Q3 2021 Woodward Inc Earnings Call
[music].
Yes.
Right.
Yeah.
Thank you for standing by welcome to the Woodward, Inc. Third quarter fiscal year, 2021earnings call.
At this time on what I can inform you that this call. This day recorded for rebroadcast and that all participants on a listen only mode.
I wanted to presentation, you will be invited to participate in a question and assets.
Joining us today from the company on Mr. Tom Gendron, Chairman and Chief Executive Officer, Mr. Bob Weber, Vice Chairman and Chief Financial Officer, Mr. Don Guzzardo, Vice President of Investor Relations, and Treasurer, and Dan <unk> Director of Investor Relations I would now like to turn the call over to him.
Mr. Rosato. Thank you. Please go ahead Sir.
Thank you operator, we would like to welcome all of you to Woodward's third 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 from.
Those who have not seen today's earnings release, you can find it on our website at Woodward Dotcom. 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 August 16.2021.
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 3 is on.
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.
Elements can and do frequently change please.
Please consider our comments in light of the risks and uncertainties surrounding those elements, including the risks we identify in our filings.
In addition, Woodward is providing certain non U S. GAAP financial measures, we direct your attention to the reconciliations of non U S. GAAP financial measures, which are included in today's slide presentation, and our earnings release on the related schedules.
We believe this additional financial information will help in understanding our results.
Now turning to our results for the third quarter.
Net sales for the third quarter of fiscal 2021 were $557 million compared to $524 million for the prior year quarter.
Net earnings on adjusted net earnings for the third quarter of 2021 were both $49 million or <unk> 74 per share.
For the third quarter of 2020 net earnings were $38 million or <unk> 61 per share and adjusted net earnings were $31 million or <unk> 48 per share.
Net cash provided by operating activities was $318 million for the first 9 months of 2021 compared to $212 million for the same period of the prior year.
Free cash flow and adjusted free cash flow for the first 9 months of 2021 were both $297 million from.
For the first 9 months of 2020.
Free cash flow was $173 million and adjusted free cash flow was $169 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 and.
In the third quarter of 2021, we were pleased to deliver significantly improved performance compared to the prior year period.
As our markets progress down the path of recovery, we do anticipate pandemic related volatility continue.
The ongoing global supply change disruptions unpredictable impact from Covid variance from the varying pace.
While economic improvement all contribute to future uncertainty.
We continue to believe our markets will return to pre pandemic levels. In 2023, we will see significant growth related to our market share gains and the favorable fleet dynamics.
Moving to our markets.
Commercial aerospace continues to recover as airlines became from reactivated parked fleet aircraft build rates continue to climb and passenger traffic increases.
U S. Domestic travels returned to near pre Covid levels, while international remains weak.
Importantly, commercial fleet now being utilized had significantly higher Woodward content, which we believe will lead to strong aftermarket sales growth.
The defense markets overall remain favorable however.
However, as anticipated the demand for guided weapons is softening.
Defense aftermarket activity to remain solid through the aircraft utilization and upgrade programs.
Turning to our industrial markets.
And power generation demand for gas turbines is increasing we expect further improvement in 2022, driven from predominantly by growth in Asia, and then continuing on replacement of coal powered plants.
Aftermarket activity is beginning to increase the volume anticipated to come back to pre COVID-19 levels in 2022.
Backup power for data centers continues to be strong.
Transportation demand from China natural gas trucks softened significantly in the quarter as a result of the anticipated implementation of China 6 diesel emission regulations, which drove short term demand for China 5 diesel trucks.
The natural gas truck market remains strong as from approximately 15% on the total truck market. However, we do expect quarterly volatility to continue.
Global Marine market has seen improving ship utilization from the pandemic related loans, which will drive aftermarket activity.
The oil and gas markets, leading indicators have improved as crude oil prices and energy demand has increased.
In summary, we're seeing improvements in our markets year over year, and we delivered a solid quarter. However, based on global economic recovery on our financial results are impacted by global supply chain disruptions.
Covid related impacts in the regional markets.
As has been our priority throughout this pandemic, we continue to generate robust cash flow by leveraging our operational structure and optimizing working capital, allowing us to continue investing in growth opportunities.
We remain steadfast on our commitment to developing innovative products designed to enhance emissions performance reliability and fuel efficiency, which.
Meaningfully contributed to a cleaner global environment.
As global demand for cleaner energy renewable fuels and greater efficiency accelerates, we will continue to invest in these opportunities in both our aerospace and industrial segments.
Before giving the reigns over to Bob for his final earnings call as Chief Financial Officer, I would like to thank Bob 1 more time for his tremendous contribution to the Woodward team.
Over 16 years at Woodward.
It was truly an unrivaled counselor partner and friend for that we all wish him. The best of luck in this next phase of his life.
During our next call I look forward to being joined by Mark Hart.
I'll now turn the call over to Bob.
Thank you Tom I appreciate the kind remarks, and I very much enjoyed my time with Woodward.
Mark will be on excellent CFO and together with you and your entire senior leadership team I know I'm, leaving the company in good hands.
Turning to our financial results this quarter Woodward net sales increased to $557 million compared to 524 million for the prior year quarter.
Sales in the third quarter of 2021 were negatively impacted by approximately $30 million as a result of global supply chain constraints predominantly impacting our aerospace business on.
Low recovery plans are in place we anticipate that these issues will continue beyond our fourth quarter. Accordingly, we are not providing more detailed guidance at this time.
Aerospace segment sales for the third quarter of fiscal 2021 were $341 million, an increase of 11% from the prior year quarter.
Commercial OEM and aftermarket sales were up compared to the prior year by 51% and 11% respectively.
Really driven by the increasing build rates and domestic passenger traffic.
Sequentially commercial OEM sales were down 6% net.
Commercial aftermarket sales were down 3%, both compared to a strong second quarter.
The sequential declines were primarily due to supply chain constraints and normal quarterly variability.
Defense OEM sales were up 5% and defense aftermarket sales were down 17%, both as compared to the prior year period.
Sequentially Defense OEM sales were down 14% and defense aftermarket sales were up 5%, both as compared to a strong second quarter.
Both defense OEM and aftermarket sales in the current quarter were negatively impacted by supply chain constraints.
Defense order volume and backlog remains strong.
We do anticipate a significant decline in guided weapons in fiscal 2022, more specifically J D.
Aerospace segment earnings for the third quarter of 2021 were $53 million or 15, 6% of segment sales compared to $41 million or 13, 4% of segment sales for the third quarter of 2020.
The increase in segment earnings was primarily the result of higher volume predominantly in commercial OEM.
The decrease in sequential earnings as a percent of segment sales was primarily due to the decline in defense OEM sales.
Turning to industrial.
Industrial segment sales for the third quarter of fiscal 2021 were $216 million compared to $217 million in the prior year period.
Excluding the renewable power systems and related businesses, which I'll refer to as Rps industrial segment sales for the third quarter of 2020 were $210 million.
The increase in industrial sales, excluding Rps was primarily due to the impact of favorable foreign currency rates, which was partially offset by softness in China natural gas engines and global supply chain constraints.
5 diesel truck pre buy negatively impacted natural gas engine sales more than we anticipated.
Industrial segment earnings for the third quarter of 2021 were $27 million or 12, 6% of segment sales consistent with the prior year quarter.
Non segment expenses and adjusted non segment expenses were $14 million for the third quarter of 2021 compared to non segment expenses of $15 million and adjusted non segment expenses of $17 million for the same period last year.
At the Woodward level R&D from the third quarter of 2021 was $30 million or 5.3% of sales compared to $35 million or 6.6% of sales from the prior year quarter.
SG&A in adjusted SG&A for the third quarter of 2021 were both $48 million compared to $57 million and $50 million, respectively for the prior year quarter.
The effective tax rate on the adjusted effective tax rate were both 16, 8% for the third quarter of 2021.
For the third order of 2020, the effective tax rate was 14, 6% and the adjusted effective tax rate was 21.29, 1%.
Looking at cash flows net.
Net cash provided by operating activities for the first 9 months of fiscal 2021 was $318 million compared to $212 million for the prior year period.
Capital expenditures were $21 million for the first 9 months of 2021 compared to $39 million for the prior year period.
Free cash flow and adjusted free cash flow for the first 9 months of 2021 were both $297 million compared to free cash flow of $173 million and adjusted free cash flow of $169 million from the prior year period.
The increase in free cash flow and adjusted free cash flow was primarily related to effective working capital management and lower capital expenditures, partially offset by lower net earnings.
Lastly, turning to our fiscal 2021 outlook.
While we expect sales earnings and free cash flow results for the fourth quarter to be higher than the third quarter considerable uncertainty remains with respect to COVID-19 variance global supply chain disruptions and regional market volatility on.
All of which are expected to continue.
Accordingly, we are not providing more detailed guidance at this time.
This concludes our comments on the business and results for the third quarter of 2021.
Operator, we are now ready to open the call to questions.
Thank you the question and answer session will begin at this time.
And I speaker phone, please pick up the handset before pressing any numbers.
Did you have a question. Please press star 1 on your push button phone should you wish to withdraw your question press the pound key.
Your question will be taken in the order. It is received please standby for your first question is Sir.
Our first question comes from Gautam Khanna.
With Cowen Hey, guys. How are you good how're you doing.
Okay.
Thanks, guys and congrats Bob.
Thank you very much.
Hey, I wanted to ask if there was an announced transaction between.
Parker Hannifin and Maggie.
Wondered if what your initial view is of the.
Competitive implications, if any to the actuation business or any other part of the Woodward.
Business.
Yeah.
Okay great.
I don't really see.
The acquisition.
Megabyte Parker change.
Changing anything in the competitive landscape.
We have a few overlapping areas, but it's minor.
Parker's strong company, so I'm sure there help.
Enhanced magnet, but in terms of competitiveness I don't think it will impact Woodward at all.
Okay.
I'm curious if there were are the overlaps if you wouldn't mind elaborating.
Yeah, Theres a little bit.
And the.
Thermal management area.
And I get with Parker, we we have some overlap, but I think you're really asking about the <unk> side I believe.
There's a little bit on thermal management, there's a little bit on the industrial gas turbine space.
And there's some minor mob on their sensors business.
And theres a little bit on that.
Some are valves as well, but it's minor.
We don't really view them as a significant competitor.
Okay, and just maybe stepping back just sorry go ahead.
Don.
No I didn't say anything.
Oh, sorry, I was going to ask stepping back just what your view is in terms of just M&A and sort of how the a.
On a year ago, we were contemplating the heck sell transaction with Woodward.
What that might how the company might be different in 5 years I'm wondering if you could just give us some direction on what you think.
How the portfolio might change how M&A may evolve as part of the.
The Woodward stent strategy going forward.
What are you looking at what are you where are you hoping to get bigger et cetera. Thank you.
Yes.
Well first.
Okay.
When you look at our balance.
Balance sheet and the like I think all of you can see that you know where we're strong we're still.
We have a strong balance sheet, we're doing real well on cash flow, we're still on the pandemic. However, that's already on the prepared remarks, we said you know we'll recover our estimate as we recover to 2019 level on sales in 2023.
For the aerospace market I think that's.
Most people's belief is that's the time frame.
On.
We during the pandemic has really been focused on ensuring the health of the company continued to invest in the future and ensuring that we have a strong cash flow and strong balance sheet.
We're in the position now where we feel highly confident.
Our financial position.
I think what youre going to see us.
Go back to is what what's been a proven track record for the company and that's a bolt on acquisitions that help fill.
Still in our system strategy I have.
Good.
On tie into the direction of the company and.
We've had great success with that and I think that's the way we're going to look at it going forward.
Thanks, guys.
Thank you welcome.
And our next question is from the line of Pete Dubicki, Inc.
Hello.
Yeah, Good afternoon, Tom and Bob and Don and yet Bob Best of luck.
Thank you.
I guess on the supply chain issues can you give us some more color on kind of what's going on there specifically.
And the $30 million impact that you quantified I can't remember if you said was that all aerospace or split and within aerospace was it was it split between defense and commercial I'm. Just wondering if you could give us a little more color there.
Sure.
It was predominantly aerospace, but we did see shortages and disruptions on both sides.
You've evolved we've all read about the electronics and that's probably the predominant area.
We're seeing shortages come from.
But there is a variety of things we've got.
Plant.
Shutdowns or at least slowdowns related to COVID-19 and related to other issues. So there Jim.
It's been a variety of things that I think with respect to getting things back up and running.
And with respect to the announced shortages that we're seeing impact us going forward. We do believe our supply chain, we stay very close to them.
We have plans to alleviate the issues.
But it's going to continue for a while here.
Okay would you expect kind of a similar negative headwind in the fourth quarter.
Too hard to say at this time.
Like I said they have plans.
Ramps, we have anticipation of improvement.
It's very very hard to say with everything going on in particular with Delta on everything and all the talks about locking things down et cetera et cetera.
Hard to say at this time.
Okay. Okay, I guess last 1 from me on the guided weapons.
Did you say or could you say how much it was down in the third quarter and do you do you kind of quantify all of that within the defense aftermarket or both OE and aftermarket and.
I think you said it was going be down significantly in fiscal 'twenty 2.
We talked on 20% plus or.
I mean, maybe some more color on that.
Sure.
So not much aftermarket on guided weapons.
Sure it's all in.
Defense OEM.
A little humor on that angle, but.
And overall, so there is more than the JDM.
So theres a mix inside of that we have small diameter bomb aimed.
<unk> as well so for the quarter flat to slightly down.
As we go forward, though and we've kind of called this out last couple of quarters. We do anticipate in 2022 that there will be a significant decline, it's very hard to quantify at this point in time.
Partially because as we've said we've had some shortages and some of that is getting pulled or excuse me pushed into 2022.
No.
It will not be insignificant, but it will be.
Sizable.
But giving an exact amount at this time, it's very hard to do.
Okay. Okay. Thanks for the color.
Sure.
And your next question is from the line of Christopher Glynn with Oppenheimer.
Yes.
Thanks, Good afternoon.
No.
And.
Bob Thanks for raw working with us over the years preceding that.
So I'm just curious.
Marine aftermarket and the IGT.
IDT aftermarket synergies.
You know on what degree you're seeing them come back now.
I mean, the marine Formula seems very good I'm, just curious if the Robert what.
What degree the Robert hitting the road there.
Yes.
The order ramp.
To our customers and to the things like utilization rates and so on is improving.
We have not yet seen that in sales.
But we are.
<unk>.
Future order discussions and so on we're seeing a lot more optimism for 2022 and both of those areas. I think you saw the some of the announcements that came out from our customers, saying order volumes in Igt's. For example, we're improving and so thats just a matter of timing in terms of the pull through on our side. So we are.
[noise] bullish on it for 2022, not seeing a tremendous amount yet.
Okay and is there anything interesting to relay in terms of industrial book to bill or anything like that.
We're improving.
The formal book to Bill for Us because of a lot of pull isn't necessarily a number that we track or publicly used because it's not that helpful. But it is definitely on improving side of that equation in terms of the activity that we're seeing orders in some areas, we mentioned that clearly the.
China natural gas impact on industrial was the most significant element.
This quarter.
And.
What what sort of cadence do you anticipate that.
Secular growth of China natural gas engines, returning to growth I think you still have tough comps in the first half, but maybe override that just curious how you think that linearity might feel to you at this juncture.
We think it's going to be challenging because of the oversized China 5 by.
We think that will extend somewhat into the fourth quarter.
As we mentioned in terms of the size of natural gas truck market vis vis diesels, it's been improving.
And we do continue to believe in the long term secularity of that.
Natural gas is a clinton considered a clean fuel in China similar to EV.
And so we do believe that that has longer term links.
Okay. Thank you.
Your next question is from the line of Matt Akers with Wells Fargo.
Yeah, Hey, guys. Good afternoon, I had a question.
Can you talk about <unk> hundred 20, Neo Airbus is talking about pretty good rates up there kind of above what we were thinking last cycle. You can just talk about the capacity you have.
You kind of get to those rates I know, it's still a few years out but or if any other investment would be required to get there.
As you guys know, we invested a lot in the 2016 timeframe around those years towards the capacities, we kind of went into the COVID-19 environment.
Some 60 plus for both of the narrow bodies, plus 787, and so on so we have significant capacity available.
Not at this point in time aware of any supply chain constraints directly associated with that.
Obviously, they can develop as we start to ramp up probably the most concerning in some cases as Neil could be electronics shortages.
Got plenty of capacity.
No known issues with respect to <unk>.
Either of the narrow bodies at this time.
Okay.
And then I guess just on aftermarket.
There's another aerospace supplier they kind of commented that we saw.
Maybe I got a little bit of a pull forward of kind of.
Demand ahead of the summer ramp.
Are you guys seeing any kind of just unusual seasonality on that or any any indication on how that could kind of trend going into the fall on the winter.
Yeah, we never know specifically about.
Pull forward or anything.
End of <unk>.
Flow issue in terms of when parts arrive and so forth. So we did clearly see when you look back at the history of the second quarter was a strong quarter.
We do anticipate that that will continue as we've said the aircraft that are flying.
Have much more woodward content.
And a lot of aircraft that were parked had less content. So we do believe that we have a systemic improvement going forward.
But kind of as we've mentioned.
We just saw China traffic domestic traffic dropped down a little bit it's been kind of increasing most recently, we think that kind of volatility will continue.
And that will probably impact.
What we see in terms of quarterly volatility on aftermarket.
Okay, great. Thank you.
Yeah.
Your next question is from the line of David Strauss with Barclays.
Thanks.
Congrats Bob joined retirement, Thank you David.
Just wanted to ask where you guys are from a head count perspective on the aerospace side have you started to hire back and if so how much and then maybe just an update on.
How much do you think you've taken out in terms of structural costs through through this period.
Sure.
Yes, we have begun to bring folks back.
I don't have an exact number for you, but it is significant in terms of the folks that we've been bringing back predominantly obviously in the direct labor side of the equation.
Not so much on the indirect side, so kind of related to the cost savings.
We are beginning to get ramped back up from a shift standpoint.
And that will cause us to bring back indirect labor into the form of supervisors et cetera et cetera. So we are seeing we have seen and are seeing increases there.
And anticipate we will continue to see that going forward.
And I'm sorry, the second part of your question was.
How much do you think you've taken out in terms of strong cost savings.
So we called out about $100 million in total when we first went through that back in April of last year, we believe that approximately $50 million of that will be continuing.
But we also believe as many of you.
You have seen familiar of announcements there will be some inflationary pressures. So it remained to be seen where we will end up in terms of total.
Systemic cost savings and then as you saw on some of the actions we took.
Whether it be the.
The elimination of the annual bonus.
Okay.
Officer and director the cost savings, we took back some of those will be coming back on.
As we go forward into 2022.
Okay and.
Bob on the last 1 for you in terms of.
In terms of the cash balance.
Can you maybe update us on how much cash you think you need to run the business and I.
I guess.
The reasoning behind why you let it.
Net that cash balance bill that as high as it is today.
Yes, let me give you a little breakdown on the cash balance.
For the first time since I've been in this role.
We actually do have a fairly significant U S cash balance in the past, it's largely been a regional cash balance predominantly in Europe.
Now also in Asia.
So in terms of.
We're having a significant immediately available cash balance it may not be as significant let's call it roughly $250 million.
As the overall balance looks so thats give you a little color on on the way the cashes.
Situated globally.
<unk>.
We do not believe.
We're at some point, where we have a lot of excess cash given our position of focus on growth.
And we do believe there will be opportunities there.
It will come forward, both organically and Inorganically to put that cash to work. We have said that we are on a path and are back to our pre COVID-19.
50% of net earnings being returned to shareholders and we will continue to monitor the market and as appropriate or probably do some share buybacks going forward. So we intend to kind of manage that on an ongoing basis.
And watch for both organic and inorganic opportunities as we go forward.
Perfect. Thanks, again, Bob sure.
Your next question is from the line of Michael serum Mali with AAA Securities.
Hey, good evening guys. Thanks for taking the questions Bob Congrats stopped for a while there he might be sticking around you guys pulled the trigger on make it.
Okay.
About.
So just on I mean, we've seen a number of aerospace companies report. So far I mean, you guys seem to have experienced year on outsized disruption in supply chain. I mean is there anything unique or specific I mean, certainly we've heard about electronics shortages, but I mean this.
It seems the magnitude you guys are being disrupted just seems to be a little bit bigger than anybody else. I mean anything you can point to from specific products I mean.
We didn't hear from you know obviously, none of the engine guys are kind of talking about potential pressures or challenges. So presumably it's not having a widespread impact on the supply chain yet.
Yeah without maybe I'll answer the question a little bit without we don't want to named suppliers or anything, but we had a couple of suppliers that we're providing our aero segment.
During the pandemic.
Closed plants did some moves.
And they did not go well.
The second part was hiring people back on our staffing in the new locations.
It had a major impact.
On some products that go across.
A lot of our.
Okay.
A lot of our other products so it cascaded through more of.
Our business than just a single disruption might.
That also impacted our aftermarket because we ran out of.
Inventory and we Werent able to service some of the aftermarket.
As Bob highlighted earlier, we've got.
All hands on deck, working with the supplier and working on how to how to get this back on track, but that's the type of supplier disruption.
We the whole industry may see more of them as we start to ramp and people had consolidated facilities or reduce workforce and are trying to hire people back. It can hit you on this 1 just happened to hit like I said component that goes across many many of our products and it had an adverse.
Impact regarding that.
Got it that makes sense and obviously if it hit your aftermarket the more profitable I mean, just looking at the margins I mean.
The 18.9 you did last quarter I mean, how should we I.
I guess calibrate ourselves building off this 56, if it sounds like these the supply chain disruptions are going on.
So I guess, we're gonna be unpredictable, but how should we be thinking about the margin cadence going forward here.
Yeah, well 1 of the things we highlighted before Bob can jump in here too.
Sure.
We also need some of the volume to come back to get to our 20% plus target and we do see that as you go through.
Almost into fiscal year 'twenty 2 so as we go through fiscal year 'twenty 2 into 'twenty 3 we're confident that we'll deliver those margins in fiscal year 'twenty, 3 and improve as the volume pick up during between now and then so.
Sure.
And as you can see some of the the.
The market's coming back to the OEM rates are calling on them.
Those are positive not only for OEM, but for initial provisioning and so.
We're confident we'll get there, but as we've been highlighting here there may be from.
From volatility quarter to quarter until we stabilize the whole supply chain.
Got it got it and do you need the wide bodies to come all the way back to get to those margins, 20% can you cannot execute okay.
Okay got it.
Now we've got it up.
Last 1 I had just on the I know Pete was asking on the J Damn I guess I think in net Vod docs in volumes are down 10%. I mean are you guys thinking you'll see more of a headwind on that and then kind of the 10% planned procurement volumes in 'twenty, 2 or is that sort of the right number.
What we're looking at are the various.
On lots that the D O D on ordering and exactly how they flow through and Bob highlighted maybe some movement between fiscal years.
And the lot that will come into calendar year 'twenty 2 is at a much lower rate.
That could change with foreign military sales or other but we're just trying to highlight to everybody that we do see something on the JD and now from the other programs are doing well and offset some of that decline, but overall, we're have a year over year decline in 'twenty 2 on cutting.
Weapons.
Okay got it thanks, a lot guys.
Yes.
Your next question is from the line of Robert Spingarn with Credit Suisse.
Hi, good afternoon.
Bob I'll add my congrats to you. Thank you.
Just I really just have a couple of clarification questions or maybe a new 1 we've talked a lot about aftermarket supply.
Demand trending.
I think we know a little bit because you said you missed out on $30 million in sales, but maybe Tom you can talk about what's happened since March really through July.
Yeah.
Well, we're actually seeing.
All signs of demand increasing.
As you know.
Big part of our Aero aftermarket is associated with engines.
We monitor utilization.
Hours flown.
The number of aircraft in the fleet back in service. We're also doing the best we can to monitor green time on <unk>.
Complemented the airlines in the past they did what they needed to do on you know they've done an admirable job of rotating assets to keep.
Green time, so that they can produce.
On a near term maintenance expense all of that is going to come due here as you know, we're seeing more and more of the fleet get back into service more utilization. So we're optimistic about we're going to see the narrow body in particular.
Up.
The second part of that is we are seeing the Max aircraft go back into service.
Seeing Boeing.
Starting to move that production rates up on Newbuild, all that's very promising for initial provisioning sales and we anticipate that we'll see better initial provisioning sales in fiscal year 'twenty 2 as well.
So do you think it had no right direction.
And things are.
On a promising path, but still can be volatile.
Just on that Tommy Bob talked about capacity in a prior answer is there any concern or should we have any concern that you all of a sudden get high demand for aftermarket.
Couple of quarters from now at the exact same time youre hitting those higher rates for all we or the aftermarket things like CFM 56 on the OE has been and your Turbofans, They don't really interfere with each other.
Yes, you know what Robert we've been.
Last fall we.
We started we were still going down because of the pandemic internally. We started an initiative, we've just called preparing for the upturn.
And in that we were identifying long lead parts.
Training, where we would need to hire.
To make sure that we would be ready.
For the recovery.
And that has worked fairly well part of the preparing for the upturn to say he was also.
Working and trying to anticipate any supplier disruptions.
We highlighted that we have had some what we didn't highlight is how many we resolved and fixed before they became problems. So we have had success, but we've also been hit some that we werent able to counter.
So all that being said as we've been preparing for it on.
Confident.
Our constraint internally is going to be on boarding new members and training and we're working really hard and we set up special training centers to bring on people on.
The question was asked earlier, but we are we are hiring right now hundreds of direct a.
Labor.
Members.
As we see things starting to ramp and so we're bringing them on a training so.
Capacity in terms of equipment and the like is not there.
We're ensuring long lead time parts on we're ensuring we're bringing on new members as fast as we can in anticipation of an upturn.
That's why we hang on to make sure because net.
Yes.
Okay. If you can hear me pass the storm behind me.
Just wanted 1 ask 1 more on defense aftermarket not so much around there.
The discussion we've had on Jay Dam itself force, which sounds like it is a week, but we saw on other supplier surprised with some softness in defense aftermarket on a year over year basis.
And we're wondering if that just reflects D O D. Perhaps backing away from some some of the.
Behavior at the beginning of the pandemic too.
<unk> cash into the system do you think defense aftermarket elsewhere, maybe starting to fade.
We're not seeing that right now.
Some of it.
It's not not something we're anticipating.
We do recognize that at the moment, we're looking at basically flat Vod.
<unk> budgets, but in terms of where we see our our aftermarket and defense.
We're not seeing any pullback at this time.
Okay, Alright, that's it from me. Thank you thanks, Robert Yeah. Thanks.
Once again, ladies and gentlemen, if you would like to ask a question. Please press star 1.
1 on your Touchtone keypad again that is star 1.
And your next question is from the line of Chris Howe with Barrington Research.
Good afternoon, and congrats again to Bob and I definitely will Miss our travels together.
Thanks.
Yeah.
It's been asked several different ways, so I suppose I'll ask it another way.
On the $30 million related to supply chain.
Can you give any granular detail on kind of what youre seeing on a month to month basis.
To be more direct.
Perhaps how has July fared so far compared to June as it relates to the supply chain disruptions.
And following up on that if we think about the $30 million.
In the context of moving forward with.
Sales for a hypothetical example.
$10 million to $20 million is differed in Q4.
Is this deferred backlog or deferred revenue continues to build can you break out how you anticipate selling this.
It all come back in a single quarter have you started to already still in that $30 million.
That got disrupted in the third quarter, there's a lot there so yeah.
Well I'll start and then Bob.
And then as well.
The first you asked about July.
Our recovery on a couple of suppliers looks to be.
Happening more August September and moving into the first quarter of Q1.
Fiscal 'twenty 2.
So, we're saying that it's it's a little bit uncertain.
But all the <unk>.
Actions, we've taken with the supplier internally too.
Adjusted for that.
It's really going to start making progress really this month and moving forward.
So it's a little difficult because some of it is based on.
Our projections and commitments from the supplier of when we can get.
Hardware and how we moved through the day.
On the electronics, 1 insurer all of you are well aware of that the electronics on hit both the aerospace and but it also hit our industrial business.
It's a difficult 1.
And mainly because.
In our electronic controls a lot of the Ics, we use our automotive based.
Basically on automotive Ics have really good environmental.
Capabilities and I think you all realize how tight that that market is so that 1 is really hard to predict and will probably carry forward.
Yeah.
Mid 'twenty 2 maybe beyond we are working that hard.
<unk> working with our customers, but that's that's not on a 1 or 2 months solution passed so we got a mix here, that's hitting us in carrying that forward.
It's why we're not being able to give you guys all precise numbers anticipatory on certain as to how quick but we're doing everything on our capability to try and recover.
The only thing I would add to that is we've tried to cash.
To give you some color on this won't be a sudden.
Pushup of balloon into a certain quarter it will probably be a more gradual burn down as we go forward and Tom gave you some idea of.
We see improvements here on there.
Accuracy all of a sudden in the first quarter Theres a big balloon.
Wanted to at least we don't anticipate that at this time.
Okay.
That's helpful.
1 last question.
If I may.
Tom mentioned that difference recoveries net we're seeing a domestic passenger travel looks to be healthy returning to pre COVID-19 levels and then we have the other 2 buckets that are lagging domestic which are international.
In business related travel as we look at those other 2 buckets, let's say business comes back in mid 2022 and international comes back in the latter part of that year.
Can you talk about from a top down perspective.
What we should see on on the business.
Yeah.
Yes.
Well, maybe I'll start Bob Burton.
Joining me.
We talked about positive fleet dynamics from for Woodward products going forward and as you look at it.
When you have on the international or the wide bodies on it that's kind of how it correlates to obviously some narrow bodies are used on international but.
<unk>.
I do like our position and if you look.
The airlines are using.
Heavily the 787.
Triple 7 will continue.
These are aircraft.
Yeah, good content on <unk> hundred 50.
We will pick up and so.
They're going to be using these newer aircraft.
And we're seeing that even in the current utilization it's more towards those.
Those are good for Woodward, we see that we would have good aftermarket coming from those as they recover.
And what comes out of service.
Some of the the 4 engine wide bodies as you guys are aware of and some of the older wide bodies. So I think.
The wide body fleet will be.
More oriented to those newer aircraft and I think that's a positive long term for Woodward, but it will take a little bit of time for those international markets to recover.
Robert if you want to add any on that.
No I think you've covered it clearer.
Clearly.
On a piece of the wide body coming back is helpful.
On the timetable is probably pretty close to what we are hearing overall from a lot of different sources.
And so that's why we're trying to highlight that we still believe 2023 is 1 kind of things get back to more normal across the spectrum.
Until then we anticipate we're going to see.
Good quarters and lumpy quarters, it's just not going to be a nice straight line into the future.
With everything that's going on.
Okay. Thanks for taking my questions.
And your next question is from the line of Chemo <unk> with Jefferies.
Hey, good afternoon guys.
Sure.
Bob I don't know if I can congratulate you for the second or third time, so I'll congratulate John since he is retiring I'm pretty sure he actually all of our tire.
Try to get it right this time.
Okay.
In terms of on the Aero margins from Q2 to Q3 can you maybe give us the EBIT bridge walk through.
The supply chain, but also like mix with defense down how do we kind of think from that dropdown of 19%. This FTE per thank you Robert here.
It's predominantly driven by that mix element of aftermarket and defense, both being down quarter over quarter.
Lots of other small items embedded in a lot of that but those are by far the most impactful to going from Q2 to Q3, I think 18.9.
On a 'twenty target in the middle still of this pandemic with.
Still at that point in time being at 60% and no international.
I think that speaks to itself. It was good quarter. It had great mix that came through on earnings.
It was kind of hard to hold on an ongoing basis.
I guess on that point.
On your OE business did you see do you have continued destocking on the 87 and the <unk> and how do we think about how are we impacted you guys back in 18, 19, and how do we think about that impact as we head into your 20% target.
Well, we were 18.
2019, OE was cranking.
So obviously were.
Just look at the build rates, we're nowhere near where we were when we.
Went into Covid, and we were kind of at those 60 levels for a good part of that time so.
And as you know he is not in earnings.
Drag for us.
Obviously nowhere near as Tom maybe comment on the aftermarket is by far the most predominant.
So OE is also continues to be pressure, we're encouraged by the comments that have come out about.
Increasing the build rates and so on and so forth and we're encouraged that.
Travel should support that an airline profitability as we go forward should support that so.
Yes.
What we're looking for as we go forward.
Yeah.
And then maybe just the last 1 is on.
On depends on I know everybody's asked but can you size the defense business breath with an arrow I think it's 40%.
Biggest J dam and kind of what the normalized.
Whether it's a percentage of sales on a dollar number we should expect for that business going forward.
Yes.
Has been around the 40 level with commercial being what it's been it's even growing from there.
And on the JV side it is a significant program.
I think we call it out specifically.
But it is a good chunk.
Within that defense business.
Okay. Thank you.
Thanks, a lot guys.
Thank you.
Your next question is from the line of Noah pulp on that with Goldman Sachs.
Hey, good afternoon, everyone and congrats Bob on the retirement.
Thank you.
So just from a pure demand perspective, putting the supply chain issue aside.
Was commercial aerospace aftermarket softer in June and July compared to April and May where has it been fairly even through that period of time.
I would say it's been softer but.
Mostly on the supply side that it's been impacted so.
I think we did have a strong second quarter, both from the demand side.
And not seeing as many.
Constraints, whereas in the third quarter, we saw some demand.
Slippage in terms of.
Whether it's the pull ahead or not we don't really know, but we can only assume that or push outs or whatever but most of the impact was on the supply chain side of the equation.
Okay. So it doesn't sound like you wouldn't necessarily say that.
There was.
Substantial pull forward from the airlines as they were getting ready to return aircraft to service and now Theres a substantial slowdown off of that maybe maybe a little bit but.
It doesn't sound right.
Demand side I think as we.
Mentioned quarterly variability I would say the demand side would be very normal if you will.
On quarterly variability comments, whereas the supply chain side was clearly outsized in relation to the quarter. So.
Okay.
We're going to continue to see variability.
As we've mentioned, we think that the longer term medium term to longer term is very positive because of the aircraft that are flying in the content per day.
Do have compared to the aircraft that were parked so.
We're very bullish on aftermarket as we go forward you guys have seen us some quarters put up some very high aftermarket volumes compared to some of our peers.
You cant hold that forever I think we've actually have that discussion often on that eventually that some of these things can catch up a little bit and I think that's all that happened this quarter.
Okay I appreciate that.
You've mentioned the initial spares provisioning related to the 707, Max built but not delivered inventory basically hasnt happened free yet.
Any help you can provide on sizing that and how meaningful that can be for you in the coming quarters here as those are delivered.
Yeah.
This initial provisioning as Jim.
Carries good profitability with it and.
A lot of the aircraft that were parked or I'd say, most aircrafts are apart werent provisioned.
And so we're going through.
And if calculated what that can look like and I think it's a little bit of timing with.
Airlines are cash situation and when those aircraft get back into service, but.
We do expect.
A little on your initial provisioning over the next 2 years Ken.
Tied to those aircraft coming back into service, but also as the build rates both at Boeing and Airbus go up so.
Yes.
All of you that have followed us for a while you know initial provisioning.
<unk> is back to its.
It's lumpy quarter to quarter, it's based on airlines that route structure, they're flying how many new aircraft. They are bringing on board. So we've got a pretty good handle on it and we do see it as we go into 'twenty 2 and then on to 'twenty 3 that that will be an increasing benefit to aftermarket.
Like I said, it's good.
Good margin.
Part of the business.
Okay.
And then just last 1.
On the industrial side.
How many more quarters do you have a tough compare on the China natural gas piece and then.
Just looking at the margin there.
On the revenues have stabilized sequentially a few quarters now.
On the margins.
Hasnt picked back up as Theyre just mix in there.
And how and should we expect that to kind of remain stable until you fully annualize the China natural gas piece.
Yes.
Go ahead Bob.
Okay.
I'll jump in and then you could.
Pick up from me.
So.
China natural gas.
No.
The comp issue is kind of a very volatile moving target I think as you saw.
Follow us over time.
There is some seasonality there has been but predominantly what we've seen is each time they have a new set of regulations. The last round I think last year was related to natural gas engines.
This 1 is related to diesels and Thats really what creates the significant volatility so.
I Couldnt really tell you how many more of tough comps we have as much as we tried to guide that.
We anticipate from a inventory standpoint, and the return on natural gas it will probably be late in the fourth quarter going into the first quarter, but we do anticipate that it will be significant increases as we go just related to the overall systemic elements of that.
Okay, Yes.
A little color on maybe.
To add to Bobs comments.
Youre asking like Houston kind of flat revenue flat margins, while we do see coming as we move into <unk>.
22, and <unk> 3 we talk.
Or on power Gen. You on some of the prepared remarks, we do see igt's picking up from year over year and you see that.
When we call on turbo machinery controls business picking up.
1 of the things that has plays into the mix it has been industrial aftermarket.
Where we were pre pandemic seen some good aftermarket was both out on marine as well as out of the oil and gas.
Segment and as you guys were marine utilization is picking up.
It hasn't driven the aftermarket quite yet, but it will happen in oil and gas was the collapse of oil.
Oil prices.
It really shut down a lot of the activity and a lot of the demand for aftermarket parts, but thats starting to pick up we're seeing rig counts improve and alike.
So we're starting to see some areas that will help.
Not only on the sales side, but also will be positive for industrial mix in terms of margin.
Okay.
I appreciate it thank you.
Jim.
Your next question is from the line of Pete.
Hello, Paul.
Yeah. Thanks, guys just a couple of quick follow ups.
On the defense aftermarket this quarter I think Bob you said it was down 17% I just want to make sure I understand was that due to the supply chain issues or due to timing or something else, we haven't talked about.
Mostly timing.
Not a lot not as many supply chain.
Issues in that area, but we did have some.
Most of the supply chain, where in the OEM side of the equation.
<unk>.
So we do anticipate that that will return.
Follow on the earlier question, we do not see at this point in time anything with respect to changes in the Dod's posture with respect to defense spending.
Actually some of the stuff we've seen on the cash.
<unk>.
<unk> may speak more favorably to where we play.
Okay. So the supply chain issues, mostly defense OEM and commercial aftermarket did I hear that right that's right.
Okay. Okay.
And then you mentioned earlier also you expect revenue up sequentially in the fourth quarter should we think that that is true for both segments or not.
I'm not sure.
We believe at this point in time both segments.
Okay. Okay.
And then last 1 from me.
I guess just getting add Tom.
You know when we get to the fourth quarter call would you anticipate being able to give fiscal 'twenty 2 guidance at that point.
Yes, we are.
Intend.
At this point in time, we intend to give guidance.
When we release earnings in November.
Okay back to regular order.
Back orders, yet, but we hope so.
Your next question is from the line of from China.
Donna.
Owen.
Yeah, just to follow up on Pete's question.
I'm curious I mean consensus numbers that not that you guys haven't guided this consensus numbers Nonetheless looking.
Looking for about $649 million of Q4 sales and a buck on 9 obviously you guys said sales will be up.
Sequentially hopefully at both segments I was wondering Don.
Obviously, theres a lot to be better than Q3, you could still be well below consensus Q4, I'm. Just curious like can you give us some framework on.
How you think about where numbers are now how quickly the $30 million catches up.
$30 million on.
Supply constrained sales.
And.
And over what period, because I just wonder if we're going to have like a big.
An unusually large sequential pick up and maybe it's not Q4, but Q1.
Or something because of the catch up just any sort of framework on how that plays out.
Thanks, Let me let me give you some color. So first off let me say, we do not.
Speak to consensus or other external estimates as a matter of policy, but.
What we've been trying to do is to give you some sort of.
Our framework for a lot of the uncertainty on the volatility et cetera et cetera that are currently going on so we've mentioned I think a couple of areas that we do not anticipate recovering fully on.
Until late in the quarter or early in.
FY 'twenty 2.
And so from that you may discern that.
The consensus or other comments that have been made externally.
A little aggressive compared.
Compared to what we see going on at the moment on some of the things that we see that our systemic and progressing into the fourth quarter.
Thank you.
Hmm.
Yeah.
And there are no further questions.
Okay.
Thank you everybody for joining us today, we appreciate the interaction and the questions.
But before we close.
As I think most of you know we normally have an investor analyst day in December.
Going forward.
We thought it would be better to move it and we've decided to move the event to the March timeframe.
Hopefully.
We will be able to rollout.
Our strategic plan for everybody and I hope, we'll be able to see everybody in person. So thanks again for joining us today I'll turn the call back to the operator.
Ladies and.
And that concludes our conference call.
If you would like to listen to a rebroadcast of the conference call will be available today at 730 P. M. Eastern daylight time by dialing 1.8 by 58590.
We will fight for U S call.
14453734.
Non U S call and line.
The access code 7551758.
Keith will also be available at <unk>.
Company's web site Www dot.
Dot Com a 14 day, we thank you for your participation on today's conference call and ask that you. Please disconnect your line.
[music].
Okay.
[music].
Okay.
Yeah.
Moving on.
[music] flow.
Yes.
Great.
[music] expenses.
Yes.
[music].
On the energy loans.
[music].
Yes.
Okay.
Yes.
As we move on.
[music].
Okay.
Yes.
No.
[music] financial strength.
From the area with our communication.
Yes.
Yes.
[music].
Jim.
<unk> net.
[music].
And on.