Q3 2024 Woodward Inc Earnings Call
Thank you for standing by welcome to the Woodward, Inc. Third 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 provides neck.
Thank you operator, we'd like to welcome all of you to Woodward's third quarter fiscal year 2024 earnings call.
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.
And at the end of our presentation, we will take questions for those who have not seen today's release earnings release, you can find it on our website at Woodward Dot com.
We have again included some presentation materials to go along with todays call that are also accessible on our website.
An audio replay of this call will be available by phone or on our website through August 13th 2024.
All references to years in this call are references to the company's fiscal year unless otherwise noted.
Now I'd like to highlight our cautionary statement as shown on slide two.
As always elements of this presentation are forward looking and based on our current.
Outlook and assumptions for the global economy, and our businesses more specifically.
Those elements can and do frequently change.
Our forward looking statements are subject to a number of risks and uncertainties surrounding those elements, including the risks we identify in our filings with the SEC.
These statements are made as of today, and we do not intend to update them, except as required by law.
In addition, Woodward is providing certain non U S GAAP financial measures we.
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'll turn the call over to chip.
Thank you Dan and good afternoon, everyone.
Chip: As you May recall, we shared our three interconnected value drivers of growth operational excellence and innovation at our Investor Day last December.
Before we begin our discussion on financial performance I would like to share some highlights on the topic of innovation.
Designing precise energy and motion control solutions within our customers' complex and challenging product environment is in our DNA.
As our current product offerings demonstrate.
In fact, it is our purpose to design and deliver energy control solutions, our partners count on to power a clean future.
We are building on the innovations of our predecessors with a technology roadmap that aligns our purpose and our growth strategy.
Chip: With evolving customer requirements for their next generation platforms.
This active engagement insurers, we can meet the current and future needs of the end markets we serve.
Today, I'll share some of our R&D and new product development investments.
That are helping prepare woodward and our customers for the future.
I'll start with some recent news.
Chip: During the Farnborough International Air show last week, we announced that Boeing selected Woodward <unk>.
Design and manufacture advanced low profile hydraulic controls for thin wing applications on its transonic trust braced weighing demonstrator now dubbed the X 66 thankfully.
This this project is a collaboration between Boeing and NASA, the pioneers of LOE drag configuration to reduce fuel burn and emissions.
Has the potential to revolutionize single aisle aircraft design.
Woodward has demonstrated concepts that will enable precision motion control and feedback for actuation of control surfaces, yet fit within the envelope of this advanced wing design.
Another area for Woodward has invested and achieved leading technical maturity is component design and materials compatibility for control systems, delivering alternate fuels known as power to X <unk>.
Peter ex fuels, such as hydrogen ammonia and methanol are being evaluated for various applications.
These alternative fuels have potential to contribute towards the ambitious carbon reduction targets and aviation.
<unk> it.
Power generation driven by changing regulations in the global quest for a cleaner future.
Alternative gas and liquid fuels poses new challenges from a materials durability standpoint.
Woodward has invested in significant compatibility testing and analysis to develop robust material selection criteria as each new fuel as identified by customers for specific applications.
We've established a state of the art <unk> Research Center in Stuttgart, Germany, where we're testing hydrogen compatible components for the Airbus Zero E hydrogen powered aircraft demonstrator.
Another one of our newer and very exciting programs as an advanced fuel control system for the next generation of aircraft engines.
To achieve the fuel burn reduction targets for an open fan or an ultra high bypass ratio Dr. <unk> engine.
Core will have to be quite small and the temperature inside the core compartment will be significantly higher than previous engines.
To meet the reduced core compartment volume and corresponding fuel system envelope, we've designed and manufactured housings using additive technology to achieve more than 50% reduction in weight and volume compared to current fuel systems and service.
In addition, we're developing high temperature robust electrical and serve a hydraulic components designed to deliver motion control and position sensing in this demanding environment.
We're currently demonstrating technology that allows 10 times better confidence and fuel flow accuracy for combustion management.
This will enable our customers to optimize the core size to the mission delivering substantial improvements in fuel burn.
I am confident that our technology and product road maps are on track to maintain woodward's competitive edge through further innovation and alignment with our customers evolving requirements.
Chip: Moving to our markets and aerospace strong commercial domestic and international passenger traffic continues.
So as you heard in recent earnings calls some airlines discussed overcapacity in the U S domestic market and lower yields, which they believe to be short term in nature.
While the macro environment remains strong as you heard from other companies the players in the supply chain from aircraft Oems down to the raw material supplier and all of the tiers in between.
Not yet performing and synchronization.
With that in mind I'd like to update you on two lines of effort Woodward launched in 2022 to help our supply chain recover.
We deployed resources to suppliers that were struggling and we invested in rapid complex machining centers to offload suppliers and give them a faster path to recovery.
We continue to run our tiered escalation management system that I described in detail previously and.
And we currently have engineers and operations experts forward deployed to support suppliers that are impacting or likely to impact our build rates.
We are seeing numerous suppliers graduate from this list, but we have seen new ones enter the list as well.
We will continue to invest resources to collaborate with our suppliers.
With a goal of taking action sooner and.
And solving problems before they impact build rates.
Chip: We continue to reap benefits from our investment in rapid complex machining centers as we have temporarily in source thousands of parts to allow suppliers breathing room to recover.
We have invested in additional machines this year to provide even more capability and flexibility.
There is a third line of effort our lean transformation, but we are focused on reducing lead times and improving flow. This most basic body of work is delivering benefits associated with efficiency, but also flexibility and resilience.
Back to the bigger picture the lack of synchronization across the aerospace supply chain is creating part shortages from strolling suppliers and a buildup of inventory from those that can perform.
We detect that our inventory is building in the system and we are monitoring progress in communicating with our customers as we want to manage smooth flow through our operations and offer the same opportunity to our suppliers.
We are working together as an industry to better align production and support each other on a path to smoother connected flow.
Aerospace aftermarket activity remains healthy due to continued high utilization and in particular high utilization of legacy aircraft and engines that is resulting in additional shop visits and repair activity with a longer horizon than we would have predicted just a few years ago.
Overall, we continue to be pleased with the outlook of our aerospace business.
In industrial.
Rising global power demand is driving increased investment in gas fired power generation.
We are also seeing increased demand for more efficient lower emission and alternative fuel already installations to support grid stability.
Data centers and associated demand for backup power are forecast to grow sharply driven by increasing artificial intelligence and other competing demands.
In transportation, the marine market remains healthy with elevated ship build 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 heavy duty trucks in China softened this quarter. However.
However industry data indicate that natural gas engines are taking share from diesel engines and heavy duty truck applications in China.
Discussions with our customers revealed elevated inventory levels and they expect to cycle through their stock in the near term.
This resulted in lower China on highway orders for Q4, and we've revised our full year industrial sales guidance, Accordingly, which bill will go through in his section.
Regarding oil and gas markets U S. Natural gas production continues to be pressured by low gas prices, although global demand for natural gas infrastructure remains strong.
Positive sentiment in our space is driven by strong performance and outlook and domestic shale oil as well as refining and petrochemical activities in China, the middle East and India.
In summary, I would like to thank our members for their hard work and dedication to serving customers and improving our business results.
We're on track for a solid year with sales growth of two of 12%.
200 basis points of margin expansion and generating approximately $90 million of incremental free cash flow overall, we are well positioned to capitalize on the robust demand across our end markets and we remain focused on profitable growth operational excellence and.
And innovation to maximize shareholder value.
I'll now turn it over to bill to share our financial results.
Thank you chip and good afternoon, everyone.
As a reminder, all comparisons are year over year, unless otherwise stated net sales for the third quarter of 2024 were $848 million an increase of 6%.
Earnings per share for the third quarter of 2024 were $1 63.
Compared to earnings per share of $1 37.
Chip: Aerospace segment sales for the third quarter of 2024 were $518 million compared to $481 million.
An increase of 8%.
Commercial OEM sales were up 2% and commercial aftermarket sales were up 19%.
Defense OEM sales were down 4%, while defense aftermarket was up 22%.
Overall aftermarket sales were supported by higher aircraft utilization.
Aerospace segment earnings for the third quarter of 2024 were $102 million or 19, 7% of segment sales compared to $83 million or 17, 3% of segment sales. The increase in segment earnings was a result of price utilization.
And higher aftermarket volumes, which were partially offset by inflation.
Chip: Turning to industrial.
Industrial segment sales for the third quarter of 2024 were $330 million compared to $320 million an increase of 3%.
Industrial segment sales growth moderated year over year as expected due to relatively flat China on highway sales.
Chip: The increase in industrial sales was primarily driven by an 8% increase in power generation and a 3% increase in transportation, partially offset by a 6% decrease in oil and gas.
China on highway sales were flat compared to the prior year at approximately $55 million and were down sequentially.
As chip referenced earlier, we are expecting further declines in the fourth quarter with sales in the range of $10 million to $15 million at.
At this depressed level of sales the business delivers negative margins.
Industrial segment earnings for the third quarter of 2024 were $60 million or 18, 1% of segment sales compared to $58 million or.
Or 18, 2% of segment sales industrial earnings remained relatively flat as a result of price realization, which was largely offset by inflation and unfavorable mix.
Excluding the impact of China on highway natural gas truck business industrial segment margins continued to be strong at approximately 14%.
Non segment expenses were $30 million for the third quarter of 2024 compared to $24 million.
At the Woodward level.
R&D for the third quarter of 2024 was $39 million or four 6% of sales compared to $35 million or four 4% of sales.
Chip: SG&A for the third quarter of 2024 was $74 million or eight 7% of sales compared to $65 million or eight 1% of sales the.
The effective tax rate was 16, 4% for the third quarter of 2024 compared to 20%.
Looking at cash flows.
Net cash provided by operating activities for the first nine months of 2024 was $297 million.
Compared to a $156 million cap.
Capital expenditures were $72 million for the first nine months of 2024 compared to $57 million.
Free cash flow was $225 million for the first nine months of 2024 compared to $98 million.
Adjusted free cash flow for the first nine months of 2024 was $230 million compared to $103 million.
The increase in free cash flow and adjusted free cash flow was primarily due to increased earnings and improved working capital, partially offset by higher capital expenditures.
Leverage was one five times EBITDA at the end of the third quarter.
Chip: During the first nine months of 2024, we returned $348 million to the stockholders in the form of $43 million of dividends and $305 million of share repurchases.
Turning to our 2024 guidance.
We are revising certain aspects of our full year 2024 guidance to better align the expectations with the current environment.
We're lowering the industrial sales growth range based on our visibility into the fourth quarter orders for the China on highway natural gas truck fuel systems.
Chip: The reduced China on highway deliveries, coupled with the dynamic supply chain environment that chip chip referenced earlier are leading us to return to our original fiscal year 2020 for guidance for Q4 free cash flow.
Supply chain disruptions, such as late supplier deliveries and customer push outs will likely extend the timing to collect cash on planned deliveries outside of fiscal year 2022 for year end.
We remain confident that we can deliver on the revenue range for aerospace in spite of these supply chain issues.
Total net sales for 2000 2024 are now expected to be between three to five and $3 3 billion.
Chip: For 2020 for aerospace sales growth is still expected to be 12% to 14%.
Segment earnings are now expected to be approximately 19% of sales the high end of our previous range for.
For 2024, we now expect industrial sales growth to be 11% to 13%.
Segment earnings are now expected to be approximately 17, 5% of segment sales.
Chip: At the Woodward level, the adjusted effective tax rate is now expected to be approximately 18, 5%.
We now expect adjusted free cash flow to be between 300 and $350 million.
Capital expenditures are still expected to be approximately $100 million.
Adjusted.
Earnings per share is now expected to be between $5 80.
$6 based on approximately 62 million fully diluted weighted average shares outstanding.
To reiterate chip's earlier comment we are on track for a solid year with year over year sales growth expanded margins and strong free cash flow generation.
This concludes our comments on the business and results for the third quarter 2024.
Operator, we're now ready to open the call to questions.
Thank you.
A question and answer session will begin at this time.
A speakerphone, please pick up the handset before pressing any numbers.
Do you have a question. Please press star one on your push button phones.
Should you wish to withdraw your question press the pound key.
Your question will be taken in the order. It has received please standby for your first question Sir.
Our first question comes from Scott Mackenzie with Melius Research. Please state your question.
Good evening.
Hey, Scott.
Chip pill, you flag airlines talking about having too much capacity in the market, especially in the U S. Domestic market at the same time GE Aerospace reported a one three book to Bill for its commercial aftermarket.
No orders can be lumpy, but can you give us any color on how your commercial aftermarket bookings have been as book to bill above one either in the quarter or year to date.
So we don't really advertise our book to Bill on on our aftermarket.
But it's strong intake incoming and strong outgoing as you saw in our results. This quarter. It was up 19% on commercial aftermarket I.
I think the capacity comments or just a little bit of cautionary tale about.
I think the numbers were we the.
The industry delivered 8% new capacity to the.
The U S domestic.
Stick market and passenger traffic grew 4%. So it's not a big mismatch, it's small, but it's just a little bit of cautionary that the growth rate might be a little bit slower.
Think it impacts deliveries or anything of that nature utilization is still quite high.
Just sort of trying to stay consistent with all the news we're hearing in the marketplace.
Okay and then in late May Boeing received a seven $5 billion order for <unk> kits and other components.
Are you starting to see orders in support of that contract.
Speaker Change: And could any of that translate to defense revenue this year or is it more of a fiscal 'twenty five.
Well, it's getting late in our fiscal year as you know in these.
Requirements take while to slowdown we are in discussions with Boeing and other parts of the supply chain for potential.
Potential increased rates, but nothing has been firmed up yet for us.
Speaker Change: Okay. Thanks for taking my questions you.
You bet. Thank you.
Our next question comes from Scott <unk> with Deutsche Bank. Please go ahead.
Bill can you clarify how much money the China natural gas truck business is assumed to lose in the fourth quarter.
Yes.
As we talked about.
Scott.
Do expect that at the level of 10% to 15 of revenue that it goes from.
From a position where it is a negative impact from margin standpoint, I won't go into the exact detail of what that is from Macquarie.
Quantify it but it is as you can see.
A drag on our business. This is as we have discussed and kind of how we have continued to characterized.
Each business has been very volatile.
So not surprised that were here this quarter.
Given the volatility, but yes. It does it does drag our margins down on our industrial segment I think the good news, though on the to be yes.
Glass half full the good news on the industrial side is that.
We believe our our non China OE business will be in the 14% range. So we're feeling we're feeling good about our ability to execute and the rest of the business.
Okay, and I thought the original guidance had assumed that you would have 90 days of visibility <unk> guide with a solid fourth quarter that you had always assumed kind of the fourth quarter when it really have much in there.
That surprised by it.
The guidance reduction on this because I had always thought that this was already not assumed so can you help me just understand yes.
Yes, we were we were thinking that we were going to be more in the breakeven zone of maybe.
50% more to <unk> this amount of business in the fourth quarter and so like like we've said before we have a one quarter visibility and so this is our visibility into the fourth quarter.
We got a little bit more in third quarter than we were thinking we'd get and we're getting lessen in the fourth quarter, maybe we will get more in the first quarter of 'twenty. Five is just it's hard to say.
Okay. We do like this we do like this business, it's a strong margin it's good.
<unk>.
It's a good application is just lumpy and hard to start to see so.
Our focus is to be prepared to deliver efficiently and make the money when the opportunity is right and try to get through these these tougher quarters.
And then bill you repurchased it looks like $300 million of stock in the quarter for the share count was actually up sequentially and Ethernet change. The guide on share Count can you help me understand that thanks.
Yeah.
We still think that that guide is in the range and we felt that the 62 million shares.
For now is an appropriate guide for the for the year.
So the $300 million of buybacks in the quarter.
What impact does that have on the share count if any.
Yes.
It does help us to again stay in that stay in the range of our guide of 62.
As chip mentioned last quarter, we were going to look to prioritize the share repurchases in line with the $600 million program that we kicked off at the beginning of the calendar year.
And so and as you know our plan is to offset dilution and this will help us to do that.
So are you issuing issuing $300 million of stock.
I don't understand the math works.
There's a there's a dilution associated with the compensation programs in.
Exercises of options and things of that nature that we.
Offset with the purchase of these shares.
Okay. Thank you.
You bet.
Our next question comes from Pete Skibinski with Alembic Global Please go ahead.
Yes, good afternoon guys.
Afternoon Pete.
Pete: Just wanted to talk more about industrial on the revenue side I guess.
Is.
Is net pricing, becoming a little more challenging in certain niches and industrial.
Well.
I don't know about niches.
I think pricing in general is going to be a little bit more challenging across the board as inflation tends to moderate a bit.
But we've got we have opportunities with strategic pricing of our catalogs.
We have still a few more longer term LTA is to come.
Later in this this year and into FY 'twenty five that will provide us some opportunities for business that has been not adjusted for inflation over the past so theres still some opportunities to go in.
We're focused on also cranking up.
The cost reduction machine and productivity to make sure that margin expansion continues throughout the next couple of years.
Okay, Okay, and then it looks oil and it looks like oil and gas was down for the second quarter in a row, which I think everyone kind of understands that.
On the power Gen side are we kind of.
It seems like we are lapping easier comps or are we getting now to more of a steady state rate, where maybe you can grow like I don't know two times GDP in power Gen is that kind of a.
Good.
Estimate for that for that area or would you add anything to that.
I think in the in the short term medium term debt.
What you just quoted is a logic comparison is.
Works for me.
I think longer term I think we still might be facing into a a good news story of natural gas Renaissance site.
If you've listened to some of the other <unk>.
Mmm manufacturer for gas turbines, you might get more more color there, but if I do the math on the gigawatts per year required, especially in this computing environment and grid stability.
We have to add more natural gas to the to the grid in the U S and abroad. So I think that.
Especially gas turbine.
Power generation is looking good for the future.
Yes, Okay I appreciate it thanks guys.
Beth.
Our next question comes from the line of David Strauss with Barclays. Please go ahead.
Thanks, Good evening everyone.
Hello, David.
Hey, Jeff just trying to put a finer acquire on industrial as we think about.
We are modeling this business for <unk> in the 25, it looks like you're implying an exit rate.
Yes, it's somewhere around $300 million a quarter in sales and 13% margin you talked about 14 ex the China on highway I mean, it's $300 million at quarter end.
13% margins the right way to model. This next year should we be thinking differently about it.
Well as you know, we're probably not quite ready to talk about FY 'twenty five guidance.
We like the industrial businesses that we're in whether it's.
Standby power and marine in the reciprocating engine business or it's.
The right kind of valves and important fuel control systems for gas turbines. We think all of those are growing markets to some extent, though as you.
You may have noted and others that.
Comps are getting a little harder to.
To show large growth, but we think that small to medium growth is still available and so we will as we get closer to FY 'twenty five we'll try and quantify that for you.
Okay.
Hum.
Bill would you mind breaking out the volume and price or at least price that you saw year over year and Aero and industrial.
Yes, we don't typically get into that level at the segment at the segment level, but.
At the Woodward level, we saw about 7% of of price.
Come through in the in Q3.
Yes.
Great. Thank you.
Youre welcome.
Our next question comes from the line of Gavin Parsons with UBS. Please go ahead.
Hey, Thanks, guys good afternoon.
Hey, Kevin.
Did you guys actually raise EBIT guidance this quarter.
Net of segments.
Thanks.
Basically at the segment level for our margin guide.
In industrial we went from a range to 17, 5% approximately.
We took our aero guidance.
From a range of 18 to 19 to approximately 19% which is at the top end of the guide.
Of the preview.
Speaker Change: The net of those two is higher is that offset by higher corporate or does that drop through to EPS.
Yeah.
Matt: So we on the EPS guide, we took the bottom end from $5 70 up to $5 80 to $6. So it does move yes. So if you just add point, okay and just play in the mid <unk>. If you just play in the mid point, Matt. The short answer is yes, but to Bill's point. We are just trying to put a finer point on what we see for the rest of the year.
Since were that close to the to the final answer.
Makes sense and dedicated Kevin that get for you.
I appreciate it and then just on the aerospace OE you guys kind of talked about channel inventory building.
You grew sequentially still there I know you don't want to talk about 25, yet but have you actually seen any change in demand signals from your customers and how are you thinking about managing your 25 to ensure there isn't too much inventory in general Thank you.
Right. So we do have signals from different players in the in the in the tiers of the supply chain. So we're trying not to read too much into the different signals, we've had some push outs.
As people try to rebalance their inventories as well.
In the supply chain, so we've seen a little bit of that but we've seen no official overarching change to rates.
And we're just trying to manage it well and stayed in communication and not build too much of our own finished goods but.
Make sure we can respond if the pool increases.
Thanks.
You bet.
Our next question comes from the line of Sheila <unk> with Jefferies. Please go ahead.
Hi, Jeff.
Thank you so much so first on industrial.
Trying to understand the profitability of that business.
Yes, when you look at the <unk> business I think in prior quarters, you had said it operated inventory light adjusting circumstance.
And then <unk> on the fixed cost and so how do we think about it.
Going from 40% op margins at $50 million of revenue to breakeven at 25 million.
Las <unk>.
At $10 million to $15 million of revenue it seems like it's a 40% operating loss given the rest of that segment is operating at 14%. So why does the business shrink so much is that customer or what is it.
Well as volume and fixed cost and that's what that's what the math is.
What the math says Sheila that.
Sure.
Sensitive to the amount of volume in it it can swing pretty pretty dramatically.
Okay. So it's all based on a certain customer and pricing for that customer.
The volume goes in it's very volatile.
And then maybe if I could ask about Aero Dan in terms of inventory I feel like this is what we've been waiting for with others in the supply chain, but nobody has really helped the impact of that so.
I guess do you think this is more of a comment in terms of inventory, where where are you seeing it most in the supply chain and then is it fair to say that the aftermarket offset lower OE, hence the margin raise in aerospace.
I didn't catch that last part of the question Sheila.
Is it fair to say that stronger aftermarket was better and Thats, what led to higher margins in aero versus the lower early.
Yes, yes, certainly Sheila we had a mix effect of aftermarket versus OE that helped.
The aerospace margins.
So as far as that mix oriented.
Just to answer your question on inventory build so.
It's value stream specific and it's cut.
Customer specific to.
We're seeing some of the builds in the inventory so like I said, we're not overreacting in any way, we just want everyone to know that.
We're paying really close.
Close attention to it we are communicating with our customers and.
Some of that we're going to pay a lot of attention too as we figure out what FY 'twenty five looks like.
Thank you.
Welcome.
Our next question comes from the line of Louis Raffetto with Wolfe Research. Please go ahead.
Hey, good evening, thanks, guys.
Afternoon.
So I guess I want to go back to the industrial Guy because I'm still a little confused you.
You originally guided third quarter, <unk> $35 million to $40 million and I guess, you've kind of had this implied $20 million to $30 million in your model for the full year. So back half of the year Youre talking $55 million to $70 million.
You did I think you said 55 in the third quarter and now you are looking for 10 to 15 so.
Speaker Change: That's still the same amount of natural gas in the second half of the year. So I'm just trying to understand the lower.
Industrial guide as it is as John Walsh of gas or is it something else.
Yes.
Melissa.
The way I see it as that.
For the second half, we are actually lower than what we what we expected.
Again, we plan that fourth quarter.
Roughly at.
We play in the quarters roughly at sort of that 30.
At that level, where we don't distort industrial margin rates. So so that's what we had for third quarter did come in a little bit stronger, but in the fourth quarter, it's actually lower than what we expected so.
Two things together, our second half is less on the China OE each standpoint.
Okay.
Maybe just on that nonoperating expense it looks like youre tracking towards maybe three 5% or even above that I think you'd previously last year Sir.
Mark that is three to three 5% I mean should we think of that as being on a go forward basis at the high end of that from now on yes.
It came in around three.
4%.
<unk>.
It's there to support our infrastructure investment in our infrastructure to support growth and we expect it to be around that 335.
And we will update that as we get into our 24 guide.
Alright, and then just one last one just to be clear I guess one of the reasons. The commercial OE growth was relatively speaking low was simply we had a really tough comp and so is it fair to expect we should see acceleration in growth into the fourth quarter.
Yes, Youre right.
<unk> last year.
So the certification of the RGB, which which did we had inventory so that did give us.
<unk> recorded last year in commercial OE, and so that is something that we're combating it.
<unk>.
And we are continuing to see.
Hum.
Yes, yes, I'd also add that there is.
As a chance for that acceleration, but there is.
As many things as many headwinds to that on the supply chain and the customer inventory that we just need to to be moderate in our in our view about what.
Is likely to happen so it could be it could be more but but.
We feel confident about the range, we have said about the.
Speaker Change: Aerospace.
Revenue levels and growth levels for the year.
Based on that.
Thank you.
You bet.
Our next question comes from the line of Marc Michael Cerasoli with tourists Securities. Please go ahead.
Hey, good evening guys. Thanks for taking the questions.
Just on the aerospace segment and the margins I guess youre going to get some some nice lift again in the fourth quarter, but the implied margins are going to be down sequentially and I guess, just even bigger picture.
Pre Covid ethics revenue run rate you guys were north of 20% on a on a less favorable aftermarket OE mix I mean, you're probably just a shade over a third of the revenues that aftermarket for.
Defense and commercial and now Youre, probably running at 45%.
I mean, what's holding you back from getting these margins higher.
We probably could sit here and say this aftermarket is not going to be sustainable. So just I know youre not going to give guidance, but that longer term forecast you have is 20% to 22% margins.
So is there anything holding back the Aero margins right now from getting back to those pre COVID-19 peaks.
Let me just clarify something that you said about guiding the margins down next quarter, we when we give our our range of R.
Approximate 19% range that does not indicate that we are going to be sequentially down next quarter based on our year to date margin achieved so just to clarify that we're not we're not seeing that.
<unk> and <unk>.
Aerospace margin.
Next part of the question is really what's holding us back.
We are.
We are starting to enter the <unk>.
Realm of the ability to generate productivity based on all the new members.
We've hired and brought up to speed and.
Our lean transformation has taken hold and where we're getting better on those on those value stream lines that are under transformation.
We incurred a lot of inflation into our supply chain.
Costs that are working their way through and we have worked hard to get some price to offset that so.
The factors that we've been working within this sort of 17% to 19%.
Profitability range over the last two years.
Well, we talked about our Investor day guidance of 20 to 22.
Plus percent and the 2026 timeframe certainly feel confident that all of the the productivity.
<unk> automation lean transformation.
Supply chain work in sourcing work to improve those margins from now to then.
Those are activated programs and it's going to take time to make them to get them all the way through.
Speaker Change: For a complete <unk> certification in.
Frugal.
Got it got it and then just back to maybe <unk> question on inventory I mean leap I think Jay was originally forecasting 2025% growth for the year now zero to five.
Do you have any line of sight into actual units you shipped were where you originally building to that schedule and can you give us any color maybe where you are your actual build rates are.
Speaker Change: Well we're.
Very closely with all of our customers, including the.
Jay portion of CFM for leap.
We work together to provide.
All of the hardware that they need to build engines and what inventory they want to be comfortable with.
Ensure that they can start engines on time so.
We've been working with them.
On this program for a long time, and we've got a really good synchronization.
The long term demand is and working out what to do each month and each quarter thats. It.
Right.
Ongoing.
Real time discussion.
Okay perfect. Thanks, guys I appreciate it.
Thank you.
Our next question comes from the line of Gautam Khanna with Cowen. Please go ahead.
Hey, good afternoon guys.
Good afternoon gentlemen.
To follow up on that last question, maybe asked a different way are you guys actually a bottleneck or have you been.
Is your supply chain been relatively.
Brazilians and keeping up with the.
The rates that were expected of the entire supply chain and therefore.
We should be a little more cautious of how we calibrate 2025 OE rates, our OE revenues.
So in aerospace.
<unk>.
Broadly speaking in 2022, we were a problem in <unk>.
Terms of trying to be on time, and where we impacting customers guests in 2022, we were impacting customers, but in the fiscal year 2024 were not impacting customers with their build rates, we are not a bottleneck.
We're not 90% on time in full like we'd like to be to their MRP systems, but certainly their inventory there is inventory in front of build stations at our customers and we're largely on time is what I would say in the aerospace segment.
And have the Oems or the subcontract manufacturers that you shipped to.
Communicated a revised.
Purchase scheduled from you guys or are you just kind of anticipating that might happen.
So where do you think <unk>.
Yes, nothing official has been communicated from the very top though different parts of the sub tiers asked us to push out deliveries in and slowdown and things of that nature to adjust to their inventory levels and that causes us to build up more finished goods and that's what we're just saying.
Here is that we're seeing some of that activity.
Pick up as we start to not only be on time to their need but beyond time to their MRP system and maybe the MRP systems running a little hot.
Got you and then just a follow up on the guidance then.
The guidance revision.
So industrial was taken down the top line by.
Whatever 2% to $22 23 million box was that entirely due to.
The CMG.
On highway stuff, which is et cetera.
Okay. So that was a $7 million delta it sounds like in terms of operating profit.
With some of I think what some of the confusion is that when we talk ranges and guidance and then we experienced actuals we were setting those ranges based on our forecast for the best number we thought would be achieved and so when we get the actuals.
For third quarter, and we have the actual orders for fourth quarter.
Re snap that line and we say what were down compared to what we expected.
In the last quarter's guidance, so we're going to adjust the midpoint to that and its entirely due to China on highway in this case.
And given it's still a range.
On Aero sales growth.
I mean, <unk> I mean, what's the variance in the ranges just level of Destocking or do you have I mean, you're one month into the quarter. So.
I'm, just curious like where would the variance b if anywhere.
<unk> is the combination of the variance is a combination of customers that could can push.
Deliveries out and not accept things that are finished as well as suppliers that could cause one of our value streams too.
Not produce as many units as the customer.
As ordered and we would like to deliver so it's both sides of that equation.
It can create.
The low end of that range and then on the high end of that range is that we don't have.
Any supply chain issues standing in the way of deliveries and the customers will accept everything we can provide.
Stepping back guys I'm curious on how should we think about I mean, how do you guys think about 2025 on highway.
Should we assume it's just breakeven through the year like what's your best guess, given there's some destocking going on them.
Q4 levels may not be representative of.
Speaker Change: The following quarters.
What would you do.
I'll give you the standard answer to that.
I give on China on highway is that.
We can't predict more than a quarter because it's volatile there are not natural market signals to help us triangulate a forecast.
So it's so difficult to do that we've chosen not to do it.
That's.
Speaker Change: We've tried to help you with what are.
Non China on highway industrial business capability is with that margin level of around 14% right now is where we're where we're driving that business and thats, probably the best I can do for you right now.
Okay. Thank you I appreciate it.
You bet.
Our next question comes from Noah <unk> with Goldman Sachs. Please go ahead.
Hey, good evening everyone.
Afternoon.
Chip, maybe there was some confusion around discussing industrial at 14%.
Ex China on highway because.
If it's truly a completely excluding ex.
China I'll highlight that's then the loss, making so then sub 14%.
Is that correct or I guess.
Yes to the last question was if we just took it out of the model next year, what do you think the industrial margins would look like.
Yes, I apologize for maybe some imprecise language I've used in the past, but if.
If you think about China on highway doing no harm to the industrial business.
Now we're operating at 14%.
Margin.
Which that means that there are enough China on highway orders and deliveries to cover the fixed cost of that operation.
So if it goes negative then it's going to impact of 14% rate.
Do you have a sense as to where we're able to breakeven.
Yes, we said in the past that the 35 to.
Well, we've said in the past that.
$35 million to $40 million as is.
No damage to the.
No distortion to the industrial business and I think we'll just stick with that for.
For now.
Okay.
Do you have a sense for how long it will take to clear out.
The inventory that's in the channel on China on highway.
Speaker Change: Okay.
Yes.
We don't we don't know for sure on that know our customers are telling us that it's going to be a short lived destocking, but we don't have a great view into that.
Ourselves.
Okay.
Just to clarify I know on your on your question, maybe just to put a fine point on it.
In the mid to low Twenty's.
Mid $20 million is the <unk>.
Breakeven point for the China on highway.
Right.
With 35 would be where it's making something close to the segment margin.
Yes, sorry about that.
Okay.
Have you started to see.
Deep.
<unk> visit aftermarket revenue come through I mean, just the consolidated <unk>.
Growth rate it seems like no, but those seem to be starting to move along.
Yes, I'm actually glad you asked that question Noah.
We have seen quite a quite a nice.
Increase in.
Repair and overall from gear.
Geared turbofan and leap.
With the geared turbofan.
Speaker Change: Fuel nozzles, and maybe some other components, but mostly fuel nozzles.
And then on leap.
The fuel metering units as well as pumps and some other valves and actuators coming through but mostly pumps and fuel metering units.
And that.
Bodes well for the future because it has it has picked up.
I would say.
Doubling year over year.
Net.
One five to two times.
Off a small number but it's picking up.
Okay. Good.
Then just you have defense.
Speaker Change: The guided weapons.
It was under pressure for a while and then it kind of stabilized.
I think theres been some order flow but.
The revenue I guess quarter to quarter Hasnt quite sustainably picked up.
Do you have enough visibility to speak to just directionally, what kind of OE and aftermarket growth rate you could see next year in defense.
But we're not really ready to talk about FY 'twenty five.
Yes, Noah but.
If you look at the trends.
It looks it looks like the.
The defense market itself is growing.
And we've stated our our strategy is to is to.
Try and grow R.
Our repair and overhaul participation in that market.
That's one of our our growth strategies for the aerospace business.
There's a lot of opportunity there so and we're excited about it but we're not ready to quantify that.
Okay Alright.
Youre welcome.
Our next question comes from Louis Raffetto with Wolfe Research. Please go ahead.
Yes. Thank you for the follow up just wanted to be clear on this so I guess, we need to think about $100 million in China natural gas sales next year, just to have 14% margins that sort of what I just shared.
If they're if they're lower than that youre going to have lower than 14% margin with the higher you're going to have higher than 14% margins.
But one thing.
Speaker Change: Clarify we didn't say, what our industrial margins were going to be next year. So.
We don't intend to stand still.
On for one point I don't know Bill if you want to talk about the.
China revenue.
Yes.
I think as as chip mentioned and as we talked about the breakeven point.
Point is kind of what we just stated in.
In terms of <unk> for 25, and what the China revenue is again I don't think were ready to.
Get get into that but chip statement that our breakeven is mid twenties.
That just again to repeat it that is a statement.
Okay, and fair enough I didn't mean to imply that your guidance for kind of just taking the current sort of run rate that you've talked about for the last three quarters, but I appreciate it. Thank you.
You bet.
Mr. Blankenship there are no further questions at this time I will now turn the conference back to you.
Alright, Thank you very much like to thank everybody for joining our earnings call today and wish you well the rest of the week.
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