Q1 2021 Woodward Inc Earnings Call
Good day, ladies and gentlemen, thank you for standing by and welcome to the Woodward incorporated first quarter fiscal year 2021 earnings call. At this time I would like to inform you that this call is being recorded for rebroadcast and that all participants are in a listen only mode. Following the presentation you will be invited to participate and a question and answer session.
John.
Joining us today from the company are Mr. Tom Gendron, Chairman and Chief Executive Officer, Mr. Bob Weber, Vice Chairman and Chief Financial Officer, and Mr. Don Guzzardo, Vice President of Investor Relations and Treasurer, I would now like to turn the call over to Mr. Guzzardo.
Thank you operator, we would like to welcome all of you to Woodward's first quarter of fiscal year 2021 earnings call.
And today's call Tom will comment on our markets and the 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 today's earnings release, you can find it on our website at Woodward Dot com.
We have again included some presentation materials to go 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 website through February 15, 2021, the <unk>.
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 refer to and highlight our cautionary statement and as shown on slide three.
As always the 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 ongoing COVID-19 pandemic.
The elements can and do frequently change please consider our comments in light of the risks and uncertainties surrounding those elements, including the risks, we identify and our filings.
In addition, Woodward is providing certain non U S GAAP financial measures.
The direct your attention to the reconciliations of non U S. GAAP financial measures, which are included in today's slide presentation, and our earnings release and related schedules. We believe this additional information and financial information will help in understanding our results.
Now turning to our results for the first quarter.
Net sales for the first quarter of fiscal 2021 were $538 million compared to $720 million from the prior year quarter of.
The decrease of 25%.
Net earnings and adjusted net earnings for the first quarter of 2021 were both $42 million or 64 cents per share for.
For the first quarter of fiscal 'twenty, and 'twenty net earnings were $53 million or <unk> 83 per share.
And adjusted net earnings were $71 million or a dollar and 10 cents per share.
Net cash provided by operating activities for the first quarter of 2021 was $147 million compared to $27 million from the prior year quarter.
For the first quarter of 2021 free cash flow and adjusted free cash flow were both $139 million for.
For the first quarter of 'twenty and 'twenty free cash flow was $10 million and adjusted free cash flow was $29 million.
Now I will turn the call over to Tom to comment further on our results strategies of the end markets.
Thank you Don and good afternoon, everyone.
And the negative impact of COVID-19 continues to weigh heavily on the world's economy with the resurgence and new viral variants contribute contributed and significant uncertainty.
While the first quarter of fiscal 'twenty, one showed signs of stabilization many of our markets across the globe, we still anticipate quarterly volatility related to the pandemic.
And importantly, we took swift action at the beginning of the pandemic to prioritize cash management and the lean operational structure as.
The result of these actions our balance sheet cash flow have remained strong and as we announced today, we have restored the first quarter dividend the same level as the first quarter last year.
We continue to closely monitor the situation and strategically adjust our business to align with customer expectations.
Maintaining our strong financial position and continuing to invest from the future.
Moving to our markets aerospace continues to be challenged the commercial OEM and aftermarket and the most substantial declines year over year.
And we're anticipating future improvements and passenger traffic with the rollout of vaccines across the globe.
Additionally, the Boeing 737, Max since returning to service and many key markets with production rates expected to improve and 21.
The first of all Ian spending and remained solid across fixed wing and rotorcraft applications. However.
However, we continue to anticipate a softening of guided weapons of production volumes.
Defense aftermarket activity remains strong due to improved U.
The improved U S fleet readiness initiatives as well as global upgrade programs.
Turning to our industrial.
<unk> market segments and power generation, given the already depressed gas turbine market low inventory levels and pent up demand from repair and overhaul, we do not expect of us markets be it the negatively impacted by the pandemic.
Increased emissions regulations continue to drive the shift to natural gas powered and cleaner burning diesel engines. We also foresee continued growth and global energy demand.
Moving forward with the bulk of this expansion coming from Asia as developing economies.
And transportation, China, and natural gas truck demand was strong and we anticipate seasonal pressure due to high demand for natural gas during the winter months.
The global Marine market continues to be severely impacted by the pandemic.
The oil and gas market remains weak globally due to low oil prices and lack of investment although rig counts of showing some signs of improvement in recent weeks.
The summary, our markets are stabilizing we are beginning to see the payoff of our aggressive actions to address the challenges of COVID-19.
We're consistently engaging with our business partners to assess near term market demand and capitalize upon emergent opportunities.
While we will still see a significant amount of uncertainty and volatility in our markets. We do anticipate improvement as we progress through the fiscal year.
We remain focused on operational excellence delivering value to our shareholders and positioning and Woodward and capitalize upon future market opportunities as they emerge.
And I'd like to turn the call over to Bob and discuss our financials in detail.
Thank you Tom.
Aerospace segment sales for the first quarter of fiscal 2021 were $322 million a decrease of 32% from the prior year quarter.
Commercial OEM and aftermarket sales remain weak and as a result of the pandemic commercial aftermarket sales were down 47% and the first quarter of 2021 compared to the prior year as a result of depressed passenger traffic on a bright note sequentially commercial OEM was up 13% driven by increasing demand.
And for narrow body systems.
Defense OEM was down slightly in the quarter compared to a strong first quarter of the prior year, primarily due to lower sales of guided weapons, partially offset by higher sales and both fixed wing and rotorcraft the <unk>.
Aftermarket sales were flat compared to the prior year quarter, although activity remains solid.
We're all defense sales and the quarter were negatively impacted by Covid related absenteeism and supplier disruptions.
Our defence backlog remains strong and we anticipate defense spending to continue at healthy levels.
Aerospace segment earnings for the first quarter of 2021 were $46 million or 14, 4% of segment sales.
Compared to $93 million or 19, 6% of segment sales for the first quarter of 2020.
The decline and segment earnings compared to the prior year was the result of lower volume, partially offset by cost reduction initiatives.
Sequentially the margin decrease from the fourth quarter of fiscal 2020 was primarily due to lower defense aftermarket sales as well as the timing of spending on R&D programs.
Turning to industrial.
Industrial segment sales for the first quarter of fiscal 2021 were $216 million compared to $246 million and the prior year period.
The decrease of 12%.
Excluding the renewable power systems and related businesses, which were divested on April 32020, and I will referred to as Rps. The industrial industrial segment sales for the first quarter of 2020 were $218 million.
The decrease in industrial sales was primarily due to the Rps divestiture, the weak oil and gas market and ongoing impacts of the pandemic, partially offset by strong demand and the current quarter for China and natural gas trucks.
Foreign currency exchange rates positively impact of the industrial segment sales by approximately $9 million per the court.
The industrial segment earnings for the first quarter of 2021 with 33.
Million dollars or 15, 2% of segment sales.
Compared to $28 million or 11, 5% of segment sales in the prior year.
Industrial segment earnings increased primarily as a result of cost reduction initiatives.
Excluding Rps industrial segment earnings for the first quarter of 2020 or $26 million or 11, 9% of segment net sales.
Non segment expenses and adjusted non segment expenses were $23 million for the first quarter of 2021 compared to non segment expenses of $51 million and adjusted non segment expenses of $27 million for the same period last year non.
Non segment expenses for the first quarter of 2021 were favorably impacted by cost reduction initiatives.
At the Woodward level.
R&D for the first quarter of 2021 was $32 million or 6.1% of sales compared to $37 million or five 1% of sales from the prior year quarter.
SG&A for the first quarter of 2021 was $56 million compared to $62 million from the prior year quarter.
The declines in both R&D and SG&A reflect our cost management actions taken in response to the pandemic.
The effective tax rate and the adjusted effective tax rates were both 12, 6% for the first quarter of 2021 for.
For the first quarter of 2020, the effective tax rate was 13, 3% and the adjusted effective tax rate was 17, 1%.
Looking at cash flows.
Net cash provided by operating activities for the first three months of fiscal year, 2021 was $147 million compared to $27 million from the prior year period.
Capital expenditures were $7 million for the first quarter of 2021 compared to $17 million per the prior year quarter.
Free cash flow and adjusted free cash flow for 2021 were both $139 million.
Compared to free cash flow of $10 million and adjusted free cash flow of $29 million from the prior year period.
The decrease excuse me of the increase and free cash flow and adjusted free cash flow was primarily related to aggressive cost control the effective working capital management and lower capital expenditures.
We are paying down debt and reduced have reduced our leverage to one seven times EBITDA at the end of the first quarter from 2.0 times EBITDA at the end of the prior year quarter we.
We have significant liquidity available through approximately $1.2 billion of combined cash on hand, and revolver capacity, which allows us to invest and new programs and other future growth opportunities, which will contribute to increased shareholder value.
Importantly, we increased this quarters dividend to pre COVID-19 levels, underscoring, our confidence and Woodward financial position.
While the sales volume declines we're seeing are significant.
The rest of actions we took at the beginning of the pandemic to prioritize cash management and a lean operational structure are having a positive impact on our performance.
Lastly, turning to our fiscal 2021 outlook.
The dynamic and volatile nature of the COVID-19, global pandemic has continued to cause uncertainty and many of our markets. While the ongoing rollout of vaccines across the globe has begun new viral variance and regional resurgence is make forecasting the future of our business challenging and the near term.
Given this uncertainty and the protracted nature of this crisis, we will not be providing financial guidance at this time.
Although we are optimistic that ongoing stabilization will lead to recovery across the globe.
This concludes our comments on the business and results from the first quarter of 2021, and operator, we are now ready to open the call to questions.
Thank you the question and answer session will begin at this time, if youre using a speakerphone. Please pick up the handset before pressing any numbers should you have a question. Please press Star then one on your push button phone should you wish to withdraw your question press the pound key.
Your question will be taken and the order. It is received please standby for your first question of Sir.
Our first question comes from Robert Spingarn from Credit Suisse. Please state your question.
Afternoon.
Good afternoon, Hi, Robert.
You just I, Bob I think you talked about the the sequential.
It'll increase and commercial OE.
I guess from quarter to quarter here.
And when should we start to see that <unk> hundred 20 rate hike factor and when will you start drawing that through and where are you on Max rate.
And maybe Tom I'll, let you go ahead, yeah I'll say.
The the <unk> hundred 20, we're tracking.
With the Airbus production schedule.
As it flows back through.
From from Airbus for the direct sales to them and also through the engine Oems.
So we're right on line with what they're doing we always are.
Or maybe a couple of months ahead of those rates.
On the Max.
It's a little it's a little hard to say and that Theres, a lot of inventory and the system and.
We're following Boeing.
The guidance to the supply base on how to prepare for the ramp up.
And that'll be something we'll be watching very closely we're well prepared to meet the ramp.
As they move forward.
And.
I think I can comment much more on what rate they are at today.
Okay, and then just on the on the aftermarket side. We've started hearing some of the airlines talking about loading up for heavy maintenance just because so little has been done over the past year are you starting to see any corresponding evidence of an increase and engine inductions for shop visits coming up here during 'twenty one.
Yeah, Robert we're seeing forecasts and discussion with our customer that it's going to ramp up.
But we did.
Our first fiscal quarter was still of soft commercial aftermarket quarter, where and when you were sequentially down, but the the forecast looks positive and as we've highlighted in previous calls.
The aftermarket definitely will be the first to recover and we do anticipate as we move into <unk>.
The second half of our fiscal year that we're going to start seeing aftermarket recover.
Okay, and then just the last one on the Triple seven X schedule change how does that affect you you know I imagine youre on the engines, but possibly also.
One of the aircraft are you involved at all and the actuation side and is there anything you could tell us about what's happening with that airplane.
In terms of actuation issues.
Yeah, I'm not aware of any actuation issues I can't comment on that.
But where we're on the aircraft both on the.
Direct to Boeing but also on the G and IMAX the GE.
We're in good shape in terms of certification and having the hardware ready and we're just working with the customers on the extended entry into service timeline, but.
And from a Woodward standpoint, we're and we're in quite good shape on that program and there is no margin.
No significant incremental cost for you from this push to the right or anything like that.
Not significant Rob you know, obviously when things move out there's additional cost there is no doubt because we have to continue to support but it's not significant customers.
Okay. Thanks, Tom.
You bet.
Thank you. Our next question of comment comes from the line of current from Kannan <unk> from Cowen Your line is open.
Yes, thanks, guys.
And kind of following up on Ron's question.
I was a little curious of the.
The implied aftermarket sales were down two whatever $63 million or something in the quarter.
Which is lower than the last two quarters and we've heard like general electric and talked about.
A fairly significant sequential ramp and there and spares.
And their quarter Honeywell saw a big pick up sequentially as well and.
I'm just curious do you.
Any.
Any lumpiness or anything you could point to that are you.
You seen anything since the quarter, where youre starting to see evidence of demand picking up I'm, just curious what might explain.
The difference and it's all of you and some of the other guys.
There's always variability and the aftermarket the spin on products, you make and timing.
And as I mentioned the rock Rob.
We are seeing.
The increased forecast coming and in terms of like engine shop visits.
We're starting to see activity.
In terms of.
Our Q activity for <unk> and.
Enquiring about spares and so.
And we do see another one is the the Max.
Starts to come online both the.
Production ramp, but also reintroducing the parked aircraft, we do anticipate and are seeing signs of increased initial provisioning sales. So we do have confidence that as we move through our fiscal year, we are going to see a ramp up. So I think it's just between what you saw from GE and Honeywell and ours is.
And it's in the normal quarter to quarter variability and I don't think there's any disconnect.
Between the companies and the markets.
I think you'll start seeing.
The sequential improvements as we move through the year.
Okay. So you think the December quarter sort of marks the troughs.
Just on what Youre seeing today.
Definitely.
We're down at the bottom now.
How fast do you come out of that trough and Theres no doubt about that but.
And that we're down at the bottom, but we do anticipate we're gonna be increase and as we move forward.
Okay.
One other question.
And forgive the to non operating one but you know the non segment I'm just trying to get a sense for what the non segment would be on an ex items, the onetime items basis and the.
The tax rate was also.
Fairly low this quarter and.
Maybe Bob can you comment on.
Which I don't want to be wrong, and our modeling because of those items.
If you could maybe baseline us on what we what.
What we should be utilizing.
For non-GAAP and tax rate.
Yes from the first quarter is always a little heavy for us for non segment compared to the full year.
And the one time items, we had if you recall and Youll see this later and it's.
And the back of the the release also was the gain on the sale of Duarte and.
And the impairment of the Rps assets. So that's what we took out to get to.
More run rate oriented so you'll see a decline to a more consistent level with the prior year as we go through the year.
Okay and tax rate as well.
Yes.
Yes, the tax rate.
We'll probably hover in this area of little bit higher.
And the <unk>.
17, and 18% range overall as we go through the year.
Okay. Thank you I'll get back in queue I appreciate it.
Thank you. Our next question of comment comes from the line of Christopher Glynn from Oppenheimer. Your line is open.
Thank you good afternoon and good evening.
And nice job on the the cash work.
Thank you. Thank you curious the.
The incremental margin sequentially for industrial and 65, 70%.
Jim.
And just.
Wondering with Rps.
Sure.
Getting a little room behind you and that divestiture and some restructuring.
Is the kind of mid teens level sustainable now or substantial variability still expected on on that if we could remove the variable of.
Pandemic might be in such a way and subsequent months.
Yeah.
Well first of and I'd say is.
And we're committed and working hard on.
Increasing our industrial margins like we've talked.
Over the last couple of years.
So some of some of the improvements have come from the.
The divestiture cost reductions, but we did have and the quarter, we had really of favorable margin mix on products.
As we move through the year it would be aggressive to say that we were going to hold at that level, but we definitely are going to be year over year improved.
Industrial margins and and.
And we go through the year, we have to see how that margin mix plays out but year over year industrial will definitely be improved.
The mid mid teens.
Little on the aggressive side for this year, but that's the path we're on.
Okay and then.
It just did.
The defense several quarters in a row, where the supply chain issues and some absenteeism.
Seemingly impacted that and market with those kind of specific criteria more than your other end markets and just.
Curious.
<unk>.
Why there what youre seeing and.
And.
Supply chain issues ease the defense has.
And nice rebound just structurally kind of waiting for the start date type thing.
Yeah, what I'd first day as we've got a really strong backlog and defense.
A lot of our defense sales on the aerospace.
And come out of our Santa.
Santa accretive site and also our of Niall site, but.
California and had with the pandemic was hit hard we had severe absenteeism supplier issues.
To wear.
We didn't get out.
Due to that the <unk>.
Sales of aren't as high as they could be with the backlog. We had so we do have that backlog, which we will be able to.
Sell through the remainder of the fiscal year. So we expect to have the.
The Denton and that as we move forward.
And it just happened to be location specific and supplier specific problems and it happened to hit the defense side harder and it did our commercial side just due to the location.
Great. Thanks for the color.
And welcome.
Thank you. Our next question of comment comes from the line of Pete <unk> from Alembic Global Your line is open.
Yes, good afternoon, and Tom and Bob and Don.
Switching and switching back to industrial and I guess, Bob can you give us maybe a ballpark of how much China <unk> was up and the quarter.
I couldn't give you a specific but it was significant and the quarter.
Okay.
Yeah and.
And you know Pete you've followed us long enough how volatile that can be right. So that's the one.
One thing that's extremely difficult for us to.
Peg any given quarter.
Yes that was kind of my second question just the.
And the language on the slide it seem to indicate that you guys thought that maybe sequentially the China CMG could be it could be down.
On revenue is that just I guess, because the seasonality is that what you guys are expecting.
Well the one you always have to look at.
Is the Chinese new year, and the Chinese new year always slows down production and you can kind of.
Look at it and as our holiday season.
Less working days slipped down production, so and the first calendar quarter, you definitely have that.
We do see variation depending on.
Oil or diesel and gas pricing spread there was some volatility and that is.
Coming down gas has now dropped quite a bit and as and a good place moving and the right direction.
We also see positive going forward and you.
And just have to expect some volatility and that market, but positive going forward is there is still of the regulations emissions.
Clients regulations, coming up where we're going to see higher use of natural gas.
The China six regulations on diesel engines goes into effect and July that's favorable to natural gas powered trucks.
So we see some positives going.
But due to seasonality and some just normal variability and that market, we always have to be of low cautious, but the trends are and the right direction.
Thomas are you expecting the other buy ahead like and like the June quarter and front of China. It seems like you had some buy ahead last time.
There were some buy ahead, but one.
One of things that's a little bit different is there's some restrictions that are going to go into place and various large.
Cities that won't allow.
Non China six trucks to come in so I think there'll be.
Maybe some buy ahead, but it might be more limited than in the past.
Okay. Thanks for the color guys.
Yes, I agree with the.
Thank you. Our next question of comment comes from the line of Greg Konrad from Jefferies. Your line is open.
And just to follow up on commercial aerospace and you mentioned some sequential improvement on narrow bodies, but what are you seeing on the wide body side, given some commentary around destocking and some further rate cuts on the wide body side.
Well, we definitely have seen the rate cuts on the the wide body and.
I think.
Yeah, we would say from of Woodward impact that the inventory Destocking has occurred.
So that that I think we.
We believe has occurred.
But the the rates are down low.
We're working with our Oems on those rates, but.
We definitely do anticipate wide bodies are going to take a fair amount longer than the narrow bodies to recover and.
That's that's built into our production plans and.
And on their activity.
And then just the decremental and aerospace has been held pretty constant at a little bit over 30%. Despite maybe some unfavorable mix with the aftermarket at least in the quarter I mean, given some of the productivity improvements and cost take out I mean, how are you. When this market does turn how you're kind of thinking about incremental <unk>.
<unk>.
Yeah, and the one thing you're highlighting is.
Some will be looking forward to.
And we were.
Phil the ties and have the capacity to handle much higher range. So.
And that's had an effect on us to be operating below capacity.
As we move forward.
First of all I would say and Bob you may want to jump in and comment too.
With the margins, we have and aerospace and the 30% decremental is actually fairly good given the significant volume drops we would expect to see that reverse on the other on the other and as we ramp up and down.
And about there and anything to that.
Yeah, you know early on when the pandemic started I'd throw out of 40% and we didn't know and.
Still really don't know, how it's all going to pan out, but we thought it would be much higher.
And so I think it speaks to a lot of the cost actions and everybody took.
And that of kind of blunted that on the downside, we would hope that because of the same reasons that we get some leverage as we come out, but we've got a ways to go to get the capacity up first right and so as Tom said, we get.
A very a lot of capacity available.
A lot of capital that's not being employed so once we get that humming, we should see some nice incrementals going forward.
Thank you.
Thank you. Our next question the comment comes from the line of Chris Howe from Barrington Research. Your line is open.
Good afternoon, everyone.
Good afternoon.
Following up just on some of the questions.
We went through.
As it pertains to the last one of the longer this as prolonged as it relates to and aerospace recovery.
Can you talk about how this may change your outlook as far as this perhaps accelerating.
The rate at which we go into a recovery.
And along that same path of <unk>.
Thinking.
For the industrial segment, you mentioned the gas turbine expectations.
That being so influenced by the pandemic perhaps.
Some additional insight into the positives, you're seeing and the industrial segment.
Who knows how the current administration will.
Help economic growth as far as infrastructure spending, but some more detail on the positives there that may offset some of the continuing pressures that youre seeing in the industrial markets.
Sure.
And particularly around the turbo machinery side.
And it's everybody's well aware of that market with <unk>.
Down for a long time and.
And it's depressed what we're seeing right now is that.
The inventory had been really pull out of the pull out of the pipeline.
The margin was down but now we're starting to see the order books starting to fill in.
And the pent up demand and the aftermarket so we really think debt and net gas turbine and.
The rest of the turbo machinery steam turbines compressor market that.
And we're only going to head up that there really isn't.
Really any more room.
To go down we just don't see it happening and so all indicators are pointing up and as we move through the year, we see the order book filling in and that we will have and.
Enhanced sales and that's that's part of our business going forward. So that's why we highlighted that things are all moving in the right direction and the orders are starting to flow. The RFP activity is picking up and thats globally. So.
We feel pretty confident that that's on the upturn.
I think the other question was on the.
Commercial.
Aerospace market and I think a lot of the of.
So all of what happened over the holidays. There's a huge we believe there is a huge pent up demand for travel and as soon as the.
And the vaccines get all of the more we're going and we're going to see a lot of people heading.
And on trips and.
That's probably the first leisure travel business will pick up.
And <unk>.
And that more aircrafts.
And the service that the utilization will go up and we also I can.
And the airlines for the job they've done during this pandemic and how they've managed utilization and how they've been able to.
Keep keep.
Keep the aircraft flying and safe, but to balance off when they need it.
Heavier maintenance.
So that is going to come our way, it's just a matter of timing and.
And we're beginning to see indications of that that's picking up so.
John.
And as long as the the vaccines and get distributed and.
People get a little more confidence I think youre going to see more.
More rapid recovery and.
And the commercial aftermarket.
And obviously followed up by the ramp upset.
The narrow body.
Players are talking about for the neo and the Max and then that hopefully will follow up of some international travel and and we'll start seeing maybe some.
The production rate recovery on the wide bodies, but that'll take a little longer.
Thanks, Tom I appreciate your color as always and I'll hop back in the queue to give others the channel. Thanks.
Thank you.
Thank you. Our next question of comment comes from the line of Michael share Moly from Truest Securities. Your line is open.
Hey, good evening guys. Thanks for taking the question here.
And maybe.
And I don't know if this is.
Tom or Bob, but you gave us a little bit of color on the industrial margin and kind of what to expect looking at aerospace.
Kind of big Big sequential decline and thinking about I guess the recovery here. It seems like the OEM you had that sequential improvement I'm, assuming there's a little bit of a mixed issue there with with OEM margin below aftermarket and then you talked about the.
Guided weapons in that segment being down I think you've historically said those are pretty good margin should we think that this 14 and a half level could stay if aftermarket is a bit squishy this quarter and you get an uplift and OEM does that does that put more pressure on margins or just anything you can give us about.
The margin trajectory, maybe year and aerospace.
Yeah, what I would say a lot of it.
And based on recovery and we anticipate commercial aftermarket to recover.
We also expect to have higher military aftermarket and OE sales going and the remainder of the year.
That'll that'll help the mix and I.
I guess I would just say that as we look at the full fiscal year, we do anticipate that our aero margins are going to improve throughout the fiscal year and the <unk>.
Volumes recover and the aftermarket activity takes place.
And I'm highly confident you'll see Woodward backup and that 20 plus percent segment margin for error that may take us into the fiscal year 'twenty two to get to those numbers, but we will be ramping through the year if.
And the outlook and.
Recovery and travel picks up so we always got to say theres still the volatility uncertainty out in the market.
But it.
Definitely.
Was.
During this quarter was tough.
Tough quarter on the mix and the volume.
And I do want to address your question, there's no doubt.
Our aerospace.
The model is the aftermarket carries higher margin the OE and.
And so if you get.
Higher OE without the aftermarket enhancing and increasing and you will see some pressure on your margin. So that is the true.
And the point that our business has and.
But we see everything moving in the right direction going for the aerospace segment going forward through the fiscal year.
Got it can you maybe just on that can you talk Tom maybe your current utilization.
Rock cut facility I mean give us a sense of where you are in terms of capacity because I would imagine as some of those <unk> lines come back on even though they are dilutive versus aftermarket maybe you get some better absorption and I mean can you give us a sense of where rock cut is right now.
And yet there's no doubt, we're going to see real leverage on the upswing.
I would say rock cuts probably operating.
40% of capacity.
So we have that.
A lot of lot of capacity and that that's one thing everybody should take away is that those investments have already been made.
And during this downturn at all of our facilities, including rock cut.
We've been improving the production lines are.
Doing a lot of continuous improvement kaizen activity.
And it's all been the preparation so that when we do recover.
And the markets recover we're improving velocity that will help working capital we're improving the.
And the production lines, so to improve productivity going through those lines. So we haven't just been sitting during this pandemic.
And then looking at it and saying Hey, we're going to we're going to improve all of our production lines and we're going to come out of the stronger we have the capacity we've got good investment and there and we're going to have high leverage on on that when the volumes recover or as they recover.
Got it got it and just last one from me just on the working capital and looked like.
Inventories up a little bit you had a great free cash flow quarter, obviously, but how should we think about maybe inventory specifically.
And planning for that recovery and.
OEM rates may be ticking higher and being ready for that aftermarket.
Do you think inventory investment is going to be a bit of a.
Headwind to cash.
And normally would be as we come back, but we've kind of talked from time to time about all of the operational enhancements and improvements and true north work that we've been doing and so on so.
We are fairly confident that we're going to be able to offset what would normally be the pattern and so working capital needs would be of headwind as we go forward and we still anticipate the receivables will be as things improve hopefully throughout the year.
But we're feeling much.
Better about inventories in terms of progress, we're making to bring down our overall levels and counter some of that natural clearly will have to increase inventories to the.
Cope with increasing sales, but hopefully we'll be we have brought the base down and will continue to bring the base down so that we won't see significant inventory movement as we recover.
Got it perfect. Thanks, a lot guys.
Thank you.
Thank you, ladies and gentlemen, once again, if you have a question or comment at this time. Please press Star then one on the telephone keypad. Our next question or comment comes from the line of David stress from Barclays. Your line is open.
Thanks, Good evening.
Excuse me.
Uh huh.
In terms of what are you going to do with the with the cash.
Are you just going to use continue to use excess cash and delever and now the U.
Readjusted the dividend or would you would you expect to get back into the.
And the repo market and.
How are you thinking about your M&A pipeline at this point.
Yes, yes.
Oh I'm sorry go ahead, John go ahead, Bob Goodbye.
And.
You saw one we've got the dividend back to our pre COVID-19 levels. So that was kind of a step number one.
Step number two is probably going to be more along the lines of growth we have plenty of.
Organic opportunities to invest and we of inorganic opportunities to invest and.
And we will continue to watch for opportunities as they arise.
Of the repo market. We've said that we are normally kind of watch and see where the share prices and so on but while we.
To believe we're always a good investment.
Or at this point don't really have a lot of plans to get back into the repo market going forward on the <unk>.
Net side, the grape juice and we kind of paid off all of our short term pre payable debt.
And so there's almost the entire.
Revolver is available to us and.
And we really don't know for a number of years have any.
The tranches of long term debt due and the last barrage of acquisition gave us a fantastic opportunity the spread the debt out over the next.
At that time of about 15 years from now we're probably 13 of 12 years. So.
I think we are of great runway with a lot of balance sheet strength not a lot of that due some cash coming in and it will give us some great opportunities.
Okay.
And without obviously, giving us all of the moving pieces in terms of free cash flow and earnings would you expect this to be.
Other year, where your cash conversions over 100% of net income.
I would.
And we'll see how the year pans out but.
Obviously.
This was a strong quarter.
We don't anticipate that every quarter is going to be as strong as this quarter was.
And I've mentioned headwinds related to receivables, if and as we recover.
But we do believe it will probably be north of the 100% yes.
Okay, and then last one from me I know you guys aren't giving full year guidance from the past you talked about kind of what to expect sequentially for the next quarter would you expect.
Q2 to be and up sequential quarter from an EPS standpoint, or more and the flattish range.
And I think the first part of your comment it was the right part of we're not giving guidance.
Oh, okay. So.
The very hard to.
One minute of Everything's looking great.
And vaccines. The next minute, we got all sorts of problems and we can't get him out I.
I agree with the kind of dominate I think theres, a tremendous amount of pent up demand and so forth it'll really give the passenger traffic going again, but when and how quickly I think there was an earlier question about.
The prolonged hang of of the pandemic and what that what impact that might have so I think it's just too early to be able to.
And to see what's going to happen.
And the remainder of the year much less the next quarter.
Alright, guys, thanks very much.
Yep. Thanks.
Q.
Thank you. Our next question of comment comes from the line of Noah <unk> from Goldman Sachs. Your line is open.
Hey, good evening and good afternoon.
Afternoon.
And the time zone and math there on the fly.
Yes.
Yes.
Actually following David's question, there on the sequential kind of work.
For the aerospace segment and.
And looking at it as revenues.
We all look at year over year, all the time for everything for a variety of reasons, but.
In this very unique environment, and it's sort of helpful to look at the sequential if you can sort of.
And vision, where the bottom is and then walk along the bottom and then decide when the recovery occurs.
But your aerospace segment is really unique if I look at the last really kind of five to 10 years. It just has a lot of seasonality.
There is several years, where the the <unk> as you know something close to a $100 million.
Does that seasonality.
Hold and in your fiscal 'twenty, one even if there's literally no and market change through the year of.
Or.
Is that out the window, given the very unique environment.
Okay.
I think we would say, we'd still see seasonality and just be the magnitude of it but.
Some of that's just due to.
Working with our customers.
The fiscal year versus calendar year activity and the non of working days and our first quarter.
And those all play into that and.
And that type of.
The seasonality is still out there.
Okay.
And the sort of low $300 million run rate at the segments had.
Youre going to move off of that and.
Not insignificantly just on seasonality alone and then if you've got you know and <unk>.
Actual and market pick up towards the end of the year.
That would be on top of that.
I would say that's correct, we definitely will see the seasonality the tougher part and.
And we watch very closely we are and we're very conservative during the <unk>.
Prices on our outlooks and I think that paid off and we're monitoring of everything daily and as we see.
Order activity shop visit activity of those things picking up.
We're react quick to that but our outlook is as we move through the fiscal year and that we will see.
OE volumes pick up and and we will see aftermarket volumes pick up that that's our outlook, but we are cautious about the volatility and secondly, the second dip happening but.
Side of the second dip, yes, we're on a.
The sequential quarterly improvement.
Okay.
The defense business do you expect that to end up with a positive year over year of growth rate for the year.
Ah, Yes, and we think it should be.
The slightly up flat slightly up.
Okay.
Okay.
And the oil and gas business, where you noted.
And.
A recent a little bit of improvement and some of the leading indicators there.
Whats the lag time that we should think about from those leading indicators, you're referring to and the revenues and your business.
And the first.
The thing and we are seeing.
We monitor rig count and and meaning how many rigs are in service.
Looking at the activity of the.
Starting with starting with the drilling activity.
And second we're looking at is.
And with customers is there plan to rich.
The return equipment and service.
And you can say, it's very analogous to what happened and the commercial aerospace market a lot of equipment was.
Park Mothball the.
That equipment they are starting to look at and so we're starting to see some aftermarket activity meaning.
Requests for quotes.
And some parts of ordering starting to happen, our big OEM customers and those markets are talking to us about the.
Potential that they're seeing an increase and so we.
We have some positive signs, but it's it's not all firmed up yet, but it's those of the things we track and.
If we continue to see oil move and the 50 to $60 a barrel range, we should start seeing a pickup and the second half of our fiscal year.
Okay.
That's helpful. And then just one last one from me I'll just try to follow up on the free cash line of questioning as well.
And if I just kept the remaining three quarters of the year exactly flat year over year.
Maybe that's not quite fair for the March quarter, because thats sort of.
Most of the March 'twenty of quarter isn't yet impacted by the end markets, but.
Given what you just did and the first quarter, maybe that is fair so.
I guess if.
If I did that the free cash for the year would be up.
And 30% plus.
Have you attacked the cash.
Cash flow savings items that above and beyond what you'd normally be doing enough that you could have.
Very significant double digit growth and free cash flow this year or is there.
Sort of pull forward and the first quarter here.
I think the air and that is kind of the way.
There is no way last fiscal year was kind of a normal year for us.
It's kind of of the tale of two halves. The first day have started out normal and then the second half was a totally different from what you would normally see from a seasonality perspective and everything else. So the the latter part.
And particular the fourth quarter.
We're not very normal so.
And this year I'd.
And I'd like to think it would be the tale of two halves going the other way but.
And in terms of recovering and the second half I don't know that its going to be that strong. So so I don't think of.
And that you could take that approach and come up with a reasonable number.
And our.
Outside of the.
No.
Giving and with specific number and we said, we're not going to give guidance, it's kind of hard to two.
Given our outlook on that I guess I was thinking second half of last year had the end market the major and market headwinds, but I guess it sounds like your point Bob is that Youre then.
Uh huh.
Source of cash from working capital and.
Theres abnormalities, and what Youre doing outside of the business segments that you wouldn't have if things are recovering.
Because it was sales were down but working capital was flowing cash right.
And so the recovery.
Exactly.
Okay not to the same extent, but right.
And.
I see okay. Thanks, so much.
Thank you.
And.
Thank you.
Mr. Gendron, there are no fear of the questions. At this time I will now turn the conference back over to you.
Okay, and I'd like to thank everybody for joining us today.
The.
And.
The last year has been quite the crazy year quite the rollercoaster of I think woodward's matters and our.
Our whole membership has managed the crisis quite well and we.
And that were coming out of it and.
And we look forward to the next couple of quarters reporting back to you and and.
And.
We start seeing the downturn on this pandemic and look forward to and improving results moving forward.
Thanks again for joining us we look forward to talking to you over the quarter.
Good night everyone.
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And.
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Yeah.
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