Q4 2022 Woodward Inc Earnings Call
Thank you for standing by and welcome to the Woodward, Inc. Fourth quarter fiscal year 2022 earnings call.
At this time I would like to inform you that this call is being recorded for rebroadcast and 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 Mr. Chip Blankenship, Chairman and Chief Executive Officer, Mr. Mark Hartman, Chief Financial Officer Mr.
Mr. Dan <unk> director of Investor Relations.
Ill turn the call over to Mr. <unk>.
Thank you operator, we would like to welcome all of you to Woodward's fourth quarter fiscal year 2022 earnings call.
In today's call chip will comment on our strategies and related markets.
Mark will then 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 December one 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 would like to refer to and highlight our cautionary statement as shown on slide three.
As always elements of this presentation are forward looking or based on our current outlook and assumptions for the global economy, and our businesses more specifically, including the expected and potential events effects of the ongoing supply chain and labor disruptions and net inflationary pressures.
Those elements can and do frequently change.
Our forward looking statements are subject to a number of 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 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.
Now I'll turn the call over to chip.
Thank you Dan and good afternoon, everyone.
During fiscal 2022 are market strengthened and demand was solid with the exception of China.
Challenges from supply chain and labor disruptions record high inflation.
Unfavorable foreign currency exchange rates negatively impacted our performance.
We expect some improvements in fiscal 2023, and we are taking specific actions to manage key constraints that are within our control.
We remain focused on operational excellence talent development and innovation to help drive the company's performance.
<unk> value for our shareholders.
Orders are up in nearly all market segments, and we finished the year with a strong backlog and.
Moreover, our past due commitments to customers remain elevated as a result of parts shortages in labor inefficiencies.
On our last call, we discussed our strategy to mitigate supply chain risk.
And better position would work for long term success.
Like to update you on three actions we've taken.
We have redeployed talent and added indirect resources to factories to stabilize the production environment.
This support includes material planning resources operation specialists leadership support and engineers.
Secondly, we reinforced the global sourcing team to secure additional supplier capacity and allocated experienced resources to help suppliers resolve issues.
We have also found in qualified a number of new quick turn suppliers that we're using to augment specific supplier shortages.
Third.
Our advanced manufacturing engineers across the company are working to transfer selected machined components into our own plants. This in sourcing activity leverages, our substantial machining capabilities and capacity, which we expect will deliver improvements in quality delivery and cost.
<unk> and reduce our lead times.
Date more than 2000 parts have been transitioned to alternative sources.
Either in house or to a more capable third party supplier.
While significant work remains.
We believe these investments will help stabilize our supply chain and improve output.
To support the in sourcing initiatives were more effectively utilizing existing equipment to relieve capacity constraints suppliers.
While we have the capital largely in place, we're investing $10 million of new capital to create rapid response machining centers at four of our sites.
These machining centers include flexible CNC machines that will have a portion of their capacity available for rapid response, when a supplier has unforeseen problems.
That capital will begin arriving in our plants in the second quarter and our target is to produce parts and less than 10 days from the time, we identify a supplier shortage.
I'd like to take this opportunity to thank our members for their efforts and commitment to Woodward and our customers. They.
They have stepped up in the face of adversity to help us serve customers better and deliver for our shareholders.
For members meeting elevated build rate targets to engineers redeployed to assist problem solving and suppliers at.
Advanced manufacturing engineers, bringing automation and in sourcing initiatives online just to name a few examples.
Like others in the industry, we continue to grapple with the increasingly competitive labor market challenging attrition rates and skills gaps.
Hiring developing and retaining talent are critical components to our long term sustainable success and remain a top priority.
We have initiatives underway to improve training and development or new machinist and technicians undergo a rigorous multi month training and skills development process.
That enables them to perform to woodward's highest standards.
We're focused on compressing the training cycle time to develop our members quickly and efficiently without compromising safety or quality.
We're partnering with select technical schools to help augment our training bandwidth.
We're also increasing our focus on automation with multiple technology paths, including expanded use of Cobalts for collaborative robots.
We're encouraged by the results and believe the increased use of automation will deliver productivity and mitigate risk in a difficult labor market.
Turning to innovation.
<unk> is committed to solving our customers' fuel and motion control challenges, enabling improved fuel efficiency and reduced emissions in both aerospace and industrial applications.
While we are investing in and developing innovative technologies that reduce fuel consumption and associated emissions.
Seeing rising interest in the use of alternative fuels across both industrial and aerospace industries.
Together with our customers, we are developing solutions that enable a wide variety of clean fuels.
The power of the engines of Tomorrow.
Our focus on innovation enables multiple paths to a cleaner decarbonize world, which we believe represent significant opportunity for our company in the future.
Woodward has been selected as a partner to provide substantial content on a very large breakthrough aerospace project <unk>.
Involving carbon emissions reduction that will be announced in the next few weeks.
This is a significant project for Woodward involving resources and test facilities across both our aerospace and industrial businesses.
Additionally, our industrial segment is working on projects with eight different customers on a variety of clean fuels, including ethanol hydrogen methanol ammonia and bio derived natural gas these projects or for a wide variety of applications, including power generation.
Marine Agriculture and mining.
Targeting both new engines as well as conversion and upgrade opportunities for engines currently in service.
Now moving to our markets.
Demand from both aerospace and industrial customers remained strong.
And aerospace utilization rates for commercial airline fleet continued to rise driven by increasing global passenger traffic.
U S and European domestic passenger traffic has returned to near 2019 levels.
International travel continues to improve.
Yes, China domestic passenger traffic remains volatile.
In the defense market, we anticipate near term U S procurement to increase slightly and geopolitical.
<unk> pensions may lead to increased international defense spending.
In industrial markets, we are seeing robust demand in power generation driven by strong growth in Asia continued increases in global aftermarket activity and ongoing demand for backup power that data centers.
In transportation, the global Marine market remains healthy with higher ship utilization, which drives increases in current and future aftermarket activity.
Cruise and ferry operations are back at near 2019 levels, which should result in increased spare parts demand.
In addition, the global Marine market interest for alternative fuels is increasing as more projects are announced and under development.
Demand for China natural gas trucks remains at depressed levels.
The oil and gas market is favorable as equipment utilization remains elevated these factors should result in increased aftermarket demand.
In summary, we believe our markets will remain strong.
As heightened demand signals for fiscal year 2023 continue to propagate throughout our markets as customers continue to increase orders.
We remain focused on improving operations to catch up on past due orders and deliver on future customer demand.
We are committed to operational excellence initiatives.
Development, and innovation, which we believe will deliver value to our customers and shareholders and will position Woodward to capitalize on future market opportunities.
I will now turn the call over to Marc to review, our quarterly and full year results and our fiscal year 2023 outlook.
Thank you chip.
Net sales for the fourth quarter of fiscal 2022 were $640 million, an increase of 12% in the quarter, we realized $29 million and price gains or an increase of approximately 5%.
Sales for the quarter were negatively impacted by approximately $85 million due to ongoing global supply chain and labor disruptions.
Sales were also impacted by approximately $24 million from unfavorable foreign currency exchange rates.
Turning to our segments, starting with aerospace segment sales for the fourth quarter of fiscal 2022 or $408 million an increase of 8%.
Commercial aftermarket and OEM sales were up 34% and 24% respectively, driven by continued recovery in both domestic and international passenger traffic and increasing aftermarket.
Our increase in aircraft utilization as well as higher OEM build rates the.
The increase in segment sales was partially offset by delayed shipments of approximately $40 million caused by global supply chain and labor disruptions.
Defense OEM sales were down 18%, primarily due to lower guided weapons demand.
<unk> aftermarket sales were down 7% due to global supply chain and labor disruptions.
Aerospace segment earnings for the fourth quarter of 2022 were $63 million or 15, 5% of segment sales compared to $66 million or 17, 4% of segment sales.
The decrease in segment earnings was a result of net inflationary impacts on material and labor costs as well as increases in manufacturing costs related to supply chain disruptions and inefficiencies related to training recent hires partially offset by higher sales volume.
For fiscal year 2022, Aerospace segment sales were 152 billion.
Compared to $1 four zero billion.
For the prior year, an increase of 8%.
Aerospace segment earnings for fiscal year, 2022 for $231 million or 15, 2% of segment sales compared to $234 million or 16, 7% of segment sales for the prior year.
Turning to industrial.
Industrial segment sales for the fourth quarter of fiscal 2022 or $232 million compared to $193 million an increase of 20%.
The increase was driven by higher marine sales from continued utilization of the in service fleet and strong industrial turbo machinery sales due to the growing demand for power generation and process industries.
This increase was partially offset by delayed shipments of approximately $45 million due to global supply chain and labor disruptions and unfavorable currency exchange rate impacts of approximately $22 million.
Industrial segment earnings for the fourth quarter of 2022 were $21 million or 9.0% of segment sales compared to $21 million or 10, 7% of segment sales.
The favorable impact from higher sales was offset by increases in manufacturing costs related to supply chain and labor disruptions.
Costs associated with training recent hires.
Net net inflationary impacts on material and labor costs as well as unfavorable current foreign currency impacts.
Fiscal 2022 industrial.
Industrial sales were $863 million compared to $842 million for the prior year.
An increase of 3%.
Industrial segment earnings for fiscal 2022 were $83 million or nine 6% of segment sales.
Industrial segment earnings for 2021 were $109 million or 12, 9% of segment sales.
Non segment expenses remained consistent at $17 million for the fourth quarter of 2022 and 2021.
Adjusted non segment expenses for the fourth quarter of 2022 were $21 million compared.
Compared to $12 million in fiscal 2021.
Non segment expenses were $81 million for fiscal 2022 compared to $64 million for 2021.
Adjusted non segment expenses were $78 million in fiscal 2022 compared to $59 million.
At the Woodward level.
R&D costs for the fourth quarter of 2021 or $30 million or four 7% of sales compared to $28 million or four 9% of sales.
For fiscal year, 2022, R&D costs were $120 million or 5.0% of sales compared to $117 million or five 2% of sales.
SG&A expenses for the fourth quarter of 2022 or $50 million compared to $38 million.
For fiscal year, 2022, SG&A expenses were $203 million compared.
Compared to a $187 million.
The effective tax rate was six 5% for the fourth quarter of 2022 compared to 18, 2%.
The adjusted effective tax rate was five 3% for the fourth quarter of 2022 compared to 18, 8%.
The full year effective tax rate was 14, 1% for fiscal 2022 compared to 15, 1%.
The adjusted effective tax rate was 14, 3% for fiscal 2022 compared to 15, 3%.
Looking at cash flows.
Net cash provided by operating activities for fiscal 2022 was $194 million compared to $465 million.
Capital expenditures were $53 million for 2022 compared to $38 million.
Free cash flow was $141 million for fiscal 2022 compared to free cash flow of $427 million the.
The decrease in free cash flow for 2022 was primarily related to working capital increases as a result of production delays from supply chain disruptions as well as lower earnings.
Leverage was two one times EBITDA at the end of the fourth quarter.
We also have significant liquidity consisting of $1 1 billion of combined cash on hand and revolver capacity.
During fiscal 2022 $518 million was returned to stockholders in the form of $473 million of repurchase shares and $45 million in dividends.
Lastly, turning to our 2023 outlook.
Our fiscal 2023 outlook assumes improving operational and financial performance throughout the year, while navigating a challenging industry wide environment the.
The supply chain and labor disruptions are anticipated to begin to subside during fiscal 2023 with the expected pace of improvement increasing in the second half of the year. However.
However, the pace of improvement is uncertain and the results could be negatively impacted if supply chain and labor disruptions do not improve as anticipated.
The strong demand environment is expected to continue with price realization and ramping over the course of the year.
We expect the full year price realization to be in the range of 5% consistent with the fourth quarter of fiscal 2022.
We anticipate total net sales for fiscal 2023 to be between $2 six zero billion.
And $2 75.
$1 billion.
Aerospace sales growth is expected to be between 14 and 19%.
Industrial sales growth is expected to be flat to up 5%.
Our aerospace outlook assumes increases and OEM build rates and overall global passenger traffic as well as higher aircraft utilization rates.
Military sales are expected to increase slightly as global military budgets begin to rise.
Industrial sales are expected to be supported by demand for power generation equipment, rising oil and gas investments and a stable global marine market.
Partially offset by continuing unfavorable foreign currency exchange rates.
China natural gas truck sales are expected to remain at depressed levels.
Aerospace segment earnings as a percent of segment net sales are expected to increase by approximately 150 to 200 basis points driven by increased sales volume and price realization in both commercial OEM and aftermarket partially offset by the return of annual variable incentive.
<unk> costs.
Industrial segment earnings as a percent of segment net sales are expected to be flat year over year due to increased sales volume and price realization offset by the return of annual variable incentive compensation costs.
EBIT is expected to include approximately $60 million of annual variable incentive compensation costs, an increase of approximately $50 million over the prior year.
We anticipate our interest expense will increase by approximately $10 million, primarily due to rising interest rates.
The effective tax rate is expected to be approximately 19%.
Free cash flow is expected to be between $200 million to $250 million.
Capital expenditures are expected to be approximately $80 million.
Earnings per share is expected to be between $3 15.
And $3 60.
Based on approximately $61 million or fully diluted weighted average shares outstanding.
The favorable earnings impact of anticipated sales growth and price realization improvements. In addition to our ongoing efforts to improve operational performance are expected to be partially offset by the anticipated return of full annual variable compensation costs.
Finally to assist in your modeling a few reminders.
First our fiscal first quarter contains fewer working days than the preceding and subsequent quarters due to the holidays.
Therefore, we anticipate fiscal Q1 results will be lower sequentially and lower than the other three quarters in fiscal 2023.
Second many of our OEM contracts have price escalation clauses that go into effect on January one.
And third we anticipate the pace of improvement across the supply chain will increase in the second half of the year.
This concludes our comments on the business and the results for the fourth quarter of 2022.
Before we move into questions I would like to announce that we will be holding our investor and analyst day in early June 2023, and we will hopefully see many of you there.
Operator, we are now ready to open the call to questions.
Thank you. Thank you. Thank you would like to ask a question. Please press Star then one on your telephone keypad.
Our first question is from Sheila.
Sheila <unk> with Jefferies. Your line is open.
Hi, Good afternoon, guys and thank you for the time.
Maybe if you could talk about your guidance for aerospace of 14% to 19% growth and how you think about the different pieces.
And your expectations within that end.
How youre thinking about price is that consistent within aerospace <unk> and 'twenty and into 'twenty.
Yes.
Thanks, Sheila I'll answer your last question first.
The price increase I mentioned in the range of 5% as both across aerospace and industrial generally consistent across both of those.
Related to the aerospace growth of 14% to 19%. We do anticipate continued growth on the commercial both the OEM and the aftermarket side on the commercial OEM side with some increasing build rates.
From the aircraft manufacturers on the aftermarket side, we're anticipating the aftermarket continues.
Have strength related to the utilization of the aircrafts and the passenger miles.
Mileage in passenger miles increase that we continue to see so.
As we look across the as we've talked in the past we look across the aircraft that are flying that is favorable to Woodward based on the content on the the the dynamics of the aircraft that are flying and so that that has a positive effect for us also.
And just maybe specifically on the commercial aftermarket how do we think about that into 2020 through mobile can you talk about the aftermarket and the contacts.
Supply chain <unk> leap reliability.
And so yes.
<unk> deliberate with how that kind of combined.
Right.
So Sheila this is shifts from good afternoon, how are you doing.
Secondary.
Good good to talk to you. So we see strong inputs to our overhaul facility's right now from.
From the commercial aircraft in the content that we have on them, both narrow body and wide body. So we feel we feel strong about that continued.
The strong inputs and our ability to deliver so we have some supply chain challenges from part shortages and that's created some past dues to customers, we're bringing more of the.
The machine.
The machine parts inside our own facilities. So we're able to support our overall with spare parts a little bit better as we've as we forecast out into the future. We've had some of the same impacts in our defense aftermarket.
Production and returned to customers as well and we're going after that problem solving in the same way by <unk>.
In sourcing and alleviating some of the supply chain challenges by moving the parts.
Thanks, So much Jeff Thank you Mark.
<unk>.
The next question is from Christopher Glynn with Oppenheimer. Your line is open.
Thanks. Good afternoon appreciate the extensive detail on the guidance up and down the P&L.
So.
The guidance came with.
Caveats talk about.
Relative to your expected pace and steady improvements in some of the.
Apply chain labor things going on.
What might be your ability on those efforts to Canada.
Breakthrough and beyond the guidance assumptions.
It doesn't seem like you're.
Claiming any victory, but you have real deliberate efforts going on.
So just curious about the sense that.
Some of those things could could really kind of breakthrough and normalize your operations a little more aggressively than you are indicating.
Okay understand where youre coming from that question, Chris Thanks, Thanks for that.
What we see right now like you said is we're taking very very specific actions going after the problems that we see and we've been able to show some progress in certain areas, whereas we're reducing the number of suppliers that are having problems and behind on their deliveries to our in.
Put in.
And we're reducing the number of parts that we're chasing but we continue to be surprised by.
Other suppliers that fall down in the process and so were we don't feel strong enough and incredible enough that we can claim a sustained ability to support the customer demand just yet.
We would like to bring more parts inside we'd like to have our machinists come up the learning curve, a little bit more and have demonstrated sustained ability to see that decreased output.
Before we would start to claim any victories on that front. We are taking the actions, we think that are necessary and prudent and we're even.
Redeploying resources that would on normal days look like excessive to go after supplier improvements and internal factor.
Factory optimization, but we believe that sort of.
Resource over deployment is what's required right now.
Great and then.
On the industrial.
Margin profile understand a lot of what we just talked about is germane to both segments.
I am curious one thing you didn't.
I haven't heard you talk about is is there any issue with.
SKU complexity and breadth breadth or excess customization.
<unk>.
Maybe what the front ends feeding into the factories is.
Could be optimized a little more I'm just curious.
Brain storming if that is.
Article of discussion a year off years, yes, you are.
Curiosity is justified Chris <unk>.
Being in the role now a number of months.
Still learning and coming up the learning curve, but that is one observation that I make is that we have a lot of a lot of complexity. We have some a lot of aged components and systems that don't get a very steady stream of orders and our ability to look across the.
The product line portfolios and potentially optimize that going forward.
Simplification can drive velocity and focus and that's one of the things that will be taken a look at in 2023.
Thank you.
Yep.
The next question is from Pete Kubicki with Alembic Global your line is open.
Hey, good afternoon guys.
Okay.
Hey, guys. If I heard you right in terms of the Covid disruption.
You quantified it for the fourth quarter, I think you said $40 million for aerospace.
That was $55 million in the third quarter are things at least trending somewhat in the right direction in aerospace but.
You're kind of in the same ballpark of $45 million in arrears in industrial is that right.
Yes, that's correct.
We've got we have seen we have seen some improvement, but as far as how sustainable that is and if that's a trend we can keep connecting the dots on we we haven't demonstrated that in a way that I can say with confidence.
Our first quarters can be better than the fourth quarter of last year, we certainly.
Have the have the momentum of resources in place, but being able to realize that.
And say, we're going to continue to March that down right away here.
B, probably too optimistic.
Saying that we're going to make progress throughout the entire fiscal year, we are making that commitment.
Okay and then just what are you guys assuming for our FX headwind in fiscal 'twenty three it Tom because it seems like you are talking about a pretty good demand environment for industrial.
Obviously.
Kind of a low single digit type of average.
Guidance for industrial side, I'm, just trying to figure out if it's more so supply chain or more so FX or I don't know if you can bifurcate it a little bit for us.
Yes, Thanks, Pete let me give you a little clarity on that so first just to remind everybody. Our FX is really what I call more just translation FX or our exposure to the euro.
As is naturally hedged we have revenues in euros, we have costs in euros. So early it's just the translation effect of those euros translated into dollars that we continue to see which does have as youre pointing out that top line effect on the industrial side of the business with with where the Euro is currently at about.
Parity to the dollar it is a.
Into effect for us.
<unk>.
I will say mid single digits, five ish percent of FX headwind.
The euro stayed at parity with the dollar just from that translation effect.
Okay, that's great very helpful.
I guess just last one for me on this.
The incentive comp costs in fiscal 'twenty, 3% to $50 million increase.
That's pretty steep.
More than 20% of your EBIT this year, right, so pretty pretty pretty big jump there.
Similar question can you kind of bifurcate that for us.
Is it kind of linear between if I look at the size of aerospace versus the size of industrial and is that just kind of based on your expected results in 'twenty three.
Yes, so just to do a little.
A reminder for everybody.
During the pandemic.
We were pretty clear on.
We didn't have bonus the variable compensation part of our membership incentive was not in our cost structure in 2020 in 2021, how we did have a slight improvement in variable compensation was paid out at a very low level in <unk>.
1022. So this is returning us back to.
The normal variable incentive compensation.
Picture, if you look at the incremental $50 million.
The other piece.
You could break it down like Youre talking about the one other piece you have to remember is we do have variable compensation that would be in the non segment.
Segment also and so it's really across those three.
Aerospace would be the largest as you're kind of thinking about there.
Okay. Thanks, guys.
Yep, you're welcome Pete.
The next question is from Matt Akers with Wells Fargo. Your line is open.
Hey, guys good afternoon.
I wanted to ask about share count and how youre thinking about repurchases. It looks like you're assuming 61 million shares for next year kind of flat off of.
Q4, so just how youre thinking about using our platform the authorization there.
So what we're thinking is at this point, we would be at the $61 million, which is generally flat off of Q4 like you are talking about wed have to offset some dilution.
If we ended up taking further opportunity to.
Increase that over the offset of dilution that would be something that we would talk about in future quarters related to what the share count effect might be of any further repurchases over the dilution effect.
Okay got it thanks, and can you give us any more help on just the pacing of <unk>.
EPS as we go through the year I know there is the pricing step up.
Early next year, but I guess, how much lower is kind of Q1 compared to the other quarters.
Yes. So some of this is just a reminder, our Q1 has always been lower than the other quarters, It's a working day.
Type approach and you look at our customer their customer working days also are lower and so.
As we mentioned that.
That is kind of always there now on top of that you hit on a few of those the pace of improvement that chip was talking about related to our supply chain and labor disruption effect, we're anticipating that to the rate of improvement too.
Really increase in the second half of the year, so again, not not being overly optimistic as to what we could do here in Q1, you mentioned that the price.
The OEM industry that the customers that are industry based increases typically go into effect on January one so those those won't come into effect here in our Q1 also and so.
That's kind of what we look at when we look at Q1. The other piece of my prepared remarks was really talking about I mean, we do anticipate it being lower than then.
Lower sequentially than our Q4, and so that's kind of the ballpark that we're thinking about.
Yeah, Okay. Thanks, a lot.
Well go next question is from David Strauss with Barclays. Your line is open.
Thanks, Good afternoon.
Dave.
So the $60 million in variable incentive comp can you Mark can you just level set us what was that number the last time you paid in full in 2019.
Yes, it was in that same general ballpark.
Okay.
And then on cash flow you had a fair amount of working capital headwind in SG&A on a pretty big headwind. This year. It doesn't look like in the guidance for free cash flow, you're assuming any sort of working kind of it looks like working capital is fairly neutral is that right.
Yes that would be fair and out there are there are.
Some pieces that are going on underneath the working capital.
Overall, one with the sales growth that we are anticipating for the year, obviously that will have an effect on the receivables balance as we go throughout the year, we are anticipating some improvement in inventory, but also with some of the timing of payments to our suppliers and where.
The timing within the year and kind of where our payables balance was it at year end that would offset some of that inventory improvement that we see and so really it's those three factors generally or kind of what's driving some of the working capital.
That we have the other one that I do want to point out for everyone is with the current <unk>.
U S legislation around the ability to deduct the R&D expenses for U S tax purposes, and this isn't just a Woodward thing. This is for everyone. We will have.
Higher tax cash payments.
In this year than we had in prior years, because we have to in essence capitalize that R&D costs for tax purposes, and you can only deducted over a four year timeframe. So that also has a headwind in our free cash flow for 2023.
How much is Walmart.
R&D piece.
We spend $120 million ish this year on R&D and so you think about you.
U S tax rate.
<unk> 25 ish percent and you're only getting a quarter of that so it is going to be.
$30 million somewhere in that ballpark.
Okay. Thank you very much.
Welcome to welcome.
The next question is from Rob Spingarn with Melius Research your line is open.
Hi afternoon.
Andrew.
Mark going back to this price realization of 5% and 23 aside from the higher incentive comp what's the cost inflation that you are anticipating in 'twenty three because it does it match the price or is it worse or better.
Yes, so the price relation realization, we're assuming in.
Obviously, the inflation of effect that we had in 2002 was pretty significant both on material and labor, we're not anticipating that inflation goes away in 2003, but we are anticipating that price realization wood wood.
More than.
Offset some of the.
Material and labor inflation that we're seeing so it should be a tailwind to us.
Okay, and then going back to Pete's question, just the decrease in the.
From $55 to $40.
The delayed.
Delayed shipments if you will it sounds like you could recover all of that in 'twenty three if that kind of quarterly progress holds up is that fair.
We're not counting on reducing all of our.
Our past dues to zero in the.
Fiscal year, 2023, where we're focused on making progress, but that would be overly optimistic in my opinion.
Okay, and then chip just in terms of commercial OE can you talk about what kind of rates you've embedded in your aerospace guide for the the major programs the Max the 87 and the neo.
We've just taken with the air framers or publicly talking about is their rates where capacity is to deliver at those OEM rates and we don't we don't see a big a big challenge in front of us to achieve those.
We've been doing pretty well.
On those programs as far as delivery goes.
What's your rough lead time to when an aircraft gets delivered to the customer.
Well, it's hard it's hard to say that in these days where are our especially our engine OEM customers have the same problems that we do in terms of they have engines that have most of the hardware on them. So we don't have a great visibility.
<unk> to win the serial number of say our fuel metering unit is put on an engine serial number and then it gets attached to an engine it.
Airplane at Boeing or Airbus.
Back in the day, we would have said, it's a six month or so cycle time, but as of now it is hard to see how that.
How that's been going.
And just last thing just given your background chip is it fair to assume that structural large structural castings, while there may be a major problem here there are a lot of other issues.
Unfair and opinion this whole thing on that.
The OE delays.
So.
Four for us.
<unk> isn't our biggest issue I know you are asking that broadly I just want to make sure I am clear about Woodward versus industry from a woodward endpoint from Woodward standpoint, electronic components and machine parts are really our big too that we're tackling there we have a few casting issues there the smaller type castings.
But really machine machine parts and.
Electronic components are our biggest issues at Woodward.
Across the industry.
There is there are labor issues and materials issues at every step of the supply chain. So.
Think that.
The large structural and other investment casting is just one of the many issues out there.
Some may be hiding in the shadow of those as those take center stage and when you pull those constraints off youll find the others struggling so I think it is.
My experience so far says this is a.
Industry wide.
Multi level of.
Tier.
Issue and the supply chain.
Okay. Thanks, very much EBIT.
The next question is from Gautam Khanna with Cowen Your line is open.
Hey, guys. This is Josh on for Gautam today.
I guess, just kind of piggybacking hi, there.
Yes, so kind of just.
Piggybacking off Rob's question, there digging deeper into the Aerospace guide for next year wondering.
I'm wondering if you can square just quantify maybe some of the puts and takes of the 14% to 19% revenue growth.
By end market.
Commercial OEM versus aftermarket and I think youre, a customer called out at one point last year 2000 leap deliveries at one point.
Probably sale given the recent castings issues, but I'm wondering if you could provide some perspective, there and maybe initial provisioning starting to ramp.
And then further off of commercial aftermarket I think is.
Is it safe to assume that we get close to a.
Pre COVID-19 sort of run rate.
Revenue profile there.
Okay.
Yes, so I'll take the last yes, maybe take less on first and then work back through the other pieces. So.
The revenue profile.
Pre COVID-19 for for Us.
In our guidance that's not the levels that we're actually at so no I guess would be the answer to that based on the sales guidance that we have as we're kind of moving through the year.
Like chip mentioned will be aligned to Airbus and Boeing build rates as we kind of move throughout the year.
That's what we're anticipating as I mentioned will be fully we're fully capacities for that to hit those levels.
On the on the commercial aftermarket side of the business as chip mentioned the inputs in for repair and as I mentioned a little earlier.
Aircraft that are flying have higher Woodward content.
Now than they did pre pandemic, so that's a positive for us.
Helps us on the aftermarket side.
Initial provisioning.
Continues on the leap engine side of the business.
We arent anticipating.
Significant initial provision in China as part of our guide and so that's we've talked previously over the last year or two that that was a watch item for us.
With where.
The situation is we're not anticipating a significant initial provisioning in China, but we still have other airlines.
Taking initial provisioning units, either because they're expanding their route structure or because it's a new airline increasing there there.
<unk> or $3 20.
Neil Neil.
Aircrafts so.
That's what's really driving a lot of the aftermarket side of it is really just the usage and the flying.
Aircrafts today have a lot more woodward content time than they had pre pandemic.
The other side of the aerospace as the defense side.
We've talked about stability there other than the guided weapons that we have seen on the guided weapons. The last couple of years.
Decreases primarily related to the <unk> program.
That's generally stabilized now so generally on the defense.
Defense side were generally stable the defense aftermarket side, we've been impacted by the supply chain and labor disruption. There. The demand has been strong and we have not been able to get the product out.
As we were mentioning we would anticipate that some of that would be improving as we go into the second half of the year.
And that's what we'd look for on the defense aftermarket side to have a little bit of growth there based on our improving operational capability.
Yes, just to add that I think some of that range. There on on growth for 2014, and 19% depends on how well we do burning down the past dues. So it may not link exactly to demand. The demand is strong and it's kind of on us and our ability to deliver the output.
Understood.
And then if I could just sneak one more in here Jeff.
Kind of just bringing your new perspective to Woodward here.
I guess, what's your view of the current portfolio today.
See anything non core at the moment or are you pretty content with the portfolio kind of as you see it today.
I think from a promote from macro perspective.
I really like the portfolio of products that we have the current set of products as well as those in the new product development.
Pipeline, so very pleased with.
The overall product strategy and the.
Execution in the.
Vision of the.
The commercial team to get these products on the right platforms.
On both the industrial and the.
The aerospace side of the house and.
Frankly, there's work to do at <unk>.
Lower granular level of the product portfolio that I was referring to earlier in terms of.
Looking at the health.
And profitability as well as demand for certain skus that we carry and may be moving customers along to the newer generation of products and things things of that nature.
Some good work to be done there that will improve our ability to support customers and our profitability. So work to be done at the granular level, but overall at the macro really like what I see.
That's great. Thanks chip you're.
Youre welcome.
The next question is from Noah <unk> with Goldman Sachs. Your line is open.
Hello, everyone.
Good afternoon.
Just following up on that.
The defense business, you mentioned the guided weapons in the aftermarket.
What rate of decline did those end up having for full year 'twenty two and what are you assuming for those in the 'twenty three.
Function of the defense business grows.
So the <unk>.
Rate of decline on the on the defense OE side for the year was about 17%.
The defense aftermarket was about 12%.
Two different reasons there as we've discussed there is still a little softness on the guided weapons sight.
Just on the <unk>, a little bit more softness yet yet in <unk> 23, compared to 22, but otherwise as chip was just saying.
The demand is strong and it's really a matter of us being able to get that past due down to be able to show growth there.
Okay.
What what are the drivers behind the the lumpy.
To the upside.
Growth rate at industrial.
Fourth quarter.
Versus.
The trailing several quarters and how youre guiding for next year.
Yes, so we had strong growth across.
All of our end markets and across all of our businesses on the industrial side in the fourth quarter.
And really the other.
Other than the China natural gas business, which remains at these depressed levels and so.
It was it was a strong fourth quarter on the industrial side and then even on top of that we have the headwind of the FX, which would even add industrial looking even stronger on the topline and so.
Demand has been there we've been I think saying that for a while now across all of our business, but specifically with industrial we continued to call it out the demand for power generation.
Across Asia power demand, replacing coal power plants here in North America backup data backup power for data centers has been strong and continues to be strong the marine side, we've talked about the continuing strength of both the OEM build rate has been at elevated levels.
And maintains at that level.
The marine aftermarket side.
We've talked historically that it was very depressed during the pandemic that there was going to be this bullwhip effect of.
Everyone needing to restock their shelves with spare parts and then also do repairs when the vessel is in port getting loaded and unloaded and we continued to see that and strength there in the fourth quarter, and then the oil and gas side with commodity prices.
The levels that they are both the utilization of the equipment. That's out there and then even driving some new investment has really been what drove the industrial side I would say, it's just a continuation of what we saw on the demand side as we continued.
Throughout the year, so mark covered the external demand side nicely there and then Additionally, we had strong performance from our Woodward <unk> <unk>.
Facilities in Germany.
Serving those marine and industrial markets and we had some outages from.
Chip's shortages and some other components that came in and we redesigned some.
Market boards to accept different types of <unk>.
Components that we could find availability on it so we had a strong.
Finished there too with lines that were wedded and ready to receive those those components in September .
Okay.
The next question is from Chris Glynn with Oppenheimer. Your line is open.
Thanks, I think my follow ups have been asked but just wanted to clarify did I hear a 5% FX headwinds, which you have baked in if the currency stays at euro parity.
On the industrial side, yes.
Okay. Thank you.
Youre welcome.
Again, Please press star one to ask a question. The next question is from Noah <unk> with Goldman Sachs. Your line is open.
I think my phone pick.
Pickup there. So chip are you just explaining that the <unk> industrial had some.
Things kind of tucked into the end of the year that don't repeat.
Why does the growth rate immediately decelerates.
The compare in the fourth quarter wasn't that difficult compares don't really change I guess why would.
All of those things Mark just described.
Continue at or better than low single digit growth rate.
Little bit of FX, there I think is the big the big.
<unk>.
Okay.
Okay.
In the era, we intentionally tend to do better and get more delivered there's plenty of demand.
On us.
Has to deliver to improve right now we're forecasting that we're going to be steady into the next quarter.
On deliveries and if we can do better we will.
Okay.
That makes sense.
On the aerospace segment margin.
It is now it's now declined year over year on growing revenue three quarters in a row.
The guidance for next year.
Depending on where you put everything in the ranges it seems.
It seems to imply kind of a clean historical 30% incremental margin to the upside.
How do we get confident that you can sort of flip that on a dime heading into the new year here.
Alright.
<unk>.
The numbers that I have.
More comfortable talking about or the 100 to 150 basis point improvement that we are it is in our guidance.
For margins.
So that's that's.
Collecting some of.
The improvement that we've lost over the past quarters, saying that okay. Here are the things that we are working to improve number one the efficiency of labor utilization.
To have in the <unk>.
Arts here on time, so we can build and deliver on time and then also the price that we have.
<unk> in the fourth quarter that we plan on having come through this following year and then we will have the escalation formulas and the other opportunities.
In the coming years, so it's really.
Just.
Better cost and performance inside our four walls supplier performance and then.
The price that we've accumulated over the fiscal 2022, and then what's planned for 23.
Okay I appreciate that and I wanted to ask one more if I may which is back to free cash flow.
Mark.
You guys have talked about being able to have multiple years of free cash well in excess of net income because.
Youre coming out of our Capex cycle, so youll have DNA well in excess of Capex.
Does this R&D tax law change.
And to that for a few years or how should we think about that and do you have an outstanding target for cumulative $2 billion of free cash is that is that still a good target.
Yeah. So I'll take the second one first and then I'll go back to the R&D impact.
Related to kind of our go forward look I mentioned during the call that we're planning on an investor and analyst day in June of 2023, we will update our forward look at that point.
Related to the R&D this year will be the biggest impact because of the way that the law works is.
As you go every year you get another 25% of the.
So in essence than one in four years starts accumulating over the four years. So 23 is the biggest impact of all of them be smaller in 'twenty four.
I will say very minor and 25% and then by the time you get to 'twenty six it flattens itself out there is no impact because youre getting to amortize in essence for years by the time you get there. So 23 is the largest impact.
That's the headwind that again I think most companies are going to see here in the U S.
Okay. Thanks for taking my question.
Youre welcome.
The next question is from Michael <unk> with <unk> Securities. Your line is open.
Hey, good evening guys. Thanks for taking the questions.
Just a general follow up sure maybe Mark and chip just just to be clear.
The past due.
From a supply chain. That's all included in the guidance. So even if you sort of catch up that maybe drive upside, but it would put you at the higher end of the guidance is that how should we should think about kind of liquidating that that balance.
I think the short answer is yes, we have assumed a certain amount of <unk>.
Progress on eliminating past dues, but not.
Not completely and if we.
Can get more traction operationally earlier, we can eat into that more and head towards the high range of the of the sales number.
Got it and then just in terms of raw materials and other kind of choke points I know at one point I think you were having issues sourcing alumina ability for the fuel metering are you sort of caught up there or do you have that that part of the supply chain rectified.
Yes, thank goodness, we do have plenty of.
60, 61, Bill at Behr, and Rockford and the line is what we call wedded. So.
Every station has the work in front of it for.
For now we've.
Mitigated some of our risk by expanding our our sources for the billet and we're continuing to watch that very carefully.
Daily vertically integrated there in that net plant. That's one of the last places I'd expect the supply chain issues challenges, but it did earlier in the year.
But as of now we've got we've got plenty of material in front of the line.
Got it and then just the last one I guess you talked about the in sourcing and some of the capital being spent are there any qualification or re qualification requirements that you have to go through and I guess should we.
Some of the in sourcing as that ramps up and maybe new equipment comes online is there any margin impact in either of the segments and I guess I'll even throw in you talked about some of these carbon emission projects.
Should we be thinking about that as sort of.
Maybe a modest headwind to margins just just everything youre spending on.
So I wouldn't think of that.
The decarbonization admissions improvement alternate fuel projects has any impact on.
On margins.
Our R&D.
Factored into the plan and the guidance that we've given on that.
The other question was.
I guess thinking about sourcing that.
That.
That activity should improve margins and thats factored into our overall 100 basis point improve.
Improvement for the year.
The other thing to think about there is many of these parts we've made before.
So and we outsource a maybe five or 10 years ago in some cases.
And so we still maintain a qualification of what we'll have to do is run off some parts on the actual machine that we put on the ground.
And the parts that we choose will choose that we have designed control over and we've we've made before we've made like parts of afford to minimize that that cycle.
Got it that makes sense perfect. Thanks, guys.
Welcome to growth.
We have no further questions at this time I'll turn it over to chip Blankenship for any closing comments.
So I'd like to thank everybody for joining us today, good questions and good dialogue, we will look forward to seeing you next time.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating and you may now disconnect.
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