that overall.
Yeah, well right now first and foremost as you know what I would say is.
Stabilized the business and sure we we maintain.
Adequate liquidity and the reason I say that is there's enormous uncertainty in the markets and we've run all sorts of scenarios and you know we're we're on top of it so we want to make sure that.
Stablex, what the new normal is gonna be.
And you know that's going to take.
Probably the second half of the year to see actually where the markets go.
And what fleet dynamics are going to be in the aerospace side.
Recovery in industrial I think it's all of you know, we're we're significantly tied to global industrial production growth somewhere be watching that and it says we see that I would just highlight Woodward is a very strong cash generating company. Once we work through that we have our costs and.
Place, we're continuing to invest during this down cycle and technology R&D and then we're going to turn our sites to growth again.
And that growth will be first and primarily.
Organic and then were visit with the excess cash flow that we're starting to generate.
Inorganic opportunities that fit our strategies and the long term plans of the company. So I think its give you a little time before we get really.
Not much attention to that but we will once we get to that what I'm a call the new normal, which I think it'll take.
Six months or more to really establish.
Sure I appreciate the color grass.
Thanks.
Our next question comes from the line up Sheila.
Hi, all glu.
Please state your question.
Hi, good afternoon, and thank you guys. Tom that's one for you to start.
You know now that Boeing and Airbus have guided and I understand visibility is limited, but they had out production rates. How do we think about production rates and delivery rates for your platforms I'm, particularly on the Max if that entry into service is you know mid this year and there assuming they deplete their inventory within a year no kind of how does that.
Yeah I'll go into your planning process.
Yeah. So weve you know, obviously, we take our customers input and.
As I think everybody's aware Boeing talked about the rate they want to get too and they talked about a gradual increase to get to that rate on the Max.
We're still waiting for the details of that gradual increase.
You know so we could put our plants. It what I wouldn't say is that we're well positioned we have long lead time parts.
And.
And either in inventory or in the pipeline, we could flex quickly to respond to their ramp.
So were be monitoring that closely and obviously they get up to.
31 aircraft a month that they talked about that that's that's very positive for our company. So we're just have to watch at.
What is that gradual ramp up that they referred to in.
The details we have not receive yet.
Okay Fine I understand that and then obviously margins an era, where really stopped stellar this quarter. You know appreciate that reduced on an annual bonuses had a part to play in that I guess, what else, where the driving factors and to Rob's question. How do we think about the decrementals given aftermarket a higher margin businesses.
It's going to decelerate faster or you know how do we think about that with your new facilities in the early production.
Yeah. So in the quarter as we said legacy aftermarket was still strong.
Yeah, we started seeing then.
Second half a March you know when we really started seeing some coming down we have some tail going into the.
Fiscal third quarter here.
You know, it's we're still processing that one thing I'd like to highlight and it was in the prepared remarks is our mills or defense sales are doing very well year over year up a there there is strong.
Year to date.
The defense side.
You know were up in that 20% year to date.
On defense, both OE and aftermarket and we have a huge backlog and defense. So defense sales are.
The backlog strong growth as there are the margins are good so that's helping to offset there's no doubt that our air commercial Aero.
Aftermarket margins are healthy.
And.
That will put pressure on overall aerospace margins, we think we've taken you know.
Corrective actions to get our costs down.
Today, you as we go in and we talked about the the.
Third quarter and fourth quarter being difficult one of the reasons. We have is a lot of you on the call know about our rocket facility I mean its furloughed.
Basically today.
We've had to we just had a shutdown production in line with what our customers are doing we are still running our aftermarket shop, we still have.
Hardware going through there, we will feel that but we're kind of committed on managing cost.
And cash flow to keep margins still healthy in the aerospace side, but they will they will come down some from these strong mark.
Recently, we had last year and in the first half of this year.
Okay, and then Bob one more for use in say, you're you're guiding for punishment and keep coming back for more he has [laughter] on the inventory you guys maintained up pretty up their level you know it didn't really blow up on you in the quarter you expect to each to a free cash flow positive. So we shouldn't expect a tick up in.
Inventory line item.
I sure hope not normally we'll see both receivables and inventories come down quite a bit and that's where we anticipate a in the next half as well so we see a lot of.
Flow out of working capital into cash and it will probably come from both they are in inventory.
Okay. Thanks.
I would just add to also capex coming down further.
Sure.
Our next question comes from the line of Chris how.
Please state your question.
Good morning, everyone and welcome back Bob.
Thank you.
I'm just a follow up on actually that last comments about capital expenditures as we look at that in addition to your cost structure.
Factoring in a would have lot of its don't know as far as the shape of this recovery that.
We'll eventually happen how should we look at the cost structure in capital spending.
Once we start on the recovery.
You keep it at a relatively conservative levels or how should we think about that flexing up and down.
Yeah, No we definitely are going to take a much oh finer point to our pencil on capital spending.
And limit the investment we will probably be below.
Yes, first half spending in the second half.
I will be very cautious probably going into 2021, because we see this extending into the coming here. So we'll be very tight on overall spending.
Yeah, just maybe to add its you if you come back and I could be we had put in.
New facilities, and we put in the capital equipment to support the line rates that were planned for this calendar year, which have stopped so as we go to what we're all talking about will be the new normal I think we will have a very adequate capacity to where we.
We will not need spent capex or for that purpose, we will spend it on the need for R&D program any.
Maintenance and required to keep things operating efficiently but.
Passive wise, we won't need it and we we can go quite a ways before we're going to need to have any significant increases in capex.
Okay.
That's helpful.
A lot more questions here, but just parsing through some of these.
You talked about the sense, the strong growth that you're seeing and OEE and also aftermarket.
If we look at that.
From a positive perspective is there a way to think about expectations in that side of the business given its relatively strong performance in.
In this downturn environment as we look into the remainder of this calendar year and into next.
Yeah, I think you're referring to defense.
Correct.
Right, Yeah, Yeah, and defense side, you know we have a pretty good.
Time horizon, where we see orders and we have.
Strong orders going through 2021.
So from that standpoint, I think the outlook for defense you know over the next 18 months.
Very healthy.
And on the aftermarket side.
We're looking at what can we pull in sooner than that.
But with military aftermarket that is a possibility so that is gonna be a tailwind for us.
Offsetting some of the negatives on the commercial side.
[noise]. Okay. Thank you that's all hit for now and I'll hop back in the queue. Thanks, Okay. Thank you.
Our next question comes from the line up Christopher Glynn. Please state your question.
Good thanks.
Just curious.
Anything interesting to its receivables on the commercial aerospace side.
Any you know what types of deferrals or allowances are under consideration there.
Yes, well right now.
[music].
Our receivables and our collections are doing well.
There's no doubt there's pressure from airlines to push out where we're being you want to say very diligent on that.
And try to ensure we pull our collections and we're also being very cautious on re establishing our credit limits.
And ensuring that we don't end up with bad debt.
So this is a practice we've been through in the past and our team is doing it I think an excellent job on this right now on the OE side, you know our our Oems are the big global players.
Everybody in industry has a pressure on cash, but they're still pain and I anticipate that that will continue so I think would be fine on receivables, but we're being cautious.
The paid that there will be airline bankruptcies as I I'm sure everybody is and so we're being very cautious we got the discipline process and I think we're going to do just fine on or receivables.
Okay and then thank you for that and I think you sort of big explain the or sort of baseline for thinking about decrementals is about 30% at both segments with maybe a mix kicker at aerospace if I heard you correctly.
Could you quantify the sort of cost reductions that you're anticipating in the back half from the spectrum of your actions.
No. We haven't made an estimate of what those are they will take place.
Throughout the course of the house.
There's so many different things going on across a very broad spectrum of types. So.
Kind of giving a number of.
The cost savings anticipate a behalf would be getting a little bit too far out so no we haven't.
As you can see we're taking a lot of actions.
And we believe that it will ultimately get our costs aligned but in terms of where that topline is going to end up that's still uncertain as well. So what we have not tempted to disclose what we believe the cost savings are specifically related to those.
Okay. Thanks for your thoughts.
Yes.
Thank you.
Our next question comes from David Strauss. Please state your question.
Thanks, Good afternoon.
I see no.
On the.
The aftermarket without making you quantified what would your thinking.
The peak to trough decline.
Would you I think for a while you've been running you know your aftermarket bins <unk> has been running well above and some growth or capacity growth would you expect you know the aftermarket your aftermarket revenues to decline more than the decline that were ultimately going to seating capacity.
Well.
<unk>.
No and the reason first it over.
The third quarter and maybe rolling in the fourth are going to be very difficult, but the fleet That's park and the like you know we.
We're not different than other.
The other people in the industry you know, we're gonna see dramatic reduction and commercial aftermarket.
As we recover.
And I call it our our fleet demographics are still very strong.
We were on some great programs a lot of has its V 2500, CFM 56, GE 90, G.N.X. a lot of these haven't come in even for their first engine shop visit.
Some of them haven't had their second visit so as we come out of this and you are going to see I think a significant amount of retirements a we've analyzed that we will see some of our product on those retirement.
But overall the fleet that we believe will be flying.
After.
We come out of the pandemic and the airlines reduce total capacity will be favorable to Woodward products in the field.
And that we will see strong aftermarket coming again at that point. So we've talked about that over the years and as you see we've we've done better than the most players in the market and our aftermarket growth net that's really tied those demographics the time.
The engine shop visits.
We think that will carry forward after we get out of the crisis.
And then we will start seeing a recovery and the Max will start shipping again, we're see initial provisioning coming back so overall I think.
It's a it's a great business a great market position and once we get out of the you know the next six months and things start to normalize that aftermarket will come back well.
Okay, I guess, a similar question thinking about.
Aerospace versus industrial I mean, your aerospace is pretty.
A lot easier for us.
Kind of visualize how much that might decline, but on industrial given all the different end markets. Obviously I know on gas is a big headwind would you expect the peak to trough drama for industrial and to be similar to what you think we're gonna see an aerospace or will industrial you think overall be better.
No.
In the industrial.
As you said it's it.
We have a lot more markets a lot of different dynamics going on so you know as an example oil and gas.
Has dried up I I'd say, our reduction there isn't the 70% to 80% reduction right now.
Huge on the other had our China sales are growing.
They're not declining.
So second after the year, we see that happening then we see power generation is going to decline so overall.
Yeah, the reduction it's hard to pinpoint, but it it'll be.
You know 20, 30%.
Yeah. So we can't that's a little bit again, we.
Don't take that it's like fixed number I'm, what I'm highlighting is why we suspended guidance at the moment, it's very difficult to forecast that with the major disruptions were seeing it is how quick global economy gets back how quick manufacturing picks up.
How quick industrial production picks up social dry power generation and the like so.
We have a few bright spots in industrial, but we have some strong negatives and overall.
It's going to be a fairly sizeable overall year over year reduction.
Okay. That's helpful. I appreciate them and last one for me Bob the the decline in accrued liabilities, so far year to date, what what does that relate to.
[noise] a lot of that the elimination of them on us.
Okay, because I think at all there also was a pretty big decline in Q1.
Oh.
Yes.
Yep.
Yeah, It's also related to the bonus.
Okay alright. Thanks.
Yeah.
Our next.
Our next question comes from the line of Michael Somali.
Please state your question.
Hey, good evening guys. Thanks for taking my question, but here you guys are all healthy <unk>, maybe a comp just to maybe comp or finer point on you know you're not going to give guidance I get that aftermarket you know it seems like you know near term here you know <unk> should we think about.
Something in the neighborhood of capacity for aftermarket I mean, if you know it seems like most of the pure companies out there are thinking.
Essentially 50% decline in aftermarket some some even greater than not I mean, it is that sort of realistically in the realm of possibilities. As you guys are looking at you know sort of incoming orders, whether there's even shop visits planned or you know, whether what's getting postponed and pushed out from a shop visit.
Standpoint.
Yeah, there's no doubt.
As you've seen.
A lot of our customers.
Have a furloughed their shops.
So they're taking it down.
[noise] zero right now are near zero.
So we're.
<unk> and T something to commercial aftermarket over the next six months.
In the 50.
50, plus range is realistic.
I mean, we've modeled scenarios.
All the way to 80% reduction.
Yes, so we can.
Study, what it means to cash and liquidity I'm, not saying, that's where it's going well we've modeled.
All across the board.
The longer in the fleets park and they're not flying the larger that decline is gonna be in the next half year.
It'll start picking up you know the fleet started flying again so.
Shots why not.
It's like you pointed out you can't pinpoint that but the decline is significant.
Got it and then on on the commercial OEM side, you know we've seen the rate cuts you know we can certainly you know think about the revenue exposure, but is there going to be was that revenue decline on a week in a baby be a bit more pronounced if you know there's buffer stock in the supply chain you know the entire some.
Why chain needs to get realigned I mean, how how are you guys thinking about you know maybe some of those added headwinds on top of the rate reductions that were seeing out of Boeing and Airbus.
Yeah. So I mean, that's that's a good question.
Terms of understanding the supply chain, there's no doubt there was a fair amount of inventory in the supply chain we have.
Ah analyzed and we have a good understanding the inventory of our product.
All through.
The entire supply chain and we have in our modeling factored that in.
Two.
How quickly you get to these new rates, how does age complete we don't know for sure our customers of deplete inventory.
But you know we've taken several scenarios that that.
We think we have a good understanding we modeled it it's in played into you know our.
Liquidity analysis and through all that we feel we're in good shape and have good understanding, but well see how that plays out but there is lot inventory in the system today.
Okay.
Last one just G. Obviously are still a big customer for you guys. I think there are announcing permanent a workforce reductions 25% any any implications on on the JV for you guys with you know either what's happening at GE you know the magnitude of operate reduction.
The reason you know programs still in the Hopper like the nine ex engine.
Well the not ex engines moving along well Yeah second second light vehicle went up and you know very successful Lucky engine.
<unk>.
We will see on the JV side impact to reduce.
Production volumes, we will continue to support and get the nine <unk> or the NYNEX into service.
But you know it won't be immune either a it'll have to adapt to the new rates as well as a aftermarket revenue to the JV that is tied to.
Yeah, the a large engine programs.
Okay got it alright, thanks, guys.
Hi, Thanks.
As a reminder.
Did you wish to to ask a question.
Quest I won on your push button phone.
Your next question comes from the line up.
Tom common.
Please state your question.
Hi, Thanks, good afternoon and.
Hey, holding down the color kind of.
So just a follow up on Mike's question. His last question on de stocking.
Tom could you talk about maybe the number I don't know how to frame it but the number of customers you sell too.
Within the supply chain as opposed to just GE and Boeing and Airbus I mean.
Is it you know hundreds of intermediary subcontract manufacturers to the Oems is it can.
No what I'm, saying go yeah, it's it's.
It's definitely in that 10, so what you'd have to look at as we obviously, we sell to all the engine manufacturers.
And all the Oems, whether commercial regional or Bizjet as well as rotorcraft.
We also sell through the tier one.
So all the major tier ones also buy from Woodward, Yeah. Those are mainly in our what we call or components and sensors a business. So so there's yeah, there's quite a few channels.
I don't know that have a top my head exact count, but you know.
Yeah, it's tens of a tier ones as well as the engine and the Oems. So there. So we've analyzed the entire so when I said that we've analyzed that entire supply chain, where all the inventory is in those channels of Woodward hardware.
And do you think that you'll go a quarter two or three with you know substantially lower purchases I mean, how did he close to zero for some period of time just as.
Folks work down their inventory some of your customers or I'm, just trying to get a sense for them. Yeah. I came to the sequential you know how bad it can get and then and snapped back too.
Well, we we've done scenarios got them of HM throughout there and what well what would the inventory or strategies be or inventory plans or our customers I can't tell you. We seemed customers that are determined to keep the supply chain wet.
Producing so having a proactive look at that and we have had some customers that have brought it to zero for a period of time, so it's kind of across the board.
But I would say going to zero is very is so far has been a rarity, but we have seen a few of those you know that taken out orders are pushed out orders for several months.
Most of our trying to keep.
You know supply chain wet and are very concerned if you shut off supply chain, how do you bring it back up as you start ramping production again so.
I think it has been very helpful that Boeing coming out with their line rates Airbus has come out with theirs.
We're also being sensitive.
To the fact that those may not be vinyl line rates, but you know we're watching that closely.
But you know with that information everybody is really yeah, if you want to say replanning.
You know there.
Their their internal line rates their inventory strategies are planning material planning so.
Just like we are so we have factored that in.
So on the only side and wont wont be able very many of them, bringing is down to zero I guess, that's a long winded answer to that question.
I appreciate it then one other one we've heard anecdotal.
Remarks from some suppliers.
Further downstream that they're seeking.
[music].
Price reductions among their suppliers and I'm wondering if you've actually had any serious pressure yet.
Some of your key customers on rethinking the price.
Agreements you already have in place that hasn't been that pressure do you expect that to grow is that's factored in tiny are thinking.
You know that.
We've we've seen a few request for that but I'll just remind everybody on the call that you know weird almost all of our business is done under long term agreements.
With.
Fixed you know with the pricing fixed.
So I don't see that that's going to impact us.
Okay.
And last one just to Refis at Laronde.
It's been a what else was he talked about it I'm just curious it where are we in terms of.
Moving that technology into the U.S. hasn't happened as you know what sort of your.
If you can just give us a state of the stayed on the Raj.
Yeah.
Yeah. We're so yeah, we're still very pleased with the launch acquisition and the business.
We have been working you know with.
All all of our global engine Oems.
With bringing the combination of the raunch technology and Woodward technology together for solutions we've won.
Quite a few programs in Asia with Raj now.
We have U.S. customers that are working with us and looking at it.
So some of those programs may slow down a little bit, but we are being successful.
Getting new applications.
And you know, we're going to continue to be aggressive with that but the the combination of their technology with Woodward controls and actuation and Valvoline technology.
Quite a quite a comprehensive offering and customers are responding well to that.
Thanks, and welcome back up.
Thank you very much.
[noise] Mr Ginger.
No further questions at this time I will now turn the conference back to you.
Well, thank you for everybody for joining us today.
We appreciate the questions and a discussion we are in very.
Unique times.
I would just highlight that we're addressing.
This crisis I think very proactively.
We talked about a little bit in prepared remarks, I just want to highlight that we're still investing for the future whatever is going to come out of the stronger than before and as we stabilize we will be Turner focus back to growth.
So thanks for joining us look forward to talking to you a during the next quarter. Thank you.
Ladies and gentlemen that concludes our conference call today, if he would like to listen to a rebound.
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[music].