Q2 2021 Woodward Inc Earnings Call
Thank you for standing by welcome to the Woodward, Inc. Second 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 in a question and.
Session 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 like to turn the call over to Mr. Luiz Arnaud.
Thank you operator, we would like to welcome all of you to Woodward second quarter fiscal year 2021 earnings call.
In 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 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 may 17th 2021.
The phone number for the audio replay is on the press release announcing this call as well as on our website and will be repeated by the operator at the end of the call.
I would like to 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 ongoing COVID-19 pandemic.
Those elements can and do frequently change please consider our comments in light of the risks and uncertainties surrounding those elements in.
Including the risks we identify in our filings.
In addition, Woodward is providing certain non us GAAP financial measures, we direct your attention to the reconciliations of non U S. GAAP financial measures, which are included in today's slide presentation, and our earnings release and related schedules.
We believe this additional information will help in understanding our results.
Now turning to our results from the second quarter.
Net sales for the second quarter of fiscal 2021 were $581 million compared to $720 million for the prior year quarter.
Net earnings and adjusted net earnings for the second quarter of 2021 were both at $68 million or $1 <unk> per share.
For the second quarter of 2020, net earnings were $91 million or $1 41 per share and adjusted net earnings were $104 million or $1 61 per share.
Net sales and net earnings were up 8% and 64%, respectively, when compared to the first quarter of 2021.
Net cash provided by operating activities was $219 million for the first half of 2021 <unk>.
<unk> to $52 million for the same period of the prior year.
Free cash flow and adjusted free cash flow for the first half of 2021 were both $206 million.
For the first half of 2020.
Free cash flow was $23 million and adjusted free cash flow was $55 million.
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.
The second quarter of fiscal year 'twenty, one showed improved results from our first quarter and we believe our markets will continue to improve for the remainder of the year and into 2022.
The growth the aggressive actions, we have taken to address this unprecedented crisis continue to drive strong cash flow and improve our liquidity and overall financial position enable ongoing investments and opportunity for growth.
While COVID-19, vaccinations gained momentum increases in cases persist across the globe continuing to drive uncertainty with respect to the pace of economic recovery.
Moving to our markets.
Aerospace continues to feel pressure, although it is encouraging to get see the sequential improvement from the prior quarter.
The sustained depression of global passenger traffic, resulting from the pandemic continues to impact commercial aerospace markets.
However, we are seeing positive indicators, such as improving passenger traffic Inc.
<unk> aircraft build rates and utilization and the return to service of the Boeing 737 Max.
Importantly, <unk>.
Production rates of the Max and which we have significant content are expected to increase during the year.
We are encouraged by these trends and expect the continued vaccine rollout to have a positive impact on commercial aerospace.
Defense spending remains strong with respect to both OEM and aftermarket activity.
We see continued strength in guided weapons through the remainder of this year with moderation expected next year.
Turning to our industrial markets and power generation demand for gas turbines remains steady at historically low levels, although we anticipate a recovery in 2022.
Aftermarket activity is starting to recover largely driven by depleted inventories and resumption of maintenance projects.
Global Energy production continues the shift to natural gas and renewables support initiatives to reduce emissions.
And transportation, China natural gas truck demand continues to be strong driven.
Driven by favorable pricing and increased regulations to improve emissions.
Government initiatives supporting natural gas trucks are also emerging in several other countries.
The global Marine market is showing signs of improvement with increases in both demand for new vessels in global freight pricing.
Repair and overhaul projects that were postponed due to the pandemic are also beginning to pick up.
The oil and gas market remains challenging however, global demand and increasing oil prices are beginning to drive investment in drilling and fracking and natural gas compression.
In summary, we delivered strong financial performance as our markets showed signs of economic recovery.
We will continue to closely monitor the situation as we progress through the back half of the year.
As the pandemic unfolded, we reacted quickly to navigate the uncertain market environment reduce our cost structure increase our focus on operational excellence and prioritize diligent cash management.
In addition, we continue to gain market share in both our aerospace and industrial segments, and we won new programs during the downturn.
We believe Woodward is emerging from this unprecedented crisis, an even stronger company.
Now before turning the call over.
Bob Weber announced his intention to retire in January of 'twenty two.
He will retire from his role as Chief Financial Officer effective September 30 of this year and will serve as a special adviser to me for an interim period.
I want to thank Bob for his dedication and valuable contributions during his more than 15 year tenure at Woodward.
Under Bob's leadership, the company has grown tremendously and we have delivered exceptional value to our shareholders holders over his career.
I truly appreciate the partnership and friendship we have built over the years and I'm excited for him as he enters its next phase of his life.
Probably wish Patty and you all the best.
We also announced that Marc Hartman Who's currently our senior Vice President financing corporate controller will be appointed as Chief Financial Officer effective October one.
I look forward.
Working with Mark in his new role and leveraging his extensive experience to drive Woodward continued growth and success.
Now I'll turn the call over to Bob to discuss our financials in more detail.
Thank you very much Tom.
Aerospace segment sales for the second quarter of fiscal 2021 were $365 million, an increase of 23% from the prior year quarter.
Commercial OEM and aftermarket sales remained weak compared to the prior year as a result of the pandemic with commercial OEM down, 30% and aftermarket down 42%.
On the bright side sequentially commercial OEM was up 34% in the commercial aftermarket was up 18% driven by increasing build rates in passenger traffic.
Defense OEM was down slightly in the quarter compared to a strong second quarter of the prior year from.
Due to lower sales of guided weapons.
Surely offset by higher sales in both fixed wing and rotorcraft.
Offense aftermarket sales were down compared to the prior year quarter.
Although activity and backlog remains solid.
Aerospace segment earnings for the second quarter of 2021 were $69 million or 18, 9% of segment sales compared to $118 million or 24, 8% per segment sales for the second quarter of 2020.
The decline in segment earnings compared to the prior year was the result of lower volume, partially offset by cost reduction initiatives.
Turning to industrial.
Industrial segment sales for the second quarter of fiscal 2021 were $217 million compared to $246 million in the prior year period excluding.
Excluding the renewable power systems and related businesses, which I will refer to as Rps.
<unk> segment sales for the second quarter of 2020 were $215 million.
Increase in industrial sales, excluding Rps was primarily due to strong demand in the current quarter for China natural gas engines, and the positive effects of foreign currency exchange rates, partially offset by weak oil and gas and the ongoing impacts from the pandemic.
Industrial segment earnings for the second quarter of 2021 were $28 million or 12, 9%.
Sales compared to $26 million or 10, 6% of segment sales in the prior year. The increase in industrial segment earnings was primarily the result of cost reduction initiatives.
For the second quarter of 2020 industrial segment earnings, excluding Rps were $25 million or 11, 6% from segment net sales.
Industrial segment earnings as a percentage of sales for the first half of 2021 were 14% compared to industrial segment earnings excluding Rps of 11, 8% from the same period of the prior year.
<unk> earnings are a result of the many actions we've been taking to optimize our product portfolio and global footprint.
Non segment expenses and adjusted non segment expenses were both $10 million for the second quarter of 2021 compared to non segment expenses of $28 million and adjusted non segment expenses of $11 million from the same period last year.
At the Woodward level.
R&D for the second quarter of 2021 was $28 million or four 8% of sales compared to $35 million or also four eight per cent of sales for the prior year quarter.
The decrease in R&D was mainly due to the quarterly variability of project expenses.
Customer funding.
SG&A for the second quarter of 2021 was $44 million compared to $58 million from the prior year quarter, which included $17 million and merger and divestiture transaction costs.
The effective tax rate and the adjusted effective tax rate were both 13%.
For the second quarter of 2021.
For the second quarter of 2020, the effective tax rate was 14, 8% and.
The adjusted effective tax rate was 16, 2%.
Looking at cash flows.
Net cash provided by operating activities for the first half of fiscal year, 2021 was $219 million compared to $52 million from the prior year period.
Capital expenditures were $13 million for the first half of 2021 compared to $29 million from the prior year period.
Free cash flow and adjusted free cash flow for the first half of 2021 were both $206 million compared to free cash flow of $23 million.
Adjusted free cash flow of $55 million per the prior year period Jim.
Increase in free cash flow and adjusted free cash flow was primarily related to effective working capital management and lower capital expenditures.
We have reduced our leverage to one seven times EBITDA at the end of the second quarter.
To one nine times at the end of the prior year quarter.
Lastly, turning to our fiscal 2021 outlook.
The ongoing rollout of vaccines across many countries is driving optimism for economic recovery.
But the enduring turbulence caused by the COVID-19, pandemic, including significantly reduced global passenger travel and new viral variance continues to cloud near term forecast, while we believe many of our markets will improve for the remainder of this year and into 2022, we will continue to withhold guidance.
As we navigate the uncertain economic landscape.
This concludes our comments on the business and results for the second quarter of 2021, operator, we are now ready to open the call to questions.
Thank you.
A question and answer session will begin at this time, Inc.
Using a speakerphone please pick up the handset before pressing any numbers should you have a question. Please press star one on your question from phone should you wish to withdraw your question press. The pound key Okay question. It will be taken in the order. It is received please standby for your first question Sir.
Your first question comes from the line of Robert Spingarn from Credit Suisse. Please state your question.
Good afternoon.
Good afternoon Robert.
So I have a couple of questions, but I wanted to start with.
Just on the aerospace margins, they're pretty good and theyre almost back to where you've been and with the tailwind you have for the rest of the year.
With just fundamentals improving.
Have a mixed tailwind can you hit 20% plus margins here in fiscal third or fourth quarter.
Yes.
It's a great question.
As highlighted we're not giving guidance.
We definitely are.
Believe there will be an aftermarket tailwind coming.
As more aircraft are brought online the utilization goes up so we're confident in our longer term guidance for both segments. So we're on the path to get there Rob.
We just have to see how the market materializes and as we get the sales growth, we're going to lever that and to improve profitability.
Okay. Tom can you give us any detail or Bob on in the aftermarket if if the improvement or how do we think about provisioning versus regular spare sales.
As that improves.
Yes longer than the other.
Right now it's stronger on the.
Repair and overhaul side than on provisioning, but we do anticipate as we move later this year into next year, we'll start to see provisioning recover.
Okay, and then Tom I wanted to follow up on your comment I think it was your comment on Max.
And that the rates will rise throughout the year throughout calendar 'twenty, one, but I was hoping you could be a little bit more specific with your inventory position there and current rates and then as demand recovers.
I wanted to get a sense of how quickly you can ramp beyond 31, given that your capacity I assume from 52 or 57 and at that point is the gating factor just labor.
Yes so.
You are correct on that.
<unk>.
We were sized.
To support the higher rates, both for the Max and the Neo.
So one of the good news is we come out of the pandemic is we have the capital equipment to support the highest rates that we anticipate that Airbus and Boeing it'll be going too. So that's good news as we go forward.
We are onboarding new members.
To support the ramp up we put together some.
Innovative and extensive training sessions to some of them are members, we're bringing back that were either laid off or furloughed others are new members moving forward, but we're very confident in our ability to onboard.
Members to help support the ramp the.
The ramp the.
The other comment on inventory in the system. The inventory was depleted so theres a combination we will see some inventory increasing.
We're on track.
Head of the production we will be ahead of the production rate ramp there is still a lot of uncertainty around the production rates.
And so we're tracking with exactly what Boeing and Airbus.
Airbus are saying they wanted to achieve and but I think there's can be some volatility in those rates over the next.
Six to 12 months, Okay, and just normally what's your lead time relative to boeing's delivery.
To the end customer.
Yes normally it.
When you are in normal circumstances, it would be on the order like.
Four or five months.
Okay, Alright, thanks, Tom appreciate it sure.
Your next question is from Sheila <unk> from Jefferies. Please state your question.
Hi, good afternoon.
Bob Congratulations John.
Thank you again.
I'll, maybe stick to one or two.
Jim I don't know maybe this is for you a little bit on the aftermarket we touched on it a little bit.
The short term, but also the longer term on your aftermarket how do you kind of think about it you know whats provisioning been historically your sales and what what does it look like it does.
The way you sell to airlines has changed because of the pandemic at all or.
Because you've upped your Max content of course in the EBIT 20, So maybe if you could talk about aftermarket expectations, both near term and longer term.
Sure.
I'll start Bob chime in anytime.
Sure.
Yes, Sheila the first.
Maybe laying some groundwork.
As we look at the aircraft coming back into service.
And I guess it goes without saying most everybody knows that they bring and the newer more efficient aircraft back into service or retiring some of the older aircraft and as we look forward. If we call. It the demographics of the fleet are going to be very favorable.
In terms of the aircraft we have more content on.
And so we're starting to see that just in utilization in aircraft being returned to service. So the point of that is longer term. We think we're going to have tremendous aftermarket revenue coming in.
The aircraft are brought in service.
Airlines start taking new deliveries of the particularly the new narrow bodies in the new wide bodies, where we have significant content. So that's looking very favorable to us and we anticipate as those utilization rates go up we're going to start.
Seeing more maintenance in it and I think as you're well aware of.
Yes, some of our what we call legacy products Thats per.
Free Neo and Max narrow bodies.
The 2500 CFM 56 are some of those are just seeing their first shop visit or come into the second so.
We think the maintenance activity will start picking up and again very favorable to us.
In terms of initial provisioning.
As you would expect the airlines of their preserving cash and being careful about that but as we start moving in and out.
Out of the pandemic they start putting the plants into service they start taking more of the Max aircraft out of storage into service. We think we're start seeing initial provisioning pick up and definitely a good part of our aftermarket mix maybe more in fiscal year 'twenty two than the remainder of 'twenty. One I think it's going to take a little time.
For all those deliveries.
For the airlines start picking it up but.
When we look out.
It's kind of going back pre pandemic, our demographics are positive our market share has improved utilization of the equipment. We're on is going up that all it all signals improved aftermarket over the over the next years and I think it'll be very favorable to us.
Just staying on this topic, then I guess.
I'm sorry, if I missed it did you mentioned what the initial provisioning as the overall aftermarket sales.
These Max a ship out of inventory would you expect any initial provisioning with them are those are all already allotted for no Sheila.
Both.
Phrase it this way.
The Max there in storage at least for the.
The most part have not been provision of Woodward equipment.
Okay.
So.
And it's got a as they get taken up and.
Utilization starts going up we expect that to come but.
That's what I'm, saying, it's more of a I think as we approach our fiscal year 'twenty. Two we're start seeing provisioning recover it's been very low.
During the pandemic.
Okay, Alright, thank you very much.
Welcome.
Your next question is from <unk> <unk> from Cowen. Please state your question.
Yes, Thank you and congrats Bob again.
Thank you.
Hi.
I guess, we'll get you another top on another call those sales.
That's right yeah.
Alright, Okay. Good well, Hey, I was curious about if you could talk about the exit rate on the aftermarket was it did it get.
Did it get better through the quarter in terms of growth or was it pretty consistent January February March.
And what have you seen so far.
Through the second calendar quarter through April on the aftermarket.
Yes.
<unk> I would say.
Month over month, the aftermarket improving.
So yes, we're seeing the utilization we're tracking.
Weekly utilization on all the aircraft, we have content on and what's happening we're seeing.
Shop visits starting to increase.
So it's pretty much month over month and yeah.
We anticipate that continuing.
Kind of.
In conjunction with aircrafts coming back into service so.
As long as we can see the steady improvement.
Things Youre going to see continued aftermarket growth.
Okay and can you say anything about the product types, where you're seeing it is it on the actuation isn't on the engine component that is it is it across both.
Any any skew either way, it's skewed towards the engines gautam.
So.
I would say.
That's where traditionally.
The engines.
Our it.
Business supporting the engines.
Higher aftermarket than on the airframe and that's just truly that the engines are always running <unk>.
You generate more time and more aftermarket revenue from engine so.
So it is skewed that way.
Okay.
Then.
Related to that is there anything on EBITDA.
Is it.
Is it broad based or is it regionally stronger in the U S. I mean, I just I'm curious I imagine it is just kind of.
We look at where the flight hours or.
Yes.
It is tracking to your business or share as youre aware the hours or the most in the U S and in China.
So that's definitely driving more of it.
Okay.
Forward visibility at this point into boss.
Second calendar quarter is pretty good I mean can you see.
Through June what the.
Expected shop visits are suppose to be or where is it still kind of very very short lead time.
In terms of aftermarket.
We're seeing.
Forecast from our customers and like for shop visits, but I would say there is still a fair amount of volatility in the market.
And.
We.
We're anticipating.
Increasing aftermarket increasing shop visits were planning for that.
Doing our own.
Internal provisioning demand planning for that but it is still volatile and there is still true.
The amount of uncertainty around it but our belief is it's going to continue to pick up.
We're getting ourselves prepared for that.
Thanks, guys very much.
Thank you.
Your next question is from Peter Kubicki from Alembic Global Please state your question.
Yes, good afternoon, Tom and Bob and Don and Pete.
Hey, guys I, just wanted to get a better sense, maybe Tom for with two quarters left in the year.
You know where your lack of visibility stems from because I think consensus in general expect revenue to be up in the back half of the year for you guys. You've lapped the top COVID-19 comps. So is it an issue where you expect revenue to be up in the back half of the year. It's just hard to kind of ballpark a range around the revenue and then because of that.
Ballpark of margin around that is that kind of the logic.
While we did not re initiate guidance.
There is still.
Even on the OE production rates.
We're still seeing.
You won't see variability in the rate.
And.
We're still.
Being cautious.
All the rates.
We're going to be met or achieved so theres a little uncertainty there.
And there is definitely uncertainty in the aftermarket.
All indicators are pointing to improvement but.
It's a challenging time.
To really nailed those down second thing.
You know as the definitely uncertainty wrapped around the Max how fast will.
The planes get delivered will China approved the Max what will the utilization be I know, there's a lot of factors that are still not.
Solid, but as we were trying to say is the indicators and the trend is going in the right direction. It looks positive, but it's really still.
With all that variability very difficult to pinpoint.
The exact forecast and then as you pointed out with the.
Mix issues that you can have on the aerospace side, there, it's hard to pin down the margins but.
We're encouraged by the outlook.
Okay. Okay.
Bob do you want to say something.
The only thing I was going to add as we were kind of focused on the aerospace side, but there is a lot of equal uncertainty on the industrial side as well.
On gas pricing has firmed up a little there.
China natural gas is always kind of.
Variable and so on and we're seeing the marine market and that's very impactful to launch.
Start to show some signs but they're.
Or just too early to call or even on the industrial side as well.
That was actually my second question was the marine market.
Not not a particular expertise of mind, but.
You read these articles about bottlenecks in ports and whatnot and it's hard to know you know it seems like got short term negative, but it also seems like maybe a positive that there's a lot of.
<unk> out there.
Well global global trade picking up so.
I mean as order flow picking up for you guys in marine is visibility picking up is I was just wondering if you could maybe give us some some clarity there and maybe how launches John kind of through the down cycle that'd be great. Thank you.
Yes.
One that you are seeing is.
The utilization is increasing in the marine market in particular, if you want to say it.
Freight carriers.
So we're seeing that we're.
We're encouraged.
By the order book, it's picking up.
And we're also seeing LNG.
LNG carriers order book picking up and utilization picking up on those and those are.
Very strong programs.
For Woodward content on those.
The cruise market.
And that and we've got a lot of content on the cruise ships.
In particular through <unk> and through our traditional business.
We're encouraged to see.
That they may be allowing cruises in the U S. Here I think the latest was maybe starting in July.
As that gets firmed up we think there'll be some maintenance maintenance activities kicking in and that'll be a positive. So those are things like Bob highlighted.
We see them coming it's just exact timing is a little hard to predict but.
Overall, the marine market is.
Recovery in the order books are picking up now there are long lead time orders just so you know I mean, there are out.
The order book goes out a couple of years.
Lead times so.
But it's been a positive trend and most important thing for us right now.
Utilization, which drives the aftermarket and that's encouraging.
Okay, I guess I didn't fully understand cruise ships its a pretty good chunk of the Rogers revenue. It's a good part of it is a good part of the business good.
Hi Tech products that go in there.
Good aftermarket associated with the cruise ships.
As you know has been dead in the water so.
Yes.
Along with Alpine income would be yes, exactly it also be fair, we always say cruise ships ferries all of that it's just been.
It's not happening in the pandemic and as that recovers that will be positive and then like I said the utilization of the.
Cargo carriers and the like is improving.
It's good business and then.
We're encouraged by the order book so.
It is not.
Good track and hopefully.
Second half of this year into next year, we'll start seeing some recovery in those which will be good for our industrial segment.
Okay.
One from me just on the guided weapons comments.
Fiscal 'twenty two are we talking substantial declines 50% type declines are.
Lower double digits.
Okay got it.
C.
Some reduction in that.
Orders for the smart weapons.
Which may be partially offset by foreign military sales and the foreign military sales are not firm, but we anticipate.
Moderation or a reduction, but it's not that dramatic as you were highlighting.
Okay.
Thanks, very much guys.
Sure.
Your next question is from Christopher Glynn from Oppenheimer. Please state your question.
Thanks, Good afternoon, everybody, but they'll hold on for a couple of days on congrats.
Okay.
So.
On the just curious you had it for industrial a number of positive comments on utilization across transportation Marine and.
General Turbo machinery oil and gas I believe two of those kind of the best directional kind of indicators to think of in terms of fiscal second half, having a little stronger volume in the first half.
Yes, we definitely anticipate.
<unk>.
Improvements in those.
Uh huh.
The sub segments of industrial.
Again with some uncertainty wrapped around it but we do see that and then traditionally.
As we move into the fourth quarter of our fiscal year is generally one of our stronger quarters. So.
We don't see that changing this year either so.
It's positive.
On the outlook with uncertainty that.
Those things materialize, but right now they are at a positive trend and you kind of saw that here in the second quarter where year over year.
We're basically flat sales.
Normally we would see that show positive, but during a pandemic we think.
That's a positive trend with improvements coming.
Okay.
And are there any revenue recognition timing issues related to COVID-19 and commissioning any any equipment or anything like that from investor.
Nothing that I would say is material.
Okay.
Last one from me on the aftermarket for Aerospace you had a real nice sequential pick up some a number of others were kind of flat, maybe even down a little ex business jet, including some of the bellwethers. So.
John.
Is that just depict the volatility out there in the market or is there a structural.
Aspect to you is that the demographic shift already kind of being reflected.
I would say.
We're analyzing every week.
Fleet and the utilization of the fleet and I definitely think it's the demographics as we call. It in the fleet are favorable to Woodward content, and I think thats, what youre seeing in.
Longer term.
We've highlighted that for years going back to when we secured.
All of the additional content on these new new aircrafts.
And I think you'll start seeing that materialize over the next number of years as they are in service and they start hitting maintenance cycles. So we think that's a positive for us.
Interesting to see it out of the gate there. Thank you.
Welcome.
Your next question is from Chris Howe from Barrington Research. Please state your question.
Good afternoon, everyone. Thanks for taking my questions.
Alright.
First off starting with the China six regulations.
Talking about it a lot last quarter I know, it's hard to get into the <unk>.
Into the weeds with precautionary reasons on a quarter to quarter basis.
But perhaps with these going into effect in July.
Can you talk about your expectations in the second half of this business.
And your outlook in general once the regulations are going into place I know you mentioned there were some limitations.
Two the potential upside there on the last call just wanted to gain the right perspective on that.
Yes.
Good question.
The China six.
Diesel regulations go into effect in July the China six per natural gas are already in effect, but.
Whats happening in typically happens every time, you have a new emission regulation.
We call it kind of pre buy so you've seen China five diesels being purchased right now.
And so that's having a little bit of an impact.
Did here in the second quarter.
As we move forward, though and you look at China, six diesel versus the gap, China six gas engine.
The cost difference has been.
Yeah.
Closer together and the fuel price is very favorable to natural gas. So the payback not only in reduced emissions, but an operating cost to go to natural gas engine.
Truck is greatly improved.
We have some.
Just to give you kind of ballpark. These are market forecast for the truck and the natural gas or I'm, sorry, all the heavy duty trucks in China.
Traditionally over the last number of years it might have been approximately <unk> <unk>.
7% to 10% of the fleet was natural gas.
Looking to our customers and our folks on the ground in China.
I believe that we might see on the order of 20% to 30%.
Natural gas trucks.
As a percentage of the total market going forward, which is a substantial market.
Expansion and we expect to do very well in <unk>.
Holding our market share or even growing share.
We have very very <unk>.
High performing.
System for.
China <unk>, China ex gas engines. So the expansion that will increase and so as you go through the remainder of our fiscal year, but more importantly, as you go over the next couple of years, we expect the natural gas.
Percentage of the total markets improve.
That's a positive for our business longer term as that happens so.
Overall, the outlook is good little volatility upfront or S.
Bob and I would say there's always volatility.
In the China market.
We do see that but the day.
Longer term trend is very favorable as well.
Okay, that's very helpful and I have one follow up.
You answered some of my other questions on industrial as it relates to.
Perhaps areas that could recover.
In the future moving to aerospace though.
Commercial aftermarket should recover first narrow than wide body.
Yes.
As we kind of look at.
Where we are now versus three months ago, and we move to.
How we would term a new normal which seems to be changing on a daily basis, but how should we think about incremental margins. It's been discussed a lot.
Perhaps there could be outsized outsized.
Sequential improvement quarter to quarter, but as we move into.
Fiscal year, 'twenty, two and beyond business is much stronger than it was pre pandemic.
What could we see.
As far as incremental margin space.
Sure.
I'm sorry.
Tom can jump in if he wants.
From the margin simple we've said.
The way you characterize it aftermarket should come first followed by OEM book.
The build rates are improving so it's not a huge shift in overall.
The mix between aftermarket and OEM, but we do believe it will be a tailwind.
Kind of been looking at analyzing at a lot of different ways and it's very hard to kind of triangulate on a lot of variables obviously, but.
But we do believe as we go into 2022.
And beyond we should see.
Tailwind.
We've had people ask us if it's $25 27, 30%.
Segment margins extremely difficult to quantify but we do believe it will be a tailwind.
Okay.
That's all I got.
Could you repeat that please.
That's all the questions I have.
Okay. Thank you.
Your next question is from David Strauss from Barclays. Please state your question.
Thanks, Good afternoon.
Yes.
The.
The 42% I think commercial OE sequential growth that you that you saw this quarter.
That was much stronger than what we've seen elsewhere.
Was there any easy comparison issue or what exactly drove that was there anything there besides just math.
Max being really low and starting to come back from you all but we.
We would have seen that with other other companies as well.
Yeah, just to check the numbers, what we gave it was 40% 42% down year over year.
And 18% up for you or talking to commercial aftermarket right.
Can you actually commercial OE.
I'm sorry.
So that was down 30% year over year and up 34 up 30, yes.
Still yeah, I got to know them pretty significant yes.
More significant than what we've seen elsewhere.
Yeah.
And as Tom pointed out it'll be.
Kind of lumpy the timing all depends on a lot of the timing of shipments and so on and so forth but.
I don't know that we would expect it to stay that.
A little quarter to quarter.
Okay.
Yeah, the only thing I would add.
Comparing to.
Other companies.
At these rates pick up they are definitely on the programs, we have gained high market share and so.
Sure.
To me, it's not overly surprising that we have good recovery in there.
Versus maybe somebody that is more heavily weighted to legacy programs.
It may be part of it.
Okay.
How much how.
How much of your new equipment commercial new equipment and aftermarket.
Business jet related at this point and what are you seeing on the business jet side.
Yeah actually Biz jets.
Came through the pandemic a lot better than we thought sitting here a year ago.
We.
The Biz jet market is a good market for us we've got content.
Many many starting from.
Almost all of the new aircraft out there.
And that's actually held together pretty well and.
The IND.
Indicators are positive for increasing.
OE sales.
One of the things, we always track and is a good indicator is the used market.
It's the used markets available.
So, let's say that available.
Earlier, the newer aircraft available in the used market is very low right now and surprisingly low and my my view and so we're starting to see some OE activity.
Being forecasted and coming up.
Right now looks quite healthy going forward.
How much of your commercial your aerospace business. Tom is aftermarket you think at this point.
Our site business, John how much is business yet.
Oh.
No.
We are.
<unk>.
I don't know.
That breakout.
Oh.
We're somewhere in the.
A little bit north of 10% overall.
No Sam General Aviation.
Okay.
And then the last one.
Bob I guess.
An update about.
How youre thinking about your cash balance and what there is to do there I assume you don't want to be running with close to $300 million in cash on the balance sheet for too long.
Yes no.
We've kind of talked about getting back to our pre COVID-19 policies and directions. If you will which is kind of 50% of net earnings being returned to shareholders in dividends and share buybacks.
But most importantly, we're focused on growth.
And we've talked a lot about having a number of both.
Organic growth opportunities space and missiles was one of them we called out.
And also we have inorganic.
Funnel process like so many of our peers do and were always looking at opportunities there.
So we've always been.
Our model is a growth model, we believe that brings the most value to our shareholders.
So no we won't let the cash pile up for very long.
Great. Thanks very much.
Your next question is from Noah <unk> from Goldman Sachs. Please state your question.
Hi, good evening, everybody and congrats Bob on Mark coming announcements.
Thank you.
If if I if we if we just looked at the sequential growth rates you had in the quarter and aerospace original equipment on aerospace aftermarket how would you expect.
The fiscal third and fourth quarter growth rates to compare to that just directionally about holding the same faster.
Slowing down.
Well a little bit.
Jim and Bob as well, but a little bit I would say the OE OE rates should pick up.
The aftermarket.
Market.
And earlier is a little challenging to predict.
Uh huh.
Probably we will not be as high.
Our growth rate as we just saw but we will continue to be.
Very solid growth rate going forward and hopefully.
And the next few quarters, we'll be able to give more color on that as we see things stabilize but.
We do anticipate.
Okay.
Continuing to increases in both sides.
The market OEM and aftermarket.
So Tom just to make sure. We're speaking the same or talking about the same thing.
Or are you, saying you would expect that.
The rate of growth you had sequentially in commercial OE, which as David was asking was surprisingly high Youre, saying you would expect for that to stay the same or even pick up.
Or youre, just saying more of that.
Production rates are going to go higher so that's going to have some healthy growth rate for a while yes.
I think I guess I would say is I think the production rates are going to go up and where see overall still improved growth rate over the or over the second quarter.
Yes.
I think we were saying.
I expect that.
<unk> yeah yeah.
Interesting okay.
With the commentary around.
Guided weapons.
Fiscal 'twenty two.
Are you anticipating that that will drive your total defense revenue to be down in fiscal 'twenty, two or could it still growth.
It's going to have.
A flattening effect on defense sales.
Okay. It makes sense, yes.
And then.
Just one more on these aerospace margins.
If I look back over the last several years. There is there are some years, where the second quarter is seasonally strong third quarter steps back down fourth quarter back up.
It doesn't happen every year, but it happens a decent amount of yours.
Is there any seasonal strength in the second quarter here, where <unk> had stepped down a little and then <unk> back up or the <unk>.
Seasonality out the window.
John there's a little bit of seasonality and it's really making sure.
The airlines are ready maintenance wise for summer season, and then later for holiday season. So you do see a little bit of seasonality based on that.
So if I use that and then I'll use the type of incremental margins you were just talking about a minute ago year over year. It would imply third quarter aerospace margin down a little bit and then the fourth quarter.
Maybe sort of in the zone of the second quarter is up.
And I guess.
And again, what I would say when I highlighted that as a normal year.
Got it.
With.
Somebody aircraft just getting back in service.
I think.
I think the airlines personally I think they did a brilliant job of.
Rotating assets and managing their maintenance cost.
They did it.
They possibly could during the pandemic.
But there is a pent up maintenance bubble.
Bubble coming and that's another thing that's hard to forecast, but I absolutely believe you.
Youre going to see that hit and it's just exactly when it hits and I'm not sure it's going to follow normal seasonality.
Seasonality is real but im not sure. It applies this year, so I'd just be a little cautious on that.
Okay.
Interesting okay. Thanks, so much.
Welcome.
Your next question is from Pete <unk> from <unk> Securities. Please state your question.
Hey, good afternoon. This is Pete Oxalyl Don for much moly.
Is there any additional color you can provide just on Directionally, how you expect margins in industrial the trends during the rest of the fiscal year I know you previously.
Called out that margins would take a step back in fiscal <unk>, but you expect that from this quarter's level there should be able to start showing sequential improvement again over the next couple of quarters.
Sure Yeah, I mean, we're going to have variability as we've kind of always had in the business, but some of the structural the actions we've taken.
As we go forward should definitely provide the tailwind side of the equation.
Headwind side as we're still not seeing any sales increases in one of the things. We said, we really needed to get to our targets.
It's being 16 16 plus percent was some increase in sales.
So right now we're.
Okay.
Buzzword, because we are optimistic up domestic.
With respect to the remaining quarters of the year and going into 2022.
But we really need to see the sales increase to get any leverage to be able to enhance the margins.
I think we'll see a tailwind I don't think we're going to see our targets until we start to see.
Much greater sales increases that we're seeing today.
Great. Thanks, and then just on costs it looks like R&D was down about $4 million versus the prior quarter and SG&A down.
12 million, just wondering what was driving that decline.
Is it good run rate for us to use over the next couple of quarters.
Yes, probably the midpoint between them.
We've always got a lot of timing of things projects expenses and things like that that pop in and out of the quarters and so.
We have some variability so I would not say that the decline in both.
Sustainable.
Thank you, we'll see somewhere in the middle between the two as we go forward through the year.
We were running at about a four 8% rate that's pretty low for us who believe so.
I think it was mostly timing this quarter.
Alright, Thanks, a lot.
We do have a follow up question from Christopher Glynn from Oppenheimer. Please state your question.
Yeah. Thanks, So just to add a little housekeeping to close out one was on the corporate spend but I'll take your SBA comments is the answer to that and then tax rate.
For modeling purposes.
Yeah.
The forecasted for the full year.
We haven't.
That's a good one to always try to guesstimate.
Our tax rate adjusted was 13 16, two in the prior year.
We'll probably be above that 13 in the quarter.
But not necessarily significantly so.
Okay. Thank you.
Yeah.
Mr. Gendron, there are no further questions at this time I would like to turn the conference back to you.
Okay well.
Thank you for everybody joining us today and thank you for your questions.
We look forward to.
Talking to all of you.
During our third quarter release, so have a good day.
Thank you.
Ladies and gentlemen that concludes our conference call today, if you would like to listen to a rebroadcast of this conference call. It will be available today at 730 P. M. Eastern daylight time by dialing 185585920564.
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