Q1 2024 Woodward Inc Earnings Call
Thank you first and thank you for standing by welcome to the Woodward incorporated first quarter fiscal year 'twenty 'twenty four earnings call.
At this time I would like to inform you that this call is being recorded for broadcast and that all participants are in a listen only mode.
Following the presentation you are invited to participate in a question and answer session joined.
Joining us today from the company are chip Blankenship, Chairman and Chief Executive Officer, Bill Lacey, Chief Financial Officer, and Dan Probusiness Director of Investor Relations I would now like to turn the call over to Dan provisioning.
Thank you operator, we'd like to welcome all of you to Woodward's first quarter fiscal year 2024 earnings call.
Dan: In today's call chip will comment on our strategies and related markets. Bill will then discuss our financial results as outlined in our earnings release.
Dan: At the end of the presentation, we will take questions.
Dan: For those who have not seen today's earnings release, you can find it on our website at Woodward Dot com.
Dan: We have again included some presentation materials to go along with todays call that are also accessible on our website.
Dan: An audio replay of this call will be available by phone or our website through February 12 2024.
Dan: 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.
Dan: I would like to refer to and highlight our cautionary statement as shown on slide three.
Dan: 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.
Dan: Those elements can and do frequently change.
Dan: Our forward looking statements are subject to a number of risks and uncertainties surrounding those elements, including the risks we identify in our filings.
Dan: These statements are made as of today, and we do not intend to update them, except as required by law.
Dan: In addition, Woodward is providing certain non us GAAP financial measures.
Dan: 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 unrelated schedules we.
We believe this additional financial information will help in understanding our results.
Dan: Now I will turn the call over to chip.
Chip Blankenship: Thank you Dan and good afternoon, everyone.
Chip Blankenship: We delivered significant sales growth and margin expansion in the first quarter.
Chip Blankenship: The strong start to our fiscal year reflects our focus on operational excellence over the past 18 months.
Chip Blankenship: Which enabled us to capitalize on continued strong end market demand.
We increased output due to improvements in our production planning supplier performance and internal execution.
Chip Blankenship: We also achieved our commercial objectives, securing key long term agreements that were available in the quarter for both industrial and aerospace segments.
Chip Blankenship: We made good progress consolidating industrial catalogs, which allowed us to clarify pricing with global channel partners in certain end customers, resulting in better control and visibility for action.
Chip Blankenship: Notably net sales grew sequentially, which reveals successful implementation of our production system principle of consistent performance.
Chip Blankenship: Achieving and maintaining flow a supplier of materials.
Chip Blankenship: Production of parts in house and feeding Assembly test at the rate of customer demand is essential to hit customer and business targets.
Chip Blankenship: Quarter end heroics are not welcome as they destroy flow and introduce and consistency to every aspect of the production system.
Chip Blankenship: Well, we have not yet achieved the labor productivity, we believe we're capable of.
Chip Blankenship: We are laying the foundation to achieve significant results.
Chip Blankenship: I want to thank all of the analysts and shareholders, who attended our Investor day last month.
Chip Blankenship: For those who participated you will remember that we laid out our three interconnected value drivers.
Chip Blankenship: Profitable growth operational excellence and innovation.
Chip Blankenship: Our Q1 results show, how the relentless pursuit of operational excellence can deliver both growth and margin expansion.
Chip Blankenship: Woodward's profitable growth is fueled by robust demand in both aerospace and industrial end markets.
Chip Blankenship: We have made progress aligning price to the value of our products.
We are still experiencing material cost inflation from our supply base, when we forecast and we forecast this to continue through calendar year 2024.
Chip Blankenship: Our price actions as well as our supplier simplification and in sourcing efforts represent a two pronged approach to mitigate some of the impact of inflation.
We are gaining momentum from our value stream transformation efforts and I am very pleased with the progress we've made so far.
We are increasing the number of value streams under transformation engaging more of the team and the process.
Chip Blankenship: Notably a significant percentage of the kaizen events associated with the transformations are being led by hourly members, which results in powerful and lasting talent development.
Chip Blankenship: We are expanding our automation project funnel with goals to improve quality and reduce future labor demand.
We're putting our plans into action and you can see this in our guide for capital expenditures, we look forward to sharing more with you in the coming quarters.
Chip Blankenship: Our purpose is to design and deliver energy control solutions, our partners count on <unk> to power a clean future.
Chip Blankenship: In both segments, we are working closely with our customers to develop new technologies that reduce fuel consumption and emissions and.
And enabled multiple paths for a cleaner future.
I recently spent a day in Zeeland, Michigan at one of our aerospace sites.
Chip Blankenship: This visit was focused on both GTS fuel nozzle repair and overhaul rate readiness as well as a deep dive into our ignition systems and combustion control product development process.
Our ignition systems development is maturing and preparation for the next single aisle aircrafts.
Chip Blankenship: But it is ready now for applications that need the efficiency and reliability improvements it has to offer.
Chip Blankenship: This team has a great track record with automation and it is a key driver to GTS fuel nozzle overhaul capacity expansion, which may be needed sooner than expected.
Chip Blankenship: While we did share a refreshed purpose and values on Investor day, we recently rolled it out to our nearly 9000 members around the world.
It has been gratifying to see their reactions and the pride they have in Woodward.
Chip Blankenship: After all they are aligned efforts enabled the performance improvements we delivered this quarter.
Chip Blankenship: The excitement is tangible.
Chip Blankenship: Our purpose video is on our website and I encourage you to take a look.
Chip Blankenship: It is an honor to lead the next chapter of Woodward building on the legacy set before us.
Chip Blankenship: Our entire leadership team is excited about our future and prepared for the challenge.
Chip Blankenship: Moving to our markets.
Chip Blankenship: Aerospace commercial airline domestic and international passenger traffic now exceeds 2019 levels.
Chip Blankenship: Results in high aircraft utilization rates.
Chip Blankenship: Further increases in aircraft utilization are expected.
Chip Blankenship: As international passenger traffic in Asia Pacific still lags, yet offers opportunity as it recovers.
Chip Blankenship: Trans Atlantic traffic remains strong.
Chip Blankenship: In defence geopolitical developments and government spending proposals indicate potential increased procurement and R&D spend signalling potential opportunities for Woodward.
Chip Blankenship: In industrial demand for power generation remained strong driven by growth in Asia and the middle East.
Chip Blankenship: Global aftermarket activity remains high as does demand for backup power.
In transportation, the global Marine market remains healthy with elevated ship rates ship build rates driving OEM engine demand and high utilization rates driving current and future aftermarket activity.
Chip Blankenship: Demand for alternative fuels across the marine industry continues to increase.
Chip Blankenship: We are encouraged by the additional OEM and aftermarket opportunities as multi fuel engines contain greater Woodward contests.
Chip Blankenship: Demand for natural gas heavy duty trucks in China increased significantly compared to last year.
Chip Blankenship: This current demand is being driven by a number of factors, including a favorable LNG to diesel price spread.
<unk> supply of natural gas and carbon reduction initiatives across China.
Chip Blankenship: This market remains volatile and we continue to evaluate the durability of this demand.
Last week I would've said LNG infrastructure development continues to benefit from global investment, but some uncertainty has been injected into the investment equation with the recent U S government pause.
Chip Blankenship: A further LNG export approvals.
Chip Blankenship: In summary market signals indicate continued strong demand.
Chip Blankenship: The operational improvements, we have made position us to capitalize on this demand.
Chip Blankenship: We remain focused on pursuing profitable growth operational excellence and innovating for the future to deliver on our purpose and drive enhanced shareholder value.
I'll now turn it over to bill to share our financial results.
Thank you, Jeff and good afternoon to everyone.
Bill Lacey: Net sales for the first quarter of fiscal 2024 were $787 million, an increase of 27%, earning.
Bill Lacey: Earnings per share and adjusted earnings per share for the first quarter of fiscal 2024 were $1 46, and $1 45, respectively.
Bill Lacey: Compared to earnings per share in adjusted earnings per share of <unk> 49.
Bill Lacey: Aerospace segment sales for the first quarter of fiscal 2024 were $461 million compared.
Compared to $396 million, an increase of 16%.
Bill Lacey: Commercial OEM and aftermarket sales were up 23% and 9% respectively, driven by higher OEM production rates continued growth in both domestic and international passenger traffic.
Bill Lacey: Creasing aircraft utilization and price realization.
Bill Lacey: Defense OEM sales were up 4% in the quarter due to increases in ground vehicle components and guided weapons defense aftermarket sales were up.
Bill Lacey: 45%.
Bill Lacey: Aerospace segment earnings for the first quarter of 2024 were $79 million or 17, 2% of segment sales compared to $55 million or 14% of segment sales. The increase in segment earnings was primarily a result of higher volume.
Bill Lacey: And price realization.
Bill Lacey: Turning to industrial.
Bill Lacey: Our industrial segment had a record quarter for both sales and earnings in industrial segment sales for the first quarter of fiscal 2024.
Our $326 million.
Bill Lacey: Compared to $223 million, an increase of 46% we saw growth in all markets from a combination of higher volume and price realization with an increase of 96% in transportation.
Bill Lacey: 20% in power generation is 2% and oil and gas.
Bill Lacey: Sales for on highway natural gas trucks in China total approximately $75 million in the first quarter driven by significantly higher demand compared to the prior year quarter.
We do not expect this higher level of sales to continue in Q2 as demand signals indicate a return to previous peak levels of approximately $50 million.
Bill Lacey: Industrial segment earnings for the first quarter of 2024 were $67 million or 25% of segment sales compared to $11 million or five 1% of segment sales.
Bill Lacey: The sharp increase in industrial earnings was a result of operational improvements, including increased output and efficiency gains favorable product mix and significantly increased demand for on highway natural gas trucks in China.
Bill Lacey: Excluding the impact of the China on highway natural gas truck business industrial segment margin increased approximately 900 basis points compared to the prior year.
Bill Lacey: We do not expect the overall first quarter industrial margin levels to continue in the remainder of the year.
Moving forward, we expect margin pressure for the China on highway natural gas truck business due to lower volume leverage and higher material costs, including spot buys and expedited freight.
Bill Lacey: Outside of the on highway natural gas truck business. We also expect margin pressure in the remainder of the year due to an anticipated shift in mix and cost increases.
Bill Lacey: Non segment expenses were $26 million for the first quarter of 2024 compared to $24 million.
Bill Lacey: Adjusted non segment expenses for fiscal year 2024 were $27 million.
Bill Lacey: At the Woodward level R&D for the first quarter of 2024 was $31 million or three 9% of sales compared to $29 million or four 6% of sales.
SG&A for the first quarter of 2024 was $75 million compared to $63 million.
Bill Lacey: Adjusted SG&A for the first quarter of 2024 was $70 million. The increase was primarily due to higher annual incentive compensation.
Bill Lacey: The effective tax rate was 17, 9% for the first quarter of 2024 compared to six 7%. The adjusted effective tax rate was 17, 7% for the first quarter of 2024.
Looking at cash flows net cash provided by operating activities for fiscal 2024 was $47 million <unk>.
Bill Lacey: Compared to $5 million.
Bill Lacey: Capital expenditures were $42 million for fiscal 2024 compared to $24 million.
Bill Lacey: Free cash flow was $5 million for fiscal 2024 compared to negative $19 million.
Adjusted free cash flow for fiscal 2024 was $3 million.
Bill Lacey: The increase in free cash flow and adjusted free cash flow was primarily due to increased earnings.
Bill Lacey: Partially offset by the above target payout for fiscal year, 2023 annual incentive compensation as well as higher capital expenditures.
Bill Lacey: During the quarter, we repaid $75 million of long term debt.
Bill Lacey: Leverage was one three times EBITDA.
Bill Lacey: The end of the first quarter compared to two three times EBITDA.
Bill Lacey: $13 million was returned to stockholders in the form of dividend in the first quarter of fiscal 2024.
Bill Lacey: Lastly, turning to our fiscal 2020 for guidance.
Bill Lacey: Based on our strong first quarter performance and visibility into the second quarter demand for the China on highway natural gas truck business, we are updating certain components of our fiscal 2020 for guidance.
Bill Lacey: Total net sales for fiscal 2024 are now expected to be 315, and $3 $3 billion.
Bill Lacey: Our aerospace segment guidance is unchanged for fiscal 2020 for aerospace sales growth is still expected to be 10% to 14% and segment earnings are still expected to be 18% to 19% of sales.
Bill Lacey: Our industrial segment guidance includes broad based market strength and improving operational performance.
Our guidance now assumes approximately $50 million for our China on highway natural gas truck business in the second quarter.
Bill Lacey: However, given the volatility and limited visibility into this market our guidance continues to assume minimal activity in the second half of fiscal 2024.
Bill Lacey: As a result for fiscal 2024, we now expect industrial sales growth to be 8% to 10%.
Bill Lacey: Segment earnings to be 14% to 15% of segment sales.
Bill Lacey: At the Woodward level, the adjusted effective tax rate is still expected to be approximately 21%.
We now expect free cash flow to be between 300 and $350 million.
Bill Lacey: Capital expenditures are still expected to be approximately $100 million.
Bill Lacey: Adjusted earnings per share is now expected to be between $5.
Bill Lacey: And $5 40 based on approximately 62 million fully diluted weighted average shares outstanding.
Speaker Change: This concludes our comments on the business and results for the first quarter 2024.
Speaker Change: Operator, we are now ready to open the call to questions.
Speaker Change: Thank you the question and answer session will begin at this time, if you are using a speakerphone. Please pick up the handset before pressing any numbers did you have a question. Please press star one on your push button phones JV with Kiwi should you wish to withdraw your question again press Star one on your.
<unk> will be taken in the order. It is risky please standby for your for your first question Sir.
Speaker Change: First question comes from the line of Robert Burnham from Melius Research. Please state your question.
Robert Spingarn: Hi, good afternoon.
Robert Spingarn: Afternoon, Rob.
Robert Spingarn: Some nice numbers I wanted to.
Robert Spingarn: Talk a little bit about aerospace sales growth your commercial OEM sales were up 23% year on year and up quarter over quarter, Despite lower working days in the quarter and at a more granular level.
Robert Spingarn: <unk> did you see significantly higher growth on wide body programs, then on narrow body.
Robert Spingarn: And then I want to ask a follow up on the 737.
Hi.
Robert Spingarn: The the growth wide body and narrow body beige grew according to their own kind we saw growth in both.
Speaker Change: But at slightly different levels I can't make it more granular for you than that.
Speaker Change: Okay, I'm, just trying to get some insight into because the cycles are not exactly lined up narrow body at least was a little bit ahead of wide body, but wide body seems to be smoother based on what's going out there and that leads to this follow up question, which is when we think about the 737.
Speaker Change: How would you characterize your OE, what kind of rates you're targeting given what's going on in Seattle, and then is there a difference in how youre shipping to the engine OEM.
Speaker Change: Versus how youre shipping to Boeing.
Speaker Change: In terms of rate. So yes, there are differences there.
Hard to its hard to say because we go through a number of different folks and addition of straight to Boeing So we do some to spirit, some to Boeing and and some to the CFM and the <unk>.
Speaker Change: Fact of the matter is we can't see the rates very clearly in our.
Speaker Change: Demand from our customers for various reasons on inventory in and things of that nature, but youre pointing out probably the biggest volume risk that we're looking at as a company and on the aerospace side.
Speaker Change: And.
Speaker Change: It's an insightful question because we're in a position where we're making sure we have the capability to get to the advertised rates in terms of what we think the Po demand growth will be from each of those different customers associated with the 737, but.
Speaker Change: We're also looking at what the financial impacts would be if they don't get where they've advertised theyre going to go and we believe we can manage that risk.
We've looked very carefully at what we need to do to to optimize if there are some signals that the rates not going to go up as much as we thought it would we have already seen some inventory.
Speaker Change: Maneuvers go on with other People's fourth quarter last quarter. So.
Speaker Change: We don't take those signals, yet as a signal a slowdown but.
Speaker Change: We're watching it carefully and we have internal plans to adjust.
Speaker Change: So chip just to clarify on that does that mean that the lower end of your aerospace guide contemplates. This idea of a freeze at Boeing that we heard about last week I know you've only had a week to think of deafness if that.
Chip Blankenship: Yes, it's.
Speaker Change: It's been a long week.
Speaker Change: Just thinking about that.
Chip Blankenship: But we do yes, we do believe our guide we can operate inside of our guide with that with the with that freeze.
Chip Blankenship: To continue.
Speaker Change: Okay. Thanks, so much.
Speaker Change: Beth.
Speaker Change: Your next question comes from the line of Scott <unk> from Deutsche Bank. Please go ahead.
Scott: With your question Hey, good afternoon, Hey, good afternoon.
Good afternoon, Scott and Scott.
Scott: Hey, Chip can you say, what the price realizations were this quarter as industrial.
Speaker Change: Go ahead bill.
Speaker Change: Yes.
Speaker Change: Overall.
Bill Lacey: Scott our price realization was 50 $50 million and the industrials represented.
Bill Lacey: It represented a significant.
Bill Lacey: Piece of that 'twenty, So arrow I'm, sorry of the 50 or so.
Bill Lacey: Aero and industrial both contributed to two that overall $50 million.
Bill Lacey: Realization at the Woodward level.
Okay, and then bill just sticking with Houston, and sorry, if I missed as to what drove the 8% increase to the free cash guidance at the midpoint.
Bill Lacey: Yes, so as we saw as we see the increase in.
Speaker Change: In <unk>.
Bill Lacey: And the earnings that flow through.
Speaker Change: We felt that.
Speaker Change: What we sort of saw in the second half of our of our of our business. We felt that it was appropriate to raise our our cash flow guidance.
Okay, and then shipped to disclosure of the Red Sea create any discernible benefit for marine aftermarket just due to the longer transit times and utilization rates for marine vessels.
Speaker Change: Yes.
Speaker Change: It's hard to say exactly how that's going to impact utilization, but the way I think about it is that.
Speaker Change: Longer routes fewer transits in shorter routes more transit I think that there is enough demand out there to keep those ships moving so we're.
Speaker Change: Not forecasting any.
Steeper increase in utilization, but we're comfortable with.
What we see.
Okay and last quick question chip the grounding on the V 22 fleet does that create any opportunity for defense aftermarket I think your ship set content there was pretty high thank you.
Speaker Change: Yes.
Chip Blankenship: 'twenty two is a significant.
Speaker Change: Repair and overhaul.
Program for Us and as you can see the defense aftermarket as we talked about was significantly up some of that represents our ability to execute better.
Speaker Change: At the facility that does the repair and overhaul on the V 22, and some of the other defense programs. So there is there is plenty of demand or execution had been historically getting in the way of some of that realization of that demand. So we're we're we're working as hard as we can with the defense logistics and other customers to support them.
Speaker Change: Thanks, guys critical quarter.
Speaker Change: Thank you.
Your next question comes from the line of Matt Akers from Wells Fargo. Please state your question.
Matt Akers: Yeah, Hey, guys. Good afternoon. Thanks for the question.
Matt Akers: Hey, Bill.
Matt Akers: Bill you made a comment in the opening remarks about I think it was kind of pressure on margins from kind of a mix of cost versus price increases. The rest of you could you just elaborate on that a little bit and maybe maybe the timing and I think I think in prior years <unk> gotten kind of a January one pricing.
Matt Akers: Pricing step up is that kind of still the right way to think about it for this year.
Yeah.
Bill Lacey: I believe the discussion Matt that I was having was as it relates to our.
Bill Lacey: Q1 margin delivery of.
Bill Lacey: Of 25.
Bill Lacey: Percent in industrial and.
Matt Akers: In the pressure against the Q1, it's really.
Matt Akers: On the ongoing standpoint, it's in line with what we anticipated.
It's more more versus the Q1 experience as.
Matt Akers: As we look in industrial we don't expect this year to have a 25 old rate overall margin rate and as I mentioned in our non <unk> business.
Matt Akers: Where we've talked about in delivering about 900 basis points.
That really was.
Matt Akers: Is having a very strong mix quarter in it.
Matt Akers: In Q1, and we don't expect that to continue.
Matt Akers: And.
Matt Akers: And secondly, we anticipate some cost coming into play.
In the in the in Q2 to Q4.
Matt Akers: Which again will not allow us to repeat that 25.
Matt Akers: Now we are.
We are inspiring.
Matt Akers: Working hard and our investments in all of our initiatives.
Two to get to that underlying underlying non OE margin rate, but again, that's going to be more out in the future.
Matt Akers: And not here in Q in fiscal year 2024.
Speaker Change: Got it. Thank you that's helpful. And then I guess, if I could do one more just the timing you're thinking of this this new repurchase authorization does that kind of a two year period like the last one was or just how youre thinking about that.
Speaker Change: So what we announced Matt was a three year program.
Speaker Change: <unk> $600 billion in total.
Speaker Change: And.
Speaker Change: Our philosophy.
That is to manage dilution.
Speaker Change: <unk>.
And also as we look at our cash flow and as we look to the highest return opportunity.
Speaker Change: We will continue to consider further purchases, but thats. The plan that we submitted was a three year $600 million program.
Great. Thank you.
Speaker Change: Welcome.
Speaker Change: Your next question comes from the line of Sheila <unk> from Jefferies. Please state your question.
Thanks, guys. Good afternoon, I just wanted to follow up here.
Sheila: And check in on long term margin you talked about next question. When you look at Q1 margins ex <unk> it looks like 14% and then pay for the rest of the year cloud so.
Alright, Robert brings about your longer term margins of 112 or 15 advertising still can you just thinking about beyond 2025.
Speaker Change: And if thats all cost pressure.
Yes.
Speaker Change: The original guidance that we gave on our business was 13.
Robert: 14% for that industrial.
Robert: Business.
Sort of the mid fifteens and as we look longer term.
Robert: We're still sort of in that mid teen range for industrial.
Robert: Okay.
Robert: And then similarly on aerospace if we could talk about profitability. They are just up nicely year on year, but work to do to get to the guide so how do we think about.
Robert: Progressing through the year, especially in light of some of those early comments that productivity that have been placed on the price capture.
Speaker Change: Yes, as you mentioned Sheila we saw a nice 300 basis points improvement versus Q1, a year ago.
As we discussed at Investor Day.
Speaker Change: The margin rate increase that you will see an arrow.
Speaker Change: Is mainly driven by volume in our OEM business as we mentioned the OEM.
Growth outpacing the aftermarket growth will cause a mixed pressure at our cm level, but as that volume comes through we'll get leverage and we will see that increase as chip mentioned.
Speaker Change: We we understand what we understand as it relates to the the Boeing announcement and based on what we understand right now.
Speaker Change: Our confirmation of our 18%, 19% Arrow is still good and we will keep monitoring it and if something changes we will we will communicate that but really that that that volume increase throughout the year being levered is what will get us to higher margin rates.
Speaker Change: <unk>.
Speaker Change: And as the defense aftermarket accretive or dilutive to segment margins.
Speaker Change: Yes, yes.
Our defense aftermarket is good good margins.
Speaker Change: We will take it all day, it's accretive Jess.
Jess: Okay. Thank you.
Jess: Welcome.
Jess: Your next question comes from the line of Gavin Parsons from UBS. Please state your question.
Gavin Parsons: Thanks, Good afternoon.
Gavin Parsons: Afternoon, Hey, Kevin.
Gavin Parsons: How much visibility do you have into the other industrial businesses. Besides H in terms of revenue.
Speaker Change: So we have some really close long term.
Gavin Parsons: Forecast work that we do with our customers and.
Gavin Parsons: Areas, where we can freeze volumes and understand.
What the expectations are from customers whether that is in the.
Gavin Parsons: The gas turbine arena or the reciprocating engine arena and across all three of our sub.
Gavin Parsons: Sub segments for.
Gavin Parsons: <unk>.
Gavin Parsons: Debt.
Gavin Parsons: Industrial segment, so pretty pretty good visibility and pretty good stability.
Gavin Parsons: And we continue to burn down past dues as well internally so we're getting.
Closer to the customer demand directly affecting our what we plan for our factories.
Gavin Parsons: Got it was industrial backlog up for the quarter.
Gavin Parsons: We don't really measure it that way and we talked about that on another conference call. We have a way of looking at that but because we are building to a forecast as well as their actual orders.
Gavin Parsons: When the orders come in sometimes that doesn't exactly represent what we've built.
Speaker Change: Makes sense and then maybe if I just go back to the Investor day Slide showing the engine service value five times higher on this generation of engine.
Speaker Change: Which is greater than your content gains can you just remind us when the majority of your engine aftermarket occurs and kind of how that's spread over maybe regular service versus heavy checks.
Speaker Change: So we still we forecast the 2026.
Speaker Change: Long term.
Speaker Change: Our view that we shared at the Investor Day is.
Speaker Change: No.
Speaker Change: That 2026 is before some of that really.
Speaker Change: I think volume of the aftermarket shows up on the engine side. So.
Speaker Change: The guide for aerospace margins in all of our cash flow and the like really.
Speaker Change: As before the wave of that engine aftermarket that we expect from the GTS and the leap engines on the <unk> hundred 37, Max and the <unk> hundred 20, <unk>. So there's a lot of lot of goodness outside that forecast that we've already given.
Speaker Change: Thank you.
Speaker Change: Yes.
Speaker Change: Your next question comes from the line of Pete Skibinski from Alembic Global Please state your question good.
Pete Skibitski: Good afternoon, guys nice corner.
Pete Skibitski: Thank you.
Pete Skibitski: On the $75 million of China on highway.
Pete Skibitski: I recall, you guys were expecting closer to $50 million in the quarter could you maybe validate that and then now you're expecting $50 million in the second quarter and I just wanted to get maybe a little more fidelity on the back half of the year. When you talk about minimal activity is that closer to zero or is that closer to kind of a 25% to 50 range just wanted to know more fidelity there.
Pete Skibitski: Yes.
Speaker Change: So yes, you're exactly right we were expecting more like 50 in the first quarter and the customer has plans to meet the demand in their country for what they believe is a.
Demand for more natural gas trucks versus diesel and.
And so we responded as best we could to that increased demand.
Speaker Change: We did have some inventory available, but we did have to exercise our supply chain in the <unk>.
Speaker Change: Simply a test to get them that material and it wasn't outperformance. So the team did a fantastic job up and down the line to deliver on that customer demand.
Speaker Change: So as we sit here in second quarter, we don't.
Speaker Change: I don't have any further information to share other than we really think it's going to be in the neighborhood of 50% and for the rest of the year.
Speaker Change: Bill I don't know, how you wanted to add that minimal.
Bill Lacey: Minimal amounts.
Bill Lacey: In the second half.
Bill Lacey: Okay, and then just just wanted to follow up on the oil and gas up 2% in the corner is the outlook there kind of slowing substantially as the rest of the year and industrial kind of depended on in the power Gen side.
Bill Lacey: So I did sort of tongue in cheek say that we could go out have been telling you that natural gas.
Bill Lacey: And especially the natural gas side of oil and gas look strong because I had met with a couple of our different engine Oems and they all said they were seeing strong investment, especially in the in the oil patch in fracking, where natural gas was involved in.
Bill Lacey: Companies were investing in additional new engines to get better output.
But I just don't know if that's going to hold with this latest announcement from the administration that they are putting a pause and really.
Bill Lacey: How that makes people feel about further investments and whether they will take all those engines. They supposedly have on orders so.
Bill Lacey: It's still early to tell on that side.
Bill Lacey: <unk>.
It's been steady for us, but not as high growth as the transportation.
Bill Lacey: Asian in the power Gen segments.
Bill Lacey: But we'll just have to see how this plays out.
Speaker Change: Understood understood. Thanks, guys.
Speaker Change: Yes, yes.
Speaker Change: Yes, Thanks Pete.
Speaker Change: Your next question comes from the line of Christopher Glynn from Oppenheimer. Please state your question.
Christopher Glynn: Thank you good afternoon.
I was curious to hear the comment about guided weapons shuts.
Christopher Glynn: <unk> had some growth in the quarter.
Christopher Glynn: Were you surprised by that and as do you expect to trend there.
Speaker Change: Yes, thanks for that question Christopher.
Speaker Change: Not surprised by the growth we have spoken that Jay Dan was going to get bottomed out. We have also have said that we have seen growth in the other areas, but it was.
Christopher Glynn: Kind of overcome by the decline in J D. So we expect it to start seeing that.
Christopher Glynn: That growth and it did.
Christopher Glynn: To say that it came through.
Christopher Glynn: Okay.
Christopher Glynn: Is that looking fairly consistent.
Christopher Glynn: Dynamic there.
Speaker Change: Currently yes, we continue to be in conversations with our our customers to see if there is any new plans around <unk>.
<unk> weapons, and Jay dam, but to date, we sort of expect to see.
Speaker Change: Moderate growth in this area.
Speaker Change: Great.
Speaker Change: Amortization.
Speaker Change: Yes, as I say the conversations with the customers are ongoing as bill said in.
Speaker Change: We keep getting questions about our capacity and ability to respond and we've worked with our suppliers as well to make sure. They have capacity to respond, but there hasnt been any follow up regards to anything firm.
Speaker Change: Sure.
Speaker Change: In addition to that.
Speaker Change: Great. Thanks for the additional color a follow up on industrial.
Speaker Change: Called out the backup power demand.
Speaker Change: Curious.
Speaker Change: You're seeing more of a secular growth dynamics.
Speaker Change: Anything interesting by applications or regions or is it very broad based on the backup power.
It's fairly broad based but in in North America with the.
Data centers as well as <unk> and some of the large language model stuff coming through.
Speaker Change: We believe as our customers believe that Thats an opportunity for further growth.
Speaker Change: Well into the future and so we're prepared to respond to that.
Thank you very much.
Speaker Change: Youre welcome.
Speaker Change: Your next question comes from the line of Louis Raffetto from Wolfe Research. Please state your question.
Louis Raffetto: Hey, good evening, Thank you very much.
Louis Raffetto: Maybe just a follow up on Matt's earlier question given the stronger <unk> does the updated guide and some of that margin pressure you talked about bill does that take into account higher variable comp now.
Louis Raffetto: Yes, it does.
Louis Raffetto: Okay.
Louis Raffetto: And then also just the other income that was $20 million this quarter versus $8 million is that mostly equity interest in a JV with an arrow or is anything else going on in there that flowed into the segment yes.
Louis Raffetto: We're seeing some strong JV performance.
Speaker Change: Okay, and then just last one I think.
Speaker Change: Chip mentioned sort of the Capex, obviously, it spiked pretty high here in the quarter was anything to really note of and we kind of settle down here. The next three quarters given the reiteration.
Speaker Change: We confirmed our $100 million guide it.
Speaker Change: It was as we anticipated and so.
Speaker Change: So so no it's as we expected.
Speaker Change: Okay. Thank you.
Speaker Change: Welcome.
Quantum Corner: Your next question comes from the line of quantum corner from TD Cowen. Please state your question.
Quantum Corner: Hey, good afternoon guys.
Quantum Corner: Good afternoon good afternoon.
Quantum Corner: First I had a question on the guidance just to be clear is the entirety of the raise related to the CMG stuff.
TD Cowen: Yes, the simple answer.
TD Cowen: Like we said before if that if that particular.
TD Cowen: Product line outperforms that will flow through and then.
TD Cowen: We just passed that along from a very strong first quarter to the rest of the year not signaling any other real pressure problems. So it just flowed through.
Speaker Change: Got you.
Speaker Change: And then.
Speaker Change: One of the things that was a bit confounding was in a truck production in China in calendar Q4 came down quite a bit.
And the diesel natural gas spreads compressed what do you think is actually driving Canada <unk>.
Speaker Change: <unk> business.
Speaker Change: Why it might not have a longer tail.
Speaker Change: Yes, I wish I understood it better and I wish our team all everybody on the team wishes they understood it better.
Speaker Change: When we talk with our main customers there.
Speaker Change: The the speech that we receive is really about the secular growth and opportunity of natural gas natural gas.
Cleaner burning availability.
Cost is good so over the over the long term this business should perform.
Speaker Change: But it's just our experience is that it's lumpy and volatile and so it just depends on how long term.
Term view your take on that growth curve.
Speaker Change: And what can you count on so for US we haven't been able to count on consistent stable growth and that's why you hear US say, we think its related to the <unk>.
Speaker Change: Natural gas diesel cost spread.
Speaker Change: The availability is kind of a new.
Speaker Change: Factor that is that is positive.
Speaker Change: But it's hard to say.
Some of it's government policy I just.
Speaker Change: Leave it at that.
Okay I appreciate that and then switching to the Aero.
Speaker Change: Maybe.
Aero: So just a follow up on Rob's initial questions.
Speaker Change: Obviously, the FAA on the 737 is Kenneth.
Speaker Change: Restricting the rate hikes at Boeing for some period of time.
Speaker Change: We've seen some suppliers see destocking of whether it be <unk> sales.
Speaker Change: Or some others I'm just curious are you seeing any evidence.
Speaker Change: Among your many customers of.
Speaker Change: Of schedule changes may be asking for orders to be delivered later.
Speaker Change: And then was the case a couple of months ago.
Speaker Change: Any perturbations you've seen in your order book.
Speaker Change: 737 in particular.
I'd say over the last 18 months, we've seen orders be pushed out and polled in kind of.
Speaker Change: I won't say regularly but.
Speaker Change: Periodically.
Speaker Change: And we haven't seen an uptick in that as of recently and I'm, giving you as of today and information I don't know what could happen tomorrow.
But we always we always see replanting in.
And end of quarter end of the year.
Speaker Change: Decisions to push things out or pull things in based on our customers' supply chain activity in their desired inventory positions, but we haven't seen anything that signals to us.
Speaker Change: The big step change in rate across the board across the customers nothing nothing consistent like that.
Okay.
Speaker Change: Last one.
Speaker Change: In the past you guys have provided past dues or some sort of framework to think about those do you have an updated figure for that.
Speaker Change: I don't I don't because I don't think it was really.
Speaker Change: Helpful to anyone because those past dues werent going to flush through the system in any.
Speaker Change: Lumpy kind of way just because right now what it is is our capacity really limits our ability to ship at a certain rate to each customer based on the product line.
Speaker Change: So and we are also seeing some of those past dues evaporate do too.
Speaker Change: Folks over ordering when they when they don't have confidence in a supplier and a supply chain. They tend to put more orders in the system to try and get more priority and we've seen some of those past dues evaporate. So we're not sure that that is really is helpful.
Speaker Change: Characterization of our ongoing businesses. It maybe once was early in the supply chain crisis.
Speaker Change: I appreciate it thank you very much youre welcome.
Your next question comes from the line of Michael <unk> from <unk> Securities. Please state your question.
Michael: Hey, good afternoon, guys real nice results.
Michael: Afternoon, Mike Thanks, Michael.
Michael: Just back to the industrial margins I mean, I guess for the remainder of the year could you help us out with the cadence I guess you get some on highway strength here in the second quarter, but then that will fall off in.
Speaker Change: Presumably you'll have down margins year on year, just I mean I guess.
Speaker Change: Maybe a little bit surprising with all the good stuff you've got going on from operational excellence pricing is there any additional drag in those industrial margins or is it just really carrying the overhead.
Speaker Change: Got it as you guys said not assuming any any on highway production in second half.
Well, if you remember kind of I just want to take you all the way back to when industrial margins were single digits in sort of mid single digits.
Speaker Change: At times.
With low on highway.
Speaker Change: Volume.
Speaker Change: And the fact that we're signaling margins that are in the low to mid teens here.
Speaker Change: <unk> represents quite a bit of goodness from both price and operational excellence in the other parts of the business. So I don't I don't feel like it's out of line, especially when you look at where we've been.
Speaker Change: It's easy to sort of say Oh, we did 18 and now we do of 'twenty how come it he is going to go back to 14 or 15.
Speaker Change: Because we've made a lot of progress from where we've been but it's just not the kind of progress that supports 20% margin on an ongoing basis does that makes sense.
Speaker Change: Yes, and I guess I'm just look at the run rate for the rest of the year being just below 13%.
Speaker Change: And then you'll do that'll take you to the midpoint of your guidance I'm looking at a 13% margin quarter.
Speaker Change: Steffan.
Speaker Change: It's still well above that high single digit, but obviously a step down.
Steffan: Yes, we just if you take on highway down to really not contributing let's say because in past times, we've seen an io it'd be negative when volumes really really low, but if you take it down to not contributing to sort of a breakeven than you might believe the numbers that youre seeing.
Speaker Change: Okay, Okay, no that makes sense.
Just shifting gears can you give us any more color on that 45% growth in defense aftermarket and anything I think I heard you call out vehicles, but anything else and how to maybe think about the trajectory going forward there I know.
In the slides you kind of pointed to I think supply chain and some other items.
Speaker Change: Yeah. So it really is an execution story, we've had a lot of demand and we've disappointed.
Speaker Change: At customers for quite a long time by very long turn times, and our defense repair and overhaul.
Speaker Change: Portfolio.
Speaker Change: Really good news good news that our execution has improved substantially and we've got flow going there.
Speaker Change: And we're planning repair and overhaul just like we planned OEM production with a rigorous process now.
Speaker Change: And we've got good focus on it.
Speaker Change: The even better news is that the growth is across literally all of the programs that we're involved in so theres no one program outlier to.
Speaker Change: To lean on or be concerned about.
And so as we continue to to put in operational excellence focus on defense repair and overhaul I believe that's a good growth lever for us.
Speaker Change: Our margin improvement lever for us for that part of the business.
Speaker Change: We.
Speaker Change: I talked about our value stream.
Speaker Change: Transformation efforts and that defense repair and overhaul value stream is on the list for 2024 to further.
Speaker Change: Enhance the performance there and serve those very important customers better.
Speaker Change: Got it helpful. Thanks, guys.
Speaker Change: Beth.
Speaker Change: Your next question comes from the line of Sheila <unk> from Jefferies. Please state your question.
Speaker Change: Sheila <unk>. Please state your question.
Sorry about that chip I wanted to follow up on.
The third remark Samsung.
Sheila: In your script, you mentioned you went to zero and last week.
We really focus on the future fuel nozzle and how it might come from.
Sheila: Better than expected I was wondering if you could just.
Sheila: Comment on.
Sheila: What that means businessman on personal content.
Sheila: Earl.
Earl: Yeah, So our assumption.
Earl: Working with the engine OEM on this was that the early shop business would be more like.
Clean check and repair activity, which is fairly low content for us in sort of supporting a quick turn philosophy.
Earl: But.
Earl: There is some indication that perhaps the build standard might want to focus on ensuring our longer next run of the engine in which case, we might see more.
Earl: More scope and more overhaul type procedures to ensure a longer second run, but a lot of that is going to be airlines specific and customer specific and what they want for our work scope. We're just trying to make sure. We stay ahead of that demand and if that's the direction. They want to go with their strategy that we are ready to support it.
Got it thank you.
Speaker Change: Youre welcome.
Speaker Change: Your next question comes from the line of Louis Raffetto from Wolfe Research. Please state your question.
Louis Raffetto: Alright, thanks for the follow ups. So chip I. Appreciate you Bill all of the sort of the openness on chat low natural gas given where things have been sort of in the past maybe just to sort of put a finer point on this you said the full guidance increases from China gas Youre talking 40% margins on that business, if we assume there's $50 million of sales.
<unk>.
Louis Raffetto: I mean, it looks like the margins industrial in the back half of the year kind of stepped down to low double digits is that kind of what you were just referring to.
Chip Blankenship: Yes, that's what we're discussing yes, okay, just just one.
Speaker Change: Thank you Yeah, I know I know.
There are a lot of moving parts here I appreciate your your inquisitiveness.
Speaker Change: Thank you.
Mr. Blankenship there are no further questions at this time I will now turn the conference back to you.
Mr. Blankenship: Okay. Thank you all for joining us have a great day.
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