Q2 2023 Woodward Inc Earnings Call
Thank you operator, thank you for selecting volcker.
Thank you for standing by welcome to the Woodward, Inc. Second quarter fiscal year 2023 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 are 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, and Mr. Dan Provost, Nick the director of Investor Relations I would now like to turn the call over to Mr. <unk>. Please go ahead Sir.
Thank you operator, we'd like to welcome all of you to Woodward's second quarter fiscal year 2023 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 have again included some presentation materials to go along with todays call that are also accessible on our website.
An audio replay of this call will be available by phone and on our website through may 15th 2023.
The phone call 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 <unk>.
Including trends in our business drivers in each of our segments, our updated guidance the expected and potential 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.
Now I will turn the call over to chip to comment further on our results strategies and markets.
Thank you Dan and good afternoon, everyone.
We delivered strong sales growth in the second quarter, driven by robust demand for Woodward products and services across our end markets.
Notably our industrial business had a strong quarter driven by a sharp increase in shipments.
The ongoing industry wide challenges, including supply chain and labor disruptions and inflation continued to impact our results.
However, we are encouraged by the progress we're seeing from our strategic investments.
Resource reallocation and price realizations initiatives.
And our first quarter call, we announced streamlined aerospace and industrial organization structures.
Designed to enhance the customer experience.
Simplify operations and increased profitability through improved execution.
Our primary focus has been on transforming the industrial segment were significant changes required to improve performance.
Want to provide an update on the three main priorities that we outlined on our previous call.
First was right sizing the industrial business.
We took the actions required to align our cost structure with current market conditions.
You can see some of these impacts and the restructuring charges.
Second was pricing we are executing multiple work streams to capture prices that better reflect the value, we deliver as well as offset significant inflation, we have had to absorb from suppliers and our own wage rates were.
We are on track to achieve our 5% price realization target for fiscal year 2023.
Third was product portfolio rationalization, where we have made progress, but there is still more work to do.
To provide some context, so far we have eliminated 5% of the approximately 60000 skus in the industrial segment.
This is just one lever, we're pulling to improve efficiency and expand available capacity.
And the team did an excellent job executing this quarter, while continuing to take care of customers.
In addition across Woodward, we made notable progress on our efforts to develop and retain talent.
We are benefiting.
From a more stable workforce in the form of productivity improvements and increased production output as our members become more proficient in their roles.
Our rapid response machining centers are coming online with contributions made to our second quarter output.
We anticipate additional machines on the floor in may with contributions to output in June .
We are also using capacity on existing machining centers to provide parts manufacturing support for both supplier bail out and permanent in sourcing actions.
Well, we have seen some improvement in supply base performance, we are still very active managing and problem solving with suppliers as well as their sub tiers.
We're taking ground together and holding it but we're still subject to shortages in unrealized recovery plans short summary wood.
Woodward and our suppliers are getting better, but we're not out of the woods yet.
I would like to recognize the contributions of our Woodward team.
Our newer members have come up steep learning curves, while our experienced members have been good coaches.
Many experienced engineering quality and sourcing team members remain on temporary assignments to get us stabilized and on solid improvement paths.
Thanks to our members for their efforts and results.
Moving to our markets.
In aerospace utilization rates for the commercial airline fleet continue to rise driven by increasing global passenger traffic.
U S and European domestic passenger traffic has returned to near 2019 levels.
Domestic travel in China is also increasing as restrictions ease.
In addition international travel continues to improve.
In defence, we anticipate near term U S procurement to increase slightly as the full year 2023 budget was approved at almost 10% higher than the previous year.
In addition, rising geopolitical tensions may lead to increased international defense spending.
In industrial demand for power generation remains strong driven by LNG growth and continued demand for backup power at data centers.
In transportation.
Global Marine remains healthy with increased ship utilization and normalizing freight rates.
Cruise and ferry operations have recovered back to pre COVID-19 utilization rates, which should result in increased spare parts demand.
Global Marine interest in alternative fuels continues to increase which should enhance OEM and aftermarket opportunities as multi fuel engines contain greater Woodward content.
In addition limited demand for natural gas trucks in China emerged in second quarter.
Though future demand beyond third quarter remains unclear.
For oil and gas elevated commodity prices continue to drive higher equipment utilization, which should result in increased aftermarket demand.
In summary, we believe our markets are strong as heightened demand for signals.
Indicate continued growth and opportunity for Woodward, we remain.
<unk> focused on improving operational execution across the company developing and retaining talent and innovation.
All of which will position Woodward for long term sustainable growth and enhance value for shareholders.
Before I turn the call over to Marc to review, our quarterly results and fiscal year 2023 outlook.
Want to thank Mark for his many outstanding achievements and contributions to Woodward over the last 16 years, we wish him all the best in his future endeavors.
Thank you chip.
Net sales for the second quarter of fiscal 2023 or $718 million, an increase of 22%.
Sales were impacted by approximately $14 million from unfavorable foreign currency exchange rates.
Aerospace segment sales for the second quarter of fiscal 2023 for $437 million, an increase of 17%.
Commercial OEM and aftermarket sales were up 30% and 28% respectively, driven by continued recovery in both domestic and international passenger traffic and increasing aircraft utilization.
Defense OEM sales were down 10% in the quarter, primarily due to lower sales of guided weapons.
With the exception of guided weapons defense OEM demand remained stable at elevated levels.
Defense aftermarket sales increased to 16%.
Aerospace segment earnings for the second quarter of 2023 were $73 million or 16, 8% of segment sales compared to $60 million or 16.0% of segment sales.
The increase in Aerospace segment earnings was primarily a result of higher commercial OEM and aftermarket volume as well as price realization.
Partially offset by inflation higher manufacturing costs and annual incentive compensation.
Turning to industrial.
Industrial segment sales for the second quarter of fiscal 2023 for $281 million compared to $214 million an increase of 31%.
The increase was driven by volume increases across all markets.
The sales increase was partially offset by the negative impact of foreign currency exchange rates of approximately $11 million in the quarter.
Industrial segment earnings for the second quarter of 2023 were $38 million or 13, 4% of segment sales.
Compared to $17 million or eight 1% of segment sales.
Industrial segment earnings increased due to higher volume and favorable product mix, partially offset by inflation higher manufacturing costs and annual incentive compensation.
Non segment expenses were $58 million for the second quarter of 2023% compared to $15 million.
Adjusted non segment expenses were $23 million for the second quarter of fiscal 2023 compared to $17 million.
Adjusted non segment expenses for the second quarter excluded costs, primarily related to specific charges for excess and obsolete inventory.
Rationalization and restructuring to optimize the cost structure.
At the Woodward level R&D for the second quarter of 2023 was $38 million or five 3% of sales compared to $32 million or five 5% of sales.
SG&A for the second quarter of 2023 was $76 million.
Compared to $44 million.
The effective tax rate was 11, 8% for the second quarter of 2023 compared to 11, 4%.
The adjusted effective tax rate for the second quarter of 2023 was 17, 8% compared to 11.0%.
Looking at cash flows.
Net cash provided by operating activities for the first half of fiscal 2023 was $40 million compared to net cash provided by operating activities of $50 million.
Capital expenditures were $44 million for the first half of 2023 compared to $24 million.
Free cash flow was negative $4 million for the first half of fiscal 2023 compared to $26 million.
Adjusted free cash flow was negative $1 million for the first half of fiscal 2023 compared to $27 million.
The decrease in free cash flow was primarily related to increased capital expenditures.
Leverage at the end of the second quarter was two two times EBITDA compared to one eight times EBITDA.
During the first half of fiscal 2023 $51 million was returned to stockholders in the form of $25 million of dividends and $26 million of repurchase shares under our board authorized share repurchase program.
Lastly, turning to our fiscal 2023 outlook.
We continue to expect year over year improvement in the second half of fiscal 2023.
Due to our better than expected results experienced in the second quarter as well as anticipated lower income tax rate for the full year, we are raising certain aspects of our full year guidance.
Total net sales for fiscal 2023 are now expected to be between $2 seven zero billion.
And 280 $1 billion.
Aerospace segment sales growth is unchanged at between 14 and 19%.
Industrial sales growth is now expected to be between 14 and 19%.
Aerospace segment earnings as a percent of segment net sales are still expected to increase by approximately 150 to 200 basis points.
Industrial segment earnings as a percent of segment net sales are still expected to be flat compared to fiscal 2022.
The adjusted effective tax rate is now expected to be approximately 16%.
We still expect adjusted free cash flow to be between $200 million.
And $250 million and capital expenditures to be approximately $80 million.
Adjusted earnings per share is now expected to be between $3 50 and.
And $3 75.
Based on approximately $61 million or fully diluted weighted average shares outstanding.
This concludes our comments on the business and the results for the second quarter of 2023.
Thanks, Mark before we open the call for questions I want to share that our Investor day will be held in New York on December 7th 2023.
There will be more information to come and we hope to see you. There operator, we're now ready to open the call to questions.
Thank you Sir for the question and answer session will begin at this time.
Are using a speakerphone please pick up the Ann Sofie for question any numbers.
Have a question. Please press star one on your push button phones.
Thank you rich.
To withdraw your question. It is also firewood.
Questions will be taken in the order. It is risky. Please standby for your first question Sir.
And our first question comes from Rob Spingarn.
<unk> research.
Good afternoon.
Good afternoon, Rob.
First Mark best wishes to you.
I appreciate that thank you Ralph.
And.
Chip I'm, just kind of focus at least to start here on industrial.
Because I think we're all a bit surprised both at the sales strength.
And at the margins.
So first on the sales you talked about volume what about price. If we take that sales growth can we parse that out a little.
We're not really we don't breakout the price between the segments, but it was largely in line with the overall <unk>.
The 5% Mark.
I mean.
To what extent were you surprised by this because it just again in both in terms of sales and margins. It's just it seems pretty strong.
Well from the sales side, it's what we've been working on.
Since.
Since the challenges post COVID-19 on trying to achieve the customer demand so.
Every other conference call you were kind of making the point that we're not making progress there, but it's starting to come through.
The increase in output was really across the board at industrial our Woodward launch facilities are achieving.
Achieving.
Levels of <unk>.
Shipments in our Fort Collins campus as well came on strong this quarter.
We've made a number of changes in leadership, we have a lot of new.
Members here in Fort Collins, any way that are getting more proficient at either machining or assembly and test and so all of these activities across the board with with the supply chain getting healthier are contributing to our ability to increase the output as.
As far as profitability goes it's a story of product mix. So we've had.
A better aftermarket.
Mix coming out of Woodward, lower Orange, and that's helped us along with China <unk> coming back.
Not to the highest levels, we've ever seen but some healthy orders that dropped in and where our convertible inside the quarter, because we had inventory prepared.
Okay, and then just to close the loop on this it seems just the way the guidance.
<unk> was adjusted here that the second quarter is we'll see some moderation in industrial in the back half of the year in other words.
Sales growth tails off a little bit the margins come back down is that fair was cute was Q2 just with it.
Up shipments in addition to the everything else you said.
As far as the I think it's fair to say, we expect the second half to moderate on profitability in industrial but we do we are we are seeing enough customer demand.
But if we can continue to have <unk>.
Improvement in our supply chain as well as the output in our factories, we will able be able to deliver.
Largely at these kinds of rates.
Okay. Thanks, so much you.
You bet.
Next is Scott Vishal credit Suisse.
Hey, good evening, Mark can you say, what China natural gas truck sales were in the quarter and how that compares to a year ago. Also if you can give us a sense for how the China natural gas truck markets trading in <unk>, So far and I would be very helpful. Thank you.
Yes, so we don't break China natural gas out specifically.
Did recover some from the very depressed levels that hit has been at for the last year plus timeframe.
We don't have much visibility I think as most of you know we don't have much visibility in that market.
And really our Q3 at this point and so.
Thats what were what were pausing on at this point, we don't really forecast continued improvement in China.
Or are the natural gas or the natural gas price and diesel.
<unk> basically the same now in that market as they were in Q2 basically just trying to.
The underlying driver if thats changed at all.
Yes, I mean, they have been approaching the spread level that historically.
<unk> has produced.
Opportunities to capture some of the on highway heavy duty truck demand that's out there from the and truck buyers and so it's been in that ballpark that's been that.
That spread has been appropriate too.
Potentially have that would be some of the reason for the demand that's happened.
Okay, Great and then another question just on the initial provisioning sales into China, I think you've called that out as a potential upside driver in the past.
As they reactivate their Max fleet has any of that come through in Q2, so far or excuse me in Q2 or is that still to come.
We haven't seen any activity on that.
We're just we're waiting to see how that develops like everybody else.
Great. Thank you guys.
Welcome to all of them.
Well go to Pete Scott Belsky Alembic global.
Hey, good afternoon, guys nice corner.
Amit Thank you.
Chip I think Rob touched on this a little bit but in terms of sales this quarter and industrial was this more.
You were surprised by your ability to deliver as opposed to end market demand.
Is that the right way to characterize it.
Well.
In terms of the supply chain.
I would say we were pleased with our output versus versus surprised we've been we've been trying to get to these levels of flow in our factories for a few quarters now because the demand has been sustained.
Sustained and high and so as far as that goes we made progress each month.
Wasn't a hockey stick kind of performance so that gives us confidence that we are achieving a sustainable flow in our facilities.
As long as we can keep working with our suppliers and making sure we have the right parts at the right time, we can we can keep achieving these.
Lines of levels, because the demand is there I can assure you that right now.
Okay. Okay, so maybe a little bit of both demand got better and your ability to supply the demand got better as well is that fair.
Well, we've had the demand for a number of quarters now, but I would say our ability to perform as well as what's improved its really largely what I've said before about.
Our team members coming up to speed.
Because maybe even half of our direct workforce has less than two years in the role, but every quarter. They they get more proficient at their roles and that's really.
Helping to.
Us to perform.
Okay, and just curious I think last quarter, you had about $60 million in revenue in industrial that was still kind of.
Are you kind of characterize it as a color.
We disrupted revenue did you work down that $60 million kind of.
I don't know disruption or backlog, however, you want to call it.
We're making progress on past due commitments to customers, we're not really calling that out anymore, because it got to be such a such a number that it doesn't really represent an in period discontinuity. So we have plenty of backlog in which.
We're excited about.
Have past due backlog that we're trying to get current on so all of that's a function of.
Our ability to.
Increase output and we've made some really good progress on that this quarter.
I appreciate it last one for me started with.
Everyone on this but.
Chip just given the market in China and kind of the political situation are you guys, reaching the point that maybe you're not all that interested in it and the risk reward in China anymore on the LNG side.
It's a challenging market I'll, just I'll, just say that right now and.
We have our business and we're going to run it as best we can and that's all.
We have to say about that at this time.
Fair enough thanks, guys.
Well, thank you Youre welcome.
Your next question comes from Sheila <unk> with Jefferies.
Thank you good afternoon, gentlemen, Mark and Mark. Thank you for all the help over the years.
Hi, Sheila.
Chip I wanted to talk about two things you mentioned in your prepared remarks.
First I guess.
From the line of questions. Pete just had the backlog based on the 5% of accident years in industrial sort.
Sort of what are the metrics that you use.
To rationalize products.
How do you think about the port.
<unk> overall.
So some of the.
Key metrics, we've used to as part of the rationalization is.
Demand in terms of consistency of demand.
Is there an alternative part that's a newer part.
Where it is in its product lifecycle is it.
In the Sunset period, and there is an opportunity to replace that with a newer part at that at that customer so all of that sort of product lifecycle.
Type of metrics or what we're using as well as profitability and so when you when you put all that together.
That's how we're making our decisions.
The biggest the biggest opportunity for us really is to.
Move customers to parts that we have a better ability to supply to them at a lower cost to us in a better value to the customer and if we stop introducing these discontinuity is into our factory and our supply base.
We can achieve more with our capacity.
Okay great.
And then maybe just switching gears, whether it's in Aero and industrial.
When you think about improving your labor pool, you mentioned youre seeing some improvement in that.
In the process, where are you in terms of your improvement and when do you expect the normalized 2019 levels our current.
Capacity outlooks that you have.
So we've been forecasting sort of get into that place here youre talking about in terms of BN.
At a level of proficiency and capability that we're targeting.
Where we've seen the supply base improve as well.
But like I said in the prepared remarks, we're not out of the woods yet.
Graduates from suppliers from the escalated.
Watch list.
But.
We add some to it as well we graduated more this quarter than we added so that's a good sign.
But we're forecasting.
Fighting through this.
Probably the rest of this calendar year at least.
Welcome.
Next we'll go to Christopher Glynn Oppenheimer.
Thanks, Good afternoon.
I was wanted to.
Wanted to go back to the industrial margin outlook.
No.
The <unk>.
Back half it implies about flat year over year for the back half.
While.
You are making a lot of changes and improvements and some certainly some evidence in the second quarter.
So just wondering.
What's masking that read through.
Okay.
Well, we want to be.
We don't want to get ahead of ourselves Chris in terms of our our capability to deliver.
The MX was what it was in second quarter from a profitability standpoint in first quarter. We were we were short on profitability. So we want to have a balanced view on the second half we're doing everything we can to make it better than plan and if it flows through in a way that we get a.
The MX and <unk>.
We achieved the price levels that we won and we get the productivity then.
It could be better, but right now we're sticking with that forecast because.
There's a lot of ground to cover between now and then.
Okay understood.
Relative to the 5% SKU reduction.
Any way to kind of ballpark or benchmark, what the ultimate <unk>.
That is what range of the SKU reduction you might have in mind.
Well, there really isn't because the number isn't necessarily the goal we're trying to set up our our ability to serve customers with the most profitable mix that we can we can supply. So that our customers are are happy our shareholders are happy at the same time, that's what we're driving.
Forward towards and.
I just wanted to give those numbers not necessarily as a tracker, but just to have everyone understand the size of the effort that is involved here because it is substantial.
I think we've got a ways to go.
But I wouldn't put a number on it because that's not really the goal.
Okay.
Then just switching to defense.
Are you seeing actual.
Our rfps are inquiries or.
For ground shaping up for <unk>.
International demand Renaissance and maybe remind us what proportion you serve internationally.
Okay.
So as far as new business goes we.
We haven't really seen much along those lines, we've seen one or two.
RFID, but nothing that we could really.
Towards a change in demand levels associated with that that's more of a sort of looking at it.
At the environment, and saying that something might develop there thats what those remarks, we're about so we haven't really seen that turn into any specific programmatic demand.
And related to that.
How much is international related in a lot of our sales do go through.
Through the Dod directly so we don't always have a specific number on that as it relates to just knowing that some of our sales to the U S government do end up with our foreign military partners.
Got it thanks for the answers.
Your next question comes from David Charles Barkley.
Thanks, Good afternoon.
And Mark Thanks, Eric.
And Mark Thanks for all your help and best of luck.
Yes.
Back on the defense side.
The defense drawdown that we're still seeing on the OE side is this still J dam.
And if so how much how much more downside is there to two <unk>.
Yes, so the softness.
On the defense side is still the guided weapons programs there is still some.
Softening based on the orders that we've seen.
From the Dod if you will on that now the upside always there is there if there are foreign military partners that have put some orders in but as chip just mentioned and we haven't seen anything on that front. So there is still some softening there that we'll see going forward.
Okay.
The nonrecurring items, you would call it on the quarter access inventory restructuring so on I assume most of this is related to the industrial business is that correct and should we expect to see more of these nonrecurring items as you go through kind of the rationalization there.
Yes, so on the.
Obviously, there was a few different ones on there.
The rationalization piece of it was mainly on the industrial side as chip mentioned with the number of Skus that we're looking at at there there were some other items that went across the whole business.
From that perspective, the restructuring charge was another one that was primarily on the industrial side of the business.
We call those out we consider them discrete and just trying to give a flavor for you operationally what happened in the quarter. So that's why we called those out specifically.
Going forward, we would continue to call out anything that may come up, but obviously in the quarter. We had a lot of a lot of adjustments a lot of items in this quarter that we would not anticipate that would be.
Occurring again.
Okay and last one I.
I guess again for you Mark I mean, I was a little surprised given the sales growth in the quarter, we didn't see more of an inventory drawdown.
<unk>.
When when when would you expect us to start.
The inventory balance come down.
Yes, so as the year progresses and this is what we even called out even last quarter that this was going to be a second half improvement story I think we even talked about in the last quarter that we didn't anticipate.
<unk> inventory working capital improvement in the second quarter and so we do anticipate as part of part of our $200 million to $250 million guide on free cash flow that we will have working capital improvements, including a decrease in inventory and so thats, what we always expected the year and I would say that we're on track with our expectations.
Alright, thanks very much.
Welcome.
We'll now hear from Gautam Khanna Cowen.
Okay.
Hey, good afternoon guys.
And we'll miss him.
Thank you I appreciate that.
Of course, so I was wondering I don't know if you said this but do you guys have any past dues at this point you've quantified that.
That level in the past couple of quarters.
We do have quite a bit of past due and we.
<unk> our quarter sales. So we're burning that down we will we do forecast to make improvements significantly on that in the second half.
We go as we go forward through the year, we have been.
Continually impressed with the demand that the customers, replacing upon us so as we improve our output.
But like I said, we don't we don't anticipate quantifying that going forward.
Recently, we've been 335% range is kind of what's implied in the guidance.
Of sales.
Sure.
Of sales. Thank you I appreciate it.
Are their entire markets you're reconsidering.
Participating in.
At this time Gautam, it's really just looking at the products.
And doing good old fashion product management product lifecycle is this in early in its adoption phase is at its peak is it on a sunset path.
Should we treat it in the marketplace, how should we price. It up is there a product that comes behind it that is offers more value to the customer that we can sell and get behind in a way.
In terms of running our supply chain and our factories, you've got those runners repeaters strangers in aliens front in terms of like how often do you see this come through the factory and should we be thinking about.
Planning differently or eliminating some of our strangers in aliens as we say in the supply chain world.
And.
Having our operations be more efficient and there is a lot of hidden cost and a lot of hidden capacity tied up and running some of those through the.
Assembly lines.
So it's really more about that than getting out of markets.
Okay, and just last one chip.
One of the things.
I'm curious about is.
On the leap aftermarket.
<unk>.
CFM talks about a 60% attach rate on OEM service contracts power by the hour, which is about <unk>, what they did on the CFM.
Does that have any different economics.
Economic implications for Woodward.
ISG now just the CFM a bigger customer.
On these aftermarket sales than it was in the past and does that matter I'm just curious how we should think about.
Yes, that's all.
The short answer.
I mean, there may be some subtleties in there but.
Frankly, we we see the we see the units come in from the same types of overhaul shops, and Thats, where things happen at the transaction basis for us So we wouldn't really.
No the difference I don't think and we wouldn't treat it differently ourselves.
Yes.
Thanks, guys.
Next we'll hear from Michael Chair Molly tourist security.
Hey, good evening, guys nice quarter. Thanks for taking the questions. Thank you Mark best wishes going forward.
Thank you pleasure.
Orders continue to be robust and even though there's lots of chatter of recession. It seems like you guys arent seeing that just any color on the backlog there.
Yes, we are not seeing the R word.
Okay. Okay.
And then just shifting gears.
Aerospace the Aero margins.
Pretty pretty impressive this quarter I think multi multi quarter high was there any benefit there I think you kind of mentioned, maybe last quarter and a quarter before that there was going to be some SKU rationalization in aero any any color you can provide on maybe benefits there or was it just just MX.
And volume that drove the margins.
For Aero the margin improvement is largely getting the volume back.
Getting productivity with the learning curve of our newer members.
Some price.
<unk> set the target we're trying to achieve this this year.
And that.
Price improvement and cost improvement delivered the the margin improvement really no rationalization going on in the aerospace segment to speak of at this time.
Got it.
Last one just in terms of OEM production rates can you give us any maybe color in terms of.
Underlying assumptions, what's in the guidance in terms of build rates by specific platform. What are you thinking in terms of leap are you specifically aligned with GE and safran right now on the narrow bodies or anything you can tell us there.
Well I think.
I'd like to say that we're somewhat removed from the published build rates debt.
The air Framers.
Announced in support.
We're closer to it obviously on the engine.
Components that we provide we are right in line with the demand from GE and Safran and the CFM side.
Pratt and Whitney on the pure power side. So we just.
They supply us the demand and we do our very best to ship on time.
Got it.
Alright, perfect. Thanks, guys.
Youre welcome Ella.
Well go to Scott This does credit thanks.
Hey, Thanks for taking my follow up Jeff My understanding is that part of what's constraining profitability in aerospace as the long term agreements on the defense side.
Which it sounds like in many cases don't really have any inflationary protection on them.
I guess my question is are we at a point, where youre getting some of those contracts re price now, but you still have cost increases so defense profitability profitability.
Is kind of stable from here or are you at an inflection point up or down that we should be aware of I'm just trying to think about defense profitability, how it trends in the near term and medium term.
I think from a defense standpoint, you should stick with the idea that that's.
That's stable.
Referring to.
Price actions on the commercial side.
Okay, and then any preview for what it's going to be the focus at the Investor day.
A preview.
Okay.
It's a little early it's a little early for the preview. We're looking we're looking to deliver on the second half and let's call that the preview.
Alright fair enough thanks, guys.
Okay.
Next we will hear from Noah <unk> Goldman Sachs.
Hey, guys.
So thank you for the time.
How much of the adjustments between.
GAAP earnings in the non-GAAP earnings are cash.
And which of those do you expect to occur again in the back half if at all.
Yes, we had a minor.
We had a minor difference between I'll call it reported free cash flow and adjusted free cash flow it was $3 million or so so in the quarter there was not.
Much significance in cash going forward there'll be some difference mainly related to some of the restructuring charge.
It isn't a sizable number.
Got it.
And Mark.
To get to the full year the backhaul.
Because obviously.
Pretty strong.
You have so you have that historical seasonality to some degree.
Maybe can you just talk through the visibility into that and how much of that is working capital release.
Yes. So if you look at the back half compared to the front half obviously, there's earnings component and an earnings improvement component for the second half and then the rest will be a working capital improvement, which includes as I was speaking earlier on the call the improvement on the inventory side. So.
So there is there is opportunity on the working capital side also as part of that 200 $250 million guide that we gave.
Okay.
Chip when you were speaking about the industrial revenue performance.
Where it goes from here.
Thank you Amanda and thank you Steve.
Stable.
Supply chain improvements and the operational improvements we've made key pork you could keep running at these levels.
The industrial quarterly revenue was kind of the low $200 million for a while.
It's a pretty significant step up to the $2 81.
The guidance implies that steps down sequentially through Q4 Q.
But are you, saying I guess I just want to make sure if I take.
<unk> taken that you said literally is it in your scenario analysis that industrial.
Works higher sequentially off of what you just posted for the second quarter.
No I didn't mean sequentially higher and really the other variable that I that I.
Perhaps left off was the China.
On highway is quite lumpy and we don't foresee much demand in the second half, there's a little bit in <unk>, so taking that out would would bring.
Bring the top line down a little bit but from.
From the baseline products and industrial coming out of our Colorado facilities and Woodward Lauren Scheibe.
We foresee the ability to deliver like we delivered in March.
Okay great.
That helps me better understand that.
Okay. Thank you so much rate crucial thank.
Thank you Youre welcome.
Hey, good evening.
Best of luck to you as well.
Thank you.
Maybe if I could just go back to the last question.
Some of the margin strength in the quarter to the China natural gas and Thats kind of what the pop what drove the pop and then given that you don't necessarily see a lot of it in the back half.
Got it in the bank asset <unk>.
Is going to bring those margins back down.
Yes Louis.
I would attribute it to two things the China <unk> as well as the aftermarket product mix coming out of Woodward launch and to some extent, Colorado, but mostly.
From our German plants. So it was the combination of Av.
That aftermarket mix in the China <unk> that made the quarter.
Okay, Great and then maybe just.
With industrial do you have now.
Both between the sharing.
And Walter.
Alright, sorry, I couldnt understand into last few words.
Oh, sorry, the growth the growth of reciprocating engines, and industrial turbine machinery in the quarter. So the underlying.
Industrial.
Yes.
They both grew.
Strong in the quarter.
Recip engines was up over 30% in.
Turbo machinery is up over 25%.
Great.
Good quarter there.
Just one more on the interest.
Scott is.
Is it still sort of cost control over year or change there.
That's accurate.
Okay, great. Thank you very much.
Youre welcome.
Next is a follow up from Pete.
Global.
Yes, thanks, guys.
One follow up.
Industrial does have a lot of sort of short cycle economically sensitive businesses are early some proportion of it I was wondering if you could characterize kind of what youre seeing in the short cycle businesses are you seeing any kind of global economic weakness or are things fairly steady state demand wise for you.
It's pretty steady state demand wise.
We're looking really hard at that because we are focused at the same thing you're hinting at there that.
That should be our Canary that should let us know that pay challenging times or are coming but we don't see any.
Any let up on the demand right now from the short or the longer.
Cycle part of our industrial.
Customer base.
Okay. Appreciate it thank you.
Welcome.
Reminder, everyone that it is star one if you have a question today.
We'll go to Tony Bancroft Gabelli funds.
Thanks for taking my question, Yes, <unk> chip and team congratulations on the quarter market share.
Looking out farther.
Farther.
Yes look out farther Woodward they didn't look at I realize it's different.
Our team, but Woodward and looked at our merger a few years ago now that your markets are looking pretty healthy you guys got great aftermarket condition, you've got good good positions everywhere I overall aerospace and defense, where do you see yourself in the next five years is there anything changed your longer term.
Our strategic plan to be the leader in energy conversion de carbonization now that we are.
Looking in more favorable.
Ill still makes sense is that a possibility can you just give me maybe any any kind of update or change.
Well no no update to to announce at this time.
Tune in on Investor day for how we see the longer term future.
But I would say we're focused on.
Fulfilling our mission is to Woodward.
The company right now that's where we're focused.
Got it thanks, so much.
And Mr. Carlos Galvez, Nick there are no further questions at this time I will now hand, the conference back to you.
Thanks, operator, we want to thank everyone for joining today's call and we look forward to continuing our conversations.
Ladies and gentlemen that concludes our conference call today, if you would like to listen to an audio replay of this conference call. It will be available today at 730 PM Eastern time, the telephone number to access. The replay is one 870 702030 or one six <unk>.
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Yeah.