Q3 2023 Woodward Inc Earnings Call
Speaker 1: Thank you for standing by. Welcome to the Woodward Inc. Third 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 listen-only mode. Following the presentation, you are invited to participate in a question and answer session.
Speaker 1: Joining us today from the company are Chip Blankenship, Chairman and Chief Executive Officer, Bill Lacey, Chief Financial Officer and Dan Provasnick, Director of Investor Relations. I would now like to turn the call over to Dan Provasnick. Please go ahead.
Speaker 2: Thank you, operator. We'd like to welcome all of you to Woodward's third quarter fiscal year 2023 earnings call.
Speaker 2: In today's call, Chip will comment on our strategies and related markets.
Speaker 2: The bill will then discuss our financial results as outlined in our earnings release.
Speaker 2: At the end of the presentation, we will take questions.
Speaker 2: For those who have not seen today's earnings release, you can find it on our website at Woodward.com.
Speaker 2: We have again included some presentation materials to go along with today's call that are also accessible on our website.
Speaker 2: An audio replay of this call will be available by phone or on our website through August 14, 2023.
Speaker 2: 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.
Speaker 2: I would like to refer to and highlight our cautionary statement as shown on slide 3.
Speaker 2: As always, elements of this presentation are forward-looking, including our guidance, and are based on our current outlook and assumptions for the global economy and our businesses more specifically.
Speaker 2: Those elements can and do frequently change.
Speaker 2: Our forward-looking statements are subject to a number of risks and uncertainties surrounding those elements, including the risks we identify in our filings.
Speaker 2: In addition, Woodward is providing certain non-US GAAP financial measures.
Speaker 2: We direct your attention to the reconciliations of non-US GAAP financial measures, which are included in today's slide presentation and our earnings release and related schedules.
Speaker 2: We believe this additional financial information will help in understanding our results.
Speaker 2: Now, I will turn the call over to Chip to comment further on our results, strategies, and markets.
Speaker 3: Thank you, Dan, and good afternoon, everyone.
Speaker 3: We delivered strong sales growth in the third quarter, driven by robust demand and our improved ability to deliver products to our customers.
Speaker 3: We expanded margins through productivity improvements and price realization, partially offset by increased material and labor costs.
Speaker 3: We continue to make progress on our strategic initiatives focused on enhancing the customer experience,
Speaker 3: Simplifying operations.
Speaker 3: and increasing profitability through improved execution.
Speaker 3: Output is increasing, pricing actions are yielding results, and we are seeing efficiency gains as our new members come up the learning curve and become more proficient in their jobs.
Speaker 3: We've seen improvement in our supply base performance.
Speaker 3: However, the environment remains challenging and we continue to actively manage and problem solve with our suppliers.
Speaker 3: Our team has done a great job responding to the fluctuating delivery risk landscape.
Speaker 3: We remain focused on this workstream with significant resource allocation and a goal of identifying risks further upstream and launching countermeasures earlier in the process.
Speaker 3: Moving to our markets.
Speaker 3: In aerospace, commercial airline utilization rates continue to rise, with U.S., Europe , and China domestic passenger traffic now surpassing 2019 levels.
Speaker 3: In addition, international travel continues to improve nearing 2019 levels.
Speaker 3: In defense, due to geopolitical developments and government spending proposals,
Speaker 3: We expect R&D and procurement to increase, which bodes well for Woodward's future opportunities.
Speaker 3: In industrial, demand for power generation remains strong, driven by growth in Asia, increases in aftermarket activity, and continued demand for backup power.
Speaker 3: In transportation, the global marine market remains healthy with increased ship build rates and higher utilization driving current and future aftermarket activity.
Speaker 3: Marine customers continue to launch more projects that incorporate alternative fuel capability in their specifications.
Speaker 3: This should drive expanded OEM and aftermarket opportunities as multi-fuel engines contain greater woodwork content.
Speaker 3: In addition, Chinese heavy duty truck output increased significantly in February , as did the portion that is natural gas powered.
Speaker 3: The natural gas-powered production rate has been relatively stable since February , but future demand remains uncertain.
Speaker 3: In oil and gas, global investment in LNG infrastructure development continues.
Speaker 3: Rig counts increased globally, though U.S. activity declined year over year.
Speaker 3: In summary, the market signals we are receiving indicate continued strong demand.
Speaker 3: We remain focused on operational excellence, developing talent, and innovating for the future, which we believe will drive long-term, sustainable growth and deliver enhanced value for shareholders.
Speaker 3: Before we move on to our financial results, I'd like to introduce Bill Lacey, who took the helm as CFO in May.
Speaker 3: Bill has a distinguished track record in financial operations and business leadership.
Speaker 3: With three months in role, Bill is well integrated into Woodward and he is already contributing to the team.
Speaker 3: Bill, welcome to your first Woodward earnings call. I'll now turn it over to you to share our financial results.
Speaker 3: Thank you, Chip. It's great to be here. Net sales for the third quarter of fiscal 2023 were $801 million, an increase of 30%. Aerospace segment sales for the third quarter of fiscal 2023 were $481 million compared to $402 million.
Speaker 3: an increase of 20%. Commercial OEM and aftermarket sales were up 41% and 28%, respectively, driven by higher OEM production rates, continued recovery in both domestic and international passenger traffic.
Speaker 3: increasing aircraft utilization and price realization. Defense OEM sales were down 12% in the quarter, primarily due to lower sales of guided weapons. Defense aftermarket sales were up 17%.
Speaker 3: Aerospace settings earnings for the third quarter of 2023 were $83 million or 17.3% of segment sales compared to $57 million or 14.1% of segment sales.
Speaker 3: The increase in segment earnings was primarily a result of price realization and higher commercial OEM and aftermarket volume, partially offset by higher annual incentive compensation.
Speaker 3: Turning to industrial. Industrial segment sales for the third quarter of fiscal 2023 were $320 million compared to $213 million, an increase of 51%. The increase was driven by higher volumes across all markets as well as price realization.
Speaker 3: Industrial segment earnings for the third quarter of 2023 were $58 million, or 18.2% of segment sales, compared to $21 million, or 9.9% of segment sales.
Speaker 3: Industrial segment earnings increase due to higher sales volume, price realization, and favorable product mix.
Speaker 3: partially offset by higher annual incentive compensation.
Speaker 3: Industrial sales and earnings benefited from significantly increased on-highway natural gas truck production in China, although future demand beyond the fourth quarter remains uncertain.
Speaker 3: Non-segment expenses were $24 million for the third quarter of 2023 compared to $19 million.
Speaker 3: At the Woodward level, R&D for the third quarter of 2023 was $35 million or 4.4% of sales compared to $32 million or 5.2% of sales.
Speaker 3: SG&A for the third quarter of 2023 was $65 million.
Speaker 3: compared to $46 million primarily due to higher annual incentive compensation.
Speaker 3: The effective tax rate was 20% for the third quarter of 2023 compared to 21.6%.
Speaker 3: Looking at cash flows, net cash provided by operating activities for the first nine months of fiscal 2023 was 156 million dollars compared to 86 million dollars.
Speaker 3: Capital expenditures were $57 million for the first nine months of 2023 compared to $37 million.
Speaker 3: Free cash flow was $98 million for the first nine months of fiscal 2023 compared to $49 million.
Speaker 3: Adjusted free cash flow was $103 million for the first nine months of fiscal 2023, compared to $52 million.
Speaker 3: The increase in free cash flow and adjusted free cash flow was primarily due to increased earnings partially offset by higher capital expenditures.
Speaker 3: Leverage was 1.7 times EBITDA at the end of the third quarter compared to two times EBITDA.
Speaker 3: During the first nine months of fiscal 2023, $64 million was returned to stockholders in the form of $38 million of dividends and $26 million of repurchase shares under a Board-authorized shared repurchase program.
Speaker 3: Lastly, turning to our fiscal 2023 outlook.
Speaker 3: We continue to expect year-over-year improvements in the fourth quarter of fiscal 2023.
Speaker 3: Due to the continued strong in-market demand and our improved ability to deliver for our customers, we are raising certain aspects of our four-year guidance.
Speaker 3: Total net sales for fiscal 2023 are now expected to be $2.85 and $2.9 billion.
Speaker 3: Aerospace sales growth is now expected to be between 16 and 18 percent.
Speaker 3: Industrial sales growth is now expected to be between 28 and 30 percent.
Speaker 3: We now expect the full year price realization to be approximately 7% of prior year sales.
Speaker 3: Aerospace segment earnings as a percent of segment net sales are still expected to increase approximately 150 to 200 basis points.
Speaker 3: Industrial segment earnings as a percent of segment next sales are now expected to increase approximately 340 to 440 basis points.
Speaker 3: The adjusted effective tax rate is now expected to be approximately 18%.
Speaker 3: We still expect adjusted free cash flow to be between $200 and $250 million dollars in capital expenditures to be approximately $80 million dollars.
Speaker 3: Adjusted earnings per share is now expected to be between $4.05 and $4.25 based on approximately 61 million fully diluted weighted average shares outstanding.
Speaker 3: This concludes our comments on the business and results for the third quarter of 2023.
Speaker 3: Operator, we are now ready to open the call to questions.
Speaker 1: Thank you. The question and answer session will begin at this time. If you are using a speakerphone, please pick up your handset before pressing any numbers. Should you have a question, please press star 1 on your push button phone. Should you withdraw your question, press the star 1 on your push button phone.
Speaker 1: Your question will be taken in the order that it is received. Please stand by for your first question, sir.
Speaker 1: question comes from the line of Robert Springarn of Emilius Research. Please go ahead.
Speaker 4: Hey everybody, welcome Bill.
Speaker 5: Thank you, Robert. Good afternoon, Rob. Good afternoon, Rob.
Speaker 6: Chip
Speaker 2: you know, these first of all very good numbers, clearly. I wanted to focus in on the industrial side, where some of these numbers are really higher than what we've seen before on a quarterly basis. And just to understand, is this a new normal? Was there some pent up inventory that got sent out?
Speaker 2: In terms of a new normal, or maybe it's benchmarked against the recovery versus 19. I'm not sure what the right way to do it is, but especially because a quarter like this, you know, almost implies the fourth quarter in industrial would, you know, or for the company would be even flat to down. I just want to understand if you're being conservative, really had a.
Speaker 5: framework this entire thing. Sure, Rob. So the, I mean we don't really give out detailed numbers at the subunit product buying levels, but I would like to say that the
Speaker 5: Industrial performance has a very high mix of China on-highway shipments in it. As far as a new normal, we do not forecast this as a new normal, but we are enjoying quite a high demand from our customers in China for products that we had a significant amount of inventory for and were able to respond quickly last year.
Speaker 5: It's a line of business that we've talked about in the past that's very hard to forecast. We have limited forward sight to orders. When the orders come in, our strategy has been to try and be in a very good inventory position with a flexible supply chain to respond....
Speaker 5: And that's the approach we're continuing to take. We do have some limited visibility through the fourth quarter, which, you know, gave us confidence to raise our guidance for the fourth quarter. But as far as China on highway volume, we don't have enough visibility beyond that to make any statements about it.
Speaker 5: As far as the other lines of business, we did see sequential and year-over-year improvements in efficiency and amount of product delivered, sales for the other product lines, our plants here in Fort Collins, as well as the
Speaker 5: The l'orange facilities in Germany have all been improving with our focus on the elements of lean manufacturing and the transformations we're trying to foster and put in place and lead.
Speaker 5: So, good results by all parts of the industrial portfolio. However, I would not forecast this sort of.
Speaker 5: margin level as a sustainable type of.
Speaker 2: benchmark. Okay and then if I could just follow up on that two quick things one is there a way to think about 320 million in industrials and to allocate that across the businesses or to rank order what's the biggest what's the smallest and then bill for you just curious
Speaker 2: it sounds like there's some moving pieces and maybe a little bit of conservatism, but why no increase in the cash flow guide? Thank you.
Speaker 3: Yes, so first on the, on giving a little more detail, as Chip said, we typically do not give sub-level sales below the segment. On cash, we continue to see good improvement there overall.
Speaker 3: and we are holding our guide. We will see good delivery from earnings and we will see our inventory continue to improve from an efficiency standpoint. And so we believe that the investment that's required for us to deal with the higher volume.
Speaker 2: number. Okay, thank you both.
Speaker 7: Thank you both. Welcome.
Speaker 1: Thank you. Your next question comes from the line of Sheila.
Speaker 1: Please state your question.
Speaker 8: Thank you. And welcome, Bill and Hi-Chet. Great quarter. On this industrial business, just obviously we're not industrial analysts, so what's your visibility? It looks like your backlog typically is a third of your revenues. What level of visibility do you have at the moment? I would say three and a half in in some way gone, in some way still.
Speaker 8: big as the China business, I think it used to be 100 million run rate. Are you guys on an annualized basis higher than that?
Speaker 8: I think it used to be a hundred million run rate. Are you guys on an annual basis higher than that?
Speaker 5: So like Bill and I said, Sheila, we're really not breaking out the business to those level of details underneath the industrial segment. But I think it's fair to say that
Speaker 5: We enjoyed a strong quarter and we don't have much visibility to China OH volumes.
Speaker 5: Post 4th quarter of this fiscal year.
Speaker 5: We sit back and we look at some pretty lagging indicators to tell us how that overall market is behaving. We saw an uptick in February , both in terms of the number of heavy-duty trucks being manufactured in China.
Speaker 5: as well as the fraction of them that are natural gas powered versus diesel. And we can surmise a number of factors that might go into why that's happening post-COVID and with natural gas availability. But really we're just speculating a little bit on that. And we have that backward looking.
Speaker 5: explanation, but we don't have much forward visibility for China OH.
Speaker 8: Okay. And then maybe if I could ask one on price, I think you raised your price assumption for total company from 5% prior to 7%. What drove that across the segments and where are you sort of in the cycle of pricing increases flowing through? Otherwise, I know somebody on the phone that would like to see me respond further, so please
Speaker 5: So on the price realization, we did raise that forecast for the total year. We had good performance of the escalation indices that drive most of our OEM contracts and we worked through the
Speaker 5: spare parts pricing catalogs and our general catalogs for those not on long-term contracts. And we've been able to achieve those pricing targets that we laid down in the marketplace and that result of that price realization.
Speaker 5: is delivering the 7% versus the 5%. So mostly aerospace then?
Speaker 5: I think they are both kind of in line with that top level number.
Speaker 5: I think they're both kind of in line with that top level number. Okay. Thank you.
Speaker 1: Your next question comes from the line of Christopher Glynn of Oppenheimer. Please state your question.
Speaker 9: Thanks. Good afternoon. And just me and Chris, you know, hey, I think, you know, maybe another crack at industrial I think the press release kind of isolated the upside to the NG business. So I was wondering, verse your internal plan did the
Speaker 9: natural gas China account for really all or the preponderance of the upside?
Speaker 5: While it was a large portion of the upside, like I was saying earlier with Sheila, that all of our other product lines, be it the liquid fuel diesel products from Woodward-Larange in Europe to the natural gas and actuation.
Speaker 5: types of business units here in Fort Collins. All of our plants had increased output and we've improved efficiencies based on our supply chain performing better and having parts to the line on time as well as our people just getting more proficient at their roles. We're also you know practicing
Speaker 5: continuous improvement processes that are delivering additional benefit in terms of both capacity and efficiency. So it's really across the board. It's not the case of one segment performing really well and masking malaise or poor performance in others. It's just that it's a little bit of an outsize.
Speaker 5: performance from the China OH, but all product lines improved this quarter.
Speaker 9: Okay, and.
Speaker 9: You know last quarter you commented that You know the industrial sort of turnaround so to speak you weren't out of the woods, and you know it's a impressive kind of top to bottom look at all the operations and processes and industrial so I appreciate that.
Speaker 9: What's the status update data in terms of in the woods, out of the woods?
Speaker 5: So I like the fact, and I've congratulated the team that we've turned the ship in the right direction in all the product lines. And we've made progress on the product rationalization that I talked about earlier. We continue to make progress on that.
Speaker 5: I'd say that our next areas for improvement are really driving the inventory down to serve the demand and as well as meet the customer demand. Right now, we're improving our capacity and we're planning to our capacity, but the customer demand is even higher. So, in order to say we're really out of the.
Speaker 5: Woods on the turnaround, I would have to see us meet the customer demand, which the team is working really hard on, as well as get our inventory levels down even further. And then I'd say I think we're out of the woods and in great shape.
Speaker 9: Great, appreciate that update. Last one for me, you talked about, you had a comment about defense expecting R&D and procurement to increase in the macro sense, voting well for Woodward. So I'm curious if you could
Speaker 9: elaborate on that, you know, what kind of a ramp curve do you envision, what sort of contours are you seeing, you know, reasonably take shape.
Speaker 5: Well, as you know, in most cases in defense-related processes, the ramp is relatively modest. And what we've been spending our time doing is investigating and responding to opportunities.
Speaker 5: which both the opportunity, there are more opportunities lately, and the urgency with which these opportunities are being handled is greater. So that's why the words, one of the reasons that I think there's some confidence that opportunities will continue to evolve. But
Speaker 5: These are not near-term opportunities that will make an impact to the sales anytime soon. Okay. Thanks for that. Appreciate it. Okay.
Speaker 1: Your next question comes from the line of Matt Ackers of Wells Fargo. Please state your question.
Speaker 10: Hey, good afternoon guys. Thanks for the question. I wanted to kind of take a step back kind of on just earnings visibility, probably. I mean, so this quarter relative to consensus, probably positive surprise, I think.
Speaker 10: last quarter was also a big positive for I. Q1 was kind of a negative surprise. I guess you guys have been managing through supply chain uncertainty and uncertainty around China. So I guess as we go forward, is there a point as we get into maybe it's next fiscal year that sort of settles down and we get a little bit more visibility or just sort of how you think about the outlook there.
Speaker 5: So I think the outlook I would say on that is we're just getting much better about our visibility upstream to supply chain kinds of issues and we're able to take these issues on with more mitigation to avoid.
Speaker 5: you know, having a line down stoppage or impacting a customer's shipment. So I think our ability to forecast around our delivery models is improving and will continue to improve as the supply base continues to perform better.
Speaker 5: And our factories also continue to perform better. But as far as on the customer side for something like China OH where we have very limited visibility, I wouldn't predict that to get better.
Speaker 5: We just don't have the tools or visibility in our toolbox to help with that. But as far as the supply chain avenue, our visibility has improved quite a bit there.
Speaker 10: Yep, okay, thanks. And I guess just the latest thoughts on the share repurchase, I think the plan at one point was to complete that authorization by January . Is that still how you're thinking about it?
Speaker 5: We still have an open plan and we are evaluating opportunities for capital deployment with our board and we'll continue to go forward and do what's prudent.
Speaker 11: Thank you.
Speaker 11: Thank you. You bet.
Speaker 1: Your next question comes from line of Pete Skibitsky of Olympic Global. Please state your question.
Speaker 12: Yeah, it's a pretty impressive quarter, to say the least.
Speaker 12: I was wondering if you could kind of update us a little bit of a follow up to Chris's questions I think but maybe you could update us on where you're at with your various initiatives. I'm thinking you know insourcing is the insourcing push over now you know training the new employees has that been completed and you mentioned customer experience.
Speaker 12: in your opening remarks, I think. I'm not sure what's going on with that. And then this whole, you had some thoughts about shoe rationalization as well. Just wondering what the status of that was. Thanks.
Speaker 5: Great, so you may have to remind me about one or two of them there that you rattled off, but I'll hit what I can. As far as insourcing, we're continuing to do quite a few part transfers, both between suppliers as well as insourcing to make sure we've got enough.
Speaker 5: flexibility to and sourcing options to serve the customer. So right now we have, like we did last quarter, they're not the same parts. Some of them are different parts. We have over a thousand parts in a part transition either between suppliers or in sourcing.
Speaker 5: We've made 16,000 parts through the rapid
Speaker 5: response machine centers that we have set up. We've got all the equipment on the floor right now at those locations.
Speaker 5: So that's very active and that will continue probably for multiple years as we try to simplify our supply chain and also make it resilient by having multiple sources where required.
Speaker 5: but having fewer sources in total.
Speaker 5: allowing us to serve them efficiently. We have taken thousands of more offerings off the books this quarter. We intend to reduce the neighborhood of 10,000 to 15,000 skews this fiscal year.
Speaker 5: And we'll continue to evaluate that and become more efficient next year as well.
Speaker 5: to evaluate that and become more efficient next year as well. That initiative will continue.
Speaker 5: labor productivity, we continue to get better at this.
Speaker 5: Our drive to hire new employees and direct employees for manufacturing has reduced, but we still have levels of attrition at some locations that require onboarding, training, and raising a breaker for more than 50 people.
Speaker 5: and a little bit of support from experienced machinists and assembly technicians that, you know, I would say we're not completely out of the woods of that. And maybe the new normal is that we have a little bit higher attrition than we're used to in the past.
Speaker 5: So we need to stay capable on that front. But I see continued labor productivity going forward.
Speaker 5: The last one was customer experience. So part of the...
Speaker 5: Industrial reorganization and the aerospace reorganization was focused on serving these two segments with one aerospace approach and one industrial approach, mostly centered around how we serve customers. We had multiple teams calling on some of the same.
Speaker 5: OEMs and service providers and we've worked hard to streamline that customer experience.
Speaker 5: You know, but maybe mostly from a customer experience standpoint is delivering the right amount of Way-Piers delay it. Really.
Speaker 5: of orders on time with the right quality at the right price. So that's something we're focused on as well. That's great. Very, very helpful.
Speaker 12: I just I have to ask on the macro.
Speaker 12: I know sometimes visibility is tough there, but you're in a lot of different industrial niches.
Speaker 12: Any sign that any of those niches are peaking or customer pull is kind of slowing down a little bit, cycle's changing.
Speaker 5: The one that I mentioned a little bit was that the global...
Speaker 5: oil rig count is up, but US activity, including fracking, is not keeping pace, even declining. And so we're watching that, but it hasn't resulted in any order intake for us slowing down yet. But we've got to kind of looking around the corner.
Speaker 5: watch on that. That's the only one that really comes to mind that's a little bit, has some soft indications in the macro that we haven't seen, you know, in terms of what orders we're getting. Everything else is up into the right, I mean, as far as revenue passenger miles, I would say, starting this summer.
Speaker 5: Field rates at OEM, air framers, shot visit rates for engines coming in for overall, everything that we see on that is up into the right.
Speaker 5: framers, shot visit rates for engines coming in for overhaul. Everything that we see on that is up and to the right in the current forecast.
Speaker 13: Okay. Appreciate the color.
Speaker 13: Okay, appreciate the color.
Speaker 1: Thank you. Your next question comes from the line of Gautam Khanna of TD Cowan. Please state your question.
Speaker 1: Thank you. Your next question comes from the line of Gautam Khanna of KD Cowan. Please state your question. Yeah, thanks. Good afternoon, guys.
Speaker 2: Afternoon. Afternoon. I had a couple questions. First on the industrial side,
Speaker 2: remember last quarter the backlog did not go down right there was not a supply chain.
Speaker 14: Catch up that drove.
Speaker 5: big recovery in shipments. Did that occur in this quarter just reported the June quarter? Just to be clear, when you say backlog, it was our past dues didn't go down.
Speaker 5: passed yeah yeah but again that was the same thing this quarter we were not
Speaker 5: We're not capacitized at a level right this minute to both satisfy current customer demand and burn down past due. So industrial past dues stayed largely the same.
Speaker 14: Okay, and to an earlier question.
Speaker 14: on the mix impact from the natural gas business in China.
Speaker 14: It sounded like it was broad-based strength with an industrial. Is there any way for us to isolate?
Speaker 15: you know what
Speaker 14: what piece of that might be non-recurring if it is CNG and if it is only here for a quarter or two.
Speaker 14: Is there any color you can give us on that?
Speaker 14: to where margins would have been but for CNG.
Speaker 3: Yeah, not much more than what we already have provided.
Speaker 14: Okay. Have you guys provided anything on that or did I miss it? It wasn't clear.
Speaker 11: to me.
Speaker 5: No, we just don't break out our product lines at levels below the segment, Galpin.
Speaker 14: Okay, but is CNG particularly rich mix?
Speaker 5: It's a very healthy business for us.
Speaker 5: It's just it's healthy when it's high volume and it's not healthy when it's low volume and that's
Speaker 5: That's why we should keep using the word volatility because it has some really good marginal delivery on high volumes. At low volumes it doesn't look quite as good.
Speaker 15: Okay.
Speaker 14: And in terms of the SKU rationalization, how far along are you in that journey and
Speaker 14: you know how much how much of that was you know influential in the actual June quarter numbers
Speaker 5: I don't think we haven't really seen the TQ Ragellization hit the bottom line yet in terms of just like moving the needle. What we think we'll see first is
Speaker 5: improvements and efficiencies in both the supply base as well as our plant operations. And that's mostly in
Speaker 5: Fort Collins.
Speaker 5: It'll show up, you know, alongside general productivity. That's where it's gonna help us in terms of.
Speaker 5: realizing flow through the factory and more standardization.
Speaker 5: We did some of the easy part really this so far, this first 10-15,000 is a little bit easier than the next ones where we have to work a lot more closely with customers to move them to the latest configuration of some.
Speaker 5: product family member in order to eliminate an offering. I hope that makes sense.
Speaker 14: Yep, now it does. And then last one, and perhaps I missed it, but the commercial arrow aftermarket on a sequential basis looked.
Speaker 14: up minimally. I didn't know was there any a is that right? I think that's about right, but
Speaker 14: Is that right? And any reason for the pause? Because we're seeing pretty strong sequential aftermarket.
Speaker 14: prints from some of the other companies in the space.
Speaker 14: prints from some of the other companies in the space. Anywhere you can.
Speaker 5: discern what trend is going on there. We're not showing up sequential, but we are showing healthy double digits year over year.
Speaker 15: Uh, is there
Speaker 1: Thank you. Your next question comes to line of Michael Cermolli of Truth Securities. Please take your question.
Speaker 9: Hey, good evening guys, real nice results. Thanks for taking the questions. Maybe Chip, I know a lot of guys are trying here, but I guess if the visibility isn't great in the China on highway, I mean, how are you guys actually planning for this? I mean, what?
Speaker 9: Do you have typical lead times? What are your turnaround times? I mean, I'm just trying to get a better understanding of how you're actually trying to run your facilities.
Speaker 16: given the lack of total visibility here.
Speaker 5: Yeah, right now, I mean, our strategy is to, like I said earlier, have enough inventory to be responsive to the customer if we have short lead time orders, which we have had. But also not carry too much inventory so that.
Speaker 5: you know, a big rock around our cash flow. So we're trying to get that optimized. We're doing things like, you know, looking at what the rates have been over a longer period of time and try to plan for a low level that we can respond to if it goes up. So it's more like the
Speaker 5: protect the ability to get upside if we get orders. This is kind of how we're thinking about it right now. I mean.
Speaker 5: Bill and I are both relatively new to this market, and we're relatively new to this business line. So we're trying to make sure we don't miss the opportunity right now and get good cash flow and earnings for shareholders and figure out if there's a better way to understand and plan for it.
Speaker 16: Got it. And I mean, you're not going to give us 24 guidance here, but I mean, kind of model this segment now and looking at the volatility, you know, just on the margins last quarter, you know, 13 for over 18, I guess the fourth quarter's back down to 13 or so.
Speaker 16: business right now and then the on highway, depending on volumes, would drive those upside pops that we're seeing like in this quarter.
Speaker 5: Yeah, I'm sorry, we're just not ready to talk about 24. I know why you want to know the answers to all those questions. And we're working through all of our plans right now trying to make sure we close out 23 strong. We have a really solid 24 plan that.
Speaker 16: will be compelling for investors and that we are sure we can achieve. Got it. It's just last one arrow. OEM looked like it was up 17% sequentially. Any material change or orders or, you know, just specific platforms, rates that you've
Speaker 5: nothing really out of the out of the ordinary except for specific customers wanting more parts to support both OEM as well as you know.
Speaker 11: Be...
Speaker 5: inventory positions that they want to be in based on what they see in the future.
Speaker 5: Inventory's positions that they want to be in based on what they see in the future. Okay.
Speaker 1: Great. Thanks, guys. You bet. Thank you. Again, if you'd like to ask a question, press star one on your telephone keypad. And if you want to remove your stuff from Q, simply press star one again.
Speaker 1: Your next question comes from the line of Louis Raffato of Wolf Research. Please state your question.
Speaker 9: I just want to go back to the cash flow because I think you've talked about wanting to bring inventory down, but it looks like this is your best inventory during quarter in years. inventory is now sort of well below where it was.
Speaker 9: Yeah, hi, thank you. Um, I just want to go back to the cash flow because I think you've kind of talked about wanting to bring inventory down, but it looks like this is your best inventory turned quarter in years. Inventory is now sort of well below where it was in 2019. So just
Speaker 14: Are we going to go lower? Is it going to go up in the fourth quarter and house that translating to the impact on cash flow? You've raised net income 20% plus plus, a couple quarters and still no increase? Yeah, so we still feel like we're carrying.
Speaker 5: a substantial amount of inventory to support the sales level and that world-class performance would have a set of higher turns overall. And so that's what our
Speaker 5: Lean folks are operational leaders, our planners, everyone striving to figure out how to do better than we are right now. So it is our desire to improve that.
Speaker 14: Okay, and then maybe, you know, chart attack list is another different way. I think fourth quarter industrial margin guidance is somewhere between 13, 13, half to like 16%. Okay.
Speaker 14: which I assume that's kind of bounding some variability around kind of natural gas. Is that right?
Speaker 5: That's a good way to think about it. I mean, that's...
Speaker 5: We don't give quarterly guidance, but we're in this tight, and we changed guidance this quarter, so the math is...
Speaker 14: Self-evident. OK, and so I guess at the low end of that, it's kind of back. Is that where the normalized margin rate is, if we're excluding no-chondatrogas, 13, 13, that percent margins is kind of...
Speaker 5: One redish. I think it's still early for us to give guidance on what our industrial, you know, go forward margin rate is going to be. We're, you know, we're very happy with the improvement that we've had in the base. Business and we're going to continue to work on that and I think when.
Speaker 5: We're ready to give FY 24 guidance that we'll be able to put a, you know, a nice bracket around that as well as, you know, give even more forward look to the, at the investor day of December . So maybe there's one more way to ask it.
Speaker 14: last quarter the back half guidance from Dushville was 9 to 10% and that like I guess what changed to give you 400, 300 to 400 faces points more?
Speaker 14: Yeah, when 4-2, then what the employee guidance was before.
Speaker 5: Two things changed. One was we are turning the corner in the performance of our
Speaker 5: our factories, our people, our material flow, our suppliers, our operational improvement in the base business is improving. We were, our plan was to improve it. And now that we've started to deliver on those plans and show progress and milestones and achieving the targets. And now that we've started to deliver on those plans and achieve our goals and achieve our goals.
Speaker 5: So that was the one thing that changed and the other thing was the sheer volume of the China on highway natural gas business and visibility for orders through the end of fourth quarter. So that was the one thing that changed and the other thing was the sheer volume of the China on highway natural gas business and visibility for orders through the end of fourth quarter.
Speaker 9: That's great. Thank you, Chief.
Speaker 11: Be back.
Speaker 1: Thank you. Your next question comes from a line of Noah Popunak of Goldman's ex. Please state your question.
Speaker 13: everyone
Speaker 13: Hey everyone. The afternoon now. I'll be doing it.
Speaker 17: Can you quantify how much China on highway revenue you have in the course?
Speaker 13: No, sorry Noah.
Speaker 13: No, sorry Noah. Okay.
Speaker 17: Did you have significantly more in this quarter than last quarter?
Speaker 3: Corner and corner, it's a clinch, we did see an uptick in our China and Highway business.
Speaker 15: Okay.
Speaker 18: And.
Speaker 17: Fundamentally, what is it that makes that volatile, what is it that makes it not have visibility just in terms of?
Speaker 17: What the customer is doing and thinking fundamentally when they're buying that product from you.
Speaker 5: Well, I think I, I tried to stay out of trouble on this one, but I think one of our conference calls, I did say that it doesn't behave like other markets I'm used to in some of our business team is used to working through and, you know, garnering forecasts around.
Speaker 5: It appears to be government policy at play and other factors that we don't have a full handle on. That makes it really difficult to...
Speaker 5: to forecast from where we set. But we do, as soon as we get orders, we kind of have a good level of confidence that that's how much the customer wants for that month. So that's been our mode for.
Speaker 11: for a while. Okay.
Speaker 19: Okay. And when you have...
Speaker 17: revenue that comes out of existing inventory into China OH.
Speaker 17: is the margin, you know, nearly entirely, is it, is it, is it near a 100% incremental margin drop through? Like it becomes a multiple of the segment.
Speaker 17: Or is it the segment margin? Or is it something where it's more like several under basis points better than the segment margin?
Speaker 5: Well, I guess the way I'll answer that no is that we are we carry full cost of our inventory and it's largely our business is largely in China for China.
Speaker 5: that hardware and those systems that are, we shipped to our customer are largely coming from China and staying in China. And we carry that at cost and...
Speaker 5: When we get our order, if we get pretty high volume, then the margin rates can be fairly high. If we have low volume, then we've got fixed cost to spread across that operation just like normal.
Speaker 5: The reason I'm saying all that is I'm just trying to tell you it's a normally functioning business where there's quite a lot of productivity for volume. Thank you.
Speaker 17: 3020. Lastly, for me on the aerospace side.
Speaker 17: Are you able to tell now where your aftermarket unit stand versus pre-pandemic? And what kind of pricing are you seeing in aerospace aftermarket? Well, I'm going to advise why I'd normally do this.
Speaker 5: I got the first part of the question, but I didn't get the last part. But as far as woodward units cycling through repair, we're closing in on 2019 volumes that from both a shop visit and a
Speaker 17: would word LREU standpoint. We're not quite there yet. And the second part of that was pricing. How does the aerospace aftermarket annualized pricing you're seeing right now compared to the enterprise wide level?
Speaker 17: or a used standpoint. We're not quite there yet. And the second part of that was pricing. How does the aerospace aftermarket annualized pricing you're seeing right now compared to the enterprise-wide level?
Speaker 3: We do not go at the go down pricing at that 70 level, at that level below the segment. As we talked about, both segments are contributing to that 7% guide that we gave to total year price realization.
Speaker 3: go down pricing at that 70 level at that level below the segment as we talked about both segments are contributing to that 7% guide that we gave to total year price realization.
Speaker 1: Thanks for taking my questions. Welcome. Your next question comes from a line of David Strauss of Barclays. Please state your question. Great. Thanks for taking my question.
Speaker 5: Well, like you said, we're not prepared to give 24 guidance at this time, but it is our intent to continuously improve our performance from an efficiency standpoint and ability to serve customers. So we intend to improve from where we are today and, you know, the fact that we were able to achieve.
Speaker 5: better numbers before with good volume, both well for us able to do it in future. Is the, I would think the revenue mix, then is more favorable than what you saw in 19. It looks like you're gonna have more aftermarket revenue.
Speaker 5: Maybe a little less aerospace OE and maybe less defense. I would assume that revenue mix is positive. I'm not sure I'd make that assumption just yet. We're still working through our plans and looking at this is why we're not talking about FY24, but, you know.
Speaker 5: Right now in the early planning stages, we're looking at what rates the air framers are planning to achieve and what sort of inventory levels they'd want before they do rate breaks. And that propagates the engine manufacturers and then to us. So there may be quite a good amount of OE demand in 24, which is not necessarily a bad thing at all because that's creating the installed base for the future. So. So.
Speaker 5: It's good news, good news I think, but I'd too soon for us to say what we think the mix will be. And Chip, where is your aerospace head count today relative to what it was that prior, you know, back in 2019?
Speaker 5: That's a question that I don't have the answer to in front of me.
Speaker 5: Okay, yeah, we don't have it for me
Speaker 1: Okay, I can fall with Dan on that. Thanks. Great. Yep, you bet. Your next question comes to line of Robert Spingine of Millius Research. Please stay your question.
Speaker 2: Thanks. I just want to come back on aerospace and just ask you briefly, with regard to the LEAP and the GTF and some of the durability and time on wing issues, to what extent is that factoring or impacting your aftermarket? Are you shipping more because of these cycles being shorter?
Speaker 2: And then as a follow up to that, how might we think about this latest issue at RTX with the with the GTF and how that might impact you know, with all the inspections, you know, maybe
Speaker 5: taking shop time and so forth. How might that impact Woodward as that plays out over the next year or so? I think it's early to say on how that inspection and you know, potential replacement program for the GTF would affect us.
Speaker 5: You know, there's a number of like you were referring to, you know, earlier shop visits, hospital shop visits, quick turn kind of activities to support, you know, infant issues with the fleet. Most of these have little effect on woodward because our LRUs can stay on the engine typically. Now we might get some check and repair kinds of...
Speaker 5: And that will normalize itself over time. I think as far as we're concerned, it's minimal impact for us. From a control standpoint, we do have some other hardware that there are some design changes on that we are supporting our customers on those parts. Okay, thank you. Yep. Mr. Blankenship, there are no further questions at this time. I will now turn the conference back to you. All right, well, thank you very much operator and thanks for all the folks online and all your questions today.