Q3 2020 Woodward Inc Earnings Call
To the Woodward Inc. third quarter fiscal year 2020 earnings call.
At this time I would like to inform you that this call is being recorded or rebroadcast that all participants are not listen only mode.
During the presentation, you'll be invited to participate no question answer session.
Joining us today from the company I'm at the time children, Chairman and Chief Executive Officer, Mr., Bob Weber, Vice Chairman and Chief Financial Officer, Mr., Don 'cause Auto Vice President Investor Relations and Treasurer.
I would now like to trying to cold call over to Mr. 'cause Arnaud.
Operator.
Oh.
Today's call Tom will comment on our workers strategies.
Yes.
No.
Oh presentation, we will take questions.
Okay today's earnings.
With that.
Yeah again included.
Station to go along with today's call.
She said more than let's say Oh.
A replay of this call will be available by phone or the website.
Well, yes.
[noise] 2020.
The phone number for the audio replay is on the press release announcing this call as well as on our website.
And we'll be repeated by the operator at the end of the call.
I would like to referred to and highway or cautionary statement as shown on slide three.
Always elements of this presentation or forward looking or based on current outlook in assumptions for the global economy.
No business is more specifically, including the ongoing corporate 19 pandemic and related measure measures taken 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 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 into earnings release unrelated schedules. We believe this in additional information will help in understanding our results.
Now turning to our results for the quarter third quarter.
Net sales for the third quarter fiscal 2020 were $524 million compared to 500, and 752 million for the prior year quarter, a decrease of 30%.
Net earnings were $38 million or 61 cents per share compared to $66 million or one dollar and two cents per share for the prior year quarter.
Adjusted net earnings were $31 million for 48 cents per share compared to adjusted net earnings of $84 million or $1.30 cents per share for the prior year quarter.
Net cash generated from operating activities for the first nine months of fiscal 2020 was $212 million compared to $219 million for the prior year period.
Free cash flow was 173 million.
And adjusted free cash flow was 169 million for the first nine months of 2020 compared to free cash flow of $141 million for the prior year period.
I will now turn the call over the time to comment further on our results strategy to end markets.
Thank you Don and good afternoon, everyone.
Performance in this quarter was severely impacted by the global pandemic.
However, as we discussed last quarter.
Endemic was first taking hold on the world, we took immediate actions to mitigate adverse effects on our business.
These actions include heightened communications hires customers.
Proactively revising demand and supply plan.
Cost cutting and cash preservation stuff.
I'm proud of the strength and resiliency.
Her team as we continue to navigate to this challenge period.
As we progress through rapidly evolving economic environment, we've been focused on the safety of our members.
These while maintaining our financial strength.
So far what we're seeing in our markets is within the range of the scenarios that assumptions, we develop early in our third fiscal quarter.
We continue to closely monitor the situation.
We adjust our business line customer expectations, all rightsizing, our cost structure for today.
To to invest for the future.
Moving to our market some more detail.
Aerospace segment took the branch of the impact from the pandemic.
Mobile flight hours declined as much as 80% on platforms OEM build rates plummeted due to the.
Global manufacturing constraints plant closings and furloughs.
Like traffic has begun to slow increase off the bottom.
That is starting to show some improvement.
An OEM production rates are slowly stabilizing.
However, we anticipate a slow recovery and commercial or space over the next couple of years of commercial aftermarket recovering first.
When it does recover the fleet that will be in service will have greater Woodward content than the permanently retired aircraft resulted in a positive fleet dynamic for Woodward favorably impacting both our earnings and cash flow.
In defense, our aftermarket business delivered solid growth driven by global upgrade programs and improving the U.S. combat readiness.
Overall defense OEM activity remains strong however, woodward sales levels were pressured due to cope and related supply chain challenges.
With respect to our industrial segment.
On April Thirtyth, we closed on the divestiture of our renewable power systems and related businesses, one of a number of strategic initiatives to focus our industrial segment and enhance our margins.
We're confident that these actions will contribute to delivering on our profitability targets as we move forward.
Turning to our industrial markets power generation.
Scheduled deliveries for industrial gas turbines are largely unchanged for calendar year 2020.
Due to long lead times, however, as in past downturns the impact on gas turbines lags the general market. So we expect to see a reduction activity in 2021.
And transportation, China, NASA natural gas truck production volumes rebounded from shutdowns earlier in the year, but I've shown volatility as a global pandemic continues to drive economic uncertainty.
Marine markets have been depressed and almost all areas as a result to the pandemic.
Oil and gas markets continued to be very challenged with weak customer demand low oil prices and a decline in drilling activity.
Why all oil prices have improved from the recent lows. The current levels are still an impediment capital investment.
In summary, the actions we took early in the quarter to address the downturn in our markets soften depend Democrat related impacts on our financial results.
As a result of these actions we delivered significant cash flow in the quarter improved our liquidity further strengthened our balance sheet.
We continue to closely monitor this dynamic environment and are constantly exploring other actions to be taken.
Well, we anticipate continued pressure on our business through business through our fiscal 2021, we remain confident long term strength market position growth opportunities for our company.
We will continue to invest new technology and operational excellence.
Most of our business that naval Woodward's could successfully navigate numerous path.
Yes.
As we manage through this unprecedented period, we're focused on delivering exceptional shareholder value and emerging even stronger company.
Now I'll turn it over to Bob discussed finance.
Thank you Tom.
Aerospace segment sales for the third quarter fiscal 2020, with 306 million, 39% decrease from the prior year quarter.
Fine and segment sales was predominantly driven by lower commercial sales due to the secular decline in passenger traffic and lower OEM production rates plant closings and furloughs all as a result of the gold pandemic.
Commercial aftermarket sales were down 47% in the third quarter of 2020, that's compared to the prior year quarter as a result of the severe decline in global flight hours.
Fence OEM sales were down in the quarter, driven by lower sales of guarded weapons and fixed wing aircraft tied to supply chain issues Golden 19, as well as a very strong quarter in the prior year.
Defense aftermarket activity benefited from continued military spending in support of the U.S. defense initiatives to improve the combat readiness of the U.S. fleets and global upgrade programs.
Overall defense sales for the first nine months of 2020 were up 8% compared to the same period last year and our backlog remains strong.
Aerospace segment earnings for the third quarter of 2020 were $41 million or 13.4% of segment sales compared to 103 million or 20.7% of segment sales for the third quarter of 2019.
Current earnings were negatively impacted by the severe commercial aftermarket decline and lower OEM sales, partially offset by the cost reductions we took earlier in the quarter.
Turning to industrials.
Industrial segment sales for the third quarter fiscal 2020 were 217 million.
Compared to 253 million in the prior year period.
Decreased to 14%.
Putting the renewable power systems and related businesses, which I will refer to as Rps industrial segment sales for the third quarter would have been 210 million compared to 230 million for the third quarter of the prior year, a 9% decrease.
Industrial segment sales declined in the quarter as a result of the macroeconomic headwinds impacting our markets today continued weakness in oil and gas and the divestiture of Rps.
Industrial segment earnings and adjusted Industrial segment earnings for the third quarter of 2020 were 27 million or 12.6% of segment sales.
Industrial segment earnings for the third quarter of 2019 were 26 million or 10.4% of segment sales.
Adjusted Industrial segment earnings for the third quarter of 29 team were 29 million or 11.4% of segment sales.
Excluding Rps industrial segment earnings and adjusted Industrial segment earnings for the third quarter 2020 would have been unchanged at $27 million or 13% of segment net sales compared to industrial segment earnings excluding Rps of 27 million or 11.9 per se.
Oh segment net sales for the same period last year.
Adjusted Industrial segment earnings excluding Rps for the third quarter of 29 team would've been 30 million or 13% of segment net sales.
Adjusted Industrial segment earnings decreased primarily due to the lower sales volume, which was partially offset by cost reduction initiatives.
However, as Tom mentioned overall segment profitability as a percent of sales was approved by the divestiture of Rps.
Non segment <unk> expenses were 15 million for the third quarter of fiscal 2020 compared to 27 million for the same through to the prior year.
Adjusted non segment expenses for the third quarter 2020 were 19 million compared to 20 million for the same quarter last year.
Adjusted non segment expenses for the third quarter of 2020 excludes primarily the gain resulting from the resetting of certain cross currency interest rate swaps and the impacts of restructuring charges related to pull that make team.
Adjusted non segment expenses for the third quarter 29 gene excluded towards a move related costs.
Reported and adjusted non segment expenses, the third quarter of 2020 benefited from cost reduction initiatives.
At the Woodward level R&D for the third quarter 2020 was 35 million for 6.6% of sales.
To 41 million or 5.4% of sales for the prior quarter.
For your core excuse me.
Decrease in R&D was primarily due to cost reduction initiatives and the divestiture of Rps.
Best DNA for the third quarter of 2020 was 57 million compared to 53 million for the prior year quarter.
Adjusted EPS Gionee was 50 million for the third quarter 2020, compared to 52 million for the prior year quarter.
The decrease in adjusted as Gionee was primarily the result of cost reduction initiatives, partially offset by higher amortization expense related to the Woodward Mirage acquisitions.
The effective tax rate for the third quarter 2020 was 14.6%.
Brad to 28.4% in the third quarter of 29 team.
Adjusted effective tax rate was 29.1% for the third quarter 2020, compared to 25.5% for the third quarter of 2019.
Looking at cash flows net cash provided by operating activities for the first nine months of fiscal year 2020 was 212 million compared to 200, a 19 million through the prior year period.
Capital expenditures with 39 million for the first nine months of 21 cents compared to 78 million for the prior year period.
Free cash flow for the first nine months of 2020 was 173 million.
Compared to free cash flow what of 141 million for the prior year period.
Adjusted free cash flow was 169 million for the first nine months of 2020.
The increase in adjusted free cash flow was primarily result of lower capital expenditures aggressive cost control and effective working capital management.
Adjusted free cash flow removes the impact so certain onetime nonrecurring items and we believe it provides better comparability of ongoing operations between the current and prior period.
As Don mentioned, please refer to the tables in the slide deck.
This call for a detailed reconciliation.
We remain confident in the strength of our <unk> financial position today and continue to focus on prudently managing cash flow as we progress through this challenging environment.
We continue to believe we will generate positive free cash flow throughout the downturn.
As a result of closely managing cash and reducing debt leverage declined to 1.8 times EBITDA up into the third quarter.
We also have significant liquidity available grew approximately $1 billion of combined cash on hand and revolver capacity.
In summary, these are challenging times, but the actions we've taken have reduced the impact of sales declines on earnings and cash flow strengthened our balance sheet and improved our liquidity, while still driving critical investments in our future.
Lastly, turning to our fiscal 2020 outlook.
Global economic effects associated with the goal that 19 pandemic have been unprecedented in their scope and depth.
We continue to see severe volatility in our markets, making even short term forecasts challenging.
Because of that uncertainty, we will not be providing specific financial guidance for fiscal 2020.
However, we anticipate our fourth quarter financial results to be similar to our third quarter.
This concludes our comments on the business and results for the third quarter fiscal 2020.
Operator, we're now ready to open the call to questions.
Thank you Sir.
Question and answer session will begin at this time, if you're using a speakerphone.
The handset before passing any numbers should you have a question. Please press star one on will push button phone. She lives to withdraw your question. Please press the pound <unk>.
A question will be taken in the owner seed.
Bioflo your first question.
And so first question comes from Sheila from Jefferies. Your line is open.
Hi, good afternoon, guys and thanks for the time.
My first question I guess would be on the aerospace side, if you could.
Obviously, we are seeing a massive decline if you could maybe comment on where you are on production on the Max and other platforms in what you're seeing in terms of your own inventory.
Yes.
I think the first thing would.
Comment on the Max is.
I think all production rates for us right now a little bit uncertain.
I think what really old.
Play out as when its certified.
Yes, things had been moving and so I guess.
We don't have a today and stabilize production rate to quote so I think I.
We're not we're not state anything on that one the rest of the production rates are tracking with what Boeing and Airbus on the commercial side have communicated to the market and those have been reflected in.
Updated peos that have come through either directly or through our tier one customers.
So we're tracking really with what they're saying.
Hi, sorry, Tom just on the Max or you producing any right now.
We have some hardware that we're producing.
So it varies by the end product that we have.
So yes, we are producing but it depends on how much inventory was already in the system, what they're pulling and it's not consistent across all our Max products.
Okay, and then I wanted to ask about industrial I think the Decrementals were pretty good actually and I don't know how much of that was the Rps divestiture that was dilutive to the business, but maybe can you talk about you know what helped margins is this a sustainable level.
Yes, we were we are encouraged by the industrial segment earnings this quarter and I think it does represent some of the work that we've been doing.
There is an impact to rps for the quarter in the year to date.
It's obviously favorable I'd say, it's one of probably three major things the cost reduction actions.
And Rps and then having some mix going out a little bit we were seeing turban.
Business, improving and they kind of first six months and so fairly flat in the last quarter offset by a decline in the low Raj aftermarket.
Great. Thank you.
Thank you.
Our next question comes from Robert Spingarn Credit Suisse.
Please state your question.
Good afternoon.
Yeah.
Tom Your arrow margins held in pretty well this quarter. Despite this the sharp drop in sales I'm wondering if you'd be comfortable calling.
The June quarter, the floor for margins unless the pandemic gets much worse.
Or maybe said differently should we expect further costs out.
In Q4 to have favorable drop through to margins, assuming that sales don't get worse.
Yeah, It's rally and there's a definite a strong ties into the volume.
The third quarter was a very tough quarters, I think everybody on the call knows.
Summers head facilities clothes people refer load.
We're taking products the airlines were park.
Very challenging time.
You could say.
Subject to.
Further pandemic issues.
That our fiscal third and fourth quarter should represent the bottom.
Okay now, we can't say that for certain but that's that's what it would look like.
And then Bob highlighted.
And I mentioned as well.
The first thing that's going to come back is aftermarket.
You know the production rates have been changed as everybody knows you know.
You know the really the most on certain one as Sheila asked was the Max and that that's still uncertain going forward exactly what the ramp rate on the Max will be the other ones are understood, obviously down significantly from where they were.
Six months ago.
So what we see as those OEM. The first thing they'll start growing is aftermarket reason highlighting that it's obviously, that's a high margin business. So it should.
Bode well for increasing margins as we move into 2021 on lower sales, which are anticipated year old.
And then just in the it on the industrial side were from I guess, a topline perspective, but you know how are things trending as we move past June into the summer here I guess, both from a from a topline perspective, and then how you think about margins.
Yeah.
Well topline, there's going to be continued pressure.
We have seen our customers.
Reduce some production rates I'm sure a young you've seen some of those announcements come out over the last week, we can have.
We do believe though that our margins will continue to hold and improve.
Both from cost out actions, but also.
Yes, we would call portfolio adjustments that we've done with.
Pruning some businesses.
And in fact, we're moving low margin.
Businesses and our core business. So I have good margin so.
This is one step towards a goal we've had that we're not changing.
Changing which is industrial should be a 16% plus margin business.
Volume picks up.
What's the cost structure initiatives, we've taken out will lever.
Sales growth into higher margins as before.
But we are going to still have.
Well.
Outlook for some months comp so we really see out things stabilize.
Okay. Thank you Tom.
Thank you.
Our next question comes from Christopher Glynn Oppenheimer. Please state your question.
Thanks, Good afternoon.
The on it.
Yeah, I just wanted to kind of build on the discussion of the.
You know margin pathway for industrial there.
Right up pruning just want to get a sense of what degree pruning is taking place are there other than our P.S. should be thinking about that is kinda like a couple point impact.
On the topline.
Yeah, I think what were we say that <unk>.
As Bob highlighted what we referred to as the Rps businesses. So there's a number of product lines with the wind.
Turban converters being the largest of those.
Those product lines that had lower.
Actually significantly lower margins than the core industrial margins and so we've talked previously.
Previously when we announced the divestiture of the businesses that we would be like two two and half points margin improvement based on steady sales based on that divestiture.
And then mission.
And says we're not core worse dziedzic to our future.
Okay.
Yeah, just wanted to clarify there are not other pruning actions contemplated maam.
Nothing material, yeah, we constantly look at our portfolio, but we do not see anything on the order of an rps in the near you know in the future.
Okay money jump over to marine for a minute.
How should we think about that tracking in terms of driver is it really global trade any weight to.
Oil and gas production levels and also wondering if the environment.
Creates a window, maybe if there's any pent up aftermarket demand that built up in the system.
Yeah, I think it's really tied to global economic activity Global GDP.
ER, which leads to trade ins are highlighting.
Where we see a your point is correct, we do see that there will be some pent up aftermarket demand.
I mean as [noise].
As the ships are brought back online and act and utilization increases.
So we are.
Looking at that and would anticipate in our forecast said.
As the economy picks up the global economy picks up that we will see that second thing that we're seeing some favorability on is.
Orders for LNG carriers. So LNG is a trend out there we have substantial content on LNG carriers.
And so we see that coming in the next couple of years as a as those ships are built and put into service and those also will have a nice aftermarket tied to him.
Okay. Thanks sounds good.
Thank you.
Thank you.
And next we have Pete lending global please state your question.
Hey, good afternoon guys.
Hey, Hey, Tom the comment in the slot in the commercial aftermarket and just your comments about the better mix on the newer aircraft.
Are you, implying or should we think that maybe the recovery in commercial aftermarket sales for you guys is kind of more of a V shape recovery versus you know, obviously kind of slower or more modest slope on OEM sales.
I I would not claim of V shape recovery I think what we're really trying to say their peters.
So we really monitor all the aircraft in the fleet, we actually track every airline what they're flying.
Their routes structures are on what aircraft, they're utilizing because we look at the retirements that have been announced or planned and once we see coming.
They're taking out aircraft that has a little to no Woodward concept for the most part.
There will be some that have you know.
That's a spectrum, but for the most it's [noise].
Smaller.
Fleet that we see coming out of.
Recovery of the pandemic will have higher content per aircraft.
Then the fleet that was being flown before so what that means is as we move forward and the market recovers, we will recover probably better than the market because we have more content per plane.
Which will lead to.
Higher sales with with good margins. So it's more about really a very detailed analysis of what we call. The demographics of the fleet and we think the Woodward portfolio.
A year from now two years from now as things settle out.
Started flying again will be an excellent portfolio and we'll have better positioned in the market.
Okay. That's great just more follow up on industrial side.
Thank you God I feel like oil and gas has been soft for you guys for a few quarters now I lose track exactly but.
And I think you guys were talking about you know, 70% to 80% down something like that but at what point do we get to easy comps in oil and gas are are we getting culture to kind of the trough in that area.
Yeah, I think as you roll pass the first quarter 21, or the start of calendar 21.
There's no doubt and one point you know we saw.
It was on the order, 80% drop in our oil and gas.
Sales.
Applications and oil and gas and.
Just a reminder for everybody on the call too.
A lot of that product that Woodward product that goes into that oil and gas market.
It's on drilling or compression pumping and those are applications that have a lotta hours. So when they're running they generate good aftermarket a lot of that's been shut down and so with no operation. There's no additional aftermarket in addition to know Oems.
So yeah, it's kinda for industrial you know we were pretty pleased.
Pleased with how we've made it through all this but if you think about we had an oil and gas crisis compounded by a pandemic.
And we're still you know, we're still holding together so when that recovers in which it will well be in good shape and.
Ah somebody asked the question earlier, you know maybe is related to marine but you could apply that to oil and gas when they bring these rigs back up online and start operating there will be an aftermarket demand to get all that back in place and we saw that before during previous oil.
Cycles are oil market cycles.
But much appreciate it thank you.
Thank you.
And we have David Strauss of Barclays.
Please state your question.
Hey, thanks.
But when it [laughter], so I don't know except Minimis. It did you actually see how much you're a commercial aero OEE sales were down.
In the corridor and could you comment on.
The potential for de stocking to see a pickup in the a and the revenue declined that you're seeing on the commercial aero side from here.
Yeah. So.
Commercial Aero was down approximately six Aero OEM was down 62%.
In the quarter so.
Quite significant.
We we have studied and this is why its little hard to say production rates.
There was a question regarding the Max but even on some of them.
As we've been monitoring in calculating all the inventory in the system and so there will be some rightsizing of inventory.
Through the whole supply chain, we've got that planned into our numbers.
I would say we've seen some of that.
I think you called the de stocking I'm, just saying the inventory in supply chain needs to come to new balance given the production rates that's occurring.
But all the lines that.
Boeing Airbus Embraer, we are producing product is just said which rate or we producing and it will then turn over the next month to stabilize to their stated rates.
Okay.
And on the aftermarket Tom.
Got the potential going forward, then we could actually see a couple lean.
In the aftermarket relative to your underlying kind of flight activity I mean, right now we're seeing.
For you guys and pretty much everyone else the aftermarket down in line with no kind of what calendar Q2 flight activity was down but do you do you have any concern that we might actually see the aftermarket come in below flight activity going forward as the airlines kind of get their arms around this and start using no start cannibalizing part.
Yes, and use material on all that thanks.
Yeah.
[music].
I think the you know.
I would state the airlines are doing a proper jobs, if I wasn't there she's I'd be doing the same trying to.
Minimize expenditures as much as they can today.
The interesting thing is we're still seeing.
Activity of engines going into shops, obviously, a much much reduced rates.
We will see and we were planning that in our outlook that the airlines will do their best to delay.
By swapping out.
Equipment.
You know delay expenditures that they can.
We.
In some ways in the corridor.
Our aftermarket sales were not down as far as flight hours.
Even in this bad corridor.
So.
It's it's there's a lot of uncertainty wrapped around that you know there's certain amount of maintenance it has to occur.
And.
I don't know that we're you know right today I would not believe we will fall below flight hours as a drop the one.
Challenging part also to watches the impact of.
All the fleet being retired or parked what happened so some of that equipment, a again, we're tracking that but all that.
We shouldn't be too far off of flight hours and then as as they start.
Putting more aircraft back into service, which means you have to make sure the.
Flight worthy and safe and.
And so forth.
We will start seeing that aftermarket pick up and so maybe.
Pick up more rapidly than flight hours, there will be a inflection point on that so.
Challenging to forecast a given that you know I've been in the industry along time. So as my team you know we've got a really good experience team you know.
From 35 to 40 plus years in the industry nobody seen anything like this so we're doing our best estimate talk to customers talk to airlines work with everybody.
But I do see once we hit that inflection point that was the fleet dynamic discussion. We had earlier, we will see Woodward accelerate out of this downturn due to the fleet demographic.
Alright, crushing it all the color sense yeah.
Thank you.
And up next we have microphone to with securities.
Please state your question.
Hey, good evening guys. Thanks for taking the question here, Tom maybe just a.
Well, a little bit more on on the aftermarket I mean, the down 47% in a quarter I know you kind of gave the expectations for the for the second half kind of being a bottom here, but do you think do you think the aftermarket growth could get worse. I guess you know did you did you entered this quarter with the backlog I mean, clearly there were.
You know engines in the shops and you know I think if we look at.
What some of your big customers, you know GE, So I think 60% declines in.
Some of their CSC billings and you know that the engine shop space. It's down. So you think the aftermarket actually gets worse here in the short term before picks up or do you think you bottom tier.
I I do believe word near bottom.
You know with a.
Plus or minus.
Yeah, I'm not sure what percent to put on it it's pretty close to bottom what okay. You know overseen.
Yeah.
Just yeah.
Sure with everybody. We did have a number of airline customers, where we had hardware back for repair and overhaul who said stop working ship. It back as is done to any more work stop. So we did see a fair amount of that but same time, we had.
A number of customers, which we were unsure of at the time, saying please completed get it back to US and then we've seen some.
Outlook for shop visits you know to come off of this bottom as we move over the next few months.
So we've seen the whole the whole gamut here and we've also been yeah, frankly, we've been very careful careful and if you.
Look at how well we did on our our receivables we've been very careful to ensure.
Airlines and operators are able to pay and so we had I have a lot of dialogue and we did really well with that so.
So I.
I can't say it won't get worse, but I am more in line that we're pretty well bottomed.
Or near the bottom and you know over the next.
And I must say over the next year based on the uncertainty, but we're start to see.
On an inflection point in that time period, and then I'll start picking up again.
Got it Okay, and then just what about the.
Your your opportunities and content on the Triple Sevenx benign next engine that being pushed out the does that have been I mean, obviously, there's a whole host of other things going on but that does that have any any major near term impact than you guys.
Well yeah of course.
You know this.
No.
All of our previous.
Five your forecasts are now changed so.
Right, but if you had gone back six six months ago.
Those sales were in our forecast obviously going forward as we recast in everything we've adjusted and you know so we were triple Sevenx would have had sales you know it was planned to come online and once that came on line. There would have been initial provisioning sales. So yet you know there's an impact to that it's it's not huge.
And it.
But at same time, it's not lost you know I truly believe that'll be a very successful aircraft.
People will fly again people do want to fly internationally.
We all sit around here and talk about <unk>.
In my entire working career I've never been home this much in a row in my life. So you know, we're all or like going a little started crazy not traveling so.
We're already to get going to assumes we can and I think the whole worlds that way so you're going to see these the demand for the aircraft come back. It's just you know the one year two years three years.
But I'm very confident were see people flying again and that international flight will go and Triple Sevenx 77.
Athree fifth you're going to be great plains.
Gotcha, right and last one just the margins in the quarter I know last quarter I think there was the reversal of the variable comp and bonus was there anything else did that flow through it all in this quarter or was that all done last quarter.
But it was all done last quarter in terms of reverse or there was nothing recorded in the quarter goes we four goals the annual bonus for the year, but no big credits like was less okay.
Got it thanks guys.
Yeah.
Thank you.
And again, ladies and gentlemen.
To ask a question you'll need to press star one on your telephone.
A question please press the pound <unk>.
Our next question comes from Tom cannot Colin.
Please state your question.
Yes. Thanks, good afternoon, guys. They got afternoon.
I wanted to pick up on one of the earlier questions and.
With that and Tom's response to it which was that you might see part outs and.
I guess, some cannibalization, but I was curious like have you guys. What does your exposure to use serviceable material.
Maybe you know how to the.
How did that.
Affect the last downturn and.
And Ah you know how is the aftermarket mix different or or similar to what was experience you know what the mix was back and.
Back in the awaited on nine downturn or maybe have for that 911, what have you.
Yeah. If you go back those temporary I mean, it's it's a good question.
To date, we haven't.
You know, we havent seen that.
Use service material market and that we would anticipate that with retirement permanent retirements to where you would see some of that equipment coming on line.
Well, we did what we did hit in the last.
Hi, we had a real downturn.
It was a small impact from that but the interesting thing was some of that though they say used serviceable material.
We would see a number those type controls come back to us to be a if you want to say brought up standard latest service bowls and be prepared so they have a little more values. So we actually would see some aftermarket tied to that.
Same universally we saw but we did see on some are more complex units that they actually come back through us.
We're actually looking at that and saying, okay. If that that's coming available, let's work to make sure well, we we participate in.
In that market and so we're looking at ways to do that.
But I don't expect it could be a.
Oh, a material negative on our aftermarket.
Okay.
And just a follow up from earlier.
You know do you feel like you have good customer visibility right now on what you're supposed to deliver over the next two or three quarters or it's just getting to the point on de stocking.
Yeah, yeah, its ability to have or to keep getting change orders or what have you you know schedule changes and the like.
Yeah, what what I've shared with you we talked about this last quarter, but.
Yeah, I would say this across all our customers and all our markets. Okay. So no not going to highlight one over another so this is industrial and aerospace.
It.
Customers can be slow to change their orders.
And.
Well, we did is you don't understanding this and having lived through downturns, we proactively changed our production plan.
Based on what we saw an anticipated what's going to happen.
And in her prepared remarks, we made reference that and we were pretty darn accurate with what happened.
We are talking to our customers every week.
All customers to aligned.
What what they're looking for deliveries what the inventory levels are like so.
Oh long to answer your question, we're very confident and on top of what inventories in the system, what our customers are doing and how we will produce to the current.
Requirements.
No.
Will there be volatility in those requirements and I'd say, yes, because we could see changes in production rates, we could see changes in the market but.
Customers are working really well with us and we're like I said, it's a weekly discussion and I would say we've got a really.
Yeah.
[noise] inventory.
Our.
Okay.
Great and just one last one on a.
You know your appetite in this downturn to entertain acquisitions or mergers or what have you just cash redeployment.
Because at one of the situations, where we just kind of preserve liquidity or.
Are you looking at things in the M&A pipeline.
Yeah, but at what I'd say first as a liquidity.
Was priority number one.
No and then what that liquidity or not knowing initially where this could go we wanted to ensure we had ample liquidity no issues with that covenants and the like can you can see by the results that werent quite good shape there.
As we go over the next year, we will start.
Accumulating cash.
And as we watch the market conditions to ensure we don't need to preserve liquidity.
We are actively working on our growth initiatives.
And.
We did this.
Then past downturns, we did it after 911, we did it after the financial crisis and lot of goes right I remember.
And the financial crisis, Bob and I months before the crisis hit.
We told the World you know prices were too high we went into that financial crisis net.
Net debt free until everybody in advance we were going to buy and we did we made.
Two significant acquisitions that really.
And as an aerospace market.
So we're we're we're be looking at.
Opportunities, but we're big we're gonna be conservative and very prudent about claim at a cash and.
Like at same time, though I know, we like to talk a lot in M&A I just want to highlight this is we're still investing very.
Well into R&D organic development.
I see opportunities or customers where.
Weak suppliers may not make it not able to properly or customer the market.
Opportunities that.
We're positioning our technology. So that we can have more share on the next application. So we're not backing down on that.
And I, absolutely believe we're gonna come out stronger with.
Very good growth rate as Mark.
We're gonna be doing both.
Thank you very much guys.
Sure.
Thank you.
And we now have a follow up from robbing from credit Suisse.
Please state your quite high I just.
I wanted to just calling on that last question and then some earlier comments on de stocking.
And I'm asking your customers.
You know or trying to frame what your customers really need I wanted to ask you Tom if you ever get into a situation where you have mixed signals between on the OE side between what the airframe guys are saying and the engine guys.
Not not really Rob.
There's always a difference.
Do lead times and you know.
I'd say.
Material management strategies.
But but they are in sync and we're confident and matter of fact, we constantly look at both to ensure we're confident in the data that we get from both of them.
So I would say today.
Yeah again, we're tracking this.
Monitoring weekly discussions they there and saying.
No reason I asked that is because you'll remember back with precision Castparts, who sold a lot of components through the engine guys. They were in this you know lengthy period of Destocking and we couldn't quite track. It and then you know it turns out that at least one particular engine OEM was over stocking or at least had been.
And I just wondered if there's any risk of that not necessarily going forward, but maybe it's already happened and just wanted to be aware of it.
Yeah, well, what I would say occurs in the industry and we would at Woodward would do the same thing if you have.
Long lead time.
Parts.
With.
Supplier, that's not consistently delivering on time.
You're going to build up a buffer of inventory.
And then if things change you got to burn that off what I would say with our customers is we're we're kinda delivering to.
In a more just in time fashion, and then we'll where when we talk about inventory in the supply chain, what we're talking about as you know some of our.
Hardware will go to you know and the cell manufacturer that then get potted with an engine then gets on to the airplane. So you got to track that inventory in the system.
When we're selling to a customer they do not have big build ups of Woodward inventory at their sites. So you know, it's mainly just what's flowing through the system. So that that's where I have a little more confidence.
And in an understanding of what's in the supply chain that there's not going to be a big de stocking effect on Woodward I can't say on the every supplier because.
We have I could tell you we buffer some of our suppliers just due to poor performance.
Sure.
We can deliver so.
I understand how that occurs but that's not what works very.
Okay, and then just while I have you and and I don't think this came up before but you know.
Capex is down by something like half from last year and that was discussed in the context of free cash flow, but I'm just wondering when we come out of the pandemic whenever this is <unk>.
A year or two years three years from now well, we have a big catch up spend.
No.
Yeah, you don't know this this is you know and this is good for you know.
Our investors.
Or future investors look you know, we we facilitized and.
More prepared for all the growth that was happening and we were ahead of it.
So just thinking that in line rates that were going we we had years of not needing additional capacity you know there be maintenance capital.
Capital for productivity and things so it's not like gonna be zero, but it's gonna be significantly below path capex levels, because we have.
Okay excellent. Thank you.
Oh.
Thank you.
And Mr. Gendron there no further questions at this time I will now turn the conference back to you.
Well, thanks, everybody for joining us today and.
Yeah, I think we're going to challenging times, but I can only imagine for all our investors how challenging is to understand what's going on the market and what's going on with their company. Hopefully were provided you with some information color.
Please reach out to us if you have questions and we look forward to talking to you through this quarter and at our next quarterly report so thank you.
Ladies and gentlemen that concludes our conference call today, if he would like to listen to a rebroadcast of this conference call. It will be available today cutting at 730 PM Eastern daylight time by dialing 1855592, 056, well you last call.
You May dial 140, 4537, before six or nine let's call.
So.
And to the access code either call.
So call it 38888.
Hi for.
Okay, well also be available at the company's website www Dot Woodward dot com for 14 days.
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