Q4 2024 Woodward Inc Earnings Call
Thank you for standing by welcome to the Woodward, Inc, fourth quarter and 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.
Speaker Change: Joining us today from the company are chip Blankenship, Chairman and Chief Executive Officer, Bill Lacey, Chief Financial Officer, and Dan provides NEC director of Investor Relations.
Speaker Change: I would now like to turn the call over to Dan <unk>.
Dan: Thank you operator, we'd like to welcome all of you to Woodward's fourth quarter and fiscal year 2024 earnings call in.
Speaker Change: In today's call chip will comment on our strategies and related markets.
Speaker Change: Bill will then discuss our financial results as outlined in our earnings release and.
Speaker Change: And at the end of our presentation, we will take questions for.
Speaker Change: For those who have not seen today's earnings release, you can find it on our website at Woodward dotcom.
Speaker Change: We have included some presentation materials to go along with todays call that are also accessible on our website.
Speaker Change: A webcast of this call will be available on our website for one year.
Speaker Change: All references to years in this call are references to the company's fiscal year unless otherwise stated.
Speaker Change: I would like to highlight our cautionary statement as shown on slide two of the presentation materials.
Speaker Change: As always elements of this presentation are forward looking including our guidance and are based on our current outlook and assumptions for the global economy, and our businesses more specifically.
Speaker Change: Those elements can and do frequently change.
Speaker 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.
Speaker Change: These statements are made as of today, and we do not intend to update them, except as required by law.
Speaker Change: In addition, we are providing certain non U S GAAP financial measures.
Speaker Change: 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, we believe this additional financial information will help in understanding our results.
Chip Blankenship: Now I'll turn the call over to chip.
Chip Blankenship: Thanks, Dan and thank you all for joining us today.
Chip Blankenship: 2024 was a remarkable year for Woodward.
Our team continues to make significant progress.
Chip Blankenship: Guided by our values and motivated by our purpose.
Chip Blankenship: To design and deliver energy control systems that are partners count on to power a clean future.
Chip Blankenship: Our members' dedication to serving customers and meeting our commitments to all stakeholders drove record performance in a number of areas.
Chip Blankenship: Annual revenue exceeded $3 billion for the first time.
Chip Blankenship: Which was the <unk>.
Chip Blankenship: The result of strong performance in both of our segments.
Chip Blankenship: Aerospace sales increased approximately 15% to record levels.
Chip Blankenship: And margins expanded approximately 260 basis points.
In industrial we also achieved record sales.
Chip Blankenship: Boosted by elevated sales in our China on highway product line and continued strong performance from the rest of our industrial business.
Chip Blankenship: As a result, we delivered an all time high earnings per share.
Chip Blankenship: And free cash flow increased by more than $100 million compared to the.
Chip Blankenship: The prior year.
Chip Blankenship: Now I'd like to highlight some noteworthy achievements from 2024 and each of our value driver pillars of growth.
Chip Blankenship: Operational excellence and innovation.
Chip Blankenship: Starting with growth.
Chip Blankenship: We delivered on strong demand across our end markets.
Chip Blankenship: In aerospace with an unusual combination of localized demand uncertainty and continued supply chain challenges.
Chip Blankenship: Our team remained agile and adaptive to changing conditions.
The fact that we have significant content on commercial and defense growth programs.
Chip Blankenship: Coupled with an extensive installed base has allowed us to navigate the external forces and mitigate impacts to our business and members.
Chip Blankenship: As we move into 2025, we are ready for anticipated service growth from leap in GTS engines.
Chip Blankenship: In September we celebrated the completion of our loves Park transformation, which created a cutting edge facility.
Chip Blankenship: Featuring advanced MRO services infrastructure, including new testing capabilities.
Chip Blankenship: We are also working with customers to support their growth.
Chip Blankenship: For example earlier in the year, we announced new MRO agreements with Lufthansa technique.
Chip Blankenship: Clients Airlines and Turkish Technic.
Chip Blankenship: In our industrial segment, our diversified portfolio delivered strong results.
Chip Blankenship: We are preparing for continued industrial growth in specific applications and prioritize product lines.
Chip Blankenship: We recently broke ground on an expansion to a glutton facility, which will increase capacity and streamline flow and multiple value streams to deliver growth in power generation and marine transportation markets.
Chip Blankenship: We've also set a clear strategy to expand our industrial service offerings.
Chip Blankenship: We are deploying repair overhaul and upgrade capability regionally to better serve customers around the globe.
Chip Blankenship: The Woodward controls systems installed base is extensive.
Chip Blankenship: And we intend to make it easier for our customers to access OEM service Woodward.
Chip Blankenship: In addition, we continue to make progress on our product portfolio rationalization.
Chip Blankenship: As previously announced we signed a definitive agreement to sell our combustion component fabrication product line and all related assets in our Greenville facility to GE or Nova.
This targeted disposition is good for our customer and our members and is consistent with our strategy to focus our resources on product lines that provide the best return for shareholders.
Chip Blankenship: We are exiting the small product line that was dilutive to industrial earnings.
Chip Blankenship: In turn we are focused on our industrial gas turbine offerings with greater Woodward intellectual property and profitability, such as liquid and gas fuel metering systems as well as prime mover in power plant control systems for both heavy duty and Aero derivative gas turbines.
Chip Blankenship: Turning to operational excellence the.
Speaker Change: The safety and wellbeing of our members is my number one priority.
Speaker Change: And that of our management team each and every day.
Speaker Change: In 2024, we implemented human organizational performance or hub across several of our sites.
Speaker Change: We've seen a notable increase in workforce engagement and proactive measures taken.
Speaker Change: We plan to rollout across the rest of our sites in 2025 and 2026.
Speaker Change: Pop also supports our focus on quality by encouraging anyone to raise their hand, if they see an issue and it feel welcome to contribute to the solution.
Speaker Change: Moreover, it is an error reduction methodologies as well as a way to add layers of protection. So that human error does not lead to an unacceptable impact on personnel safety or product quality.
Speaker Change: Over the past year, we have accelerated our automation journey.
Speaker Change: Automation will enable future growth, while improving safety and quality.
Speaker Change: From a workforce development standpoint. This approach allows us to mitigate the impacts of attrition and transition members to more value add higher skilled work.
Speaker Change: We're seeing early positive results.
Speaker Change: We continue to make progress on our supplier simplification program.
Speaker Change: We're focused on working with our strategic suppliers to reduce complexity.
Speaker Change: Improve alignment and provide better demand signals.
Speaker Change: In addition, our rapid response machining centers continue to provide flexibility by alleviating supplier capacity issues and internal bottlenecks.
Speaker Change: In 2025, we are focused on continuing our lean transformation in our quest to achieve predictable and consistent operating results.
Speaker Change: Lastly, we've made great progress on our innovation value driver.
Speaker Change: We are focused on innovation to solve customer challenges and we're helping them achieve their future goals.
Speaker Change: Whether it's related to technology stocking for the next single aisle aircraft or for the energy transition.
Speaker Change: In aerospace we are prioritizing technical maturity to achieve share growth for the next single aisle aircraft.
Speaker Change: In July we announced that Woodward was selected to provide rotary actuation solutions for the NASA and Boeing Transonic Trust braced wing <unk> 66, a demonstrator.
Speaker Change: In addition, we were selected to provide the trim control panel for jet zeros blended wing body demonstrator.
Speaker Change: Last year, we completed a significant construction project at our Stuttgart Engineering center to conduct hydrogen and fuel cell component testing as part of our investment to design and deliver components for the Airbus Zero E demonstrator.
Speaker Change: This work has potential for applications in both aerospace and industrial end markets.
Speaker Change: All of these accomplishments position woodward to be competitive for decades and to deliver long term shareholder value.
Speaker Change: Moving to our markets and aerospace strong commercial passenger traffic continues.
Speaker Change: While market demand remains strong industry supply chain challenges persist impacting build rates and creating further operational uncertainty for 2025.
Speaker Change: Our direct sales to Boeing have been negatively impacted by the work stoppage.
Speaker Change: And we responded by temporarily shutting down related production lines and redeploying resources to other areas.
Speaker Change: We're working closely with Boeing and remain poised to meet their future demand signals.
Speaker Change: Engine manufacturers are continuing to pull at a steady rate and conversations have indicated no changes in the near term.
Speaker Change: This is reflected in our 2025 guidance that bill will speak to later.
Speaker Change: Aerospace aftermarket activity remains healthy due to high utilization rates on legacy aircraft and engines.
Speaker Change: <unk> in higher shop visit rates for longer.
Speaker Change: And due to delays in new aircraft deliveries heavier work scopes have been implemented for each of the relevant legacy engines.
Speaker Change: In defence geopolitical developments continue to drive demand for defense products.
Speaker Change: Suppliers are actively scaling operations and we remain well positioned to capture these growth opportunities we.
Speaker Change: We are expecting strong growth across our defense portfolio in 2025.
Speaker Change: Including a significant increase in smart defense production, an additional order activity, which will more than satisfy the remaining open lots.
Speaker Change: The current lots are at legacy pricing levels, and Woodward will continue to experience compressed margins due to supplier price increases.
Speaker Change: For future lots, we have substantiated, our increased costs and anticipate improved margins from new pricing in late 2025 or early 2026, depending on delivery rates.
Speaker Change: Turning to industrial.
Speaker Change: Global demand for power generation remains robust.
Speaker Change: Investment in gas fired power generation is increasing for both primary and backup power to enhance grid stability and support the expansion of renewable energy.
Additionally, demand for data center power is forecast to grow sharply driven by increasing AI and other computing demands.
Woodward is well positioned to capture this opportunity, which includes control actuation and fuel metering systems for both base load natural gas and backup diesel applications.
Speaker Change: In transportation, the global Marine market remains healthy.
Speaker Change: Elevated ship build rates support strong OEM engine demand and future aftermarket opportunities.
Speaker Change: In the meantime high utilization rates are driving current aftermarket activity.
Speaker Change: Demand for alternative fuels across the marine industry continues to grow which validates our R&D investments as multi fuel engines feature higher Woodward content and we are currently enjoying a return on these investments with new engine and service kits currently in production.
Speaker Change: Demand for heavy duty trucks in China declined in the fourth quarter as production remains at low level due to local economic challenges.
Speaker Change: In 2020 for Woodward saw a material decline in sales from the first half to the second half of the year due to elevated inventory levels at our customers.
Speaker Change: Since we last communicated we now believe deteriorating local economic health and narrowing fuel price spread will negatively impact our China on highway sales more than previously thought.
Speaker Change: As we have communicated in the past demand is particularly volatile for this product line and we have limited visibility into future orders Bill.
Speaker Change: Bill will discuss more about woodward's outlook for China on highway in his section.
And oil and gas efficiency improvements and low commodity prices are impacting upstream services in the U S.
Speaker Change: Positive sentiment in this space is driven by continued investment in refining and petrochemical activities in China, the middle East and in India.
Speaker Change: In summary, we are pleased with our 2020 for performance and the progress we've made on innovation stabilizing supply chains, enhancing operations and positioning ourselves for sustainable growth.
Speaker Change: Both our strategy and execution are driving meaningful results and we expect solid momentum well into 2025 and beyond.
Speaker Change: I want to thank all Woodward members for their hard work dedication and commitment to delivering value to our customers.
Speaker Change: As we look to 2025, we remain focused on profitable growth operational excellence and innovation.
Speaker Change: This is how we will maximize shareholder value.
Speaker Change: And now I will turn it over to Bill who will share more detail around our 2024 financial performance at 2025 guidance Bill.
Bill: You chip and good afternoon, everyone. As a reminder, all references to years are references to the company's fiscal year, unless otherwise stated and all comparisons are year over year, unless otherwise stated.
Bill: Net sales for the fourth quarter of 2024 were $855 million an increase of 10%.
Net sales for 2024 were $3 three 2 billion.
An increase of 14%.
Bill: Total <unk> sales for both the fourth quarter and full year 2024 were the highest on record.
Bill: Earnings per share for the fourth quarter of 2024 were $1, 36% compared to $1 33.
Bill: Adjusted earnings per share for the fourth quarter of 2024 or $1 41.
Bill: There were no adjustments to earnings in the prior year quarter.
Bill: For 2024 earnings per share and adjusted earnings per share were $6 <unk> and $6 11.
Bill: Respectively.
Bill: Compared to earnings per share and adjusted earnings per share of $3 78.
Bill: And $4 21, respectively.
Bill: Aerospace segment sales for the fourth quarter of 2024 were $553 million.
Bill: Compared to $455 million, an increase of 22%.
Bill: Commercial OEM and aftermarket sales were up 16% and 22% respectively.
Bill: Defense OEM sales were up 40% and defense aftermarket sales were up 7%.
Bill: Aerospace segment earnings for the fourth quarter of 2024 were $106 million or 19, 2% of segment sales.
Bill: Compared to $78 million or 17, 2% of segment sales the.
The increase in segment earnings was primarily a result of price realization and higher volume, partially offset by inflation.
Bill: For 2020 for Aerospace segment sales were 2.03 billion compared to $177 billion for the prior year, an increase of 15%.
Bill: Aerospace segment earnings for 2024 were $385 million.
Or 19% of segment sales compared to $290 million or 16, 4% of segment sales for the prior year.
Turning to industrial.
Industrial segment sales for the fourth quarter of 2024.
Bill: $302 million compared to $322 million.
Bill: A decrease of 6%.
Bill: Transportation was down 19%, primarily due to decline in China off highway sales, which we had anticipated.
Bill: Power generation was up 4% and oil and gas was up 12%.
Bill: China on highway sales were $22 million in the fourth quarter, including revenue associated with the reversal of an earned volume rebate as.
As chip mentioned, we expect continued pressure on China on highway sales due to the deteriorating local economy and the narrowing natural gas to diesel spread.
Bill: We believe these conditions have prolonged the destocking efforts of our customers.
While full year, China on highway sales were approximately 70% higher than the prior year the fourth quarter was lower than the same period in 2023.
Bill: These fluctuations that we saw in 2024, clearly demonstrate both the volatility and limited visibility in this business.
Bill: We now expect China on highway sales in 2025 to be approximately $40 million.
Bill: We anticipate first quarter sales to be approximately $5 million.
Bill: As a reminder, quarterly sales below approximately $15 million will result in negative margin for this business.
Industrial segment earnings for the fourth quarter of 2024 or $38 million or 12, 6% of segment sales.
<unk> $254 million or 16, 9% of segment sales.
Bill: Industrial earnings for the quarter decreased primarily due to lower China on highway volume and unfavorable mix, which was partially offset by price realization.
Bill: Margin for our core industrial business, which is our industrial business other than China on highway were approximately 12%.
Bill: In the fourth quarter, which is lower than the approximate 14% run rate we achieved in recent quarters.
Bill: This sequential decrease was due mainly to unfavorable mix, including a temporary shift of production capacity to satisfy OEM customer requirements.
Bill: Due to the rebate reversal I previously mentioned, China on highway margins were accretive in the quarter.
Bill: For 2024 industrial segment sales were a record $1 3 billion.
Bill: Compared to 1.15 billion for the prior year, an increase of 13%.
Bill: Industrial segment earnings for 2024, or $230 million or 17, 7% of segment sales compared to $162 million.
Bill: Or 14, 1% of segment sales for the prior year.
Bill: With core industrial margins, showing approximately 200 basis points of improvement year over year.
Non segment expenses were $31 million for the fourth fourth quarter of 2024 compared to $24 million.
Bill: Adjusted non segment expenses were $27 million in the fourth quarter.
Bill: There were no adjustments to non segment expenses in the prior year period.
Bill: Non segment expenses were $120 million for 2024 compared to $131 million.
Bill: Adjusted non segment expenses were $112 million in 2024 compared to $96 million.
At the Woodward level.
Bill: R&D for the fourth quarter of 2024 was $35 million or four 1% of sales compared with $32 million or four 1% of sales.
Bill: For 2020 for R&D costs were $141 million or.
Bill: Or four 2% of sales.
Bill: Compared to $132 million or four 5% of sales.
Bill: SG&A for the fourth quarter of 2024 was $7 million to $8 million.
Bill: Or nine 1% of sales compared to $66 million or eight 5% of sales.
Bill: For 2024, SG&A was $307 million or nine 3% of sales compared to $270 million or nine 3% of sales.
Bill: The effective tax rate was 18% for the fourth quarter of 2024 compared to 15, 7%.
Bill: The adjusted effective tax rate for the fourth quarter was 18, 4% there were no adjustments to the effective tax rate in the prior year period. The full year effective tax rate was 17, 8% for 2024 compared to $15 <unk>.
Bill: 7%.
For 2024, the adjusted effective tax rate was 18% compared to 16, 8%.
Bill: Looking at cash flows.
Bill: Net cash provided by operating activities for 2024 was $439 million compared.
Bill: Compared to $309 million.
Bill: Capital expenditures were $96 million for 2024 compared to $77 million.
Bill: Free cash flow was $343 million for 2024 compared to $232 million.
Bill: Adjusted free cash flow for 2024 was $348 million.
Bill: Compared to $238 million.
Bill: 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.
Bill: As of September 32024 debt leverage was one four times EBITDA.
Bill: During fiscal 2024, we returned $449 million to stockholders comprised of $58 million in dividends and $391 million of share repurchases.
Bill: This includes $15 million of dividends and $86 million of share repurchases in the fourth quarter.
Bill: Turning to our 2025 guidance.
Bill: Total net sales for 2025 are expected to be between three three and three $5 billion.
Bill: Aerospace sales growth is expected to be 6% to 13% as segment earnings are expected to be 20% to 21% sales.
Bill: We expect total industrial sales to decline, 7% to 11% and segment earnings to be 13% to 14% of segment sales.
Core industrial sales are expected to grow 327%.
Bill: With earnings at 14% to 15% of core sales.
Due to the dynamics, we expect in our industrial segment in fiscal 2025, I wanted to walk you through two bridges that take you from 2012 for results to the midpoint of our 2025 sales and earnings per share guidance. These bridges on slide 18 of our presentation.
Bill: <unk> materials.
Bill: At the midpoint of our guide aerospace sales are expected to grow $196 million or nine 7%.
Bill: Core industrial sales are expected to grow $54 million.
Bill: Or 5%.
We expect this sales growth to translate into an additional $1 14 of earnings per share. However, we expect this growth to be offset by a significant decline in China. On highway sales are 225 guidance includes only $40 million of <unk>.
Bill: Later on highway sales.
Bill: It would be a decline of $175 million.
Bill: And a $1 15 reduction in earnings per share.
Bill: At the Woodward level, the effective tax rate is expected to be approximately 20%.
Bill: We expect free cash flow to be between 350 and $400 million.
Bill: Capital expenditures are expected to be approximately $115 million.
Bill: The investment in Capex represents a capital allocation decision to invest in high return projects, including our automation and manufacturing Assembly and test that has the added benefit of enabling future growth.
Bill: Earnings per share is expected to be between $5 75.
Is $6 25.
Bill: Based on approximately $61 5 million fully diluted weighted average shares outstanding.
Bill: So additional items to help you with your modeling, we expect year over year price realization at approximately 5%.
Bill: Non segment <unk> expense should be about three 3% of sales.
Bill: This concludes our comments on the business and results for the fourth quarter and fiscal year 2024.
Speaker Change: Now I would like to turn the call back to chip for some closing comments.
Chip Blankenship: Thanks, Bill we.
We entered 2025 with strong momentum overall, we are well positioned to capitalize on the robust demand.
Speaker Change: As Bill just mentioned our aerospace segment is forecast to grow and expand margins in our core industrial is forecast to do the same.
Speaker Change: The only significant decline we see is China on highway.
Speaker Change: And it may come back in the second half we shall see.
Speaker Change: We're on track to deliver the 2026 targets that we provided at our Investor day last year.
Speaker Change: Operator, we're now ready to open the call to questions.
Speaker Change: Thank you.
Speaker Change: <unk> and answer session will begin at this time, if you are using a speakerphone. Please pick up the handset before pressing any numbers.
Speaker Change: You have a question. Please press star one on your push button phones.
Speaker Change: To withdraw your question press the pound key.
Speaker Change: Your first question.
Speaker Change: Questions will be taken in the order. They are received please standby for your first question Sir.
Speaker Change: Your first question comes from the line of Scott <unk> with Melius Research. Please go ahead.
Speaker Change: Good evening.
Speaker Change: Hello, Scott.
Chip Blankenship: Chip I wanted to ask part of the investment thesis for Woodward as the ship set content gains on the leap in GTS relative to the predecessor programs, but Woodward doesn't have content on the CFM $56 seven B and powers 737 Engie is there any reason why you couldnt provide a PMA offering for.
Speaker Change: That engine, even though you're typically not a PMA provider and when you could boost your aftermarket growth.
Speaker Change: So we agree with you that the investment thesis is the growth in content that we have on the leap in GTS and the 737, Max <unk> hundred 20, Neo and we're really focused on serving the content and customers that we have on the V 2500, and the CFM 50.
Speaker Change: <unk>, five and getting ready for that that growth on the.
<unk>.
Speaker Change: Leap in GTS.
Speaker Change: We're not historically, a PMA supplier, we don't want to be a PMA supplier.
Speaker Change: But even if we did.
Speaker Change: Investment in that at this juncture of the remaining life of those engines, probably isn't the best use of capital and we wouldn't prioritize that.
Speaker Change: <unk> the other options that we have for pursuing.
Speaker Change: New product introduction.
Speaker Change: Okay that makes sense and then I have a question for bill.
Speaker Change: You had the defense OEM growth was really strong in the quarter, how much of that was driven by JD <unk> Boeing received a seven $5 billion order. The JDM tail kits in may So wondering if that drove the growth in the quarter and then how are you expecting the growth for guided munitions throughout fiscal 'twenty five.
Sure Scott.
Speaker Change: J J on was part part of the growth that we saw in Q4 for our defense OEM, but we also saw growth across the other products in the smart defense portfolio. They all contributed we expect for that for that for those products to continue to.
Speaker Change: To provide growth throughout 'twenty five as well.
Speaker Change: Alright, thanks for taking the questions and have a good Thanksgiving.
Speaker Change: Welcome Youtube.
Speaker Change: Your next.
Speaker Change: Question comes from the line of Matt Akers with Wells Fargo. Please go ahead.
Speaker Change: Yeah, Hey, guys. Good afternoon. Thanks for the question.
Speaker Change: I wonder.
Speaker Change: May have missed it but.
Speaker Change: You said you pause production a little bit for Boeing during the quarter could you just confirm if you've restarted and kind of what rates are at now.
Speaker Change: Sort of related to that.
Speaker Change: Kind of the puts and takes in terms of the the aerospace guidance range, what yes, what production rates will get you to the higher the low end there.
Speaker Change: So I would separate the.
Speaker Change: Engine.
Speaker Change: Content that we have from the more airframe related content that goes direct to Boeing so the direct to Boeing.
Speaker Change: Ship set content is the only thing that we pause.
Speaker Change: And we're really waiting to hear from from confirmation from Boeing about what their anticipated restart right targets are going to be.
Speaker Change: So we haven't restarted yet but.
Speaker Change: There's quite a bit of inventory in the system. So it's not an urgent matter to get that line restarted we'll be ready to go when Boeing tells us.
Speaker Change: What initial rates, they see and what rate break step Stacey.
Speaker Change: Have some preliminary information and of course, we're talking back and forth, but havent received a firm.
Speaker Change: Indication.
Speaker Change: So again, it's not an urgent matter to restart.
Speaker Change: As far as the guidance goes.
Speaker Change: <unk>.
Speaker Change: The midpoint of our guidance.
Speaker Change: Kind of assumes in the middle of calendar 2025 that Boeing gets to the rates that they were previously.
Speaker Change: At.
Speaker Change: Talking about achieving before the for the work stoppage. So we don't have a arent ready to divulge an exact number to that but as far as calendar 'twenty five goes.
Speaker Change: We're thinking the.
Previously announced rates that Boeing forecast.
Speaker Change: Got something short of that but we're very much prepared to achieve whatever rate date are able to pull out.
Great. Thanks, that's helpful. And then I guess, one more just on kind of the balance sheet and capital deployment.
Speaker Change: Just kind of what your priorities are there and if theres a target leverage ratio that you want to stay at.
Yes.
Matt Akers: Yes, Matt.
Speaker Change: <unk>.
As we talked about our capital allocation strategy is to be disciplined and balanced and to support our strategy into to support high return projects.
Speaker Change: We are focused on making sure that we offset or any dilution.
Speaker Change: In our in our share count we will.
Speaker Change: We'll also.
Speaker Change: Focus on great operational excellence projects, we have had great success and invest in our operations.
Speaker Change: We're excited about automation and Thats, one area that Youll see us.
Speaker Change: <unk>.
Speaker Change: And then from our M&A activity, we stay very active and have a very active pipeline.
Speaker Change: We're very focused on.
On making sure we stay on strategy and and.
Speaker Change: And we will keep our options open we like having a debt leverage around 115% sorry around one 5% that gives us the flexibility.
Speaker Change: To go after M&A activities, if we see something that is right.
Speaker Change: I'd also point out that we returned $449 million to shareholders.
Speaker Change: Last fiscal year, and we still have an open buyback program that we are.
Speaker Change: Ready to execute on and as Bill said stay disciplined with all of these.
Speaker Change: Options in front of us.
Speaker Change: Great. Thank you both.
Speaker Change: Welcome.
Speaker Change: Your next question comes from the line of Gavin Parsons with UBS. Please go ahead.
Gavin Parsons: Hey, Thanks, guys good evening.
Speaker Change: Afternoon, Hey, Kevin.
Speaker Change: Okay.
Just to follow up on Matts first question there it sounds like a pretty prudent assumption on the kind of Boeing build rates, but I think 6% to 13% is still wider than you would usually guide. So would you say there is a good element of conservatism in that range aside from the Boeing rates as well.
Speaker Change: A lot of things going on in the industry as I as I said about 24 with the supply chain challenges across the board, it's not just limited to Boeing so.
We have taken a wide range. The biggest wildcard is boeing's rate that they achieve and pull at.
Speaker Change: But on the the smart defense side in.
Speaker Change: On the.
Speaker Change: Airbus supply chain kind of there could be some ability for upper.
Speaker Change: Upward mobility, but there could also be some ability to to have some headwinds associated with the supply chain kind of across the board, but as you pointed out Boeing being the biggest wildcard and it is a wider range than we usually give but we're trying to make sure that we have taken into account those those things that we see as possibilities.
Speaker Change: That is good and I think that makes sense and then on the core industrial margin.
Speaker Change: What was that for full year fiscal 'twenty, four and how much visibility do you have going into fiscal 'twenty five given the 14% to 15% implies a good sized step up from where you just exited in <unk>. Thanks.
Speaker Change: Yes, so again we.
Speaker Change: For 'twenty four we exited the year at 2014.
1%.
Speaker Change: And for full year 'twenty five.
Speaker Change: <unk>, 14% to 15%.
In Q4 again, we saw the mix.
Speaker Change: That caused core industrial to be down we don't expect that to repeat.
Speaker Change: So we have good line of sight to delivering the 14% to 15% in 'twenty five for our core industrial business.
Speaker Change: I appreciate it.
Speaker Change: Welcome.
Your next question comes from the line of Louis Raffetto with Wolfe Research. Please go ahead.
Speaker Change: Yes. Thank you maybe just build a follow up on I want to make sure I understood. I think you said, China should asset $22 million in sales. So I think at that level. It would be accretive and then you also had this rebate, which you said was accretive margins and so I'm still trying to reconcile that with six weeks at all of the negative mix.
Speaker Change: Yes, so so first.
Speaker Change: One thing to first starting now.
Speaker Change: At $15 million.
Speaker Change: China on highway business is breakeven.
Speaker Change: Back in August when we had our web call. We also mentioned that at $25 million.
Speaker Change: China, all age is neither accretive or dilutive to the.
Speaker Change: Industrial core industrial margins.
Speaker Change: At 22 that we delivered there.
Speaker Change: There was this rebate.
Speaker Change: The reversal that we performed that was full price and went straight to the bottom line. So that's what caused the China on on highway to go from.
Not dilutive or accretive to actually being accretive.
Louis: And then Louis.
Speaker Change: I think I missed the second part of your question and so basically I guess that means the core business was was had lower margins and that was just asked Kurt you talked about.
Speaker Change: That's correct. The 200 basis point, we expect core industrial deliver a barrel 14%. That's what we saw in the previous quarters. That's what the total year ended up in that 200 basis points was truly related to.
Speaker Change: Shifting production from aftermarket to OEM to burn down past dues and Thats what caused the mix issue in the fourth quarter. Yes. It was a it was a customer emergency that we wanted to respond to and serve that customer because our inability to serve them.
Speaker Change: Earlier due to a raw material gap.
Speaker Change: Led to that situation. So it's a very clear understanding we have when we pulled that lever to serve that customer we had to do it at the expense of our.
Speaker Change: Higher margin aftermarket channels, and we don't anticipate that same problem in 2025.
Great I appreciate that and maybe chip just for you you talked about the sort of the strength youre seeing in power Gen sort of AI and also within marine but I guess as we look at those sort of businesses.
Speaker Change: Power Gen went from plus 20 in the first quarter to plus four in the fourth quarter.
Speaker Change: How do we really think about that is it going to Reaccelerate and then same thing for transportation and went from.
Speaker Change: Excluding China natural gas went from.
And plus 12 test.
Speaker Change: I think maybe up just a little bit in the fourth quarter five maybe yes. So yeah.
Speaker Change: Quarter to quarter, I Wouldnt get too excited about that segment of time and measure measuring.
Speaker Change: That.
Speaker Change: We serve.
Speaker Change: Customers in both oil and gas and power Gen channels with similar equipment.
<unk>.
Speaker Change: It's going to be a little bit of ebb and flow in a quarter, but if you think about fourth quarter snapshot.
Speaker Change: And then you look at the whole year of 2024, you'll see that power Gen is up double digits and when we look at our order book and our customer excitement level. If you will and the projects that we know about we see in 2025.
Speaker Change: Low double digit growth in power Gen.
Speaker Change: And then maybe oil and gas flattish.
Speaker Change: And then marine up maybe mid single digits. So we feel like Thats.
Speaker Change: What we see in 2025 based on some fairly high comps from the year before also.
Speaker Change: Alright, appreciate maybe bill just one more follow up.
Speaker Change: The divested business or how is that being accounted for in the guidance. Then there until you get rid of it and then you will account for it or has it taken out already.
Speaker Change: Yes, Louis we have factored again.
Speaker Change: Small.
Speaker Change: Part of our industrial business and that is factored into the guidance that we provided to you.
Speaker Change: Thank you.
Speaker Change: Welcome.
Speaker Change: Our next question comes from the line of David Strauss with Barclays. Please go ahead.
Speaker Change: Okay.
Hi, good afternoon. Thanks for taking the question. This is Josh <unk> on for David.
Speaker Change: Hello, John I wanted to ask.
Speaker Change: I wanted to ask how much is leaf aftermarket contributing today.
Speaker Change: And how do you expect that to grow and when do you expect it to become a meaningful contributor.
Speaker Change: Sure so.
Earlier in the year one of our earlier calls I said that we were starting to have some pretty good year over year comps in leap in GTS.
Speaker Change: Aftermarket and again off of a small base almost doubled year over year from 24 from 23% to 24, but again thats off of a small base and isn't really moving the needle all that much from a total.
Speaker Change: Aerospace commercial aftermarket standpoint for us, but as we said in our Investor day sort of.
Speaker Change: The latter 2027 and early 2028.
Speaker Change: We think with our models that leap in GTS will be rivaling the legacy.
Engine lines in terms of aftermarket and there are a few wildcards to that like boeing's production rates growing the installed base like we like we want to and like we know there is demand for.
Speaker Change: And also the.
Speaker Change: GTS aircraft on ground and the fact that we're not accumulating as many cycles per year as was in the original model. Some of these things can impact whether it's late 2027 or into 2028 when that happens, but we are.
Sticking by that timeline forecast for now.
Speaker Change: Okay. Thanks, and then the 2026 targets.
Speaker Change: You laid out for EPS free cash flow in this segment and have any of the underlying assumption there still chain changed or are those all still valid.
Speaker Change: Still intact, we like our progress so far and we see the ability to to close in and deliver those.
Speaker Change: One of the nice things about you said when does leap in GTS really.
Speaker Change: Come into play.
Speaker Change: This higher shop visit rates for longer that we're seeing on the legacy CFM $56 five in 2500 <unk>.
Speaker Change: Really helping with a strong foundation in our bridge when that takes over.
Speaker Change: So that's good from a 2026 performance standpoint.
Speaker Change: Great. Thank you.
Speaker Change: Welcome.
Speaker Change: Yeah.
Speaker Change: Our next question comes from the line of Gautam Khanna with TD Cowen. Please go ahead.
Gautam Khanna: Hey, good afternoon guys.
Speaker Change: <unk> got them.
Speaker Change: I had a couple of questions.
Speaker Change: Yes.
Speaker Change: <unk> already mentioned this but if you could lay out.
Sure.
Speaker Change: Expectations.
Speaker Change: For <unk> growth by the four markets that you report, maybe just in terms of which is highest which will be lowest.
Defense OEM and aftermarket commercial automobile.
Speaker Change: I think the.
Speaker Change: Easiest way to summarize that is that we think.
Speaker Change: Military OE would probably be the strongest that we see in 2025% growth year over year.
Speaker Change: And then Boeing is a wildcard, but if they if they do near of what they are.
Speaker Change: I've said theyre going to get back to in 2025, then commercial OE could be the next up in terms of from a growth standpoint.
Commercial aftermarket is off of a very strong comp we still see some growth available there, but very strong comp year over year and defense aftermarket that's something that we're working on we think our best opportunity there is to grow share and we're working on our operational excellence to provide that.
Capacity and the turnaround times that our customers are expecting to earn more business. There. So we don't forecast that being up.
Speaker Change: A lot next year, but we're laying the groundwork to keep growing that in the out years.
That's helpful context.
Last quarter, you mentioned prior to the strike following.
Speaker Change: Some inventory build.
Speaker Change: Certain products tomorrow.
Speaker Change: Was that just related to the Boeing side or is that also on the engine side.
Speaker Change: And if you could just characterize what you think the channel inventory.
Speaker Change: Woodward Amgen products are relevant to that kind of underlying consumption right now.
My comments last quarter were both towards the airframe content and the engine content.
Speaker Change: It's we're talking to our customers all the time and.
Speaker Change: Right now, what's what's being relayed to us is a willingness to.
Invest in inventory to allow the.
Speaker Change: Right restart and rate increase that Boeing believes that they're capable of and Airbus is pushing like crazy on the supply chain to help them get to rate 75 eventually so.
Speaker Change: As long as the.
Speaker Change: The players are willing to keep investing in inventory, we've got the capacity to keep satisfying them.
Speaker Change: That's great and then just lastly pricing what are your products for patients for pricing in fiscal 'twenty five.
And if you could give it to us by segment that would be helpful. But any color. Thank you.
Speaker Change: I'm, sorry could you repeat that.
Speaker Change: Not sure about some of the words.
Speaker Change: I apologize, yes, just pricing expectations in 2025, perhaps by salmon and get that yeah. So so.
Speaker Change: We are seeing in 25 around 5% price realization and.
Speaker Change: That's after delivering 6% and 23, 7% in 2004.
Speaker Change: In terms of Aero and industrial we expect both of those segments too.
Speaker Change: Contribute to that approximately 5% aero might be slightly stronger than the pricing we see in industrial.
Speaker Change: Thanks, guys I appreciate it welcome.
Welcome.
Speaker Change: Our next question comes from the line of Michael <unk> with <unk> Securities. Please go ahead.
Hey, good evening guys. Thanks for taking the questions.
Speaker Change: Maybe.
Speaker Change: Maybe just to stay on the <unk> line of questioning there if we think about pricing in aerospace I think you called out some of the newer pricing lots, but with potentially hitting maybe outside this fiscal year is there any call out any distinction between commercial aero pricing and kind of defense.
Speaker Change: Pricing.
Hello, Mike.
Speaker Change: Michael I think I think we're again, it's about 5%, we expect aerospace to be a little stronger.
Speaker Change: I would say that.
Speaker Change: We had some.
Speaker Change: <unk> that were fixed price that are just now coming up for negotiation. So there'll be some of that deal list.
Speaker Change: Arrow also the carryover related to those contracts that we negotiate it within 24, we will have some carryover.
And so that will be the sort of what's driving the price realization in the aerospace business.
Speaker Change: Got it got it and then just maybe back to the guidance assumptions for 2005, given that you've got.
Speaker Change: Some of your Boeing production.
Speaker Change: <unk> shut down the kind of ongoing strike disruptions, how should we think about maybe the quarterly cadence obviously the strike hit the bulk of this fourth quarter should we think about <unk> being a little bit weaker this quarter and may be more of an impact on margins or any any distinction you could provide there.
<unk>.
Speaker Change: I think it's fair to say the first quarters looks a little bit softer than the rest of the year.
Aero and industrial fewer working days in.
Speaker Change: But Oems managing their inventories at their year end compared to ours. So we usually see the first quarter a little bit seasonally softer also on from a price perspective.
The commercial Aero contract that experienced escalation and the start of the calendar year.
Speaker Change: All of these things lead to a little bit softer <unk> for us I don't know Bill if you want to.
Speaker Change: But anything more on it chip I think you.
Chip Blankenship: Covered it and Thats, what we typically see if you look back has.
Chip Blankenship: Q1, usually down a bit and then we will see.
On the back of price and in some of the other areas of volume growth throughout the rest of the group.
Speaker Change: Got it.
Speaker Change: I'll leave it there thanks guys.
Speaker Change: Thank you.
Speaker Change: Your next question comes from the line of Sheila <unk> with Jefferies. Please go ahead.
Speaker Change: Thank you guys so much.
Speaker Change: My first question was on aerospace.
Speaker Change: And any thoughts on the guidance for aftermarket after up 17%.
Speaker Change: 24, how do you think about it in 'twenty five and what Keith.
Speaker Change: <unk> incremental reform industrial client Barbosa 25, when OE is outperforming.
Speaker Change: Taking the first part first tier Sheila I think it's fair to say that after a couple of years of strong double digit growth in commercial aftermarket, we're not really thinking that that will continue.
Speaker Change: This coming year.
Speaker Change: Narrow body.
Engine.
Speaker Change: Overhaul shops are just about fall a little bit more capacity at one or two players coming online but for the most part.
Speaker Change: We see that sort of is a leveling off at a very.
Speaker Change: Nice plateau.
Some opportunity for a little bit of price.
Speaker Change: And that in that realm.
So a little bit more volume and a little bit more price is what we're looking at for 2025 and the and the commercial aftermarket.
Speaker Change: And then in defense aftermarket as we can as we can open up more capacity in and get a little bit of share there.
Speaker Change: We're definitely going after that.
Speaker Change: Sheila.
Speaker Change: On the on the incremental what will drive that in 'twenty five as the us price.
And you are correct to point out that OE as well.
Speaker Change: There will be a lower mixed in aftermarket, but the volume leverage that we're going to get we are resource for <unk>.
Speaker Change: For higher volume and so we won't need to add much cost and that will provide us some leverage flowing through and thats what is driving arrows incremental.
Speaker Change: Up above that 30%.
Okay, and then maybe one more on Aero top line and then another question.
Speaker Change: With defense flattish in the first three quarters, but then pointing what drove that uptick and how do you think about that.
I'll be Frank with sovereign fiscal 'twenty five that has drawn up a growth driver is that and what should we be lucky.
Speaker Change: Yes.
I'll speak briefly on the fourth quarter there.
That was really related to.
Speaker Change: Some supply chain.
The challenges.
Speaker Change: Challenges overcoming those as well as demand in our smart defense business across all of the products in our in our smart defense. So thats, what really drove the sequential growth in military and defense OE.
Speaker Change: And then we expect that same behavior in 2025.
Speaker Change: We will have to see how the how.
How things are pooled and our supply chains have to ramp up but we do expect to see good demand across our smart defense portfolio.
We see the demand Sheila just to build on that for a moment Bill we see we see that demand for smart defense well into 2025 and beyond.
The challenge isn't always just our supply chain, though our customers are sequencing.
Speaker Change: There are pull from us based on what they can achieve with the rest of their suppliers as well. So that's one variable that that might create some ups and down sequentially across quarters, but the demand for growth is there like we experienced in the fourth quarter.
Speaker Change: Okay got it and just one last question if you don't mind on strategy.
Speaker Change: After that gas turbine business last week actually.
Speaker Change: I guess I thought anything align to IGT with Keith So why would it be margin dilutive and can you walk us through that.
Speaker Change: The thought process behind that asset sale.
Speaker Change: Sure Sheila that asset was an acquisition and primarily.
Speaker Change: Fabricating build to print.
Speaker Change: Combustion components for just about a 100% of sales to GE for Nova.
Speaker Change: As you look at what makes a really strong business model. It usually involves intellectual property and access to the service stream in the aftermarket and really our customer wanted to control that aftermarket, which we don't blame them for its their design their intellectual property.
We have some really great members, there and some good manufacturing knowhow, but it really wasn't enough to carry the day from a customer value standpoint.
Earn a return on and so as we talked with our customer GE of Renova.
Speaker Change: Over quite a period of time about options and what to do.
Having it become part of their internal make supply chain was was the best idea for both parties.
Speaker Change: Got it thank you.
Speaker Change: Welcome.
Your next question comes from the line of Noah <unk> with Goldman Sachs. Please go ahead.
Speaker Change: Hey, guys.
Speaker Change: Afternoon, Noah Noah.
Speaker Change: Good afternoon.
Hey, Jeff.
Speaker Change: I wanted to see if you could help me better understand.
Speaker Change: The aerospace aftermarket assumption, you're making for next year.
It sounds like you're it sounds like the guidance assumes basically aerospace.
Speaker Change: Aftermarket units are up one or 2% and prices up one or 2%.
Speaker Change: I guess that would be kind of very surprised by both of those I mean on the pricing side.
Speaker Change: All of your peers are saying that yes.
Speaker Change: <unk> growth is decelerating as inflation could yourselves, but that the market. So tight that pricing is still better than historical averages.
Speaker Change: Which sounds like mid to high single digits, and then on the unit side.
Speaker Change: I understand the compares are tough, but total global air travel is still growing high single digits.
Speaker Change: The wide body hasn't come back yet.
Speaker Change: Acknowledged on this call here that.
Speaker Change: A lot of the legacy stuff is flying longer and you've got the leap in the GTS I know, it's small, but it is getting larger and it's growing a lot. So.
Speaker Change: All of that sounds like something much better than one to two on both units on price.
Speaker Change: Can we say that one of my mistake.
Speaker Change: So those are kind of your assumptions on <unk> wanted to we're not ready to.
Speaker Change: To come out with such specific guidance on us on a segment of our segment, but I would say that you are absolutely right about all of those positive indicators.
Speaker Change: The challenge on saying that the legacy narrow body fleet is going to experience a lot more shop visits year over year is that the MRO capacity just isn't there to deliver that with GTS, taking up a whole bunch of capacity that.
Could could have been utilized for the legacy <unk>.
Speaker Change: Back to the matter is theres, just not a lot more stands and not a lot more slots to get engines in now some of the some of our customers are experiencing heavier work scopes.
Speaker Change: We're going to see more dollars per shop visit if you will.
Speaker Change: That is a.
Speaker Change: And answer for us for some of the suppliers and for some of our customers, but for us whether in <unk> comes in for an overall or not.
Speaker Change: We don't there's not as much variation.
Speaker Change: In scope, we do have an active <unk> 2500 upgrade that we have been selling quite well into the fleet.
Speaker Change: So if the uptake of that is a little bit more due to.
Speaker Change: Airlines, intending to fly the units longer we might enjoy some additional upside from that upgrade.
Speaker Change: So there are a few there are few more positive notes I just don't want to set your expectations. So high that next year is going to be just like it was last year because there is some <unk>.
Speaker Change: Physics of capacity involved at that will naturally meter that.
Speaker Change: Okay.
Speaker Change: I had interpreted your.
Speaker Change: Commentary, our Triangulated all the qualitative commentary to mean that you're guiding aerospace aftermarket up low single digits for 25 is that not.
Speaker Change: Correct.
Speaker Change #100: We're not guiding at low single digits, we're not guiding specifically on aerospace commercial I was just trying to do on a relative basis I think our military OE is probably up the most than commercial OE as long as Boeing can get traction.
Speaker Change #100: And then after that commercial and driven by a combination of price and a little bit of volume.
Speaker Change #100: Yes.
Speaker Change #101: Okay fair enough I appreciate the extra detail there.
Speaker Change #102: Great. Thanks.
Speaker Change #103: On the aerospace margin.
Speaker Change #103: The incremental in the quarter was was still right.
Speaker Change #104: I think the lowest of the year.
Speaker Change #104: This defense OE.
Yes.
Speaker Change #104: Being as strong as it was is that is that a mix.
Speaker Change #104: And then I guess I'll disruptive is turning offline, so youre selling into color to your margin.
Noah: Yes to the first question Noah Youre exactly right.
Noah: Again, we look for Incrementals around 30% for Arrow and the incremental fourth fourth quarter was 28 so.
Good from sort of the benchmark it is lower than what we've seen in the previous quarters and it is driven by the fact that much of the growth in Q4.
Noah: It was related to defense OEM.
Noah: Okay.
Noah: And I guess is.
Noah: Is the Boeing turn off.
Speaker Change #106: Does that have a lot of disruption to the margin or youre, just able to overcome that.
Speaker Change #107: We were able to overcome that it's not a not a big impact as long as we get back up and running here. Soon we have redeployed those resources to both other aerospace lines as well as industrial lines here in Fort Collins and then.
Speaker Change #107: We also have taken the opportunity to pull forward some kaizen and rearrangement work that we were planning to do over a shutdown.
Speaker Change #107: So we've kind of re sequenced some things in and I think we're able to digest it pretty well.
Yes.
Speaker Change #108: Okay great.
Speaker Change #108: And then last one I had.
Even if without being specific just generally speaking.
Speaker Change #109: Are you.
Speaker Change #109: Still evaluating other possible asset sales from your portfolio or is the one we just saw.
Speaker Change #110: All youre likely to do in the <unk>.
Speaker Change #110: Medium term.
So we have before this we've already done some dispositions in sales of some very very small product lines.
Speaker Change #110: And we havent involve facilities or things like that so we're active in that.
Speaker Change #110: No Im just trying to make sure we're the best stewards of.
Speaker Change #110: The shareholders' investment and with an eye on their returns.
Speaker Change #110: And we will continue to sort of use product management discipline to continuously evaluate the portfolio.
Speaker Change #112: Got it okay. Thank you.
Speaker Change #110: Welcome.
Speaker Change #113: Mr. Blankenship there are no further questions at this time I will now turn the conference back to you.
Chip Blankenship: Alright, I would like to thank everyone for joining the call hope you have a happy Thanksgiving.
Chip Blankenship: Ladies and gentlemen that concludes our conference call today.
Chip Blankenship: Broadcast will be available at the Companys web site Www Dot Woodward dot com for one year.
Thank you for your participation on today's conference call and ask that you. Please disconnect your lines.
Chip Blankenship: [music].
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Chip Blankenship: [music].