Q2 2024 Woodward Inc Earnings Call

Operator: Ladies and gentlemen, thank you for standing by. Welcome to the Woodward Incorporated second quarter fiscal year 2024 earnings call. At this time, I would like to inform you that this call is being recorded for rebroadcast and that all participants are in a listen-only mode. Following the presentation, you are invited to participate in a question and answer session. Joining us today from the company are Chip Blankenship, Chairman and Chief Executive Officer, Bill Lacey, Chief Financial Officer, and Dan Provaznik, Director of Investor Relations. I would now like to turn the call over to Dan Provaznik.

Ladies and gentlemen, thank you for standing by.

Welcome to the Woodward incorporated second quarter fiscal year, 'twenty 'twenty four earnings call.

At this time I would like to inform you that this call is being recorded for rebroadcast and that all participants are in a listen only mode.

Following the presentation you are invited to participate in a question and answer session.

Joining us today from the company are chip Blankenship, Chairman and Chief Executive Officer, Bill Lacey, Chief Financial Officer, and Dan <unk> Director of Investor Relations I would now like to turn the call over to Dan <unk>.

Daniel Provaznik: Thank you, Operator. We'd like to welcome all of you to Woodward's second quarter fiscal year 2024 earnings report. 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. At the end of the presentation, we will take questions.

Thank you operator wed like to welcome all of you to Woodward's second 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 at.

Dan: At the end of the presentation, we will take questions.

Daniel Provaznik: For those who have not seen today's earnings release, you can find it on our website at woodward.com. We have again included some presentation materials to go along with today's call that are also accessible on our website. An audio replay of this call will be available by phone or on our website through May 13th, 2025. 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.

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 on our website through may 13 2024.

Dan: 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.

Daniel Provaznik: I would like to refer to and highlight our cautionary statement as shown on slide 16. As always, elements of this presentation are forward-looking or based on current outlook and assumptions for the global economy and our businesses more specifically. Those elements can and do frequently change. Therefore, our forward-looking statements are subject to a number of risks and uncertainties surrounding those elements. Including the risks we identify in our filings with the FDA. These statements are made as of today, and we do not intend to update them except as required by law.

Dan: I would like to refer to and highlight our cautionary statement as shown on slide two.

Dan: As always elements of this presentation are forward looking for based on current outlook and assumptions for the global economy, and our businesses more specifically those.

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.

Dan: Alluding the risks we identify in our filings with the SEC.

Dan: These statements are made as of today, and we do not intend to update them, except as required by law.

Daniel Provaznik: In addition, Woodward is providing certain non-U.S. GAAP financial measures. We direct your attention to the reconciliations of non-U.S. GAAP financial measures, which are included in today's slide presentation and our earnings release and related schedules. We believe this additional financial information will help in understanding our results. Now, I will turn the call over to... Thanks, Dan.

Dan: In addition, Woodward is providing certain non us GAAP financial measures, we direct your attention to the reconciliations of non U S. GAAP financial measures, which are included in today's slide presentation, and our earnings release and related schedules.

Dan: We believe this additional financial information will help in understanding our results.

Dan: Now I will turn the call over to chip.

Chip: Thanks, Dan.

Charles P. Blankenship: Today, prior to my commentary on our company's financial performance, I want to start with, say, which is how we normally begin our operating meeting. In our industry, we must wake up every day thinking about safety and how to sharpen our safety culture. While Woodward has a strong, even world-class safety record, there's always room to improve. As I've shared previously, we prioritize our work in the order of safety, quality, delivery, and cost. Delivery and cost are incredibly important, but we stop our work if there is an unsafe condition, and it is not acceptable to pass along a defect to meet a product delivery goal.

Chip: Today prior to my commentary on our company's financial performance I want to start with safety, which is how we normally begin our operating meetings.

Chip: Our industry, we must wake up everyday thinking about safety and how to sharpen our safety culture.

Chip: Well Woodward has a strong.

Chip: <unk> World Class safety record Theres always room to improve.

Chip: As I've shared previously we.

Chip: We prioritize our work in the order of safety quality delivery and cost.

Delivery and cost are incredibly important but we stop our work if there is an unsafe condition.

Chip: And it is not acceptable to pass along a defect to meet a product delivery goal.

Charles P. Blankenship: This disciplined order of battle is ingrained in our operational culture. At the same time, as we aspire to zero safety incidents due to the existence of layers of protection and Zero Quality Escapes due to a thorough understanding of built-in quality at the source, we know there are opportunities to improve. One way we are enhancing the safety culture at Woodward is through the rollout of human and organizational performance, also known as Hobbs.

Chip: This disciplined order of Battle is ingrained in our operational culture.

Chip: At the same time as we aspire to zero safety incidents due to the existence of layers of protection.

Chip: <unk> zero quality escapes due to a thorough understanding of built in quality at the source. We know there are opportunities to improve.

Chip: One way, we are enhancing the safety culture at Woodward is through the rollout of human and organizational performance.

Chip: Also known as hot and.

Charles P. Blankenship: An approach that builds an engaged, proactive workforce focused on preventing errors and providing for fail-safe outcomes. Key tenets of HOP are that the absence of a significant event and low injury rates do not mean a company has a robust safety program.

Chip: An approach that builds an engaged proactive workforce focused on preventing errors and providing for fail safe outcomes.

Key tenets of harp or that the absence of a significant event and low energy rates do not mean, a company has a robust safety program.

Charles P. Blankenship: In my prior experience leading HOP implementations and seeing them in action, I know it's a game-changing system. As a simple example of HOP in action, a few years ago, I visited an aluminum rolling mill facility with a mature HOP system in place and was told that my visit was the high-risk task of the day for the site. Not because I am inherently dangerous, I hope, but because my presence was a distraction and represented a significant interruption to the normal work pattern.

Chip: In my prior experience, leading hop implementations and seeing them in action I know, it's a game changing system.

Chip: As a simple example of hop in action a few years ago I visited an aluminum rolling mill facility with a mature hop system in place and was told that my visit was the high risk task of the day for this site.

Chip: Not because I am inherently dangerous I hope, but because my presence was a distraction and represented a significant interruption to the normal work patterns.

Charles P. Blankenship: It's partly this keen awareness of human interaction with the environment that makes this system so effective and why we've chosen to implement it at Woodward. Last week, during a management and board visit to our Glatten facility in Germany, I asked the value stream leader in the pump fuel assembly area what the high-risk task of the day was. Without leading the witness, he said this to her.

Chip: It's partly this keen awareness of human interaction with the environment that makes this system, so effective and why we've chosen to implement did at Woodward.

Last week during our management and board visit to our Glutton facility in Germany, I ask the value stream leader in the pump fuel Assembly area with the high risk task of the day was without leading the witness he said this tour.

Charles P. Blankenship: I was pleased with our progress. Following a successful launch of HOP at our RockCut plant last year, we're making progress across our other sites and have accelerated certain aspects of the system to all plants this year, including fatality and serious injury prevention assessments and gap closure projects. The Fatality and Serious Injury Approach, FSI for short, focuses on key risks inherent to manufacturing, assembly, and test operations.

Chip: I was pleased with our progress.

Following a successful launch of half of our rock cut plant last year, we're making progress across our other sites and have accelerated certain aspects of the system to all plants this year, including fatality in serious injury prevention assessments and gap closure projects.

Chip: The fatality in serious injury approach MSI for short focuses on key risks inherent to manufacturing Assembly and test operations.

Charles P. Blankenship: In pursuit of excellence, Woodward has aggressive targets to reduce quality escapes to customers. Our commitment to quality is essential to support OEMs and their customers' own goals for safe and reliable operation. As an error reduction methodology, HOP provides tools to help members reduce errors that could impact delivered quality. This is not just a quality function responsibility. It's everyone's job.

In pursuit of excellence Woodward has aggressive targets to reduce quality escapes to customers our commitment to quality is essential to support Oems and their customers own goals for safe and reliable operation.

Chip: As an error reduction methodology hop.

Chip: It provides tools to help members reduce errors that could impact delivered quality.

Chip: This is not just a quality function responsibility, it's everyone's job.

Charles P. Blankenship: We have conducted quality stand-downs to support members and to emphasize our dedication to getting it right. Additionally, we have embarked upon enhanced, rigorous training in areas such as quality management systems, metrology, problem-solving, and HOPs. I'm pleased to see how members embrace these methodologies in their daily work. We want to continue building a culture where they feel empowered to raise issues and help resolve them.

Chip: We have conducted quality stand downs to support members and to emphasize our dedication to getting it right.

Chip: Additionally, we have embarked upon enhance rigorous training in areas such as quality management systems metrology problem solving and hub.

Chip: I am pleased to see how members embrace these methodologies in their daily work.

Chip: And we want to continue building, a culture, where they feel empowered to raise issues and help resolve them.

Charles P. Blankenship: Next, I'd like to provide a brief update on our strategic plan. We recently performed a deep dive into the R&D and CapEx investments necessary to meet near-term financial commitments. To prepare for the next single-aisle aircraft program and prepare for our critical role in the energy transition, my leadership team and I spent time studying innovation roadmaps with our aerospace and industrial businesses and technology teams. And with our nine Woodward Innovation Network teams who work on breakthrough technologies, in some cases leveraging innovation breakthroughs across our two business cycles.

Chip: Next I'd like to provide a brief update on strategic planning.

Chip: We recently performed a deep dive into the R&D and capex investments necessary to meet near term financial commitments prepare.

Chip: Prepare for the next single aisle aircraft program and.

Chip: And prepare for our critical role in the energy transition.

Chip: My leadership team and I spent time studying innovation roadmaps with our aerospace and industrial businesses and technology teams.

Chip: And with our nine Woodward innovation network teams, who work on breakthrough technologies in some cases, leveraging innovation breakthroughs across our two business segments.

Charles P. Blankenship: I'm pleased with our progress on optimizing both the focus and the breadth of our R&D portfolio to ensure Woodward's competitiveness and unique value proposition for our customers' future products. On the CapEx front, we continue to explore additional automation investment opportunities with strong calculated returns within the planning horizon. Moving forward in these calls, I'll continue to touch on topics like these related to our interconnected value drivers of growth, operational excellence, and innovation, and I hope you'll find them interesting. Now, turning to our results.

Chip: I am pleased with our progress on optimizing both the focus and the breadth of our R&D portfolio to ensure woodward's competitiveness and unique value proposition to our customers future products.

On the Capex front, we continue to explore additional automation investment opportunities with strong calculated returns inside the planning horizon.

Moving forward in these calls I'll continue to touch on topics like these related to our interconnected value drivers of growth operational excellence and innovation and I hope youll find them interesting.

Turning to our results, we delivered significant sales growth and margin expansion year over year across both our aerospace and industrial businesses.

Charles P. Blankenship: We delivered significant sales growth and margin expansion year over year across both our aerospace and industrial business. The compounding impacts from our focused efforts on operational excellence are enabling us to capitalize on continued strong end-market demand. While there is still more work to do, I am proud of our team's efforts and dedication.

Chip: The compounding impacts from our focused efforts on operational excellence are enabling us to capitalize on continued strong end market demand.

Chip: While there is still more work to do I am proud of our team's efforts and dedication.

Charles P. Blankenship: Moving to our markets, in aerospace, we continue to see strong commercial, airline, domestic, and international passenger traffic, resulting in high aircraft utilization. Transatlantic traffic remains strong.

Chip: Moving to our markets and aerospace we continue to see strong commercial airline domestic and international passenger traffic, resulting in high aircraft utilization.

Chip: Transatlantic traffic remains strong.

Charles P. Blankenship: Further increases in aircraft utilization are expected as international passenger traffic in Asia Pacific continues to recover. While the overall macro environment remains strong, we are monitoring OEM build rate dynamics and modeling potential impacts on our business so we can actively manage these risks. In defense, the recent escalation in geopolitical tensions is driving increased demand as U.S. and foreign militaries look to replenish inventory. The amount of government R&D proposals and procurement dollars available are rising, and suppliers are ramping up to meet this demand. Unknown Speaker in industrial.

Further increases in aircraft utilization are expected as international passenger traffic in Asia Pacific continues to recover.

Chip: While the overall macro environment remains strong we are monitoring OEM build rate dynamics and modeling potential impacts on our business. So we can actively manage these risks.

Chip: In defence recent escalation and geopolitical tensions is driving increased demand as U S and foreign militaries look to replenish inventories.

Chip: The amount of government R&D proposals and procurement dollars available are rising and suppliers are ramping up to meet this demand.

Chip: And industrial.

Unknown Speaker: Rising global power demand is driving increased investment in gas-fired power generation for both prime and backup power, which is attributed to global development primarily in Asia. Data Center Demand for Backup Power, which is primarily a diesel-fueled reciprocating engine. Transcripts provided by Transcription Outsourcing, LLC.

Chip: Rising global power demand is driving increased investment in gas fired power generation for both prime and backup power, which is attributed to global development primarily in Asia.

Chip: Data center demand for backup power, which is primarily diesel fueled reciprocating engines appears to be growing sharply and the outlook for capacity firming applications supporting renewable energy and grid stability remains optimistic.

Charles P. Blankenship: In transportation, the global marine market remains healthy, with elevated shipbuild rates driving OEM engine demand and high utilization rates fueling current and future aftermarket activity. Demand for alternative fuels across the marine industry continues to increase. Demand for natural gas heavy duty trucks in China has been strong. While the mix of heavy duty truck production in China has been trending towards natural gas engines, recent discussions with our customers indicate there may be a softening in demand this summer and potentially a return to stronger demand towards the fourth quarter of calendar 2024.

Chip: In transportation, the global Marine market remains healthy with elevated ship build rates driving OEM engine demand and high utilization rates fueling current and future aftermarket activity.

Chip: Demand for alternative fuels across the marine industry continues to increase.

Chip: Demand for natural gas heavy duty trucks in China has been strong.

Chip: While the mix of heavy duty truck production in China has been trending towards natural gas engines.

Chip: Recent discussions with our customers indicate that there may be a softening in demand this summer and potentially a return to the stronger demand towards the fourth quarter of calendar 2024.

Charles P. Blankenship: We continue to monitor the economic environment and the durability of this demand and remain in close contact with our customers in China. Regarding oil and gas markets, uncertainty in the United States for LNG exports continues as application reviews remain on pause.

Chip: We continue to monitor the economic environment and the durability of this demand and remain in close contact with our customers in China.

Chip: Regarding oil and gas markets.

Chip: Certainty in the United States for LNG exports continues as application reviews remain on pause, although global demand outside of the United States remains strong.

Charles P. Blankenship: Although global demand outside of the United States remains strong, positive sentiment in the space is driven by strong performance and outlook in domestic shale oil as well as refining and petrochemical activities in China and India. In summary, ongoing market trends indicate strong and sustained demand. Our second quarter performance reflects the hard work and dedication of Woodward employees and the progress we've made to strengthen our value proposition and fulfill our purpose. We believe we are well positioned to capitalize on current and future opportunities, and we remain focused on driving profitable growth, operational excellence, and Innovation to Enhance Shareholder Value. I'll now turn it over to Bill to discuss our financial results. Thank you, Chip.

Chip: Positive sentiment in the space is driven by strong performance and outlook in domestic shale oil as well as refining and petrochemical activities in China and India.

Chip: In summary, ongoing market trends indicate strong and sustained demand.

Chip: Our second quarter performance reflects the hard work and dedication of <unk> members and the progress we've made to strengthen our value proposition and fulfill our purpose.

We believe we are well positioned to capitalize on current and future opportunities and we remain focused on driving profitable growth operational excellence and innovation to enhance shareholder value.

Chip: Now I'll turn it over to bill to share our financial results.

Bill: Thank you chip and good afternoon to everyone. As a reminder, all comparisons are year over year, unless otherwise stated net sales for the second quarter of fiscal 2024 were a record $835 million an increase of 16%.

William F. Lacey: Thank you, Chip, and good afternoon to everyone. As a reminder, all comparisons are year-over-year unless otherwise stated. Net sales for the second quarter of fiscal 2024 were a record $835 million, an increase of 16%. Earnings per share and adjusted earnings per share for the second quarter of fiscal 2024 were $1.56 and $1.62, respectively, compared to earnings per share and adjusted earnings per share of 58 cents and a dollar. One

Bill: Earnings per share and adjusted earnings per share for the second quarter of fiscal 2024 were $1 56, and $1 62, respectively compared to earnings per share and adjusted earnings per share of 58.

And a dollar.

Bill: <unk> respectively.

Bill: Aerospace segment sales for the second quarter of fiscal 2024 were $498 million compared to $437 million an increase of 14%.

Bill: Commercial OEM and aftermarket sales were up 15% and 18% respectively, driven by increased aircraft utilization as a result of continued growth in passenger traffic and price realization.

William F. Lacey: Respect. Aerospace segment sales for the second quarter of fiscal 2024 were $498 million compared to $437 million, an increase of 14%. Commercial OEM and aftermarket sales were up 15% and 18%, respectively, driven by increased aircraft utilization as a result of continued growth in passenger traffic and price realization.

Bill: Defense OEM sales were up 4% and defense aftermarket sales were up 17%.

Bill: Aerospace segment earnings for the second quarter of 2024 were $98 million or 19, 8% of segment sales compared to $73 million or 16, 8% of segment sales. The increase in segment earnings was primarily a result of higher volume.

Bill: And net price realization.

Bill: Turning to industrial.

William F. Lacey: Defense OEM sales were up 4%, and defense aftermarket sales were up 17%. Aerospace segment earnings for the second quarter of 2024 were $98 million, or 19.8% of segment sales, compared to $73 million, or 16.8% of segment sales. The increase in segment earnings was primarily a result of higher volume and net price realization. Turning to industrial,

Bill: Industrial segment sales for the second quarter of fiscal 2024 were a record $338 million compared.

Bill: Compared to $281 million, an increase of 20%.

Bill: We saw growth in transportation up 46% empowered generation increased 14%.

Bill: These increases were partially offset by a 16% decrease in oil and gas sequentially oil and gas sales were up 7%.

William F. Lacey: Industrial and segment sales for the second quarter of fiscal 2024 were a record $338 million compared to $281 million, an increase of 20%. We saw growth in transportation, up 46%. Empowered generation increased 14%.

Bill: The increase in transportation sales was primarily led by on highway natural gas trucks in China, which totaled approximately $65 million in the second quarter, driven by significantly higher demand compared to the prior year quarter.

Although we saw a significant increase year over year, China on highway sales were lower sequentially as expected give.

Bill: Given the market dynamics chip mentioned in Q3, we don't expect the same run rate that we've seen over the past several quarters.

William F. Lacey: These increases were partially offset by a 16% decrease in oil and gas sales. However, sequentially, oil and gas sales were up 17%. The increase in transportation sales was primarily led by on-highway natural gas trucks in China, which totaled approximately $65 million in the second quarter, driven by significantly higher demand compared to the prior year quarter. Although we saw a significant increase year over year, Chinese on-highway truck sales were lower sequentially, as expected. Given the market dynamics Chip mentioned, in Q3, we don't expect the same run rate that we've seen over the past several quarters.

Bill: For the third quarter, we are expecting a range of $35 million to $40 million of China on highway sales.

Bill: As we move into the second half of our fiscal year, we expect industrial sales growth rates to moderate given the high comps in the back half of fiscal 2023.

Bill: Industrial segment earnings for the second quarter of 2024 were $65 million or 19, 3% of segment sales compared to $38 million or 13, 4% of segment sales. The increase in industrial earnings was a result of higher volume.

William F. Lacey: For the third quarter, we are expecting a range of $35 to $40 million in China for highway sales. As we move into the second half of our fiscal year, we expect industrial sales growth rates to moderate given the high comps in the back half of fiscal 2023. Industrial segment earnings for the second quarter of 2024 were $65 million, or 19.3% of segment sales, compared to $38 million, or 13.4% of segment sales.

Bill: Largely due to the heightened demand for our China on highway business net price realization and operational improvements, including increased output and efficiency gains.

Bill: Excluding the impact of the China on highway natural gas business Industrial segment margins were in line with the first quarter at approximately 14%.

Bill: Non segment expenses were $33 million for the second quarter of 2024 compared to $58 million.

Adjusted non segment expenses for the second quarter of 2024 were $29 million compared to $23 million.

Bill: At the Woodward level.

William F. Lacey: The increase in industrial earnings was a result of higher volume, largely due to the heightened demand for our China on highway business, net price realization, and operational improvements, including increased output and efficiency gains. Excluding the impact of the China on Highway natural gas truck business, industrial segment margins were in line with the first quarter at approximately 14%.

Bill: R&D for the second quarter of 2024 was $36 million or four 4% of sales.

Compared to $38 million or five 3% of sales.

Bill: SG&A for the second quarter of 2024 was $81 million or nine 8% of sales compared to $76 million or 10, 5% of sales via.

William F. Lacey: Non-segment expenses were $33 million for the second quarter of 2024 compared to $58 million. Adjusted non-segment expenses for the second quarter of 2024 were $29 million compared to $23 million, at the Woodward level. R&D for the second quarter of 2024 was $36 million, or 4.4% of sales, compared to $38 million, or 5.3% of sales. SG&A for the second quarter of 2024 was $81 million, or 9.8% of sales, compared to $76 million, or 10.5% of sales. The effective tax rate was 19.1% for the second quarter of 2024 compared to 11.8%. The adjusted effective tax rate was 19.3% for the second quarter of 2024 compared to 17.8%.

Bill: The effective tax rate was 19, 1% for the second quarter of 2024 compared to 11, 8%. The adjusted effective tax rate was 19, 3% for the second quarter of 2024 compared to 17, 8%.

Bill: Looking at cash flows net cash provided by operating activities for the first half of fiscal 2024 was $144 million compared to $40 million.

Bill: Capital expenditures were $56 million for the first half of fiscal 2024 compared to $44 million.

Free cash flow was $88 million for their first half of fiscal 2024 compared to negative $4 million.

Bill: Adjusted free cash flow for the first half of fiscal 2024 was $90 million.

Compared to negative $1 million.

Bill: The increase in free cash flow and adjusted free cash flow was primarily due to increased earnings.

Bill: Lee offset by higher capital expenditures.

Bill: Leverage was one two times EBITDA at the end of the second quarter compared to two two times EBITDA.

Bill: $8 million was returned to stockholders in the form of dividends in the first half of fiscal 2024.

William F. Lacey: Looking at cash flow, net cash provided by operating activities for the first half of fiscal 2024 was $144 million compared to $40 million. Capital expenditures were $56 million for the first half of fiscal 2024 compared to $44 million. Free cash flow was $88 million for their first half of fiscal 2024, compared to negative $4 million. Adjusted free cash flow for the first half of fiscal 2024 was $90 million compared to negative $1 million.

Bill: Lastly, turning to our fiscal 2024 guidance based on visibility into the third quarter demand for the China on highway natural gas truck business and anticipated improved operational performance in the second half of fiscal 2024, we are raising certain aspects of our full year <unk>.

Bill: <unk>.

Bill: Total net sales for fiscal 2024 are now expected to be between three to five and $335 billion.

Bill: For fiscal 2020 for aerospace sales growth is now expected to be 12% to 14% in segment earnings are still expected to be 18% to 19% of sales.

William F. Lacey: The increase in free cash flow and adjusted free cash flow was primarily due to increased earnings partially offset by higher capital expenditures. Leverage was 1.2 times EBITDA at the end of the second quarter compared to 2.2 times EBITDA.

Bill: For fiscal 2024, we now expect industrial sales growth to be 13% to 15%.

Bill: And segment earnings to be 17% to 18% of segment sales.

Bill: At the Woodward level, the adjusted effective tax rate is now expected to be approximately 20%.

William F. Lacey: $28 million was returned to stockholders in the form of dividends in the first half of fiscal 2020. Now, turning to our fiscal 2024 guidance. Based on visibility into the third quarter demand for the China on-highway natural gas truck business and anticipated improved operational performance in the second half of fiscal 2024, we are raising certain aspects of our full-year guidance. Total net sales for fiscal 2024 are now expected to be between $3.25 and $3.35 billion.

Bill: We expect adjusted free cash flow to now be between 325 $375 million cap.

Bill: Capital expenditures are still expected to be approximately $100 million.

Adjusted earnings per share is now expected to be between $5 70.

$6 based on approximately 62 million fully diluted weighted average shares outstanding.

Speaker Change: This concludes our comments on the business and results for the second quarter 2024, operator, we are now ready to open the call to questions.

Speaker Change: Thank you.

Speaker Change: A question and answer session will begin at this time, if you are using a speakerphone. Please pick up the handset before pressing any numbers.

William F. Lacey: For fiscal 2024, aerospace sales growth is now expected to be 12% to 14%, and segment earnings are still expected to be 18% to 19% of sales. For fiscal 2024, we now expect industrial sales growth to be 13 to 15%, and segment earnings to be 17 to 18% of segment sales. At the Woodward level, the adjusted effective tax rate is now expected to be approximately 20%. We expect adjusted free cash flow to now be between $325 and $375 million.

So you have a question. Please press star one on your telephone keypad.

I would like to withdraw your question Press Star one a second time.

Your question will be taken in the order it is risky and please standby for your first question.

Speaker Change: And your first question comes from David Strauss with Barclays. Your line is open.

David Egon Strauss: Thanks, Good afternoon.

David Egon Strauss: Afternoon, David.

David Egon Strauss: Your increased guidance on the on the aerospace side going from 10 to 14 now 12 routine is that what is that attributable to is it OE aftermarket and.

David Egon Strauss: Could you chip could you address where you currently sit in terms of Max rates in match rates and 787 rates.

William F. Lacey: Capital expenditures are still expected to be approximately $100 million. Adjusted earnings per share is now expected to be between $5.70 and $6.00 based on approximately 62 million fully diluted weighted average shares outstanding. Operator, we are now ready to open the call to questions.

David Strauss: Yes.

Speaker Change: Yes, so taking the second one first because I think it's there.

Speaker Change: But really a relevant question that I think we might hear a couple of different ways today.

Speaker Change: As I've said before we don't really.

Speaker Change: Clark our business to exactly the build rate that we're in very close connection with all of our customers that.

Speaker Change: Lead us to the Max so whether it's an engine supplier or.

Other integrator.

Speaker Change: We.

Operator: 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. Should you have a question, please press star 1 on your telephone keypad. If you would like to withdraw your question, press star 1 a second time. Your question will be taken in the order it is received, and please stand by for your first question. And your first question comes from David Strauss with Barclays. Your line is open.

Speaker Change: <unk> just responding to the exact signal that we get from those sources and.

Speaker Change: We were.

Speaker Change: In close contact with them and having discussions about the necessity for at some point.

Speaker Change: The amount of material flow to probably reduce but as of now we haven't seen any strong signals that reduced the rates within the next quarter, we think that our fourth quarter and early 'twenty five is when we would see.

David Egon Strauss: Thanks. Good afternoon. Afternoon, David. Your increased guidance on the aerospace side, going from 10 to 14, now 12 to 14, what is that attributable to? Is it OE, aftermarket, and, Could you, Chip, could you address where you currently sit in terms of max rates and 787 rates?

Speaker Change: Adjustments potentially and you saw Boeing said theyre working sort of supplier by supplier to make sure that they've got clear to build and visibility to where they want to go.

Speaker Change: So we think there is potential.

Speaker Change: Risk to having lower.

Charles P. Blankenship: Yeah, so I'm taking the second one first because I think it's, you know, a really relevant question that I think we might hear a couple different ways today. As I've said before, we don't really [inaudible] are just responding to the exact signal that we get from those sources, and we were in close contact with them and had discussions about the necessity for, at some point, the amount of material flow to probably reduce, but as of now, you know, we haven't seen any strong signals that reduce the rates within the next quarter.

Speaker Change: Max related volume in the fourth quarter, but that's built into the guidance that bill shared.

Speaker Change: Okay.

Speaker Change: And the change in your guidance and then I know, it's only slight change, but what type of <unk> two and then a quick follow up on leap.

Speaker Change: We're starting to see shop visits on leap are you seeing any aftermarket activity yet on your lead business. Thanks very much.

Speaker Change: And maybe for chip hits, we've just on the tightening is just based on what we've seen in the first half.

Charles P. Blankenship: We think that our fourth quarter and early 25 is when we would see adjustments potentially, and you saw Boeing said they're working sort of supplier by supplier to make sure that they've got clear to build and visibility to where they want to go. So, you know, we think there's potential risk to having lower max-related volume in the fourth quarter, but that's built into the guidance that Bill shared.

Speaker Change: For Arrow.

And then tightening up as we have a half half a year left so we just see tighter visibility of their aerospace range.

Speaker Change: OEM is continues to perform well aftermarket is also holding in so so thats really David why were tightening it up to 12 to 14, I'd say, just a little more confidence that the.

David Egon Strauss: Okay, and the change in your guidance, and I know it's only a slight change, but what is your goal to and then quick follow up on on leap? We're starting to see shop visits on leap. Are you seeing any aftermarket activity yet on your lead business? Thanks very much.

Speaker Change: Low end of the range is not going to be what we're going to see you're going to see the middle to up and Thats why we tightened the pit up to 12 months to 14 on the on the range.

Speaker Change: As far as leaf, yes, we are seeing some material flow FM use some.

Speaker Change: Fuel pumps things of that nature from the.

William F. Lacey: And maybe for Chip Hitzley, just on the tightening, it's just based on what we've seen in the first half for Aero, and then tightening up as we have a half a year left, so we just see tighter visibility of that aerospace range. OEM continues to perform well. The aftermarket is also holding in. So that's really, David, why we're tightening it up to 12 to 14. Yeah, I'd say just a little more confidence that the... Low end of the range is not going to be what we're going to see. We're going to see the middle to up, and that's why we tighten.

The leap.

Speaker Change: Engine not a lot obviously a lot of those early visits are more check and repair and specific item related.

Speaker Change: But every once in a while we do see a removals that we've had the opportunity to test our.

Speaker Change: Arnaud.

Speaker Change: <unk> lay out and capability that we've laid in place.

Speaker Change: Thanks very much.

Speaker Change: Thank you.

Speaker Change: We will take our next question from Scott <unk> with Deutsche Bank. Your line is open.

Scott: Hey, good afternoon.

Scott: Afternoon, Scott Thanks, Scott.

Hey, Bill can you say, what the price realizations were this quarter and how that splits between the segments.

Unknown Speaker: Get up to 12. Unknown Speaker.

Charles P. Blankenship: As far as LEAP is concerned, yes, we are seeing some material flow, FMUs, some fuel pumps, things of that nature from the LEAP engine. Not a lot, obviously.

Scott: Yes.

Bill: Yes, Scott we continue to see really great.

Bill: Price activity to help us to offset our.

Bill: Inflation that we're seeing it'll be around eight just below 8% price realization at the company level and I'll, just say that each segment.

Charles P. Blankenship: A lot of those early visits are more check and repair and specific item related. But every once in a while, we do see a removal that we've had the opportunity to test our... R&O. Shop layout and capability that we've laid in place. Thanks very much.

Bill: Contributed their fair share to that overall.

Bill: Outcome.

Scott: Okay. Thank you and then chip it looks like you ended the quarter with about $317 million of cash on the balance sheet and.

Chip: And you didn't buyback any stock this quarter.

Scott Deuschle: And we will take our next question from Scott Deuschle with Deutsche Bank. Your line is open.

Speaker Change: I guess the question is does this reflect the change in your capital allocation priorities or are you still planning on buying back more stock in the back half of the year.

Scott Deuschle: Hey, good afternoon. Afternoon, Scott. Thank you, Scott. Hey, Bill, can you say what the price realizations were this quarter and how that splits between the segments? Yeah.

Chip: Yes, it does not reflect a change actually led to timing and other decisions.

Chip: And the mix there for.

Chip: For the second half, though I will say that we are raising the priority of the buyback in our capital allocation strategy.

William F. Lacey: Yeah, you know, Scott, we continue to see really great price activity to help us offset our inflation that we're seeing. It'll be around eight, just below 8% price utilization at the company level. And I'll just say that each segment contributed their fair share to that overall outcome. Okay, thank you. Then Chip, it looks like you ended the quarter with a

Chip: Definitely want to offset dilution and make some progress on that and return some cash to the shareholders.

Speaker Change: Okay. Thank you and our last question Chip is there anything you can say about your content on this power J dam variant that Boeing is working on.

Speaker Change: Not at this time.

Speaker Change: Okay. Thank you.

Sure.

Speaker Change: We will take our next question from Robert Spingarn with Melius Research. Your line is open.

Scott Deuschle: Yeah, it does not reflect the change actually; a lot of timing and other decisions, you know, in the mix there. For the second half, though, I will say that we are raising the priority of the buyback in our capital allocation strategy. Definitely want to offset dilution and make some progress on that and return Cash to the Sheriff. Okay, thank you. And last question, Chip, is there anything you can say about your content on this power JDAM variant that Boeing is working on? Not at this time. Okay.

Robert Michael Spingarn: Hey, good afternoon.

Robert Michael Spingarn: Afternoon, Rob Hey, Rob.

Robert Michael Spingarn: Sure.

So so chip.

Robert Michael Spingarn: Often when a new CEO comes in and new CFO, you implement a lean program or some other kind of operating system. It can take a while to bear fruit <unk> had very good results. So.

Speaker Change: So far and so I wanted to ask you.

How thats, taking place and then maybe as a follow up in other words, why youre getting faster traction and some others do but also bill is there any way for you to parse out how much of the improvement in performance in margins as is.

Speaker Change: Leanne and execution as opposed to obviously price and volume.

Robert Michael Spingarn: And we will take our next question from Robert Spingarn with Mellius Research. Your line is open.

Robert Michael Spingarn: Hey, good afternoon.

Speaker Change: So I guess first question first.

Robert Michael Spingarn: Afternoon, Rob. Hey, Rob.

Speaker Change: Woodward has been on our lean journey for.

Robert Michael Spingarn: So, Chip, you know, often when a new CEO comes in, or a new CFO, you implement a lean program or some other kind of operating system, it can take a while to bear fruit. But you've had very good results. So far, and so I wanted to ask you, you know, how that's taking place. And then, maybe, as a follow-up, in other words, why you're getting faster traction than some others do. But also, Bill, is there any way for you to parse out how much of the improvement in performance in margins is due to lean and execution as opposed to, obviously, price and volume?

Close to eight years or so and it's taken different has had different chapters to it in terms of what the focus has been on so.

Speaker Change: When when I joined in and brought a few other folks along with me.

Speaker Change: We're we're building on that that foundation that was here so.

Speaker Change: A lot of the language was in place a lot of a lot of understanding.

I will just say that the challenge really hasnt bandwidth, what we started with from the season.

Speaker Change: <unk> in the company the challenge that we face with everybody else faces and how many new how many new people are on the team.

Speaker Change: So that's our challenge and our production facilities in our production system is getting.

Charles P. Blankenship: So I guess the first question first, you know, Woodward has been on a lean journey for close to eight years or so, and it's taken different paths, it's had different chapters to it in terms of what the focus has been on.

Speaker Change: The newer people acclimated to the newer newer frontline leaders acclimated and expectations said.

Speaker Change: It's just.

Speaker Change: Like you said it is a long process.

Charles P. Blankenship: So when I joined and brought a few other folks along with me, we were building on that foundation that was already there. So a lot of the language was in place, a lot of understanding. I'll just say that the challenge really hasn't been with what we started with from the seasoned, you know, veterans in the company. The challenge that we face is what everybody else faces. And it's how many new how many new people are on the team.

Speaker Change: We've been able to stabilize some of our supply chain, we've been able to stabilize and then grow output in a number of our our plants.

Speaker Change: We still have quite a bit of variation.

Between plants performance in terms of on time delivery and the productivity journey. So there's a lot more to do and there is a lot of upside over the next two to three years that we see based on really getting traction and moving to the more advanced levels of <unk>.

Charles P. Blankenship: So that's, that's our challenge in our production facilities in our production system is getting, you know, the newer people acclimated, the newer, newer frontline leaders acclimated, and expectations set. And, you know, it's just a, like you said, it is a long process. And we've been able to stabilize some of our supply chain; we've been able to stabilize and then grow output in a number of our plants. But we still have quite a bit of variation.

Speaker Change: Increasing inventory turns and really getting more productive.

Speaker Change: The lines.

Speaker Change: And the flow of our products.

Speaker Change: Yes.

Speaker Change: And Robert I think it's going to be hard for me to split that out.

Robert Michael Spingarn: For sure, though we have.

The margin expansion has benefited greatly from our focus on on price.

Robert Michael Spingarn: But also our operational excellence has allowed us to improve our output and we are getting margin expansion because of our ability to deliver on that in the volume and getting that levered through.

Charles P. Blankenship: Between plants' performance in terms of on-time delivery and the productivity journey, there's a lot more to do, and there's a lot of upside over the next two to three years that we see based on really getting traction and moving to the more advanced levels of increasing inventory turns and really getting more productive on the lines and in the flow of our product.

Robert Michael Spingarn: I think on on lean.

Robert Michael Spingarn: As chip mentioned we are in.

Robert Michael Spingarn: In the process and I think that Theres, a lot more opportunities for that in the in the coming years, but.

Robert Michael Spingarn: Great execution, and good price and volume flowing through has really contributed to our margin expansion.

William F. Lacey: Yeah, and Robert, I think it's going to be hard for me to split that out. For sure, though, we have the margin expansion has benefited greatly from our focus on price, but also, our operational excellence has allowed us to improve our output, and we are getting a margin expansion because of our ability to deliver on that in volume and get that levered through. I think on lean, as Chip mentioned, we're in the process, and I think that there will be a lot more opportunities for that in the coming years, but great execution and good price and volume flowing through has really contributed to our margin expansion.

Speaker Change: I know that people like to say lean is this never ending journey, but based on what you. Both just said is there a way I think.

Speaker Change: Chip you said two or three years.

Speaker Change: To get <unk>.

Speaker Change: All of this fairly mature as a way to characterize what inning, we are in with lean.

Speaker Change: Hi.

Chip: I think we are in the early innings, so it's timing.

Chip: <unk> two or three year.

Chip: We've got a lot of lot of things to work with in terms of <unk>.

Chip: Our ability to improve and get more out of our.

Chip: Our production system.

Speaker Change: Okay, and then just one more quick thing.

Speaker Change: <unk>.

Typically span about 6% of sales on R&D, and you're a bit below that lately to 4% or low fours.

Robert Michael Spingarn: I know that people like to say Lean is this never-ending journey, but based on what you both just said, is there a way, I think Chip, you said two or three years, you know, to get, you know, all of this fairly mature? Is there a way to characterize what inning we are in with Lean?

Speaker Change: <unk> term, what's the right the appropriate amount to spend and where are you focusing the R&D efforts. Thanks, so much.

Speaker Change: Sure.

Speaker Change: We know that these are long cycle businesses, we're in both the industrial and the aerospace and win.

Charles P. Blankenship: I think we're in the early innings, so it's, you know, ending two or three here. We've got a lot of things to work with in terms of our ability to improve and get more out of our production system.

Speaker Change: New products, new product opportunities come along for us to participate in whether it's the launch of a new industrial engine or industrial gas turbine or a new airplane.

Robert Michael Spingarn: Okay, and then just one more quick thing. Woodward's typically spent about 6% of sales on R&D, and you're a bit below that lately, 4% or low 4. In the long term, what's the right amount to spend and where are you focusing the R&D efforts?

Speaker Change: Our R&D expenditure goes up on one of those programs comes in because there's just so much involved in designing developing and testing and certifying those new products.

Speaker Change: Right now we don't have a lot of that activity going on we've got a few components here and there on missiles and space you've got a few.

Charles P. Blankenship: Thanks so much.

Speaker Change: No.

Charles P. Blankenship: Sure, you know, as you probably know, these are long-cycle businesses in both the industrial and the aerospace sectors, and when, you know, new products, new product opportunities come along for us to participate in, whether it's the launch of a new industrial engine or industrial gas turbine or a new airplane, our R&D expenditure goes up on one of those programs because there's just so much involved in designing, developing, testing, and certifying those new Right now, we don't have a lot of that activity going on.

Speaker Change: Peter X.

Speaker Change: New renewable fuel type of opportunities underway in industrial.

Speaker Change: And then we've got this really large zero E.

Speaker Change: Airbus.

Fuel cell demonstrators. So we've got a few of these more technology development.

Speaker Change: And smaller customer product.

Speaker Change: <unk> going on we don't have any really big platforms.

Platforms.

Speaker Change: Your way with our customers. So that's what the that's what's allowing some of the R&D to to be a little bit lower and quite frankly, our net engineering expenses are up so we've deployed engineers to help with the production and productivity and what we're trying to do with lean. So I think it's it's not as much about were investing less in our products.

Charles P. Blankenship: We've got a few components here and there on missiles in space. You've got a few, you know, P2X, new renewable fuel type of opportunities underway in industry, and then we've got this really large zero-E Airbus. Fuel Cell Demonstrators.

Speaker Change: <unk> future is just taking some different color of money and putting it in different places right now where the needs are.

Charles P. Blankenship: So we've got a few of these more technology development and smaller customer product development going on. We don't have any really big platforms underway with customers. So that's what's allowing some of the R&D to be a little bit lower. And quite frankly, our net engineering expenses are up. So we've deployed engineers to help with production and productivity and what we're trying to do with lean. So I think it's not as much about us investing less in our products, people, and future. It's just taking some different colors of money and putting them in different places right now where there are needs.

Speaker Change: Got it thank you.

Speaker Change: Sure.

Speaker Change: We will take our next question is from Gavin Parsons with UBS. Your line is open.

Gavin Eric Parsons: Thanks, Good afternoon.

Gavin Eric Parsons: Hey, good afternoon, Jim.

Gavin Eric Parsons: Guys on the industrial guidance revision can you parse out how much of that was China truck versus non China truck.

Speaker Change: Yes, I'll just say in general Gavin.

Speaker Change: It is as we talked about recognizing.

Speaker Change: The Chinese on highway third quarter volume.

Speaker Change: And and we did see.

Speaker Change: Based on our non <unk> performance in the first half that we are expecting that to to stay consistent throughout.

Robert Michael Spingarn: Got it. Thank you. Sure.

Gavin Eric Parsons: And we will take our next question from Gavin Parsons with UBS. Your line is open. Thanks. Good afternoon.

Speaker Change: In the combination of those two is what led to us increasing our industrial guide.

Gavin Eric Parsons: Guys, on the industrial guidance revision, can you parse out how much of that was China truck versus non-China truck?

Speaker Change: Okay, I think non OE, she might have had some mix or pull forward in the first quarter.

Speaker Change: Is that to your point is still going to be a sequentially stable margin in the back half.

William F. Lacey: Yeah, I'll just say in general, Gavin, as we talked about, recognizing that China on Highway third quarter volume. And we did see, based on our non-OH performance in the first half, that we are expecting that to stay consistent throughout. And the combination of those two is what led to us increasing our industrial gap.

Speaker Change: Yes, we believe that.

Speaker Change: That will be sequentially stable, yes, we're working with our customers that was what we said we saw in the future based on customer input, but that that pulled forward different mix first half for second half actually didn't materialize. So that's.

William F. Lacey: Okay, I think non-OH might have had some mix or pull forward in the first quarter; is that, to your point, still going to be a sequentially stable margin in the back half?

That's a piece of the.

Speaker Change: The change to the guide as well.

Speaker Change: Okay. That's helpful. And then maybe just in China on highway gone out to 2026, and the guide doesn't have much in there.

William F. Lacey: Yes, we believe that this will be sequentially stable.

Speaker Change: Is there a way to either expand the geographic base of that technology, or maybe expand that technology into different engine types or any way to think about dampening the revenue unpredictability.

William F. Lacey: Yeah, working with our customers, that was what we said we saw in the future based on customer input, but that pulled forward a different mix, first half for the second half, actually didn't materialize, so that's a piece of the..., of the change to the guide as well.

Speaker Change: We're really evaluating a lot of different ideas to dampen the revenue volatility gab.

Speaker Change: Gavin so.

Gavin Eric Parsons: And then maybe just in China on a highway going out to 2026, the guy doesn't have much in there. Is there a way to either, you know, expand the geographic base of that technology or maybe expand that technology into different engine types or any way to think about dampening the revenue unpredictability?

Gavin Eric Parsons: We're looking at different regions, we're looking at.

Gavin Eric Parsons: How much how much we want to invest how much do we want to have.

Gavin Eric Parsons: <unk> be a part of our portfolio from a net standpoint.

Gavin Eric Parsons: If we if we grow it it might be more volatile.

Gavin Eric Parsons: We are in the strategic planning phase looking at the next three years right now and that team is.

Gavin Eric Parsons: Actively bringing forth different scenarios are ways too.

Charles P. Blankenship: We're really evaluating a lot of different ideas to dampen the revenue volatility, Gavin. So we're looking at different regions. We're looking at, you know, how much we want to invest, how much we want to like that. So early days on that. You'll hear more from it later, much later on.

Gavin Eric Parsons: <unk> that business, but also to potentially as you're saying.

Gavin Eric Parsons: Make it less volatile.

Gavin Eric Parsons: By spreading the customer base, the regional base and other.

Gavin Eric Parsons: Other other plays like that so.

Gavin Eric Parsons: So early days on that.

Gavin Eric Parsons: Youll hear more from it later from US later on it.

Speaker Change: Okay great.

Gavin Eric Parsons: Okay, great. No, no. It's a small but significant piece of the business.

Speaker Change: Small, but significant piece of the business I appreciate all the color. Thanks, guys. Indeed, yes.

Unknown Speaker: So I appreciate all the color. Thanks, guys. Indeed. Yep. Unknown Speaker

Speaker Change: And we'll take our next question from Louis Raffetto with Wolfe Research. Your line is open.

Louis Harold Raffetto: Hey, good afternoon.

Louis Harold Raffetto: Afternoon.

Louis Harold Raffetto: And we will take our next question from Louis Raffetto with Wolf Research. Your line is open. Hey, good afternoon. Afternoon. Um, maybe just quickly, I know, I think you said that

Louis Harold Raffetto: Maybe just quickly I know you I think you said that oil and gas was up 7% sequentially you have that for either Andrew or both of the other businesses in industrial.

Louis Harold Raffetto: I think you said that oil and gas is up 7% sequentially; do you have that for either or both the other businesses in the industrial sector?

Louis Harold Raffetto: Sure.

Louis Harold Raffetto: Yes.

Louis Harold Raffetto: Okay.

Louis Harold Raffetto: So.

Unknown Speaker: So transportation is flattish, sequentially. You're right. Yep. You're right. And then power generation is up, say, 7, 8%, maybe high single digits.

Louis Harold Raffetto: Transportation is flattish <unk>.

Louis Harold Raffetto: Sequentially.

Louis Harold Raffetto: Alright, Thank you alright, great and then.

Louis Harold Raffetto: Power generation is up say.

Louis Harold Raffetto: Seven 8% maybe high single digits.

Louis Harold Raffetto: Okay, great. Thank you for that. And then, Bill, maybe just for you here, if there was anything in aerospace, it was, you know, great performance. So anything sort of, I'll say one-time nature, they're just trying to sort of square what you did in the second quarter with sort of the guide for the rest of the year, which looks like margins are going to step down, like 100 basis points. Is there any reason for that? Or not? Yeah, um...

Speaker Change: Okay, great. Thank you for that and then.

Speaker Change: Bill maybe just.

Bill: For you here.

Bill: Was there anything in aerospace it was great performance, so anything sort of I'll say onetime nature, there or just trying to sort of square will begin in the second quarter with sort of the guide for the rest of the year. It looks like margins are going to step down at the 100 basis points is there any reason for that or.

Bill: <unk>.

Bill: Yes.

Speaker Change: I think.

William F. Lacey: I think I'll pick up on your last word. Conservatism is definitely a thought that we have as we look at the environment.

Speaker Change: Ill pick up on your last word conservatism is definitely a thought that we have as we.

Speaker Change: Look at the environment.

Speaker Change: <unk>.

William F. Lacey: We're, we're, you know, the first half finishing up where Aero is right around 18.5% between the first quarter and the second quarter. So that implies for the second half, roughly the same amount that we saw in the first half. And so there were some good service sales, and a little bit of good mix in the second quarter, but we think we'll continue to have a solid aerospace margin rate come out there and all that comes through. We'll be at the upper end of our 18 to 19 guide, but we are also being mindful of the supply chain as well as our OEM demands.

Speaker Change: First half finished.

Speaker Change: Finishing up at.

Speaker Change: Where arrow is bright around 18, 5% between the first quarter in the second quarter.

Speaker Change: So.

Speaker Change: That implies for the second half.

Speaker Change: <unk> the same amount that we saw.

Speaker Change: In the first half and so so there were some.

Speaker Change: Good service sales a little bit of good mix in the second quarter, but.

Speaker Change: We think we'll continue to have a solid.

Speaker Change: Aerospace margin rate come out there.

Speaker Change: And all of that comes through will be at the upper end of our our 18 to 19 guide, but we're also being mindful of the supply chain.

Speaker Change: As well as our.

Louis Harold Raffetto: Great, just one quick one. Chip, I guess. Is it fair to think that you still think we will grow faster than aftermarket, or are we less certain today?

Speaker Change: As our OEM demand demand yet.

Speaker Change: Okay, Great and just one quick one chip I guess is it fair to think that you still think OE will grow faster than aftermarket order, we less certain today.

Charles P. Blankenship: We're less certain today than we were, you know, on our last call with the Boeing rates. So, you know, one way to think about it is that we developed this operating plan at the start of our fiscal year. We were thinking that third quarter would be higher OE volume, and fourth quarter would be even higher from an OE standpoint. And now we're thinking it's going to be a little bit softer, so the mix will be better from a rate perspective.

Speaker Change: We're less certain today than we were our last call with the Boeing rates. So.

Speaker Change: One way to think about it as we develop this operating plan at the start of our fiscal year, we were thinking that third quarter would be higher OE volume in fourth quarter would be even higher yet.

Speaker Change: From an OE standpoint, and now we're we're thinking it's going to be a little bit softer. So the mix will be better from a rate perspective and.

Charles P. Blankenship: And we will be working on different margin expansion levers because we were sort of planning on higher volume and better flow through and better amortization or fixed costs for the fourth quarter based on that OE, you know, and then just looking at all the different levers we have to work on margins, we will prioritize some of the others that are not related to, you know, the OE volume increase and make sure we can deliver in that range.

Speaker Change: And we also we will be working on different margin expansion levers because we were sort of planning on a higher volume and better flow through in better amortization of our fixed costs for fourth quarter based on that OE.

Speaker Change: And then just looking at all the different levers we have to work on on margins will prioritize some of the others that are not related to.

Speaker Change: The OE <unk>.

Speaker Change: Volume increase and make sure we can deliver in that range.

Louis Harold Raffetto: Great, thank you very much.

Speaker Change: Great. Thank you very much.

Speaker Change: Welcome.

Peter John Skibitski: We will take our next question from Pete Skibitski with Alembic Global. Pete, excuse me, your line is open.

Speaker Change: We will take our next question from Pete Skibinski with Alembic Cobalt Global excuse me your line is open.

Peter John Skibitski: Hey, good afternoon, guys. Another nice quarter. One more question on China.

Peter John Skibitski: Hey, good afternoon, guys. Another another nice corner.

Peter John Skibitski: Thanks.

Peter John Skibitski: And one more question on China, I just wanted to.

Peter John Skibitski: The way you guys are talking, it sounds like you'd be at least $185 million, maybe $195 million, maybe $200 million for this year. How would you suggest we all think about Fiscal 25? What's reasonable in terms of everything you know today? Directionally at least, you know, up, flat, down, a little, down a lot. What's the right way to think about that?

Hey, you guys are talking it sounds like you'd be at least $185 million, maybe maybe 195 to 200 for this year.

Peter John Skibitski: How would you suggest we all think about fiscal 'twenty five.

Peter John Skibitski: What's a reasonable in terms of everything you know today.

Peter John Skibitski: Directionally at least flat.

Peter John Skibitski: Slide down a little down a lot what's the right way to think about that.

Charles P. Blankenship: Well, I don't know what the right way to think about that is, to be completely candid. You know, what we're doing is making sure that we're working on all the other parts of the industrial business to have 25 be a really good stepping stone towards our, you know, 2026 commitments that we put out there. So we're working on every other part of the industrial business and making sure that we're ready to respond to any demand we get from China that can make that story, you know, better from a margin standpoint and serve that customer well.

Speaker Change: Well I don't know what the right way to think about that is to be completely candid.

What we're doing is making sure that we're working on all of the other parts of the industrial business to have 25 be a really good stepping stone towards our 2026 commitments that we put out there.

So we're working on.

Every other part of the industrial business and making sure that we're ready to respond to the.

Speaker Change: Any demand we get from China that can make that story better from a margin standpoint and serve that customer well. So that's how we're thinking about it we kind of model. It in there is as a very.

Breakeven kind of level for us.

Charles P. Blankenship: So that's how we're thinking about it. We kind of model it in there as, as a very, you know, breakeven kind of level for us, something that does no, does no harm to our plans. And we, like I keep kind of saying, these two things that drive us to behave that way. One is a lack of visibility into a market dynamic that we can predict a trend for, and really customer volatility that can result in volume disappearing within a quarter.

That does note does know arm to our plans and we like.

Speaker Change: Like I keep saying is.

Speaker Change: These two things that drive us to behave that way one is.

Lack of visibility to a market dynamic that we can predict the trend for and and really.

Speaker Change: Customer volatility that.

Speaker Change: Can result in volume disappearing within a quarter. So those two things I believe require us to plan and act the way, where we're acting right now there's a change to either one of those like we start getting a lot more visibility to real market dynamics, where we have longer term.

Charles P. Blankenship: So those two things, I believe, require us to plan and act the way we're acting right now. If we changed either one of those, like we start getting a lot more visibility into real market dynamics, or we have longer-term customer commitments from all of our customers in China that would allow us to have a firmer view on what a forecast turning into shipments would be, we would plan differently. But for now, that's our approach.

Speaker Change: <unk> commitments from all of our customers in China that would allow us to have a firmer view on what would have forecast turning into shipments would be we would plan differently, but for now that's our.

Speaker Change: Our approach.

Speaker Change: Okay understood I appreciate that last one for me just on.

Speaker Change: Pricing and our pricing has been pretty solid for you guys in this environment and.

Speaker Change: Inflation does not seem to be going away right. We're in that kind of three to three 5% range as this in an environment where.

Peter John Skibitski: Okay, that is understood. I appreciate that.

Speaker Change: Youre going to continue to kind of press on pricing until something meaningfully changes.

Peter John Skibitski: Last one for me, just on, you know, pricing. The pricing has been pretty solid for you guys in this environment, inflation doesn't seem to be going away, right? We're in that kind of three, three and a half percent range. Is this an environment where, you know, you're going to continue to kind of press on pricing until something meaningfully changes?

Speaker Change: I think we have <unk>, we have to be mindful of that.

Speaker Change: Until we see a signal of of deflation going on in the in the general.

Speaker Change: General markets on commodities.

Speaker Change: But even potentially labor.

Got to be mindful of the fact that the.

These are long cycle businesses, where commitments were made a long time ago.

We are happily stuck with our customers and we're halfway stuck with our suppliers, but trying to make sure. We don't get squeezed in the middle of we've got to be active on on on price from the aftermarket standpoint, and catalogs as well as when long term agreements come up.

Charles P. Blankenship: I think we have to, Pete, we have to be mindful that until we see a signal of deflation going on in the in the general markets on commodities and even potentially labor, we've got to be mindful of the fact that These are long cycle businesses where commitments were made a long time ago, and we're, we're, you know, happily stuck with our customers and we're happily stuck with our suppliers, but trying to make sure we don't get squeezed in the middle, we've got to be active on on on price from the aftermarket standpoint and catalogs as well as when long term agreements come up, you know, the opportunity to negotiate a fair pricing, Okay, that's great.

Speaker Change: The opportunity to to negotiate a fair price agreement.

Speaker Change: Okay. That's great. Thank you.

Speaker Change: Yes.

Speaker Change: And we'll take our next question from Gautam Khanna with TD Cowen Your line is open.

Gautam J. Khanna: Yes, hi.

Congrats on the numbers.

Gautam J. Khanna: Thanks.

Gautam J. Khanna: Hey, I had a question on the.

Gautam J. Khanna: Okay.

Gautam J. Khanna: Both of them.

Gautam J. Khanna: For the level of sale.

We are required to breakeven on that business.

Gautam J. Khanna: One quarter.

Gautam J. Khanna: We do have a good a good sense of it.

Gautam J. Khanna: <unk>.

Gautam J. Khanna: And that sort of as we as chip just mentioned as we're looking out.

Peter John Skibitski: Okay, it's great. Thank you. Yes.

Gautam J. Khanna: And we will take our next question from Gautam Khanna with T.D. Cowan. Your line is open.

Gautam J. Khanna: That's kind of how we plan the business at that roughly breakeven point.

Gautam J. Khanna: Yes, sorry.

Gautam J. Khanna: Thanks.

Gautam J. Khanna: Hey, I had a question about the OH business.

Gautam J. Khanna: The first half of last year, where we were we didn't have much.

Unknown Speaker: We do have a good sense of it, and in that sort of way, as Chip just mentioned, as we're looking out, that's kind of how we plan the business at that roughly breakeven point. You know, in the first half of last year, where we didn't have much OH, it was, you know, in that breakeven to a drag kind of environment.

Gautam J. Khanna: It was in that breakeven to drag negative it was negative.

So then as we started seeing it creep.

Gautam J. Khanna: Creep up that's where we started to get a.

Gautam J. Khanna: A lot more leverage in and was able to get above that but we.

We do have a good sense of where that point is.

Speaker Change: Would you mind sharing that with US last year first half I have about $40 million.

Unknown Speaker: Would you mind sharing that with us? Last year, first half, I had about 40 million. I can't give you that, but we do have a good idea, and we use it for planning purposes. Okay. And I'm just curious, thus far, we're like a month into the quarter. Is it consistent with that $35 to $40 million, [inaudible]?

Speaker Change: Tomatoes.

Tomatoes: Yes, I can't I can't give you that but we do have a good idea and we use those for planning purposes.

Okay.

Speaker Change: I'm just curious.

Speaker Change: Thus far we're like a month into the quarter.

Speaker Change: Consistent with that $35 million to $40 million.

Speaker Change: Late in Q3 that youre expecting or are running above that.

Speaker Change: In a slowdown later in the quarter.

Unknown Speaker: We are in line with what we got in the 35 to 40 range.

Speaker Change: We are we are we are in line with what we guided in the 35 to 40 range.

Speaker Change: Okay.

Gautam J. Khanna: Okay, and just following up on an earlier question about leap after market thus far. I'm curious, given You know, the OEM CFM has a lot of service contracts attached to the leap. Are you seeing much in the way of aftermarket pricing opportunities for those for those products that you're selling into the aftermarket right now, or those going, I would imagine, more and more through the CFM service shops and therefore going out at the same price as an OE? I'll end up having a full review on that. Yeah, that's not a good idea.

Speaker Change: Just following.

Speaker Change: Following up on an earlier question about leap aftermarket.

Speaker Change: But.

Speaker Change: Im curious given.

Speaker Change: We OEM.

Speaker Change: Has a lot of global contract.

Speaker Change: Perhaps with a leap.

Speaker Change: Are you seeing.

Speaker Change: Much in the way of.

Speaker Change: Aftermarket pricing and opportunity.

Speaker Change: For those for those products that we're selling into the aftermarket right now or are those going I would imagine more and more through the.

Speaker Change: The CFM service shops, and therefore going now that the same prices in Oakville.

Speaker Change: Do you have enough.

Speaker Change: The view on that.

Speaker Change: Yes, not exactly how it works so we price to the aftermarket to anybody who.

Charles P. Blankenship: Yeah, that's not exactly how it works. So we price to the aftermarket for anybody who we work with. We work with CFM shops, we've got, you know, agreements with other airline shops, we've got agreements with independent MRO facilities. So, you know, whoever we work with, there's an aftermarket agreement for how we're going to negotiate New Terms and Conditions and Price and Turn Times, etc.

Speaker Change: We work with we work with CFM shops, we've got.

Speaker Change: Agreements with other airlines shops, we've got agreements with independent MRO facilities. So.

Speaker Change: Whoever we work with there is an aftermarket.

Speaker Change: Agreement for how we're going to.

Speaker Change: New terms and conditions and price in turn times et cetera.

Gautam J. Khanna: Last question for me was just on cost inflation in the industrial sector. Was there much of a change sequentially in the March quarter relative to the December quarter, and do you expect much of a change in the second half of your fiscal year relative to what you experienced in the second quarter? Um, yeah, there...

Speaker Change: Last question for me was just on cost inflation on industrial.

Speaker Change: Was there much of a change sequentially.

Speaker Change: In the March quarter relative to the December quarter.

Speaker Change: We expect much of a change in the second half of your fiscal year relative to what.

Speaker Change: In the second quarter.

Speaker Change: Yes, there is.

William F. Lacey: Yeah, there is... We don't see any major changes beyond what we expect in inflation. We continue to drive good prices and productivity to continue to expand our margins and kind of yield the guidance that we provided on the industrial

Speaker Change: Okay.

Speaker Change: We don't see any major.

Speaker Change: The.

Speaker Change: Changes beyond what we expect in inflation, we continue to drive.

Speaker Change: Good price and productivity to continue to expand our margins and in kind of yield.

Speaker Change: The guidance that we provided on the industrial business.

Unknown Attendee: We will take our next question from Tony Bancroft with Gabelli Funds. Your line is open.

Thank you guys.

Speaker Change: Youre welcome.

Speaker Change: And we will take our next question from Tony Bancroft with Gabelli funds. Your line is open.

Unknown Attendee: Thanks so much, gentlemen. Great job on the quarter. Chip, since you've taken over, you've really done a fabulous job. Any thoughts or changes to your thinking? I know we sort of talked about this in the past, but maybe an update on doing something transformational, either a large acquisition or maybe more within or without outside your space, or even financial engineering, similar to some of your contemporaries, like IEGE, Crane, that have done something like that. Maybe just give us an update there and just your thoughts, if anything has changed.

Unknown Attendee: Thanks, so much gentlemen, great great job on the quarter.

Unknown Attendee: Chip thank you.

Unknown Attendee: Since you've taken over you've really done a fabulous job.

Unknown Attendee: Any thoughts or changes to your thinking I know, we sort of talked about this in the past, but maybe an update.

Unknown Attendee: Im doing something transformational either large acquisition or maybe more in the.

Unknown Attendee: Within or without outside.

Unknown Attendee: Base or even financial engineering similar to some of your contemporaries IEEE Crane.

Unknown Attendee: They have done something like that just maybe just give us an update there and just your thoughts if anything has changed.

Speaker Change: Thank you.

Charles P. Blankenship: You're welcome. So really, I think if you look back at our investor day presentation, almost everything that we're thinking about for the future of the company is represented there in terms of, you know, our desire to grow our industrial and aerospace businesses, have them be collaborative and synergistic, capture all the market opportunities that we see in front of us with the aftermarket in aerospace and the energy transition and the new fuels in industrial.

Youre welcome.

Speaker Change: <unk>.

Speaker Change: Really I think if you look back at our Investor day presentation.

Speaker Change: Almost everything that we're thinking about for the future of the company is represented there in terms of.

Speaker Change: Our desire to grow our industrial and aerospace businesses have them be.

Collaborative and synergistic capture all the market.

Speaker Change: Opportunities that we see in front of us.

Speaker Change: With the aftermarket in the aerospace and the energy transition and the new fuels and.

Charles P. Blankenship: We think that's plenty of opportunity to work with. As far as M&A goes, we are always looking at bolt-on or strategic acquisitions that might help us achieve those goals that we shared at Investor Day in an even more efficient and more impactful way. And that's kind of where our focus is.

Speaker Change: Industrial we think thats plenty of opportunity to work with.

Speaker Change: As far as M&A goes we are always looking at.

Speaker Change: Bolt on or strategic ads that might help us achieve those goals that we shared in investor day, and an even more efficient and more impactful way.

Speaker Change: And that's kind of where our focus is.

Unknown Attendee: Great answer. Thank you so much, gents.

Speaker Change: Great answer thank you so much John.

Speaker Change: Welcome.

Sheila Karin Kahyaoglu: We will take our next question from Sheila Kahyaoglu with Jeffreys. Your line is open.

Speaker Change: We will take our next question from Sheila <unk>.

Sheila: With Jefferies. Your line is open.

Sheila Karin Kahyaoglu: Thanks. Good afternoon.

Sheila: Good afternoon.

Sheila Karin Kahyaoglu: Chris, I wanted to ask a few aerospace questions, just given that the performance was really good. On commercial, starting with maybe price, what do you think about pricing within OE? You talked about the aftermarket. When we look up 15% in OE, and when we kind of look at the engine manufacturers, you know, LEAP shipments were flat, but revenues were up 30, Pratt was up 40 on shipments, but revenues were up 60. So can you talk about your shipments, Delta versus Total Elite?

Good morning, Sheila.

Sheila: Thank you Laura.

Sheila: Just given the performance isn't a robot.

Sheila: Commercial starting with <unk>.

Sheila: How do you think about pricing within a rule you talked about the aftermarket.

Sheila: We look at 15% and OEM, when we kind of have a.

Look I think engine manufacturers.

Sheila: <unk> shipments are flat revenues were up 30, partly about 40 on shipments.

Sheila: Steve can you talk about your thoughts on first of all.

Sheila: Illegal.

Charles P. Blankenship: So our shipments are up quite a bit. And we've, in some cases, added some scope.

Steve: So our shipments are up quite a bit and we've in some cases added some scope. So that is also cost.

Charles P. Blankenship: So that has also caused little step functions inside our uptick of revenue year over year. As far as pricing goes, as you know, most of those contracts are long-term, very long-term contracts, some are life of program, others are, you know, just decades, and we are able to capture escalation to some extent. And so pricing year over year can be quite substantial with indexes that, you know, have performed quite well and have moved quite high in the high inflationary environment.

Steve: What little step functions inside our uptick of revenue year over year.

Steve: The as far as pricing goes as you know most of those contracts or are <unk>.

Steve: Very long term contracts some are life of program others are.

Steve: Just.

Steve: Decades.

Steve: And we are able to capture escalation to some extent and so the pricing year over year.

Steve: Can be quite substantial with <unk>.

Steve: Indexes that.

Steve: It performed.

Steve: Right.

Steve: Have moved quite high in the high inflationary environment. So it's a combination of both.

Charles P. Blankenship: So it's a combination of a little shipping, a little more number of part numbers, having the escalation clauses come in reasonably favorably, and then also having the rate and demand go up from the manufacturer. So that's one of the things that we can't see very well is where the inventory is getting bound up in the system, whether it's ending up at the airframe or, in terms of built aircraft, all the way to the flight line delivery and waiting, or it's at the airframe or facility in terms of an engine, or it's sitting in the incoming inventory, our parts sitting in the incoming inventory of the engine manufacturer.

Steve: Of shipping a little more.

Number of part numbers.

Steve: The escalation clauses come in.

Steve: Reasonably favorably and then also.

The rate and demand go up from the manufacturer. So that's one of the things that we can't see very well is where the inventory is getting bound up in the system, whether it's ending up at the airframe or in terms of built aircraft. All the way entered the flight line delivery and waiting or it's.

Steve: At the airframe or facility in terms of an engine or it's sitting in the incoming inventory are part sitting in the incoming inventory of the engine manufacturers. So.

Charles P. Blankenship: So there's a lot of spring and damp in the system, and demands may have been higher than the shipment that was being achieved by the engine manufacturer quite easily since they're trying to sort out all their different suppliers, and they don't want to turn people on and off.

Steve: There's a lot of spring.

Steve: And dampen the system.

Steve: And.

Demands may have been higher than the shipment that was being achieved by the <unk>.

Steve: Engine manufacturer quite quite easily since theyre trying to sort out all of their different suppliers.

Steve: They don't want to turn people on and off.

Steve: Okay.

Sheila Karin Kahyaoglu: Okay, got it. That makes sense. Maybe on the military aftermarket, really great performance up 30% for the first half. What's driving that? And how do you think about the exit rate out of the year? Is there more upside just given supplemental funding coming through as well?

Speaker Change: Got it that makes sense and then.

Speaker Change: Maybe on the military aftermarket really great performance up 30% for the first half.

Speaker Change: What's driving that and how do you think about <unk>.

Speaker Change: Does it rolled out of the year is there more upside just given supplemental funding coming through as well.

William F. Lacey: Yeah, just on the aftermarket, Sheila. This time last year, the first half of last year, we were having some supply chain challenges, so we saw some depressed numbers in the first half. Throughout the year, though, we saw that improvement come back, and so comps were a lot higher in the second half. So we see that we're about at the right level, and we expect that to continue through the rest of the year. But again, those comps are going to get tougher because the supply chain did improve last year.

Yes, just on the aftermarket Sheila.

Speaker Change: Sure.

Speaker Change: At this time last year, the first half of first half of last year, we were having some supply chain challenges. So.

Speaker Change: We saw some depressed numbers in the first half throughout the year, though we saw that improvement.

Sheila: Come back and so so the comps are.

A lot higher in the second half so we see that our we're about at the right.

Sheila: Level, and we expect that to sustain through the rest of the year, but again those comps are going to get tougher because the supply chain did an improved last year.

Charles P. Blankenship: Okay. And we're good.

Sheila: Okay.

Sheila Karin Kahyaoglu: Yeah, and Sheila, in working on our opportunities there, there was some discussion earlier in the call about lean. We truly believe that's a growth area for us longer term. As we get our turn times down, we can go after more business. So we think there's an opportunity there that we haven't captured yet.

Sheila: Yes, Sheila and working on on our opportunities there I mean, there was some discussion earlier in the call about lead we truly believe that that's a growth area for us longer term as we get our turn times down we can we can go after more more business.

Sheila: We think theres opportunity there that we havent captured yet.

Charles P. Blankenship: And last one on air.

Sheila: And last one on <unk> is there one thing that from our corporate wellness.

Sheila Karin Kahyaoglu: And last one, on Arrow, is there one thing that, you know, is the most favorable mix within the subsegments that you would call out?

Sheila: Program rollout.

Unknown Speaker: Most Favorable Mix

Sheila: Most favorable mix.

Unknown Speaker: Yeah, in terms of margin, whether it's the defense aftermarket or, you know, the aero aftermarket.

In terms of margin whether for FEMSA after Michal Arnaud.

Sheila: No arrow after Michael.

Charles P. Blankenship: You know, the commercial aero aftermarket is what I'd say is our place where we can get the best returns, and the situation with deliveries not increasing when the demand is so strong for travel is resulting in the legacy fleet flying longer and harder than we forecast. So one of the good things that's different from when we put together this operating plan was that we were thinking that we would be coming off of the peak of things like B2500 fuel controls and CFM56-5 HMUs, and these sorts of fuel control overhauls would be less and less and that we would have seen the peak already. But with the current situation, we believe that peak may extend quite a bit. And that's one of the things we factored into the second half, that it not going down.

Sheila: The commercial Aero aftermarket is what I'd say is our R. R place, where we can.

Sheila: Get the best returns.

Sheila: The.

Sheila: The situation with deliveries not increasing where when the demand is so strong for travel is resulting in the legacy fleet flying longer and harder than.

Sheila: And then we forecast so one of the good things thats different from when we put together this operating plan as we were thinking that.

Sheila: We will be coming off of the peak of things like the 2500 fuel controls and CFM $56 five <unk> that these these sorts of.

Sheila: Fuel control overhauls would be less and less and that we would have seen the peak already.

Sheila: But with the current situation, we believe that peak may extend quite a bit and that's one of the things we've factored into the second half is that not going down.

Speaker Change: Great Great answers. Thank you chip welcome.

Speaker Change: And we will take our next question from Michael Schirmer, <unk> with <unk> Securities. Your line is open.

Michael Schirmer: Hey, good evening guys nice results. Thanks for taking my question here.

Sheila Karin Kahyaoglu: Great, great answers. Thanks Chip. Welcome.

Michael Schirmer: Thanks, Mike maybe.

Michael Schirmer: Chip just to stay on.

Michael Schirmer: Sheila questioning and we talked about that aftermarket.

Unknown Speaker: Hey, good evening, guys. Nice results. Thanks for taking the question. Thanks, Mike.

Michael Schirmer: Up pretty strong.

Michael Schirmer: On a on a sequential basis.

Michael Schirmer: On a year over year basis was there anything and I know that.

Second quarters tends to be seasonally strong for you, but anything to call out I mean was it more provisioning or any different color. There aside from Zoe challenges anything driving that particular shrink.

Charles P. Blankenship: Yeah, there was some provisioning in the quarter. So, like you said, it's seasonal, plus some provisioning, and then not dropping off on the, you know, the legacy fleets and having a little bit of LEAP come through and a little bit of GTF fuel nozzles come through these sorts of things. You know, all happening a little bit, contributing a little bit to making it better both sequentially and year over year.

Speaker Change: Yes, there was some provisioning.

Speaker Change: In the quarter so.

Like you said its seasonal plus some provisioning and then not not dropping off on.

Speaker Change: The legacy fleets.

Speaker Change: And having a having a little bit of leap come through in a little bit of GTS fuel nozzles come through these sorts of things.

Speaker Change: All happening a little contributing a little bit to make it get better both sequentially and year over year.

Unknown Speaker: Okay, okay. I got it. And then, just maybe, all the way back to Bill Drake.

Speaker Change: Okay. Okay got it and then just maybe all the way back to build rates I know you kind of said, it's a little bit of a moving target, but you're taking down their meat production for this year I guess round numbers, maybe a quick 160 engines at the midpoint I mean were you.

Charles P. Blankenship: I know you kind of said it's a little bit of a moving target, but GE taking down their lead production for this year, I guess, in round numbers, maybe it's like 160 engines at the midpoint. I mean, were you shipping to them based on that original plan? Do you have a line of sight to see if they have excess inventory? I mean, I know, obviously, we have the aftermarket mix and the demand there. But any color on how you're building according to GE's revised plans?

Speaker Change: Shipping to them based on that original plan do you have line of sight.

Speaker Change: Excess inventory I mean, I know, obviously, we've got the aftermarket mix and the demand there, but any any color on how youre building to Ges revised plan.

Charles P. Blankenship: We're talking to them continually, as you might imagine. The feedback is that we're on plan with them and to stay tuned, so we're staying tuned, and we're telling you that there's a range of things to expect for the second half, and some of it depends on just, you know, how much schedules get pushed out in the fourth quarter. We think the third quarter is pretty well kind of baked because it's, you don't make sudden moves in the supply chain unless you're China on the highway.

Speaker Change: We're talking to them continually as you might imagine.

Speaker Change: The feedback is that were on plan with them.

Speaker Change: And to stay tuned and so we're we're staying tuned in where.

Speaker Change: Telling you that there is a range of things to expect for the second half and some of it depends on just.

Speaker Change: How much schedules get pushed out in fourth quarter, we think third quarter is pretty well.

Speaker Change: Because it's you don't make sudden moves in the supply chain.

Speaker Change: Unless your China on highway.

Charles P. Blankenship: Note to self. But, you know, we're looking at the fourth quarter, our fourth quarter, and saying, you know, there's probably some movement to expect there, and that's why we're focused on the other levers that we have to make sure we can cover anything that gets pushed out.

Speaker Change: Note to self but.

Speaker Change: We're we're looking at fourth quarter, our fourth quarter and saying.

Speaker Change: Theres, probably some some movement to expect there and Thats why were.

Speaker Change: Focused on the other levers that we have to make sure. We can cover anything that gets pushed out.

Unknown Speaker: Got it, got it. Just the last one, you just brought up China again.

Speaker Change: Got it got it and just last one you just brought up the China again.

Unknown Speaker: I mean, it's sort of the business, you know, maybe, maybe not at these levels, but can you underwrite this sort of work and these opportunities in perpetuity? I mean, is there an opportunity or a potential outcome where they bring work in-house, they go with something homegrown? I guess just trying to figure out how confident you guys are in your position there over the long term with your customers.

Speaker Change: Three of the business, maybe maybe not at these levels.

Underwrite this this sort of work.

Speaker Change: Opportunities in corporate <unk> I mean is there.

Or a potential outcome, where they bring work in house stay go something homegrown.

Speaker Change: Just trying to figure out how confident you guys are in your position there over the long term with your customers.

Charles P. Blankenship: Yeah, it's always a risk in our business that an OEM who is very strong, very well funded, and very well supported by a deep engineering team can decide to insource the fuel system. We're in strategic discussions with our customers about long-term collaboration and, you know, use the term underwriting. We want to underwrite any investment we might make with improved, you know, future terms and conditions and commitments. So, you know, we're talking to various customers about how to dampen the volatility.

Speaker Change: Yes, it's always it's always a risk in our business that an OEM, who is very strong very well funded and very well supported by a deep engineering team can decide to in source the fuel system.

Speaker Change: We are in strategic discussions with our customers about long term collaboration you used the term underwriting we want to we want to underwrite any investment we might make with improved future and terms and conditions and commitments. So.

We're talking to various customers about how to.

Speaker Change: Out of it.

Speaker Change: Dampen the volatility.

Charles P. Blankenship: And if we're going to invest in the next series of fuel systems, we want to have more assurances that we'll not only get a return but be able to plan better. So we're, we're working on it. I don't know how it'll turn out. But you know, it's not for the lack of engagement and willingness to talk about it and collaborate with our customers. Shabbat Shalom.

Speaker Change: If we're going to invest in the next series of of fuel systems, we want to have more assurances that we will not only get a return but be able to plan better. So we're we're working on it I don't know how it will turn out but it's not for the lack of.

Speaker Change: Of engagement and willingness to to talk about it and collaborate with our customers.

Unknown Speaker: Got it. Fair. Thanks, guys. Welcome.

Speaker Change: Got it.

Speaker Change: Thanks, guys.

Speaker Change: Welcome.

Noah Poponak: We'll take our next question from Noah Poponak with Goldman Sachs. Your line is open.

Speaker Change: We will take our next question from Noah.

Noah: With Goldman Sachs. Your line is open.

Noah Poponak: Hey, good evening, everybody. You know what? I don't know what. Have you ever modeled out how large the leap becomes as a percentage of the total company earnings whenever that aftermarket stream hits something close to steady state?

Noah: Hey, good evening everybody.

Speaker Change: Hello Noah.

Speaker Change: Okay.

Noah: Have you ever modeled out how large the leaf becomes as a percentage of the total company earnings.

Noah: Whenever that aftermarket stream become hips hips, something close to steady state.

Charles P. Blankenship: Well, the LEAP plus GTF is a pretty impressive aftermarket stream in our models. You know, we are talking about quite a few years because in our 2026-27 type of horizon, we're still not seeing a huge contribution, but that's more like a 28 to early 30s as far as when those come home, if you will, for the repair and overhaul. One thing I'll tell you is we're planning to grow the rest of the company alongside that, so I'm not Unknown Speaker, Unknown Attendee, Unknown Speaker, Unknown Speaker,

Noah: Well the the.

Noah: Leap plus GTS is a pretty pretty impressive aftermarket stream in our in our models.

Noah: Yes.

Noah: We are talking about quite a few years because in our 2026 27 type of horizon, we're still not seeing.

Noah: A huge contribution that's more like a.

Noah: <unk> 28 to early thirties as far as when it really.

Noah: Those come home if you will.

Noah: The repair and overhaul.

Speaker Change: One thing I will tell you is we're planning to grow the rest of the company.

Alongside that so.

Speaker Change: I am not.

Bring in any panic bells about concentration.

Speaker Change: Because we're we've got a lot of other irons in the fire and a lot of other business to grow by the time, we were talking about late 'twenty early thirties.

Noah Poponak: If I look at the aerospace margin from the perspective of an incremental margin, you know, in the first quarter, you're in the mid-30s, but it was a pretty easy compare. Second quarter was a lot tougher compared, but the incremental went up into the 40s. Didn't sound like anything super abnormal in there, maybe a little bit of mix.

Speaker Change: Okay.

Speaker Change: That makes sense.

Speaker Change: The aerospace the aerospace if I look at the aerospace margin from the perspective of an incremental margin.

Speaker Change: In the first quarter you are in the mid Thirty's.

Speaker Change: It's a pretty easy compare.

Second quarter was a lot tougher compare but the incremental went up into the forties.

Speaker Change: Didn't sound like anything Super abnormal in there, maybe a little bit of mix.

William F. Lacey: I guess the back half, the guidance implies you kind of drop back down in the low to mid-30s. And then, you know, from there to the 22 Outlook is 30. I'm sorry, the two-year forward alloc is 30. I guess, do you have a framework for the right kind of sustained? drop through in the aerospace business. And I know, you know, right now there's kind of a, you're getting both pricing costs above, very long-run normal, but just trying to get a better sense for what's possible from you on these aerospace incrementals moving forward.

Speaker Change: Yes, the back half the guidance implies you're kind of drop back down in the low to mid thirties.

Speaker Change: And then from there to the 22 outlook is 30.

Speaker Change: I'm sorry, the two year forward, Alex just 30 I guess.

Speaker Change: Do you have a framework for the right kind of sustained.

Speaker Change: Drop through in the aerospace business.

Speaker Change: Right now theres kind of Youre getting both price and cost above.

Speaker Change: Very long run normal but.

Speaker Change: I'm, just trying to get a better sense for what's possible from you on these aerospace incrementals moving forward.

Noah Poponak: I'll let Bill answer the rest of this question, but I mean, it is a mix. It is very important what the mix is when you calculate that flow through. So, you know, our mix, the sequential mix, got more... the aftermarket in it by a little bit. So that can, that can. And I'll turn the wick up a little bit on the flow through, Bill. Yeah, in general, Noah, we feel like that business ought to deliver at 30 to 35%. And so that's kind of how we look at it. And like Chip said, depending on where we are, that can be higher, but over the long term, we think about it between 30, 35%.

Speaker Change: I'll, let bill answer the rest of this question, but I mean it is it is a mix. It is a very important about what the mix is when you calculate that that flow through so.

Bill: Our mix.

Bill: Sequential mix got more.

Bill: Aftermarket in it.

Bill: But a little bit so that can that can turn the wake up a little bit on the flow through.

Yes.

Bill: In general no we feel like that business also delivered a 30% to 30% incremental.

Bill: And so.

Bill: So thats kind of how we look at it in like Chip said, depending on where we are.

Bill: That can be higher but over the long term, we think about it between 30 35.

Speaker Change: Okay great.

Charles P. Blankenship: Chip, what you were just talking about in looking at strategic changes to how you sell China on the highway and Unknown Speaker things of that nature. What would that actually look like? Are you talking about minimum buys? In short, windows of time, or how could that actually manifest?

Speaker Change: But you were just talking about and looking at strategic changes to how you sell China on highway.

Speaker Change: Things of that nature, what would that actually looks like.

Speaker Change: Yes, you are talking about minimum buys and short windows of time or how could that actually manifests.

Noah Poponak: Well, you know, we don't we don't have anything to say. That's, that's firm or, you know, negotiated at this time. We would just like to get more information on the market, and we'd like to understand more about billed rates. We'd like to protect ourselves in terms of when we've got inventory flowing from a lead time perspective, but as of now, the agreements that we have are the agreements that we have with the customers.

Speaker Change: Well, we don't we don't have anything to say.

Speaker Change: This firm or.

Speaker Change: No.

Speaker Change: Negotiated at this time.

Speaker Change: We would just like to get more information.

Speaker Change: On the market, we'd like to understand.

Speaker Change: More about build rates, we'd like to protect our ourselves in terms of when we've got inventory flowing.

Speaker Change: On a lead time perspective.

Speaker Change: But as of now.

Speaker Change: <unk> that we have are the agreements that we have with the customers we've got a.

Noah Poponak: We've got to come up with a good value proposition to decrease our risk and increase theirs from the customer standpoint. And there are, you know, multiple folks to work with in China, and, you know, the system might be useful for other regions in Asia as well. So we're, we're looking to see what we can do on that front.

Speaker Change: Come up with a eight.

Speaker Change: Good value proposition reason too.

Speaker Change: Decrease our risk and increase theirs.

Speaker Change: From the customer standpoint.

Speaker Change: And there is multiple folks to work with in China in the system might be useful for other regions in Asia as well so we're.

Noah Poponak: And then just in the near term, is it correct that you guided 3Q down on the highway to $30 to $40 million in revenue? And did you say anything about the fourth quarter sizing?

We're looking to see what we can do on that front.

Speaker Change: Okay.

Speaker Change: And then just.

Speaker Change: In the near term is it correct that you guided three Q turn on high rate of $30 million to $40 million.

William F. Lacey: 35 to 40 for the third quarter, Noah, and for the fourth quarter, again, just minimal amounts at this point.

Speaker Change: Revenue and did you say anything about the fourth quarter sizing.

Speaker Change: 35% to 40% for the third quarter Noah.

Noah Poponak: and that bill is that minimal; it just you're only going to guide one quarter at a time, or is that what the orders are telling you, based on our visibility?

Noah: For our fourth quarter again, just minimal amounts at this point.

Noah: And that will build.

Noah: Minimal it just youre only going to guide one quarter at a time or is that what the orders are telling you that the correct.

William F. Lacey: that based on our visibility and our, our, our, our feeling comfortable about that it's, it's kind of three quarters out, which is more than what we had sort of at the beginning of our, our, our, second half last year. We did get a little more visibility. And that's what we have to work with for now.

Noah: Based on our visibility and our.

Noah: Our our feeling comfortable about that it is kind of three quarters out which.

Noah: It is more than what we had sort of at the beginning of <unk>.

Noah: Sorry, the second half last year, we did get a little more visibility and thats, what we have to work with for now.

Speaker Change: Okay, great. Thank you.

David Egon Strauss: And we will take a follow-up question from David Strauss with Barclays. Your line is open.

Speaker Change: Yes.

Speaker Change: Yes.

Speaker Change: And we will take a follow up question from David Strauss with Barclays. Your line is open.

David Egon Strauss: Great. Thanks for taking the follow up. At this time, has anything changed with regard to what you laid out in terms of your forecast for 2026? Either, you know, aerospace or industrial end markets, or, you know, overall revenue, free cash flow, anything that's changed at this point in terms of what you're thinking about?

David Egon Strauss: Great. Thanks for taking the follow up.

David Egon Strauss: At this time has anything changed with regard to.

David Egon Strauss: What you laid out in terms of your forecast for 2026 either.

David Egon Strauss: Aerospace or industrial end markets or.

David Egon Strauss: Overall revenue free cash flow any anything that has changed at this point in terms of how youre thinking about.

Charles P. Blankenship: No, we're just working on the path to that answer for 2026, and we feel like we're on track quarter by quarter so far, with no change.

Speaker Change: No we're just.

Speaker Change: Working on the path to that answer for 2026, and we feel like we're on track quarter by quarter, So far and no.

David Egon Strauss: Okay, and your data center, backup power for data centers, how big is that business today, Chip, and what are you actually seeing there? Are you seeing demand signals, or are you actually seeing that manifest itself in the numbers yet?

Speaker Change: No changes.

Speaker Change: Okay and.

Speaker Change: Your data center backup power for data centers.

Speaker Change: Big is that business today chip and what are you actually seeing there are you are you seeing demand signals are you actually seeing it manifests itself in the numbers yet.

Charles P. Blankenship: So over the past couple of years, that's grown. And I think we're just going to keep that in the power generation call out, but it's grown inside that.

Speaker Change: So over the past couple of years.

Speaker Change: It's grown and I think we're just going to keep that in the power generation.

Speaker Change: Callout, but it's grown inside that and we have multiple Oems that are that are competitive in the data center.

David Egon Strauss: And we have multiple OEMs that are competitive in the data center space for standby power. Caterpillar and MTU are both very well-known in that space. And there are some other Asian OEMs coming into the space as well, because there's quite a lot of demand. So we're seeing the signs, but we're also seeing data centers get built and the big, long rows of reciprocating engines and daytanks for diesel fuel get put in

Speaker Change: Space for standby power Caterpillar and <unk> are both very.

Speaker Change: Well known in that space and there are some other Asian.

Oems coming into this space as well because theres quite quite a lot of demand. So we're seeing the signal, but we're also seeing the data centers get built in the big long rows of reciprocating engines.

Speaker Change: Data <unk> for diesel fuel will get put in.

David Egon Strauss: Okay, thanks very much.

Speaker Change: Okay. Thanks very much welcome.

Charles P. Blankenship: And Mr. Blankenship, we have no further questions at this time, so I will now turn the conference back over to you for closing remarks.

Speaker Change: Welcome.

And Mr. Blankenship, we have no further questions at this time I will now turn the conference back over to you for closing remarks.

Charles P. Blankenship: I'd just like to thank everybody for joining the call, and we'll talk to you again next quarter.

Speaker Change: I'd just like to thank everybody for joining the call and we'll talk to you again next quarter.

Operator: And ladies and gentlemen, that concludes our conference call today. If you would like to listen to a replay of this conference call, it will be available today at 7:30 p.m. Eastern Time by dialing 1-800-770-2030 for a U.S. call or 1-609-800-9909 for a non-U.S. call and entering the access code 281-9144. A rebroadcast will also be available on the company's website, www.woodward.com, for 14 days. We thank you for your participation on today's conference call and ask that you please disconnect your line.

Speaker Change: And ladies and gentlemen that concludes our conference call today, if you would like to listen to a replay of this conference call. It will be available today at 730 PM Eastern time by dialing one 800 <unk>.

Speaker Change: 770.

Speaker Change: 2030 for a U S call.

Speaker Change: Sure.

Speaker Change: John.

Speaker Change: 6098.

Speaker Change: 809, 909 for a non U S call.

Speaker Change: And by entering the access code 2819144.

Speaker Change: A rebroadcast will also be available at the Companys website, www Dot Woodward dot com for 14 days.

Speaker Change: We thank you for your participation on today's conference call and ask that you. Please disconnect your lines.

Speaker Change: Yeah.

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