Q2 2022 Woodward Inc Earnings Call
Thank you for standby welcome Peter Woodward incorporated second quarter fiscal year, 2022 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 were invited to participate in a question and answer session.
Joining us today from the company are the strength, Tom Gendron, Chairman and Chief Executive Officer, Mr. Mark Harding, Chief Financial Officer, and Mr. Dan for Basnet debenture.
Right.
I would now like to turn the call with me Timna hit from that.
Thank you operator, we'd like to welcome all of you to Woodward's second quarter fiscal year 2022 earnings calls.
In todays call, Tom will comment on our markets and related strategies and Mark will discuss our financial results as outlined in our earnings release.
At the end of the 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've 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 through may 16th 2022 or on our website.
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'd 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 expected and potential effects of the ongoing COVID-19, pandemic and net inflationary pressures.
These elements can and do frequently change.
Please consider our comments in light of the risks and uncertainties surrounding those elements, including the risks we identify 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 and related schedules.
We believe this additional information financial information will help in understanding our results.
Also all comparisons made during this call are to the same period of the prior year unless otherwise stated.
Turning to our results for the second quarter net.
Net sales for the second quarter of fiscal 2022 were $587 million compared to $581 million an increase of 1%.
Net earnings were $48 million or <unk> 74 per share compared to 60 $68 million or $1 four per share adjusted.
Adjusted net earnings for the second quarter of fiscal 2022 were $47 million or <unk> 72 per share.
There were no adjustments to earnings in the prior fiscal year second quarter.
Net cash provided by operating activities for the first half of fiscal 2022 was $50 million compared to $219 million.
Free cash flow was $26 million for the first half of fiscal 2022 compared to $206 million in.
And adjusted free cash flow was $27 million for the first half of fiscal 2022.
Before we turn the call over to Tom to comment further on our results strategies and markets Mark would like to make a brief comment.
Thanks, Dan.
As you May have heard Tom recently announced his retirement from Woodward after more than 31 years with the company.
This will be his last earnings call as chairman and CEO .
On behalf of all members and the order board of directors I wanted to thank you for everything you've done for this company for the past 17 years Youre visionary leadership piloted Woodward towards the future expanding our market capitalization from under $700 million back in 2005 to approximately $7 billion today the <unk>.
<unk> set in place in the early 2000 enabled us to achieve extraordinary growth and created significant value for our shareholders. These tremendous accomplishments will be remembered for many years to come for that we all think you. We wish you and Tracy the best of luck in the next phase of your journey.
Yeah.
Thank you Mark.
I appreciate the nice comments.
It has been an honor and a privilege to lead this special company over the past 17 years.
We have an outstanding team the market, leading product portfolio innovative technology state of the art facilities, and excite and an exciting future full of opportunities.
I'm confident in the Board's selection of chip Blankenship is my successor, and no I'm, leaving the company in very capable hands.
I look forward to working with chip as he transitions into his new role.
Turning now to the second quarter.
<unk> are up in nearly all market segments, our backlog has grown and we continue to see strong signs of recovery across the business.
However, in the quarter and looking to the remainder of the fiscal year, we anticipate ongoing market volatility.
The industry ride COVID-19 related disruptions, including global supply chain challenges in labor shortages as well as the Lockdowns in China and the warrants Ukraine.
In addition, the second quarter was also negatively impacted by increasing inflationary pressures in labor inefficiencies from the Onboarding of approximately 400, new direct members since the beginning of January .
All of these factors weighed on our results in the second quarter.
And have impacted our full year outlook.
Although we expect these challenges to persist through this fiscal year. We are encouraged by the momentum we're seeing across the business.
It is now my view that we will not be able to meet our previous guidance.
We have the orders they are not lost but what the challenge as I noted, we are reducing our outlook for the fiscal year.
Our long term outlook remains the same as we see our markets continue to recover and our sole source positions are intact.
Moving to our markets.
Aerospace continues to recover driven by rising passenger traffic and increased utilization of commercial aircraft fleets that includes significantly higher Woodward content.
U S and European domestic passenger traffic is nearly at pre COVID-19 levels.
While China domestic passenger traffic has recently collapsed as a result of further government mandated lockdowns.
International travel continues to improve.
And overall, we expect aircraft build rates to slowly rise throughout the year.
Despite general market recovery, the 737, Max return to service in China continues to be delayed with new builds for Chinese airlines pushed to later this year.
We continue to monitor the situation and the defense market geopolitical tensions have elevated the focus on defense spending around the world and increased spending is anticipated.
However, we continue to expect the JDM program to remain at lower levels for the foreseeable future.
Turning to our industrial market.
And power generation demand for gas turbines continues to drive strong growth in Asia.
Aftermarket activity has been increasing and we continue to see strong demand for backup power for data centers.
In transportation demand for China natural gas trucks is nearly evaporated for the fiscal year.
Excuse me, we believe the market will be slow to recover as lockdowns and elevated natural gas prices are impacting demand.
The global Marine market is strong with increasing ship build rates higher utilization and elevated transport pricing all of which drive current and future aftermarket activity.
The oil and gas market is favorable as prices remained elevated utilization and aftermarket demand has increase which we anticipate will drive higher rig counts and additional capital investment.
For Woodward overall, we continue to expect further recovery and improved profitability in our aerospace business as OEM build rates increase in passenger traffic recovers.
Similarly in our industrial business, we anticipate improved profitability driven by continued growth in marine markets and increase in demand for industrial gas turbines and related services as well as growing customer investments in oil and gas supported by elevated prices.
In summary, we believe our markets will continue to improve enabling woodward's achieve our long term profitability goals.
We are laser focused on addressing the challenges of this market recovery, while continuing to enhance operational excellence delivering value to our shareholders and customers and.
And positioning Woodward to capitalize on future market opportunities.
Mark will now review, our quarterly results and our revised fiscal year outlook.
Thank you Tom net.
Net sales for the second quarter of fiscal 2022 for $587 million an increase.
<unk> of 1% sales for the quarter were negatively impacted by approximately $100 million due to ongoing industry wide COVID-19 related disruptions.
Including supply chain constraints and labor shortages.
Aerospace segment sales for the second quarter of fiscal 2022 were $370 million an increase of 2%.
Segment sales were negatively impacted by approximately $60 million of industry wide COVID-19 related disruptions, which resulted in shipment delays for some orders.
<unk> OEM and commercial aftermarket sales were 21% and 40% higher respectively, driven by continued recovery in both domestic and international passenger traffic and increasing aircraft utilization.
Defense OEM sales were down 28% in the quarter, primarily due to lower sales of guided weapons defense aftermarket sales were down 12%, primarily due to COVID-19 related disruptions with the exception of guided weapons, our defense sales order backlog is increasing.
Aerospace segment earnings for the second quarter of 2022 were $60 million or 16.0% of segment sales compared to $69 million or 18, 9% of segment sales.
The decrease in segment earnings was a result of net inflationary impacts, including material and labor cost increases as well as increases in manufacturing costs related to Covid, 19, disruptions and inefficiencies related to hiring and training.
We are taking pricing actions to offset inflationary pressures, however, timing can be delayed due to certain contractual arrangements.
Turning to industrial.
Industrial segment sales for the second quarter of fiscal 2022 or $214 million.
Compared to $217 million a decrease of 1%.
Segment sales were negatively impacted by approximately $40 million of industry wide COVID-19 related disruptions.
Weakness in China, natural gas engines, and an $8 million unfavorable foreign currency impact all partially offset by increased marine sales as we continue to see higher utilization of the in service fleet.
Industrial segment earnings for the second quarter of 2022 for $17 million or eight 1% of segment sales compared to $28 million or 12, 9% of segment sales.
Industrial segment earnings decreased primarily as a result of net inflationary impacts, including material and labor cost increases as well as increases in manufacturing costs related to Covid, 19, disruptions and inefficiencies related to hiring and training.
Similar to our aerospace business, we are taking pricing actions to offset inflationary pressures, however, timing can be delayed due to certain contractual arrangements.
Non segment expenses were $15 million for the second quarter of 2022 compared to $10 million.
Adjusted non segment expenses for the second quarter of 2022 were $17 million. There were no adjustments to non segment expenses for the second quarter of 2021, adjusted non segment expenses for the second quarter of 2022 included a reversal of a charge associated with a nonrecurring matter unrelated to the ongoing operations of the busy.
<unk>.
The increase in non segment expenses was the result of timing of certain expenses as well as the return of annual variable incentive compensation costs.
At the Woodward level.
R&D costs for the second quarter of 2022 were $32 million or five 5% of sales compared to $28 million or four 8% of sales.
SG&A expenses for the second quarter of 2022, and 2021 were both $44 million.
The effective tax rate was 11, 4% for the second quarter of 2022 compared to 13.0%.
Adjusted effective tax rate for the second quarter of 2022 was 11.0%.
No adjustments to the effective tax rate for the second quarter of 2021.
Looking at cash flows.
Net cash provided by operating activities for the first half of fiscal year, 2022 was $50 million compared to $219 million.
Capital expenditures were $24 million for the first half of 2022 compared to $13 million.
Free cash flow was $26 million for the first half of fiscal 2022 compared to free cash flow of $206 million.
<unk> free cash flow was $27 million for the first half of 2022.
Adjustments to free cash flow for the first half of this year included payments related to business development activities and restructuring activities. There were no adjustments to free cash flow in the prior year period the.
The decrease in free cash flow and adjusted free cash flow was primarily related to working capital increases to support the anticipated second half growth.
Leverage was one eight times EBITDA at the end of the second quarter.
During the first half of fiscal 2000 $20 million to $294 million was returned to stockholders in the form of $22 million of dividends and $272 million of repurchase shares.
Year to date through April 32020 to approximately $400 million was returned to shareholders $377 million and repurchase shares and $22 million in dividends.
Lastly, turning to our fiscal 2022 outlook.
Covid related disruptions and net inflation inflationary impacts during the second quarter of fiscal 2022 were greater than anticipated.
Although improvement as expected through the remainder of the year, particularly related to the COVID-19 related supply chain disruptions, we have revised our fiscal year 2022 outlook. The revised outlook assumes the current inflationary environment does not significantly worsening.
Total sales for 2022 are now expected to be between $2 four zero and $2 $5 5 billion aerospace sales growth percentage is still expected to be in the low double digits to mid teens.
Industrial sales growth percentage is now expected to be between five and 10%.
The decline in industrial sales growth from the previous outlook is primarily driven by expected ongoing weakness in China natural gas engines due to the Lockdowns in China and elevated natural gas prices as well as headwinds from foreign currency exchange rates.
Aerospace segment earnings as a percent of segment net sales are now expected to be approximately 18% industrial.
Segment earnings as a percent of segment net sales are now expected to be between 10 and 11%.
The decline in both segments earnings as a percent of net sales from the previous outlook is primarily due to net inflationary impacts, including material and labor cost increases as well as increases in manufacturing costs related to COVID-19 disruptions.
The adjusted effective tax rate is now expected to be approximately 20%.
Adjusted free cash flow is now expected to be approximately 200 million to $230 million.
Adjusted free cash flow conversion rate is still expected to be greater than 100%.
Also capital expenditures are now expected to be approximately $60 million.
The decline in adjusted free cash flow from the previous outlook as it related primarily to the delayed timing of our sales and the resulting impact on our working capital balances as the COVID-19 disruptions decline, we expect our working capital requirements to improve thereby recovering the cash flow delayed from fiscal 2000 22 million in fiscal <unk>.
2023.
Adjusted earnings per share is now expected to be between $3 20, and $3 60.
Based on approximately $64 million of fully diluted weighted.
Average shares outstanding.
The previous outlook assumed approximately $66 million of fully diluted weighted average shares outstanding which would equate to adjusted earnings per share between $3 10, and $3 57.
This concludes our comments on the business and our results for the second quarter of 2022.
Operator, we are now ready to open the call to questions.
Thank you Sir the question and answer session will begin at this time, if youre using a speakerphone. Please pick up the handset before pressing any numbers could you have a question. Please question as far one tick.
Downturn should you wish to be part of your question press the pound key questions will be taken into ordering it nice to see you soon.
<unk> for your first question Sir.
Our first question comes from the line of Robert Spingarn with <unk>. Please go ahead.
Good afternoon.
Yes.
Tom Congratulations on your retirement and wish you the best it's been great working with you.
Thank you I appreciate that.
And.
Just digging in here Unfortunately, a tough quarter wanted to ask you on your on your OE sales.
Commercial Aero you've said in the past they've been profitable is that still the case with all of these inflationary pressures.
And other factors.
Yes, Rob I still see it as profitable.
As Mark highlighted in the prepared comments.
We will be offsetting inflation with price increases some of that comes through our long term agreements, which have escalation provisions those contracts. So have once per year price adjustments and then.
Those are primarily all OE.
Type agreements the aftermarket we are pushing through price increases.
Some of that.
<unk> areas, we said were supply chain, but if all of you guys remember at our Investor day, we talked about having to hire quite a few people.
With the growth that was coming and some of the attrition we saw during COVID-19.
To do that we had to we had to up our wage rates across the board.
We will start to see recovery on that too through.
Through escalation and through pricing. So it's a delayed recovery that we're going to see so we're still see.
Profitable OEM sales.
Okay and then just another one on just on ship set content you tend to have higher content on the Boeing platforms relative to Airbus and I don't know if thats the GE relationship, but given what's been happening at Boeing and some of the unforeseen errors. There do you see maybe a different mix going forward.
Between the two air Framers for Woodward.
Yes.
Well, yes, definitely Airbus rates are going up.
<unk>.
One of the things that we show on content you may be referring maybe the <unk> hundred 20 neo versus the Max.
We do have more content on the leap.
But it's pretty much equivalent.
And <unk> hundred 20, neo with leap or a Max with leap, we have slightly less content on the pure power on the neo So thats, where maybe I guess I was factoring in wide body too because there.
With the GE relationship.
That's correct.
We have better content on the wide bodies at Boeing So thats a correct statement.
<unk>.
Yes, it's going to be.
Well, let me put it this way I think over time, the 787 Triple seven acts are going to be good selling aircraft.
As everybody knows they have.
Some issues right now, but those are two very good long range aircraft and they will pick up.
The positive in the future in my view.
No that was my last the last part of my question, Tom which is due to further delays on eight seven and Triple seven X is that part of what changed here.
For this year or is that really nothing to do with it.
While we saw a little not a triple seven Alex but we saw.
The traditional Triple 70, I was down in the 87 was down so that did impact a little bit.
Yeah, but overall, we're seeing OEM rates, two narrow bodies coming back up and I think the 87 will come so.
It did it have an impact on us but.
Yes.
But it wasn't a major part of it.
Got it got it thanks again best wishes. Thank you.
Yeah.
Our next question comes from Sheila <unk> Jefferies. Please state your question.
Tom Congratulations on your retirement.
Sure Yeah I wanted to ask you question.
Questions on aerospace, but that's okay. Because you are always very forthcoming when.
When we think about Aero I think.
Investors, just kind of want to understand what's going on with inflation.
Do we think about where inflation is the most risk is that on the OE side or is that after market.
How can we think about this data I think mark mentioned in his prepared remarks, it's not considered for the remainder of the year can you talk a little bit about that.
Sure.
Well first I would highlight like I, just mentioned before we have internal Woodward labor rate inflation and that was required to.
Be able to attract and Phil.
The 400 positions that we've hired.
Since the beginning of the year those are all direct labor positions.
So that hit.
We have seen some pressure coming from suppliers, we've been I'd say, our supply chain groups have been doing a good job trying to mitigate that but there is there is some there so it.
It takes a little bit of time to recover that through our contracts and pricing.
We fully intend to recover that the aftermarket we have much more flexibility as you know and we will get those.
Offsetting price increases to inflation in place we already have done some what we're going to be doing more.
So I see that happening the other one that.
Kind of ties in.
It's not really inflation.
But.
We're ahead of where ahead of plan on hiring direct labor and if you recall, we said we're going to need to hire 100 per month, we've been with.
Our teams have been doing a good job getting people in some of that was.
Higher labor rate changes.
But when we bring in that many people.
We did have inefficiencies.
Inefficiencies. So we don't put people directly on the manufacturing line, we put them through extensive training that all goes into manufacturing overhead, which is a cost and then the people arent quite as sufficient when they first get on the lines.
We see that improving in the second half of the year, we expect labor efficiency to improve.
Quite a bit so that'll that'll be a natural.
Part of what we're calling the inflationary and Covid disruptions.
We do believe.
Be able to recover the inflation, it's just delayed.
Sure.
And we're starting to see the second half of the year and on into 'twenty three.
So a follow up to that I guess, how much of the inflation is.
Labor Force related version, thanks, Great and.
And then.
My second question would be when we look at margin.
They dropped almost 1000 basis points from where they were in Q2 'twenty granted that was a great quarter at 28.
8% margin, but.
What's that rich and the margin drop.
Well.
The margin.
Dropped definitely has some inflationary issues in there.
It does have a mix issue.
It does have these labor efficiencies in there.
Yes.
I think you guys could all do the math if you look.
Half of the year will be increasing margins, you'll see that coming through we anticipated.
Start to recover.
Some of the.
The past due we have due to these tariffs.
Disruption so you'll start seeing the margins on the volume increasing and the recovery in some of the.
Covid pressures so.
I think that's that's where it lies on that one Sheila it's a combination of all of those.
Okay. Thank you thanks a lot.
Yes. Thank you.
Thank you. Our next question comes from Peter <unk> Kubicki with Alembic Global Please state your question.
Yes, good afternoon, guys, Tom I'll Echo Robin's Sheila best of luck in your retirement.
Chip.
One clarification on aerospace the $60 million Covid headwind.
You talked about wide bodies, a little bit was that.
Much all defense aftermarket.
Because it sounds like the defense OEM was down almost all because of the kind of fundamental guided weapons softness so was it mostly the aftermarket.
No no that's it.
Mark you want <unk>.
It's across all.
All four sub segments of aerospace that $60 million impact did impact them all.
Turning to OEM market and defense OE aftermarket.
And do you have.
Are there any.
Talked the last few quarters about some of your suppliers, having I guess capacity issues because of the cutbacks as they did previously.
What's the update with those and maybe what's the update in terms of chip shortages.
No great question.
We are.
We've got a lot of suppliers with legacy products. We have so we've got a big tail of suppliers, but.
What we have is our high risk suppliers and we we went through when we originally started with I think it was about 20, we've mitigated the risk on those but as we are mitigating the risk on those I think the list.
Troubled suppliers that are still impacting us is like 28.
So that's out of.
A couple of thousand suppliers so.
So those ones we're working we've got.
Recovery plans with them, we've got teams on site.
We're addressing that in the process and the approach we are using is yielding results.
But.
It's still.
And the tight supply base, we have if you're looking at castings forgings machine houses.
They are all struggling with labor.
And capacity recovery in their facilities or some of them and as we highlighted before some of the supplier issues have been.
Plant shutdowns moving products during the.
When the market was really shut down in 2020.
So there is still recovering from some of those now on the semiconductors that is still an issue for us.
And it is impacting.
Both Aero and industrial, but I would say its impacting industrial a fair amount more than the arrow and one of the issues. We have there I think we might have said this at Investor day.
We use a lot of components.
Chips that are used in automotive.
And we're a low volume high mix supplier.
And that has been challenging due to the.
Problems. The auto guys are having getting source and so we are working hard to get.
To get the semiconductors, but that's still ongoing pressure and as we said before.
Full recovery, we don't see until 'twenty, three and it might be mid to late 'twenty three as we get that back on track.
So that's still a big challenge the other ones. We think we got good mitigation plans, but they take some time.
Start.
Recovery second half of this year as Mark said in his.
Our prepared remarks.
Some of that will roll into fiscal year 'twenty three none of the sales are lost I just want to really emphasize that they are there.
On all of these.
Generally 100% across the board sole sourced.
So it's a matter of getting recovery, helping our customers make sure we keep their lines running and getting back on track so.
That's the positive that it will come in those sales will recover in the cash flow associated with those.
Will come some of it is rolling into fiscal year 'twenty three just due to that as we shipped late in the fiscal year, that's going to end up in <unk> and that's going to roll into 'twenty three to get the cash out.
Okay. Okay. Thanks for the color I appreciate it.
Thank you. Our next question comes from Christopher Glynn with Oppenheimer. Please state your question.
Thank you good afternoon, and thanks for all the insights great insights on the Aero sector over the years.
Yes.
It was.
Curious.
The formulation of the sales push up the $100 million is that kind of a rolling cumulative that built on the $70 million for the.
Prior quarter.
Aggregate it now a couple hundred million dollars of sales push outs.
<unk> cumulative so.
The equivalent of the $70 million at the end of Q1 is now a $100 million. So it's grown $30 million since the end of Q1.
Okay, great. Thank you.
Since it sounds like the hiring and training was.
Reasonably big rub.
Yes.
And it's one of the nice swing factors in the second half as you described the process.
Yes, new talent, becoming efficient.
Im curious couple of things.
Although it's kind of proportional impossible.
And then sort of tilted to one and all.
So the hiring kind of winding down as you got in the talent they need.
Yes.
Good question.
A little bit tilted to arrow.
Where we had <unk>.
<unk>.
Line rate increases and as well as aftermarket increases.
We are actually ahead of our plan, which is good.
And we will start to see that hiring slowing down in the second half and then going to more natural.
Hiring practice of supporting the growth that we expect in 'twenty, three and covering attrition, but that that'll be more normal than what we've experienced.
Second quarter in a little bit moving here in the third quarter, but we really.
Have done a good job getting ahead of it and they will start tapering off.
Okay.
As we think about the linearity of the back half and we've got your margin and revenue and EPS guidance should we just kind of.
Functionally stair step those right through.
Kind of proportionately.
Well I would tell you it's going to.
If you say stairstep.
Maybe you can talk about it is going to be higher in the fourth quarter than the third quarter, okay because.
Yes.
So maybe that's the.
The detailed guidance I'll give you it is very backend loaded.
I would just reemphasize, it's not a lack of orders we have all the orders. So just getting the orders out and I anticipate it will be higher in the fourth quarter in the third quarter.
Okay, great. Thank you Youre welcome.
Our next question comes from David Stylistically Barclays. Please state your question.
Thank you Echo congrats on best of luck.
Thank you.
Wanted to ask I guess I guess.
At your Investor Day, I think it was March nine you you reiterated the guidance that appeared to be very back end loaded at that point I guess what.
What changed over the course of the next couple of weeks that you werent anticipating at that point.
Yes, well if you really look.
The Lockdowns in China The war in Ukraine broke out.
We didn't call out we are definitely impacted by sales that were going to go into Russia, and Ukraine matter of fact, some of those were ready to go and we couldn't ship because we no longer could ship the Russia, Ukraine kind of take orders that's not that that was major but every every $10 million plus adds up China locked.
Down.
Is impacting not just the.
The what we call the on highway natural gas that that and we did use the term evaporated I mean, that's down to near nothing right now and then other China sales have been delayed. So those are all differences that occurred between that investor day and today.
Then just on top of.
Still working through supplier issues.
We havent recovered as.
Candidly, we haven't recovered as.
Quickly as we were believing we were but it's all those factors together.
But.
The China Lockdown is still.
Again, we basically have removed.
A high high percentage of our China sales from from the forecast just.
Just with the problems there.
So that is a big difference.
We are still watching what will happen with Ukraine. So those those are impactful things that occurred since our investor day.
That's great color just in terms of a reference point, China natural gas sales than a.
Typical year or what are you anticipating out of.
That business this year versus what your I guess now yet again to zero what were you anticipating yes just.
<unk> I'll, just say approximately it would've run maybe.
$40 million to $50 million a quarter.
We're down to near zero.
Okay.
And then.
Last one for me on Max.
<unk> can you talk about where you are today are you in line with what we stated are maybe below.
Below kind of those rates or are you actually seeing some bit of.
Of restocking there.
Now the rates are kind of they're flowing through so we're on track with that.
Sure.
We're preparing to continue.
Both both what Boeing is looking at and what Airbus is looking at so we're on track for and following their guidance there.
Okay. Thanks very much.
Welcome.
Thank you. Our next question comes from Michael <unk> with Tuohy Securities. Please state your question.
Hey, good evening guys. Thanks for taking the questions Tom all the best it's been great working with you over the years.
I guess Tom.
Maybe first since David was asking about the maximum rates. I mean are you guys can you guys keep up with production I mean, if we fast forward six months 12 months Airbus, obviously, you're still talking about where they want to get the narrow bodies up to I mean are you guys, becoming the long pole in the 10 year I mean is there any.
Kind of risk on you guys being able to get product out the door that might.
Threaten future deliveries.
Yes, no, we're not holding up any deliveries of Boeing or Airbus aircraft.
We we look out.
And plan, our let me backup first we have the capital equipment necessary to produce at the highest rates that we believe Boeing and Airbus are going to go to we've talked about that before before Covid, we had capitalized in anticipation of its higher rates.
The issue we had was labor and we are on track now with the labor to deliver on those programs and we have a very.
<unk>, what's called SIOP process, where we look out 18 months we plan.
Our capacity, our labor and we're on track to meet all that so we know where the growth rate, what we need in labor capacity.
That translates into Woodward, but we're also working all of our suppliers to ensure that they are ramping and that works in progress.
I'm highly confident we're keep up with those increase in ramp rates and we're capitalized to do it.
Got it got it.
Obviously, all the suppliers who are getting impacted.
<unk> inflation.
Get the China Nat gas sales, so maybe setting that aside I mean is there anything in your business Thats, making you a little bit more unique here that youre seeing these kind of outsized headwinds or anything that you can kind of glean.
From senior business.
Yes, I think one of the ones think about.
We have a.
A wide range, if you want to calm skus in the company.
We've always said, we're high mix low volume.
A few programs our mid volume, but we have a lot of different.
<unk>.
Lines that we support and when you have lower volume you.
Are impacted more when you have.
Small number of lower volume suppliers and I would say that's the case and then the other part of that.
Which comes into play and I mentioned that earlier here on the call.
Is.
We use a lot of automotive semi.
Great semiconductors, and the reason for that is there theyre high temperature.
And they are reliable for in our market and we have a wide range of products with electronics in them.
And that.
So that debt.
Broad portfolio I think is maybe different than a few.
Some other peer companies are like.
And with the volumes that's what we believe is part of the impact that we saw and then.
Sure.
Yes, I guess, that's what we believe is part of it.
Okay. No. That's helpful. And then just last one for me on the on the Aero aftermarket. It obviously sounds like you've got more pricing power there or do you expect that you can pass through all of your cost and still get some call. It real pricing I guess or you still I'm just looking at that price cost dynamic are you still going to have.
Maybe see some pressure there in the aftermarket we can.
Okay, Yes.
On the OE contracts and as I highlighted before the ones that are under long term agreement.
We have.
Negotiated escalation clauses. So that's usually helps us recover inflation not to go above inflation.
Where we don't have any contracts, we have more flexibility, but most are.
Most of our OE sale.
Sales are under long term agreements.
Got it perfect. Thanks, a lot.
As a reminder, if you have a question. Please press star one on your bank.
Our next question comes from.
Chris with Wells Fargo. Please state your question.
Hi, Thanks for the question and Tom Congratulations and best of luck here.
Thank you I wanted to ask again on the call.
China natural gas trucks that I don't know if this is possible to parse out but.
How much of that impact do you think it was from the Lockdowns versus just higher higher natural gas prices and it sounds like you've taken that almost completely out of the guidance is there any potential upside there if the lockdown start to ease.
Yes.
Yes, it's a little hard to say actually elevated natural gas prices.
Harm the truck sales the lockdowns have reduced demand.
So I think it's certainly think it's a combo and it's a little hard to say, which one was more than the other but I think that combo is what really.
Dried up the market.
Yes, there would be upside if it recovers in the second half of the year.
Yes.
Our forecast.
That's a really hard one to predict so that's also why we.
While we really took it out.
Yeah, It makes sense.
And then I guess on the aftermarket growth.
Was there any provisioning in that number or maybe if you could just talk about how big provisioning is.
<unk> at this point out however that should sort of trend here going forward.
Provision is increasing right now.
And you can see 40% commercial aftermarket sales growth.
That growth rate was really on top of.
Delays in.
Deliveries of Max is in China, and we do anticipate that that held up or we do believe that held up some provisioning sales for those Chinese airlines. So we expect that to come as those planes start to get delivered so.
But initial provisioning is doing well as well as shop visits are up and overall.
We see really positive trends in commercial aftermarket.
Great. Thank you.
Youre welcome.
Our next question comes from Gautam Khanna with Cowen. Please go ahead.
Hey, Thanks, and congrats on a great career Tom.
Thank you.
Okay.
A couple of questions. So people have asked a bit about the second half when you mentioned the Q4 waiting.
But just the midpoint implies somewhere around 19% 20%.
The half versus first half improvement in sales and I wanted to get your sense now one month into the third quarter.
What's your confidence that maybe the high end versus the low end versus the mid point.
I know, it's a wide range, but.
Have you made any progress on the past dues.
So with over $100 million down how much of that are you kind of embedding you catch up in the current fiscal year.
And just.
How much maybe seasonality just naturally would give you a lift second half to first half because it seems like a big number.
Percentage wise, but.
If you put it out there just curious.
They're roughly.
Roughly.
If you look at the bottom end of our range.
That would imply.
Recovery or even worsening.
Past due.
Okay. The high end of the range would imply.
Made up a lot of past due mid point would be.
Closer to where we are with a little bit of improvement.
That helps you so.
No that helps.
In the third quarter have you seen a step up in monthly run rate.
Output such that so yes, so we got.
Just as you know just got one month under our belt.
I would say.
It was tracking we had a slight improvement in March.
In April .
Which is why I highlighted earlier where needed.
Large fourth quarter, two when you get into that mid point of our range and above.
Okay.
You guys had called out I think this quarter it was $1 $71 8 million of nonrecurring.
Expenses related to business development or something.
And in Q1 that was not.
Number five memory, two eight something like that are.
Are these related to the same.
Category of items.
And yes, if you could just elaborate on.
What it is why we're backing it out.
Let me try to clarify for you got them.
In Q1, we took two separate adjustments that we called out one was $2 $9 million related to business development costs and the other was a $5 million related to nonrecurring non operational impact that we have just to clarify this quarter, we reduced the $5 million.
Charge by $1 7 million.
So now it's a net of $3 $3 million. So it was a favorable.
Item in Q2 that we adjusted back out because we had the unfavorable item in Q1.
Okay got it thank you.
Maybe just on cash deployment, you have the 800 million buyback authorization minus what you've done.
How quickly do you expect to execute that or are you going to with the cash flow guide coming down a bit are you going to.
Toggled down the pace of the buyback.
It does it does it matter.
Does that impact us at all in terms of <unk>.
We.
We believe in our long range plan.
We also had cash on the balance sheet.
Fairly unlevered balance sheet and the.
The board of directors.
Mark and I.
All agreed to return capital to shareholders and I think we're tracking very well to that $800 million. We said, we're going to return and we intend to return that over the two year time period.
Yes.
But we don't have a rate at which we're going to finish that out but.
We do intend to return all of that and the timeframe.
Got it.
Thank you guys I appreciate it thanks.
Thanks, Kevin.
Our next question comes from Noah <unk> with Goldman Sachs. Please state your question.
Hi, good afternoon evening everybody.
Tom Congratulations on your retirement.
<unk>.
What did you take out of the full year revenue guidance range.
Makes up the 50 to 100 million that came out.
Well as I highlighted.
A chunk of it came out of.
Deliveries to China.
We have the FX headwind that's impacting the top line with the strong dollar.
We also.
Reduced a little bit.
In all businesses based on <unk>.
Deliveries.
Past due that we've talked about too.
Supply chain disruptions and Covid related disruptions, so it's a little bit across the board, but those are.
The big ones.
The $30 million of.
Supply chain Covid logistics.
Cited for the quarter, there was 70 million last quarter. It sounds like that 30 was a.
Was there a surprise when it comes out.
I guess, maybe that there were some assumption for that in the 30 was larger than the assumption do you have to incrementally assume something.
Less favorable for <unk> than you had in the prior guidance for that because well.
Well it just kind of what I highlighted a little bit earlier.
He was really.
Primarily additional supply chain issues and in particular, we had some real impacts around our electronics.
I guess, where I'm going with that Tom is if there was a $30 million in the quarter and now it sounds like you're thinking and others are thinking that.
Supply chain issues that seem like they might resolve themselves sooner than later now looking like they're going to last through the end of the calendar year.
And so if it's a $30 million a quarter run rate, maybe it's not 30, because maybe it gets a little better in the back half and maybe you had some assumption in the old guidance, but if it was 30 times three quarters, and then China shut down on you and then some of the deliveries are worse and then there is FX.
It sounds like that adds up to more than 50 to 100, because we're a little bit.
I was just saying this little bit earlier, if you look at the range we gave.
We do believe we will make progress on recovering some of that $100 million.
In the second half, but if you take the.
The goalposts on the range.
The bottom end is we're not going to get any better.
Maybe even a little worse top of the range as yet we really recover really well.
I do believe we will recover we're seeing progress.
In all areas, except for electronics at this time and we're working really hard on the electronics.
We also anticipate.
Sizable improvement in labor efficiency from all the direct labor, we've hired and that will help.
Efficiency and production rates go through so I do believe we will make progress on that $100 million. Our previous belief was we were going to be sooner on that recovery and obviously, we're not in so.
So that's why we.
Decided the right thing to do was called down the year.
We are making progress and I do believe second half will improve.
Will you be losing sales to new supply chain challenges in the third and fourth quarter that you didn't have in the guidance previously, while making up the old ones actually.
We anticipate really no lost sales and that's really you got to go back all of our.
I would say, 98% of all of our business is sole source.
So I don't mean permanently lost sales I just meant like to the extent that supply chain challenges are lasting longer than expected. It would seem like three fiscal <unk> and <unk> would have.
An incremental hit to them compared to the old guidance from supply chain.
And if you are making up some of the old stuff.
There is some that we have factored in and I'll give you an example.
And this is across the industry not just Woodward.
A lot of times, we're have aftermarket like I say in our industrial business.
A refinery or a power plant goes down for maintenance they want to know they have everything ready for that.
Outage.
And right now we see a few of them delaying the outage.
Because they can't get all the hardware so that's been factored into our outlook now that.
That is not a loss sale to delayed because they will do that outage in that maintenance, but they are they are pushing them out because not only woodward, but other suppliers are late.
So that that is maybe what you are asking about know of that type of thing is happening, but it once again.
A pushout not a loss not a permanent loss sale.
Okay, Yeah, no that is.
Makes sense, yes, I'm, just I'm, just trying to square up the new virtual.
But that but thats helpful. And then if I go to the aerospace margin guidance.
The <unk> 18 for the year.
Think it implies basically.
Queen spot on 40% incremental <unk> and <unk>, maybe it won't be exactly that but back half in aggregate.
If if the pricing increases take a little while to flow through as you alluded to and you still have that new labour inflation right away.
Is 40% achievable without going on I want to make sure I have that right.
We believe that's achievable and really the one <unk>.
A lever in addition to our normal incremental operating flow through that we see is really capturing that labor efficiency as we move forward from all of the direct labor that we have hired that impacted us here in Q2.
So you become more efficient the build rates go up members become more productive on a line that those incrementals will flow right through on that increased volume.
Okay got it and just one last one.
Why is the guidance for free cash flow revised so much more than.
EBITDA.
Yeah. So it all comes down to and Tom mentioned, a little bit and I mentioned, a little bit in my prepared remarks. It all comes down to working capital as you can as you see we have a large second half and as Tom mentioned.
Ramping in the second half and Q4 will be larger than Q3.
We are anticipating and that is our receivables balance will be.
Larger than anticipated previously now the great thing about that is again, it's not loss cash it's just delayed cash into fiscal 'twenty three.
Other is as inventory balances are a little higher today.
Given the Covid disruptions and we do plan on working those down but they may be higher than what we had originally anticipated given where we're at today. So between those really those two factors on the working capital. They are in inventory. That's why the cash flow impact is significant it is but again, it's just a timing thing.
It's just a delayed cash into fiscal 'twenty three.
Okay.
Alright, thanks, so much I appreciate it.
Thanks Neil.
Mr. Gendron, there are no further questions at this time I will now turn the conference back to you.
Well thanks for joining today.
I appreciate it working with all of you I've always enjoyed our interactions and I. Appreciate that you know our markets have learned our business and.
They have I've always found it enjoyable to interact with you guys.
Keep doing a good job and Mark and chip will I think carry on with you. We do believe in trying to give you good information be transparent.
We got a great company here, it's going to it's going to come back from these disruptions.
We'll be back on our long range plan in no time.
So I appreciate that and I guess as a parting comment.
You guys kind of took it easy on me today. So I appreciate that is my last call with all of you. So maybe I'll run into you in the future when a mountain New York and the likes so thanks a lot.
Talk to you soon.
Alright.
Ladies and gentlemen that concludes our conference call today, if you would like to listen to the rebroadcast of this conference call. It will be available today at 730 PM Eastern daylight time by dialing one 805 85920 <unk> for U S call or 140 floor.
53734, and here with <unk>.
Today's call and by entering the access code 6577704.
You broadcast will also be available at the company's website Ww Dod Woodward dotcom. We thank you for your participation in today's conference call and ask that you. Please disconnect your lines.
Okay.
[music].
Yes.
Hum.
[music].
Yes.
[music].