Q4 2020 Woodward Inc Earnings Call

Thank you for standing by welcome to the Woodward, Inc. Fourth quarter fiscal year 2020 earnings call. At this time I would like to inform you that the school is being recorded for rebroadcast and that all participants are in a listen only mode. Following the presentation you will be invited to parts.

The speed any question and answer session joining us today. The company are Mr., Tom Gendron, Chairman and Chief Executive Officer, Mr. about weather, Vice Chairman and Chief Financial Officer, I'm sure Don can sort of vice President of Investor Relations and Treasurer I'll now like the turn the call over to Mr. bizarre, though.

Thank you operator, we would like to welcome all of you true Woodward's fourth quarter fiscal year 2020 earnings call.

On todays call, Tom will comment on our markets and related strategies and Bob will discuss our financial results as outlined in our earnings release at the end of our presentation. We will take questions for those who have not seen todays earnings release, you can find it on our website at Woodward Dot Com. We of again included some presentation materials to the.

The along with todays call that are also accessible on our website.

An audio replay of this call will be available by phone or on our web site through December 3rd 2020 on the phone number for the audio replay is on the press release announcing the school as well as on our website and who will be repeated by the operator at the end of the call.

I would like to work with.

Refer to and highlight our cautionary statement as shown on slide three.

As always elements of this presentation are forward looking or based on our current outlook and assumptions for the global economy, and our businesses more specifically, including the expected in potential effects of the ongoing COVID-19 pandemic and related measures taken by individual governments of private industry those elements can and do frequently change.

Range. Please consider the comments in light of the risks and uncertainties surrounding those elements, including the risks we identify on 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 related schedules. We believe this additional financial information will help in understanding our results.

Now turning to our results for the fourth quarter.

Net sales for the fourth quarter fiscal 2020 were $531 million compared to $737 million for the prior year quarter the decrease of 28%.

Net earnings were $57 million or 89 cents per share compared to $67 million or one dollar and three cents per share.

For the prior year quarter of.

Adjusted net earnings were $48 million or 75 cents per share compared to adjusted net earnings of $79 million or $1.22 cents per share for the prior year quarter.

And results for the full year net sales were $2.5 billion compared to $2.9 billion for the prior year a decrease of 14%.

Net earnings were $240 million or $3.74 per share compared to $260 million or $4 on two cents per share for the prior year.

Adjusted net earnings were $254 million or $3.96 per share compared to adjusted net earnings of $314 million or $4.88 per share for the prior year.

Net cash generated from operating activities for fiscal 2020 was 340 million of $349 million compared to $391 million for the prior year.

Free cash flow was $302 million compared to $292 million for 2019.

Adjusted free cash flow was $315 million for 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.

During fiscal year 20, Woodward in the world.

Experienced incredible volatility brought on by the coal the 19 pandemic.

We acted swiftly to ensure the health and safety of her entire Woodward team took immediate and aggressive actions mitigate the adverse impact on our business.

While we continue to grapple with this volatility in our markets. We remain keenly focused on diligent cash management.

Hansen, our financial strength and flexibility and optimizing our cost structure the line with the lower demand environment.

Our team has executed well.

On the pandemic and I'm proud of their commitment and dedication to ensure we are able to successfully navigate the headwinds in front of us and physician Woodward to emerge stronger.

Moving to our markets in more detail.

Our aerospace markets were mixed for the quarter with weakness in commercial OEM and aftermarket well the strength in defense.

Commercial markets were impacted by the same decline global passenger traffic and OEM production activity.

Commercial passenger demand remains weak across the globe, but then there's three sentiment generally predicting the prolonged recovery for travel.

The traffic well below past levels, we're seeing the significant number of retirements of older aircraft the.

The fleet is predicted to be smaller for several years.

On a positive note the epay approve the return to service of the Boeing 737 Max.

Together with the Max the post called the fleet will be comprised of newer aircraft the greater Woodward content.

When it the recovery doesn't materialize, we anticipate the commercial aftermarket will be first which will bode well for Woodward in terms of earnings and cash flow.

In defense, we continue to see strong aftermarket demand related to upgrade and fleet readiness programs.

Military OEM remained strong for fixed wing and rotorcraft.

Adjusted weapons volumes have increased substantially over the last several years.

And we anticipate some moderation going forward.

I'll turn to our industrial markets the power generation the demand for gas turbines.

True from a very weak 2019, we remained soft driven by impacts related to kill the 19.

It doesn't applications are down across the board, except for data center backup power.

On a more macro level developing economies across Asia, such as India, and China continue to show signs of energy demand growth natural gas and renewables expanding their share of the energy mix.

In transportation re markets have been depressed in almost all areas as a result of the pandemic, which has caused the reduced demand for oil and gas the decrease ship utilization.

These headwinds were partially offset by the continued strength of the China natural gas truck market driven by more stringent emission regulations.

Oil and gas markets continued to be pressured due to the drastic decline in oil and gas prices weak customer demand.

However, natural gas and crude oil prices appear to be stabilizing around current levels.

Accounts are increasing which may indicate the potential for future growth and drilling activity.

The release of an effective vaccine or therapeutic to stimulate demand and lead the higher oil and gas prices and increased investment.

Speaking to our industrial business overall, environmental concerns and related emission regulations continue to drive the move the natural gas clean burning diesel engines, where we have significant content and market share.

Additionally, our focus on control the technology.

Resents growth opportunities integrating new fuel sources hybrid drive systems in advance of the mission strategies.

As the world searches for cleaner and more renewable fuel sources, we're partnering with our OEM customers to create the next generation of control solutions.

In summary, we have faced continual headwind since the onset of the pandemic. The many of our markets have started the stabilize.

Where we are working closely with our customers and suppliers across the globe since you're a lean operational structure strong balance sheet and diligent cash management throughout the down cycle.

We continue to monitor the situation very closely the remain positioned to act quickly should the environment worsened or improve.

With the current market fog generated by the pandemic, we anticipate continued headwinds in the near term. However, we believe that our proactive efforts the mitigate the impact on our business and enhance our financial strength of flexibility.

The position as well as the weather this uncertainty.

These efforts coupled with our very favorable capital structure, our ability to generate significant cash our cash.

Pleaded modernization investments of is poised to deliver on our long term growth and markets on a margin targets.

As we go forward and we see clarity in our markets, we intend to return to our pre coal the capital deployment strategy.

We will emerge stronger from this crisis and leaner than before.

Now I will turn the call over to Bob to discuss financials in detail.

Thank you Tom.

Aerospace segment sales for the fourth quarter of fiscal 2020 were $336 million a decrease of 34% from the prior year quarter results were mixed for the segment was considerable softness from commercial OEM and aftermarket offset partially by strong defense aftermarket sales summary.

Commercial aftermarket sales were down 41% in the fourth quarter of 2020 as compared to the prior year quarter. As the result of the sustained decline in flight hours across our markets. The.

Fence OEM sales were down on the quarter, although our backlog remains strong and continues to grow lower sales were primarily related to COVID-19 supply chain issues impacting guided weapons and fixed wing aircraft.

Defense aftermarket was a bright spot for the quarter due to continued military spending to improve us fleet combat readiness, along with global upgrade programs.

Aerospace segment earnings for the fourth quarter of 2020 were $58 million or 17.4% of segment sales compared to $111 million or 22% of segment sales for the fourth quarter of 2019. So.

Segment earnings were negatively impacted by the lower sales volume, partially offset by cost reduction initiatives.

For fiscal year 2020, Aerospace segment net sales were $1.59 billion compared to $1.88 billion for the prior year of 15% decrease.

Aerospace segment earnings for fiscal year, 2020 were $310 million or 19.5% of segment sales compared to $389 million or 20.7% of segment sales for the prior year.

Turning to industrial.

The industrial segment sales for the fourth quarter of fiscal 2020 were 100 of $95 million compared to $231 million on the prior year period of.

The increase of 15%.

Excluding the renewable power systems of related businesses, which were divested in the third quarter of 2020, and I will now refer to as Rps industrial segment sales of 100 of $95 million for the fourth quarter of 2020 decreased 5% as compared to $206 million for the fourth.

Quarter of the prior year.

Industrial segment sales, excluding Rps declined compared to the prior year quarter, primarily as a result of the pandemic and low oil and gas prices impacting our global markets, partially offset by an increase in trying to natural gas engine sales.

Industrial segment earnings for the fourth quarter of 2020 were $19 million or 9.6% of segment sales compared to $11 million or 4.8% of segment sales for the same period of the prior year.

The industrial segment earnings of $19 million for the fourth quarter of 2020 were up compared to $10 million of industrial segment earnings. Excluding Rps were 4.9% of segment sales for the same period last year.

Industrial segment earnings for the fourth quarter of 2020 were positively impacted by cost reductions more than offset the impact of the lower sales volume.

We continue to focus on industrial segment margin improvement through the strategic divestiture of Rps segment infrastructure consolidation and strategic product line rationalization from.

For fiscal year 2020, industrial segment net sales were $905 million.

Fair to $1.02 billion for the prior year on 11% decrease.

Excluding Rps industrial segment sales for fiscal year, 2020 were $837 million compared to $932 million from the prior year a decrease of 10%.

Both industrial segment earnings and adjusted Industrial segment earnings for fiscal year, 2020 were $100 million or 11.1% of segment sales.

Industrial segment earnings for fiscal year, 2009 team were $94 million or 9.2% of segment sales for the prior year.

Adjusted the industrial segment earnings for fiscal year, 2019 were $115 million or 11.2% of segment sales.

Excluding Rps industrial segment earnings and adjusted Industrial segment earnings for fiscal year, 2020 were $97 million or 11.6% of segment sales.

Excluding Rps industrial segment earnings for fiscal year, 2019 were $97 million or 10.4% of segment sales ex.

Excluding Rps adjusted Industrial segment earnings were 29 team were $118 million or 12.7% of segment sales.

Non segment extent expenses were <unk> point $2 million for the fourth quarter of fiscal 2020 compared to 36 million of for the same period of the prior year.

The adjusted non segment expenses for the fourth quarter of 2020 were $12 million compared to $20 million for the same quarter last year.

Non segment expenses totaled $95 million per 2020.

Fair do one on it at $19 million for the prior year.

Adjusted non segment expenses were $67 million per 2020 compared to $80 million from the prior year.

At the Woodward level R&D.

R&D for the fourth quarter of 2020 was $27 million or 5.1% of sales compared to $36 million or 4.9% of sales for the prior year quarter.

For fiscal 2020, R&D expenses were $133 million or 5.3% of sales compared to $159 million last year or 5.5 percentage of sales.

The decrease in R&D for both the quarter and the full year was primarily due to cost reduction initiatives and the divestiture of Rps.

SGN eight for the fourth quarter of 2020 was $41 million compared to $51 million from the prior year quarter. Adjusted EPS DNA was $43 million for the fourth quarter of 2020 compared to $53 million from the prior year quarter.

For fiscal 2020, EPS Gionee expenses were $218 million compared to $211 million last year.

Adjusted EPS chain, which primarily excludes merger and divestiture transaction costs was $196 million for fiscal year 2020, compared to $211 million from the prior year quarter.

The decrease in adjusted EPS Jumei for both the quarter and the full year was primarily the result of cost reduction initiatives and the divestiture of Rps.

The effective tax rate from the fourth quarter of 2020 was 16% compared.

Compared to 12.8% in the fourth quarter of 2019 the.

The adjusted effective tax rate was 13.8% from the fourth quarter of 2020 compared to 15.5% for the fourth quarter of 2019.

The full year effective tax rate for 2020 was 14.7% compared to 19% in the prior year.

The adjusted effective tax rate from the full year 2020 was 17.8% compared to 17.5% for the prior year.

Looking at cash flows.

Net cash provided by operating activities for fiscal year, 2020 was $349 million compared to 300 of $91 million from the prior year period cash.

Capital expenditures were $47 million for 2020 compared to $99 million from the prior year period.

Free cash flow for 2020 was $302 million compared to free cash flow of $292 million from the prior year period.

Adjusted free cash flow was $315 million per 2020, the increase in free cash flow and adjusted free cash flow was primarily the result of lower capital expenditures aggressive cost control and effective working capital management.

As a result of closely managing cash and reducing debt leverage declined to 1.7 times EBITDA at the end of the fourth quarter.

We also have significant liquidity available through approximately $1 billion of combined cash on hand, and our revolver capacity.

During fiscal year 2020, $51 million was returned to stockholders in the form of $38 million of dividends and $13 million of repurchase shares.

Lastly, turning to our fiscal 2021 outlook the.

The global economic effects associated with the pandemic have been unprecedented in the scope and balance.

We continue to see severe volatility in our markets, making forecast of our future business challenging.

With that uncertainty, we will not be providing financial guidance for fiscal 2021 at this time although.

Although we are encouraged by recent developments with respect to a vaccine and therapeutics related to pandemic the.

This concludes our comments on the business and results for the fiscal year and fourth quarter 2020.

Operator, we are now ready to open the call the questions.

Thank you the question and answer session will begin at this time, if you use the guys speakerphone. Please pick up the handset before pressing any numbers.

So would you have the question. Please press star one on your push button falling should you wish to draw your question press the pound key.

Your question will be taken in the order and on for Steve. Please standby for your first question Sir.

And your first question comes the line of Robert.

It's been going on with credit Suisse.

Hi, good afternoon EPS.

Good afternoon.

Bob you just talked about the the Aero margins.

And you had a nice sequential uptick here in the fourth quarter is is this indicative of how we should think about the first half of next year I know, you're not guiding but I want to get a sense.

How that exit rate continues.

Yes, the as you said it is extremely difficult to give any sort of guidance even in the near term of given what's going on so we are encouraged we did take significant cost reduction actions that we believe contributed to that on the fourth quarter. We will continue to monitor the situation and respond accordingly.

[music].

Okay, and then Tom with the Max on grounding of positive.

Obviously here across the industry does this help margins at all day.

Only in the 21.

Not so much because of OE, but more because of provisioning.

We definitely.

Anticipate we're see some pickup in provisioning, but of probably be in the latter half of 21.

On.

You know up so thats, when we expect to see it upfront.

We'll be working with our customers in and trying to see how quickly.

The Max aircraft of brought back on line out of storage and then on.

What the new production rate ramp looks like.

So overall, if you look out over the next 18 months. It is the positive and that's a very good thing for the industry on very good thing for Woodward.

One of your peers talked about a six maybe nine month lag from the time of a recovery in the air travel to win the pickup in the aftermarket might materialize would you agree with that kind of timeframe. The I think we're talking more about their airframe business, but in general is that about the right.

Lag.

I.

I actually think it's a little faster than that profit in on that.

I think the airlines have done an admirable job of.

Managing costs and balance in their aircraft the too.

Optimize maintenance expenses I think as we get the fleets flying again that we will I believe there is the pent up demand that will be coming fairly quickly. Once we start be on what's what's the vaccines are out there once the pandemic is over.

Over if you want to call the.

I think you can see pickup in we refer a lot of people do but we refer to it as the bullwhip effect on the aftermarket and we do anticipate both.

Both aircraft and industrial markets that we participate in we'll see somewhat of a bull upcoming it's hard to pin down on that is.

But I believe its low quicker than the year other client or your other coverage.

Okay. Thank you very much.

You're welcome.

Your next question comes from the line of Pete Skibitski with.

On the global.

Hi, Good afternoon, Tom and Bob and Don.

Maybe Tom to start.

Can you give us the size of the declines that you saw in the industrial Nishu in fiscal year, 20, EMEA by Powergen and transportation and oil gas.

The index that by segment the.

The the.

The I missed the question power Gen of transportation and oil and gas was that the question of it it was yes.

Our fiscal 20.

How each of those Baird.

Correct correct.

Well they were all down.

There wasn't a single one of the only.

The only part of our business that was.

Slightly up with China natural gas trucks.

Everything else is down.

Okay. Okay.

So just thinking on fiscal year 21, I know for for turbines for power I think you know the GE order book year to date has been pretty soft so I imagine you're expecting.

And you've noted that area of lags I imagine you're expecting power gen to be soft tissue in fiscal year 21, I guess I'm wondering about.

The transportation area Marine and kind of CNG, China CNG as you know that seems like a secular play are you seeing continued growth there and then marine.

Not many people on the call I don't think on marine analysts, but are we seeing a soft comp going into fiscal year 21 or is there more downside in marine expected.

With.

I really expect that.

Our fiscal third and fourth quarter and possibly.

Possibly into the first is kind of the bottom.

Yes, exactly where the little hard to call.

And then we we anticipate.

Based on economic recovery.

Well start seeing some pickup but.

Yes, youre going in on the Marine market. There is no doubt has really of the marine market.

On every segment of the marine market.

<unk> was down.

And the utilization was also down.

We do see over the next few years, some brighter spots and particularly when you look at like LNG carriers and the like we see strong order book for those and we have good on.

The share on those type of.

Vessels.

Powergen when you talk about gas turbines, we kind of believe it on.

At the bottom here.

So you know were kind of.

And seeing some movement and it's the kind of the combination again.

You heard me earlier talk about.

We say gas turbines. The on is a combination of new builds but also aftermarket.

I believe.

A lot of inventory in the system has been trained I think we're going to start seeing some of that again once again, it's a five was highlighting timing is uncertain, but we were we watch carefully.

Of the.

The the material in the pipeline and we do think it's being drained and you know that there is some activity picking up and we'd start to see something there. So a lot of our.

Mark it's everybody's taken the aggressive action.

On the people of.

Attacked inventory, so as we see a little turn and the demand pickup you're going to see some.

Recovery first in service activity.

Secondly in filling the pipeline with the inventory and then third with OEM production picking up.

Okay. So it's one of your comment on the bottom you meant that for industrial as a whole maybe we're kicking along the bottom here for the first half of your fiscal 21, and then better days ahead in the back half of fiscal 21 for industrial the whole.

That's what we're anticipating again without some uncertainty of course with.

Yes.

If we get to the how do we start shutting down the economy again or do the vaccines come out of get widely distributed and people start generating economic activity again, so that's the uncertainty, but we would anticipate second half the b.

On seeing some improvements.

Great. Thanks for the quarter EPS.

Any of that.

Your next question comes from the line of Sheila Hi.

Good day with Jefferies.

Hey, good afternoon, guys and thanks for the time, Bob you not biting on your air on margin than we think you thought maybe.

Maybe I'll have Steve on industrial.

You guys have don into the double digits and fell on the single digits. This quarter of the Decrementals were a little bit lower despite I think organic decline decelerating, so kind of puts and takes.

Sort of thought you Mark.

Margins would have been better, especially given the divestiture as well.

Yes.

Moving back to.

Nothing no color in terms of 22 on one but we we are very confident that we have taken the actions the need to be taken.

Hey get us through this crisis and be provide the long term cash.

Cash to get us to the the targets the we've called out of the past them as you know we've called out 16% as a target and then going from there and we believe on on the longer term. We have made those actions we've we've.

Taking the right initiatives and we see a path to get there.

And maybe the way of or.

Some renewed confidence in that but.

As you point out.

It's very very difficult to see anything in the near term and industrials, even buffeted by between the oil and gas prices and covert they've kind of got on both the so they're almost even more difficult. If you will of them the aerospace side, so but confidence going forward.

Okay cool I'll take it.

Tom maybe one for you can you it doesn't seem like the aftermarket was down 41% of sequentially not much improvement on.

Maybe kind of what are your expectations any details of the providing what you saw on the quarter on that business.

Well on the commercial income I thought.

Yes, no aftermarket.

I'd say on it as we've seen.

I'll go back to the.

Airlines doing the.

Good job of managing their costs.

We.

We've seen some.

And the on which aircraft on which engines, we've seen yeah, sharper declines where they're not in service.

On the the core narrow body applications from the 320 CEO Neil.

The neo and.

We're seeing and the 77 like we're seeing pretty good.

Given the pandemic pretty good activity in those and we expect those narrow body programs to pick up here shortly in the aftermarket test.

Given their utilization will be the first of rise so.

Very very.

The difficult to forecast and the.

The monitor, but we we track working with our customers daily trying to make sure we will.

We keep them service to just make sure they can fly.

But you know the.

The hours aren't being put on enough to see that turned on yet, but we anticipate of becoming.

Got it.

Thank you.

Okay.

Thanks.

Your next question comes from David Strauss with Barclays.

Thanks, Good afternoon, everyone.

EBITDA is not.

Following up on that is on the last question about the aftermarket is there Tom are you seeing any sort of the discernible difference between.

John in non engine I guess your flight deck.

Products in terms of the aftermarket.

Well generally.

We always do this just from a standard the the instant products generate substantially more aftermarket than what we would call our airframe products and even in this downturn that's that's continuing.

So that that is the case and.

You know as soon as we see more hours on the fleet week.

We can then.

Forecast forward more aftermarket coming on because we have pretty good analytical tools to equate.

The hours per application means in terms of maintenance activity. So it.

It is definitely much.

Much of our heavy weighted to our engine applications.

Yes, I guess I was just talking about the level of decline in the 41% of that pretty similar in terms of the decline you're seeing across both on would have thought the flight deck side, maybe on the little bit more discretionary than the engine side.

Yes, good question we.

I don't have it exactly on the head, but I'm going to tell you as we look at the aftermarket is pretty uniform declines.

So okay.

Okay.

How about on today.

Yes, most of our products thrust of vs and things like that they are more of a function of the.

Of the flight profiles.

Than anything else and so I think as Tom said earlier the.

The the airlines have done a good job you're right of where they can apply a discretionary spending.

But otherwise it's the all of the engines running 24 seven on that.

Thrust reversers or go on twice the average life or once every flow excuse me.

Yeah, Okay and then.

What was what was the commercial OE business down in the quarter of the year down 63% in Q3, what was that in Q4, and how did that break out between ER business jet in air transport.

Oh Biz.

Biz jets hasn't been as bad.

Commercial OE was down 64 per.

Percent, so obviously the big decline.

Bizjets the.

The lower end of the of.

The smaller aircraft have been more impacted on the larger share of aircraft.

Aircraft, and we've kind of referred to it as a flight to safety. So if you have the ability to fly the business jet during these times as opposed to commercial traffic of some people are taking advantage of that so it hasn't been down as.

As much as commercial OE.

Okay.

And last one I guess on on cash per next year, I know I know, you're not giving guidance but.

Yes on what's what's the right way Bob what's the right way to think about I guess working capital cash taxes cash Capex. I mean are are any of those needful headwinds or tailwinds I guess either way relative to what we saw you you put up this last fiscal year.

Sure what I can tell you is no capex is under our control and so we intend to the whole that down to a number of similar to this year. So.

So on that call it $50 million range is where we intend to hold that obviously the equipment isn't being used at the same utilization levels.

So in the high times.

So there is not as much maintenance needed.

In that regard on what I will tell you is that the pattern on the working capital.

Is doing.

During times of declining sales of working capital generates cash.

And in terms of when we start to see increasing sales. It will start to flatten and then eventually be a use of working capital of the one major area. The we've been focused on the.

It will be the wildcard next year is our inventory levels and we've been talking a lot about our operational enhancements and operational excellence and true North and we do believe that that will allow us to.

Make progress towards our long term targets on.

Inventory management as a percentage of sales.

So hopefully that will continue to be the tailwind in 2021, even as we come out of the downturn hopefully.

Okay and on the cast the side of the payroll the Ferrari.

Sorry, you're breaking up the on.

Sorry, the cash cash does that mean will change the next year with the payroll deferral.

No.

All right. Thank you very much sure.

Sure.

Your next question comes from the line of quantum Connor with Cowen.

Hi.

Your name guys.

Hey, guys.

One of the I had a couple of quick ones first maybe you said this already but the non segment I was just curious why it was so low relative to you on.

Historical levels, Yeah, and one of the margin.

For about the future.

The the best way to.

Sorry, the best way to look at that Theres. The Theres a table in the back of the release that will show you. All the puts and takes we had a fairly large number as you can imagine during the crisis and so on of of one off events.

That we tried to.

Take out of the numbers. So that you can see more of what the operational side of equation looks like so.

There are kind of laid out on the back.

And in terms of going forward net net we still did the have cost reduction activities in our non segment of portion of the business as well.

So we do believe that we will run a little bit lower on an ongoing basis than we have in the past.

Okay. That's helpful addition.

Additionally.

Any sort of color on go forward tax free.

To me if you already set the Mr.

No we didnt, we didnt cover it well as your guess is as good of ours, probably on the where the administration is going to you know the kind of made their position known on terms of what they would like to do and now it's just a matter of when and if the selection ever.

Finalized.

We see what happens with the.

Congress on top.

Terms of what the ability will be to make any changes and if so when so no. We don't have any forward looking statements.

With respect to the impact of our tax rate going forward.

Okay.

And then just.

Well somebody asked about the aerospace margin improvement on the sequential basis and.

I know this I wondered what we should read and if anything to the sequential incremental margin, which was nearly 60% it looks like.

Is that.

It didn't look like mix was dramatically better.

But the aftermarket down as much as it wasn't always still down where you do make some money, but I was just curious like what's the.

How should we think about incremental margin should we be thinking about it on a sequential basis, because we're not in kind of the normal.

Seasonal pattern relative to prior years, because of the de stocking and kind of the real time nature of the.

What's going on in commercial.

Right. So when you look at the ratio of Bob can jump in here too the ratio of OE the aftermarket.

We.

We are really seeing some favorable.

Ratio, there and even though the they're both down but on a down dramatically as we move forward and the this is the on the we keep going back to the uncertainty in the market, but we can tell you that we kind of alluded to that in the.

The prepared remarks that aftermarket can recover first.

Which carries better margins and.

And so as we start to see that recovery I think you're going to see improved aircraft margins that then moderate as the OEM production rates come up so its little hard to exactly draw.

Draw that curve without knowing exactly when the utilization of kick up but.

That is we have a very strong aftermarket I think everybody knows have very.

Very.

Good installed base and the fleet the as we would now say the fleet.

Demographics were working in our favour pre cove it now we.

We think the aircraft that are going to get the most hours and the like are going to be more heavily weighted to woodward content than in the past.

Which will help lead to unit better aftermarket revenue going forward. So since the things pick up I think you are going to see it.

Good good.

Good margin growth tied the aftermarket than tempering of OE production.

Growth.

Yes.

Yes.

Yes.

The only thing I'd add would be of the kind of the numbers, which I think are significant we said the commercial OE down 64 aftermarket only down 42, so that kind of speaks to Toms comment about the mix, it's a much more favorable mix.

In addition sequentially. The biggest increase we saw was in military OE, which we've kind of talked about there isn't as much differential on the defense side between the OE and aftermarket. So that's a that's a nice tailwind for overall mix as well.

Good point, and that's sort of like I did not hear that correctly. When you said the mix at that makes complete sense.

The speaking to that with OE down in the 60% range for two quarters in a row.

Presumably that's well in excess of the underline.

Consumption right. There is some destock leading into that you have the sense for kind of where that should eventually level out and how long it will take to get back to kind of.

Underlying consumption versus the destock.

Thanks, Hi, Yes, I think we have to look at is it.

And then we have to track closely the our our customers stated production rates.

So obviously as Airbus moves to their 40 and 47 rates and then on on the knee on on the on Athree 20, and you know Boeing brings the Max backup and starts working tour of the toward their stated 31 per month rate.

No, it's kind of a timing issue when the those rates.

Actually materialize the worst start seeing the supply chain of then the stocking of the supply chain as those ramps occur so.

We stated earlier on that these.

Couple of these three quarters of you want to look at.

Looking back and looking forward one.

Probably the bottom as you.

The customers start those ramp rate.

And then and then there is the restocking of the pipeline so.

A little challenging the forecast as we highlighted but you know that the.

The pattern will occur and we will see those ramps and then we will see some inventory coming so.

The move into the second half of 21, we'll probably see better visibility on that and better able to identify what what that looks like for.

Sales in production rates.

Thank you guys.

Yes.

Your next question comes from Christopher Glynn with Oppenheimer.

Hey, guys good evening on.

Yes, I was curious you used the term severe of volatility in the press release.

Wonder wonder about the arrow commercial aftermarket in particular is that Ken.

Steady.

The sort of pattern or is that all over the place too.

Well I think the severe volatility is more on where we were.

You can say in February where we are today. So we took it as of a broader look.

I think of your question is are we seeing.

On a month to month.

Large swings no we.

With the minor so.

The swings at this much lower rate, which was high volatility.

Gotcha, and then on the cash flows.

You know the the working capital of kind of.

Kind of a normal flows the the.

The revenue pressure Im just curious about the overall supply chain of some.

Players.

Acting as temporary bankers for weaker players and if it takes a while for aftermarket to pick up but they're sort of a different sort of strains on working capital flows across the industry.

Yeah, right now and then.

For Woodward, how only comment on that.

We are.

We are seeing a very good HR management and very good.

Collections.

You know we know various suppliers in the industry have.

Our under more stress.

We are we are.

Doing very well on collections. They are is in very good shape.

And we will we're confident we'll continue that going forward so from that standpoint.

It's positive.

Yeah, we did we did mention the little bit about supply chain pressure and even some supply chain issues hampering sales and really what that is all about is more tied to disruptions due to people not being able to be in the factories.

Transportation around the world things like that have caused some supply chain disruptions so on product flow.

And on we're managing that quite well, but it's still out there on it.

Yeah, especially this this month the cases are picking up all over the U.S.. We are seeing some impact from that but you know that we know that will temper with time.

But but overall for Woodward.

There there's any pressure.

I signed on with it that way, but we're doing very well on on a R.

Great Thanks for that.

And as a reminder, please press star one for any questions.

And your next question comes from the line of Chris Ho with Barrington Research.

Hi, Todd fraud, and Don Good afternoon, the Chris.

Hey.

I wanted to touch on after the market.

If we kind of break outs.

Commercial aftermarket you're.

Youre seeing strength in defense aftermarket continue the industrial aftermarket as well as consideration of the.

The longer term opportunity.

That we could potentially see for LNG carriers.

Could you, perhaps provide some color or just some general thoughts.

On the mix of aftermarket.

And how we could see that potentially play out as we look into Q4 of 21 in the early part of fiscal year 22 could we see a situation where as we normalize it put this virus behind us.

That aftermarket for each of these respective areas normalizes in conjunction.

Yeah.

Thank you you have the right.

What.

Try to give you some you know low.

Low more color you know we.

If we start on our industrial side, we do see a strong aftermarket sales.

In the marine market.

In the oil and gas market.

And if you want to say in price.

Prime power applications. So these these are where you get very high utilization of the equipment.

On.

And as we said earlier all of those are are down today, and we have seen de stocking or if you want to take inventory management occurring.

So we do anticipate as we're looking at those as utilization picks up.

Much of solid.

Solid economic activity will will drive that pickup.

We will see both.

Normal utilization driving aftermarket plus we should see some restocking in the supply chain. So we anticipate that it's just the timing is difficult to predict but that that would follow the.

Pattern the.

Net.

Woodward weve seen quite a bit.

Bob and I, both been here quite a while the we've been through many downturns and that that is an exact pattern, we see coming out of every downturn. So we're confident in the pattern is nailing the timing of that so we do see that it is very applicable to the aircraft side.

As we we think theres going to be of pent up demand.

For maintenance.

And as that utilization goes up.

And the airlines.

You know I always want to make sure im not saying different on this airlines are flying safe, but they are being very smart and how the utilize their assets too.

To not generate.

The need for extra maintenance, but once they're all flying again that maintenance is there and those hours are accumulating and we will see that kick in and so again, it's a it.

It's going to happen, it's exactly when and we do think theres been destocking in the aerospace side as well.

I anticipate we'll see some pickup there so.

Latter half 21, or 22 based on the vaccine being successful price.

Probably but exact date, a somewhat challenging to predict.

Okay great.

Most of my other questions have been taken but I'll try for one more.

Perhaps you could comment on backlog today, where it was last quarter, where it is now in.

What your expectations are more specifically to the mix of backlog or what are you seeing there on the more granular level as far as the coal that impact and how that the back.

Backlog starts to accrue work turned the corner.

As we move forward.

Yeah, you know weve talked from time to time.

The.

We're on real time systems that the.

The formal backlog isn't very indicative, but to give you the kind of some color we did mention on the.

On the OEM defense OEM side that the largely driven by the supply chain issues and so forth.

We've seen significant.

Increase in backlog related to that.

And the same is true on the aftermarket side on the.

The industrial side.

Not as much there, it's probably more in pent up demand, it's not as much backlog as of this pent up demand Tom mentioned, the power generation side well, we've got a lot of work that is of those are of utilized a lot.

And when.

When you can't get into the you can't get people in the country to service them of et cetera et cetera.

You don't necessarily see an order backlog, but you see the clock ticking down of the time when they have to do something so I think it's more of a I'll call on it in formal backlog that we're seeing on the industrial side on.

On the commercial OEM.

OEM.

Obviously, there's not a lot of backlog there until we start to see on the production rates increase again.

Thanks, Bob I appreciate all the color I'll hop back in queue. Thanks.

Thanks.

Your next question comes from the line of Michael Ciarmoli with true.

Hey, good evening guys. Thanks for taking the call here.

And the question.

Bob maybe I'll go back to the beginning of the call on trying to dig into these margins a little bit.

You know not asking for guidance, but looking at the DNA and the R&D.

I think the combination of both of those down 24 million sequentially. You, obviously got rid of the renewable but are those sustainable run rates and then again just going back that non segment.

The close to $40 million of operating expenses GAAP.

On this quarter, how do we think about that going forward.

There are there are clearly elements of it that are sustainable, but theres also elements that are purely driven by where we're at in the crisis and phases of the crisis. So I think it is very difficult to say what types of costs are you going to have to put on the when things start returning.

So you don't necessarily need to have that activity going on now, but as things return youre going to have to invest on that as we go there were a number of items. When you go through the list of all the actions of that we took but you can see for example of foregoing of the.

Our bonus of.

For the year on so on.

Some of the salary reductions that were taken.

Some of the furloughs that we took during the year furloughs or temporary they come back as the demand goes up yes. There were a substantial number of layoffs of substantial reduction in a lot of the temporary labor and things like that of that will not come back early on but may come back as the recover.

The progress is so low.

Well the only thing I can tell you of for certain is that we do believe that the cost reductions and the actions that are sustainable will improve.

Profitability as we go forward, but I can't tell you that when you look at some of the dollar amounts were showing of savings today, but those are all sustainable going forward. It it will be the you know some portion of that but not all.

Got it no I get it what about what about the gross margin down sequentially on on higher volumes and get rid of the renewables you have the favorable mix when aftermarket what drove the sequential decline in margin gross margin most.

Most of the Phil just the all the you've got a lot of fixed cost base that.

You get to a point, where it bleeds into of low the.

It's not the variable margin, but when it gets out of the gross margin level.

That you see the.

The degradation.

Okay.

I mean.

I guess last quarter, you gave one quarter out you know as you sit here today is your visibility better or worse, you think from from three months ago.

The today I'd say, it's worse.

No I mean, we're heading back add right right now.

Well, it's kind of like well, we'll see what happens, but everybody started a shut down again, so I think it's actually gotten worse than it was a month ago on you know everything was kind of going along we're bouncing along the bottom on the it on.

Now all of a sudden you see the cases whenever they elsa increasing we exceed the states shutting down on it I think the visibility is actually less than I think that also contributes to the the volatility of Tom mentioned the that you know every day, we seem to have more of.

News some negative some positive flow vaccines therapeutics Lockdowns Wow, what a month, yeah ill tremendous amount of uncertainty.

Yeah, No I got it yes, certainly don't and did what you guys are trying to navigate through all right perfect. The law I'll jump back in the queue. Thanks guys.

Thanks.

And your last question comes from the line of Robert spend going on with credit Suisse.

Hi, I just wanted to follow up with the with a couple of things.

Tom have you seen any change in used serviceable material coming into the market I think in the beginning of the pandemic people were not yet parting out aircraft are taking apart engines, but have you seen any evidence that this is happening.

Well, we're confident it is happening we havent seen.

Actual.

Impact from that.

So.

Yes, you're correct I mean people are parting out a there will be more.

Yeah, you service sort of civil material.

A lot of that.

Thank you and once again, you got to look at the fleets.

You know what impact certain fleets more than others narrow bodies as you know the sweet spot for us both on.

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Neil on.

The the new narrow bodies Max the neo but also on a 320 CEO.

I don't think theres can be much impact from U.S service material on those applications, but we will see it on some of the much older aircraft and.

We're we're we're monitoring that the to date.

We haven't seen it but you know it's hard to say how much of impact going forward.

Okay, and then just as a last one.

When we look back at the 787 delays and partnering for success there were changes in contracts to help.

The only get back on its cost curve is anything like that happened with the Max.

No.

Okay, not not not per Woodward, yes, okay. Good. Thank you very much okay.

Okay. Thank you.

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

Okay, well I appreciate everybody joining us today.

We we appreciate always talking with you its a interesting times I guess is what you could also call. This yeah. We did highlight and I just want to leave you all with the message you know Woodward is strong.

We managed the.

Pandemic well to date, we anticipate we will continue to manage it well coming out of it we're going to be even stronger.

Financially as well of technology and product and growth wise. So I look forward as we get into the next few quarters ideally seeing a change in inflection point happening and we'll be talking to you about upturns in sales not too long from now we we hope so thanks, Jim Turner, we're talking we're talking to all of you I'm sure.

During the next quarter, Thanks again bye.

Ladies and gentlemen that concludes our conference call today, if you'd like to listen to a rebroadcast of this conference call will be available today at 730, P.M. Eastern standard time by dialing 1855.

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Companys website www Dot Woodward Dot com for 14 days, we thank you for your participation on today's conference call and ask that you. Please disconnect your line.

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