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Edited Transcript of WWD.OQ earnings conference call or presentation 18-Nov-21 9:30pm GMT

·41 min read

Q4 2021 Woodward Inc Earnings Call FORT COLLINS Dec 14, 2021 (Thomson StreetEvents) -- Edited Transcript of Woodward Inc earnings conference call or presentation Thursday, November 18, 2021 at 9:30:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Don Guzzardo Woodward, Inc. - VP of IR & Treasurer * Mark D. Hartman Woodward, Inc. - CFO * Thomas A. Gendron Woodward, Inc. - Chairman, CEO & President ================================================================================ Conference Call Participants ================================================================================ * Bradley Kyle Barton Barclays Bank PLC, Research Division - Research Analyst * Christopher D. Glynn Oppenheimer & Co. Inc., Research Division - MD & Senior Analyst * Gautam J. Khanna Cowen and Company, LLC, Research Division - MD & Senior Analyst * Michael Frank Ciarmoli Truist Securities, Inc., Research Division - Research Analyst * Noah Poponak Goldman Sachs Group, Inc., Research Division - Equity Analyst * Peter John Skibitski Alembic Global Advisors - Research Analyst * Sheila Karin Kahyaoglu Jefferies LLC, Research Division - Equity Analyst * Zonghan Yan Wells Fargo Securities, LLC, Research Division - Associate Equity Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Thank you for standing by. Welcome to the Woodward, Inc. Fourth Quarter Fiscal Year 2021 Earnings Call. At this time, I would like to inform that this call is being recorded for rebroadcast. (Operator Instructions) Joining us today from the company are Mr. Tom Gendron, Chairman and Chief Executive Officer; Mr. Mark Hartman, Chief Financial Officer; Mr. Don Guzzardo,Vice President of Investor Relations and Treasurer; and Mr. Dan Provaznik, Director of Investor Relations. I would now like to turn the call over to Mr. Guzzardo. -------------------------------------------------------------------------------- Don Guzzardo, Woodward, Inc. - VP of IR & Treasurer [2] -------------------------------------------------------------------------------- Thank you, operator. We would like to welcome all of you to Woodward's Fourth Quarter Fiscal Year 2021 Earnings Call. In today's call, Tom will comment on our markets and related strategies, and Mark will discuss our financial results as outlined in our earnings release. At the end of our presentation, we will take questions. For those who have not seen today's earnings release, you can find it on our website at woodward.com. We have again included some presentation materials to go along with today's call that are also accessible on our website. An audio replay of this call will be available by phone or on our website through December 2, 2021. The phone number for the audio replay is on the press release announcing this call as well as on our website and will be repeated by the operator at the end of the call. I would like to refer to and highlight our cautionary statement as shown on Slide 3. As always, elements of this presentation are forward-looking or based on our current outlook and assumptions for the global economy and our businesses more specifically, including the expected and potential effects of the ongoing COVID-19 pandemic. Those elements can and do frequently change. Please consider our comments in light of the risks and uncertainties surrounding those elements, including the risks we identify in our filings. In addition, Woodward is providing certain non-U.S. GAAP financial measures. We direct your attention to the reconciliations of non-U.S. GAAP financial measures, which are included in today's slide presentation and our earnings release and related schedules. We believe this additional financial information will help in understanding our results. Now turning to our results for the fourth quarter. Net sales for the fourth quarter of fiscal 2021 were $570 million compared to $531 million for the prior year quarter. Net earnings for the fourth quarter of 2021 were $50 million or $0.76 per share compared to $57 million or $0.89 per share for the prior year quarter. Adjusted net earnings for the fourth quarter of 2021 were $54 million or $0.82 per share compared to $48 million or $0.75 per share for the prior year quarter. And for the full year, net sales were $2.25 billion compared to $2.5 billion for the prior year. Net earnings were $209 million or $3.18 per share for fiscal 2021 compared to $240 million or $3.70 per share for the prior year. Adjusted net earnings were $212 million or $3.24 per share compared to $254 million or $3.96 per share for the prior year. Net cash generated from operating activities for 2021 was $465 million compared to $349 million for the prior year. Free cash flow and adjusted free cash flow for 2021 were both $427 million. For 2020 free cash flow was $302 million and adjusted free cash flow was $315 million. Now I will turn the call over to Tom to comment further on our results, strategies and markets. -------------------------------------------------------------------------------- Thomas A. Gendron, Woodward, Inc. - Chairman, CEO & President [3] -------------------------------------------------------------------------------- Thank you, Don, and good afternoon, everyone. As some of you know, Don has decided to retire at the end of the year after a 31-year career at Woodward. Don has been an important champion of Woodward's growth and transformation story over the past 3 decades and has been a trusted adviser to management. On behalf of the company, I want to express our sincere gratitude for his dedication to Woodward, outstanding leadership and counsel. We wish you all the best in retirement. Going forward, Dan Provaznik, a 15-year Woodward veteran will lead our Investor Relations function. We delivered solid results for fiscal '21 against the headwinds of COVID and global supply chain disruptions. We do expect continued recovery throughout '22, although uncertainty and volatility around the pace of recovery is anticipated to remain. We believe our proven resiliency and strong financial position will allow us to capitalize on future market opportunities. Moving to our markets in more detail. Commercial aerospace continues to recover. The build rates are expected to improve further in '22 based on announcing increases and the anticipated certification of the 737 MAX in China. Commercial aftermarket is being driven by increased passenger traffic and the utilization of a commercial fleet that includes significantly higher Woodward content. Domestic travel is nearing pre-COVID levels, while international travel, although steadily improving, is still significantly lagging. Defense markets remained stable with the exception of guided weapons, which we anticipate will continue to soften in fiscal '22. Turning to our Industrial markets. In power generation, demand for gas turbines continues to increase, driven primarily by growth in Asia and the continued replacement of coal-powered plants. Additionally, we see strong demand for backup power for data centers. Aftermarket activity has been stable, but is expected to increase in '22. In transportation, the global marine market has seen improvement in orders for new ships as well as increased utilization, which will drive aftermarket activity. Demand for China natural gas trucks continue to be soft as expected, due to the absorption of China V diesel prebuy activity related to the implementation of new China VI diesel emissions regulations, which took effect July 1. In addition, global natural gas prices have spiked due to increased demand for power generation and limited supply and weather-related usage. This increase in price is expected to dampen demand for natural gas trucks in the near term. Despite this volatility, China's commitment to reducing emissions is expected to drive long-term demand for natural gas trucks. In oil and gas, prices have returned to pre 2020 levels from pandemic lows due in part to energy demand increases. Capital expenditures have increased steadily since early '21, and this level of investment is expected to continue. In summary, we've delivered solid performance in a challenging macroeconomic environment. We are seeing improvements in most of our markets. However, COVID-related impacts, including ongoing labor and supply chain challenges and regional market fluctuations continue to pressure global economic recovery. Looking ahead to 2022, we expect ongoing recovery and improved profitability in our Aerospace business as OEM production rates and passenger traffic continue to grow. In Industrial, we expect a modest improvement in profitability as our markets continue to recover. Marine cargo rates and volumes are improving, demand for industrial gas turbines is increasing and rising oil and gas prices are driving investment. We are optimistic about the continued recovery across our markets and look forward to continued progress in 2022. I'll now turn the call over to Mark Hartman. -------------------------------------------------------------------------------- Mark D. Hartman, Woodward, Inc. - CFO [4] -------------------------------------------------------------------------------- Thank you, Tom. Net sales for the fourth quarter of fiscal 2021 were $570 million, an increase of 7%. The sales for the quarter and the full year were negatively impacted by approximately $32 million due to global supply chain disruptions, which delayed orders scheduled for shipment. Aerospace segment sales for the fourth quarter of fiscal 2021 were $371 million, an increase of 12% from the prior year quarter. Commercial OEM and aftermarket sales were up compared to the prior year quarter by 67% and 23%, respectively, driven by elevated build rates and continued recovery in domestic passenger traffic. Defense OEM sales were down 6% and defense aftermarket sales were down 20% in the fourth quarter of 2021 compared to a strong prior year quarter. Aerospace segment earnings for the fourth quarter of 2021 were $66 million or 17.4% of segment sales compared to $58 million or 17.4% of segment sales for the fourth quarter of 2020. Segment earnings were positively impacted by higher commercial sales volume. For fiscal year 2021, Aerospace segment sales were $1.40 billion compared to $1.59 billion for the prior year, a 12% decrease. Aerospace segment earnings for fiscal year 2021 were $234 million, or 16.7% of segment sales compared to $310 million or 19.5% of segment sales for the prior year. Turning to Industrial. Industrial segment sales for the fourth quarter of fiscal 2021 were $193 million compared to $195 million in the prior year period, a decrease of 1%. The decrease in industrial sales was primarily due to lower industrial gas turbine sales as well as weakness in natural gas engines in China, partially offset by improvements in marine. Industrial segment earnings for the fourth quarter of 2021 were $21 million or 10.7% of segment sales compared to $19 million or 9.6% of segment sales for the same period of the prior year. The increase is primarily due to favorable impact of foreign currency exchange rates. For fiscal 2021, Industrial segment sales were $842 million, compared to $905 million for the prior year, a 7% decrease. Excluding the renewable power systems and related businesses, which I will refer to as RPS, and were divested in the third quarter of 2020, Industrial segment sales for fiscal 2020 were $837 million. Foreign currency exchange rates had a favorable impact on Industrial segment sales for 2021 of approximately $33 million. Industrial segment earnings for fiscal 2021 were $109 million or 12.9% of segment sales. Industrial segment earnings for 2020 were $100 million or 11.1% of segment sales. Excluding RPS, Industrial segment earnings for fiscal 2020 were $97 million or 11.6% of segment sales. Nonsegment expenses were $17 million for the fourth quarter of fiscal 2020 compared to nonsegment expenses of $0.2 million for the same period in the prior year. Adjusted nonsegment expenses for the fourth quarter of fiscal 2021 and fiscal 2020 were both $12 million. Adjusted nonsegment expenses for the fourth quarter of 2021 excludes the restructuring charges. Adjusted nonsegment expenses for the fourth quarter of 2020 primarily excludes the gain on sale of properties. Nonsegment expenses for fiscal 2021 were $64 million compared to $95 million for fiscal 2020. Adjusted nonsegment expenses totaled $59 million for fiscal 2021 compared to $67 million for fiscal 2020. At the Woodward level, R&D for the fourth quarter of 2021 was $28 million or 4.9% of sales compared to $27 million or 5.1% of sales for the prior year quarter. For fiscal 2021, R&D expenses were $117 million or 52% -- I'm sorry, 5.2% of sales compared to $133 million or 5.3% of sales in fiscal 2020. SG&A and adjusted SG&A for the fourth quarter of 2021 were both $38 million compared to SG&A of $41 million and adjusted SG&A of $43 million for the fourth quarter of 2020. For fiscal 2021, SG&A and adjusted SG&A expenses were both $187 million compared to SG&A expenses of $218 million and adjusted SG&A expenses of $196 million for fiscal 2020, which primarily excludes merger and divestiture transaction costs. For the fourth quarter of 2021, the effective tax rate was 18.2%, and the adjusted effective tax rate was 18.8%. For the fourth quarter of 2020, the effective tax rate was 16.0%, and the adjusted effective tax rate was 13.8%. The full year effective tax rate was 15.1% for fiscal 2021 compared to 14.7% for fiscal 2020. The adjusted effective tax rate was 15.3% for fiscal 2021 compared to 17.8% for fiscal 2020. Looking at cash flows. Net cash provided by operating activities for fiscal 2021 was $465 million compared to $349 million for the prior year period. Capital expenditures were $38 million for 2021 compared to $47 million for the prior year period. Free cash flow and adjusted free cash flow for 2021 were both $427 million. For fiscal 2020, free cash flow was $302 million and adjusted free cash flow was $315 million. The increase in free cash flow and adjusted free cash flow was primarily related to effective working capital management, partially offset by lower net earnings. Leverage was 1.7x EBITDA at the end of the fourth quarter. We also have significant liquidity available through approximately $1.4 billion of combined cash on hand and revolver capacity. During fiscal year 2021, $82 million was returned to stockholders in the form of $36 million of dividends and $46 million of repurchased shares under the previously authorized $500 million share repurchase program, of which $441 million remained available at the end of fiscal 2021. Lastly, turning to our fiscal 2022 outlook. End markets and supply chain disruptions are anticipated to improve in fiscal year 2022, although the uncertainty and volatility around the pace of the recovery is expected to persist. Growth and profitability in both segments could be negatively affected if COVID and supply chain disruptions do not improve or the pace of inflation puts additional pressure on labor and material costs. Total Woodward net sales are expected to be in the range of $2.45 billion and $2.65 billion. Aerospace and Industrial sales growth percentages are each expected to be in the low double digits to mid-teens. Our Aerospace outlook assumes further improvement in build rates in alignment with announced increases in the anticipated 737 MAX certification in China. In addition, continued recovery in flight traffic is assumed to drive growth in commercial aftermarket. Guided weapons sales are anticipated to decline while the remainder of the defense is expected to be generally consistent with 2021. Industrial growth is expected to be driven by higher demand for power generation equipment, rising oil and gas investments and increased ship utilization. China natural gas truck sales are expected to be flat year-over-year with quarterly volatility continuing due to uncertainty around natural gas prices. Aerospace segment earnings as a percent of segment sales are expected to increase by approximately 200 to 300 basis points, primarily due to the increased sales volume in both commercial OEM and aftermarket, partially offset by lower guided weapon sales, the return of annual variable incentive compensation costs, and inflationary cost pressures. Industrial segment earnings as a percent of segment sales are expected to be approximately flat to up 150 basis points, primarily due to increased sales volume, partially offset by the return of annual variable incentive compensation costs and inflationary cost pressures. The effective tax rate for the year is expected to be approximately 21%. Earnings per share is expected to be between $3.55 and $3.95 based on approximately 66 million of fully diluted weighted average shares outstanding. The favorable impact of sales growth and productivity improvements in both segments are being partially offset by the expected return of annual variable compensation costs, inflationary pressures and a higher tax rate. Free cash flow is expected to be approximately $315 million, generating a free cash flow conversion rate of greater than 100%. As sales growth returns, we anticipate higher working capital requirements, primarily driven by accounts receivable. Also, capital expenditures are expected to increase by approximately $30 million. This concludes our comments on the business and the results for the fiscal year and fourth quarter of 2021. Operator, we are now ready to open the call to questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Your first question is from Sheila Kahyaoglu of Jefferies. -------------------------------------------------------------------------------- Sheila Karin Kahyaoglu, Jefferies LLC, Research Division - Equity Analyst [2] -------------------------------------------------------------------------------- Don, congratulations on an amazing 31 years. Maybe if we could start off with just guidance implications. I'm going to actually focus on industrial because I think low double digits is pretty robust, just considering what the segment has done over the last decade. So what gives you the confidence? How is the backlog looking? Can you maybe talk about subsegment moving pieces there? -------------------------------------------------------------------------------- Mark D. Hartman, Woodward, Inc. - CFO [3] -------------------------------------------------------------------------------- Sure, Sheila. One of the reasons you see that type of growth rate is we're definitely coming off a bottom, as you know, in some of our markets where power generation was down, oil and gas was down, China natural gas was down. So as you look at it, we see good growth in our turbomachinery business, so covering gas turbines for power compressors, steam turbines used in process plants. We're also seeing good recovery in the marine market, and we're starting to see aftermarket pickup in the marine market, but also across the board. Some of the auxiliary engine applications such as backup power is increasing. Equipment sales are increasing. So we're starting to see the economic recoveries flow through to demand. A lot of that has shorter, do you want to say, shorter order cycles. So we are seeing orders come in, but a lot of it in discussions with our customers are looking at volume increases, and we're building the plans around that. -------------------------------------------------------------------------------- Sheila Karin Kahyaoglu, Jefferies LLC, Research Division - Equity Analyst [4] -------------------------------------------------------------------------------- Okay. And then maybe on just Aerospace, OE in particular. How do we think about MAX rates and 787s that you've built into your plan? Is it fair to say you're kind of assuming a 25 a month on the MAX and 2 or 3 a month on the 787? And where are you at currently? -------------------------------------------------------------------------------- Thomas A. Gendron, Woodward, Inc. - Chairman, CEO & President [5] -------------------------------------------------------------------------------- Yes. On that, Sheila, for the MAX and the neo, the 87. Obviously, the MAX and 87 have had those disruption everybody's aware of. We're really tracking to the Boeing and Airbus production rates. I think as most of you know, especially the ones that have toured our facilities, we're capacitized for much higher rates than they are announcing right now. So we're in good shape to handle the rates. We're planning to meet the rates that they're looking at. There definitely is the uncertainties will those rates materialize are heavily dependent on the FAA releasing the production quality issues on the 87 and also for China to certify the MAX. But the rates that have been quoted by our customers both plan and those happening as we move forward in the following quarter. So that's what our plans are built around it. Those are going to recover and those rates are going to be met. -------------------------------------------------------------------------------- Operator [6] -------------------------------------------------------------------------------- Your next question is from Peter Skibitski of Alembic Global. -------------------------------------------------------------------------------- Peter John Skibitski, Alembic Global Advisors - Research Analyst [7] -------------------------------------------------------------------------------- Don, best wishes. I guess, yes. So I guess, Tom, so coming off of a few quarters of the supply chain issues, it kind of feels like you guys maybe feel like the worst of that is behind you because you've given fiscal '22 guidance. So can you kind of walk us through why you feel like the worst of these supply chain issues are in the past, maybe and maybe you can even ballpark your expectation for the first quarter revenue in case there's any residual impact? -------------------------------------------------------------------------------- Thomas A. Gendron, Woodward, Inc. - Chairman, CEO & President [8] -------------------------------------------------------------------------------- Yes. So first, I'll answer the last question, Pete. I think it'll take into the second half of the fiscal year to recover a lot of the past due that was driven by supply chain disruptions. The reason we have some confidence -- so there are mechanical type components and then we got electronics. I think everybody is really familiar with the electronic shortages and disruptions. We're seeing some improvement in that happening. And so we anticipate as the year moves on, that we'll see electronics starting to recover. The mechanical side, if you say look at that, a lot of that disruption was tied to our supply base reacting to the pandemic, cutting back, closing, consolidating factories, laying off workers. And then demand is returning and there's disruptions there beyond what we could overcome. I think I shared in the past, we put together at Woodward and invested in what we call a rapid response team that we knew there were going to be supplier disruptions, and we've mitigated quite a few, but there were more than we anticipated. So we have a full team working with those suppliers. We got recovery plans, we have some confidence in those recovery plans. Like I said, they take a little bit of time, but we've overcome those. And then we're kind of dependent on the global electronics supply chain, but we see posing improvements there. So that's why you have some faith that we're going to see as we move in the second half of the year that we'll have a recovery. -------------------------------------------------------------------------------- Peter John Skibitski, Alembic Global Advisors - Research Analyst [9] -------------------------------------------------------------------------------- Okay. Okay. And anything on the first quarter in terms of level setting us on the revenue side? -------------------------------------------------------------------------------- Thomas A. Gendron, Woodward, Inc. - Chairman, CEO & President [10] -------------------------------------------------------------------------------- Well, we don't give or talk really quarter to quarter. So I think it will follow on our normal pattern, Pete. We always have the holidays, shorter amount of work days in the first quarter, as you know. And so that pattern will continue. -------------------------------------------------------------------------------- Peter John Skibitski, Alembic Global Advisors - Research Analyst [11] -------------------------------------------------------------------------------- Okay. Okay. And last one for me. There's chatter that for the defense department, we could have potentially a full year continuing resolution. And it sounds like your expectations are fairly modest for defense or maybe kind of flattish to down. It sounds like overall. Would you guess if there's any risk to that from a full year CR, if we have one? -------------------------------------------------------------------------------- Mark D. Hartman, Woodward, Inc. - CFO [12] -------------------------------------------------------------------------------- Yes. No, not overall. And Pete, you're definitely in the ballpark with what we're anticipating on overall defense that there will be some softness as we pointed out on the guided weapons and so down slightly is what we're anticipating. -------------------------------------------------------------------------------- Operator [13] -------------------------------------------------------------------------------- Your next question is from Matt Akers of Wells Fargo. -------------------------------------------------------------------------------- Zonghan Yan, Wells Fargo Securities, LLC, Research Division - Associate Equity Analyst [14] -------------------------------------------------------------------------------- It's actually Eric Yan on for Matt. Just on the guided weapon. I think you mentioned yet there will be much decline in 2022. So just thinking where we are in the JDAM slowdown or any other guided weapon if we're at a normal run rate or further to fall? -------------------------------------------------------------------------------- Thomas A. Gendron, Woodward, Inc. - Chairman, CEO & President [15] -------------------------------------------------------------------------------- Yes. So what you have with our guided weapon portfolio, the JDAM and the current lot buy by the government is down. Our other controls for guided weapons are actually going to go up. So net-net, it's still down because JDAM is the largest program. I think we're starting to approach maybe the steady state going forward on JDAM. The one thing that could change a little bit on that is we are seeing some activity around foreign military sales that could add some volume, but that has not come through yet, but we do anticipate as we move forward in '22 and to '23, we might see some foreign military sales start to fill in. But those are still unknown at the moment, but we do think that could happen. -------------------------------------------------------------------------------- Zonghan Yan, Wells Fargo Securities, LLC, Research Division - Associate Equity Analyst [16] -------------------------------------------------------------------------------- Okay. Got it. If I could do one more. Just regarding the magnesium shortage, people recently talked about. Do you see metal supply as a potential risk for you guys going into 2022? -------------------------------------------------------------------------------- Thomas A. Gendron, Woodward, Inc. - Chairman, CEO & President [17] -------------------------------------------------------------------------------- Not really a risk in terms of the metals we use and our ability to procure them. We are seeing inflationary pressures around materials as well as labor. So that's one headwind. But we right now are not anticipating that we'll have shortages of required materials. -------------------------------------------------------------------------------- Operator [18] -------------------------------------------------------------------------------- Your next question is from Christopher Glynn of Oppenheimer. -------------------------------------------------------------------------------- Christopher D. Glynn, Oppenheimer & Co. Inc., Research Division - MD & Senior Analyst [19] -------------------------------------------------------------------------------- Curious -- I apologize for the dog in the background. Nothing I can do. But price cost, I'm curious about price/cost timing, I think given a fair amount of OEM relationships and customers in industrial. And typically, there's a lag to price realization runoff some old contracts. I wonder if there's a dynamic where that kind of rolls into new pricing maybe into the new year, your fiscal second or however you want to comment on that. -------------------------------------------------------------------------------- Thomas A. Gendron, Woodward, Inc. - Chairman, CEO & President [20] -------------------------------------------------------------------------------- Sure. Logistics costs have risen, as you're pointing out. Most of our OE sales are tied to long-term agreements. So the ability to move price is limited. Now however, our long-term agreements have escalation clauses in them. So once a year, we do reset based on indices and inflation. So we will see some recovery. Other parts of our business where we have shorter cycles and not LTAs or aftermarket, we do have the ability to have some price realization in those areas. So it's a mix, but the benefit of long-term agreements that we have like I said, is they're there. We know we have the programs, but we do have to wait once a year for prices to be adjusted for the escalation indices. -------------------------------------------------------------------------------- Christopher D. Glynn, Oppenheimer & Co. Inc., Research Division - MD & Senior Analyst [21] -------------------------------------------------------------------------------- Okay. But on the net equation, what I'm understanding is you're within the lag effect, though. So it's a little pinchier presently than it's likely to be a quarter or 2 out, maybe. Is that... -------------------------------------------------------------------------------- Thomas A. Gendron, Woodward, Inc. - Chairman, CEO & President [22] -------------------------------------------------------------------------------- If you see -- yes, one of our outlook charts that you see there is we do have -- without a doubt, we're experiencing inflation, whether you look at materials, wages, logistics across all these categories, but we're also offsetting a lot with productivity, and we're driving through. We still have that pressure. So that combined with the contracts coming through, we're really netting and offsetting mostly all of that. -------------------------------------------------------------------------------- Christopher D. Glynn, Oppenheimer & Co. Inc., Research Division - MD & Senior Analyst [23] -------------------------------------------------------------------------------- Okay. That's helpful. And the $32 million of kind of hold back from supply chain issues, I'm presuming that's mostly in the Industrial segment, but I didn't really catch it if that was clarified at all. -------------------------------------------------------------------------------- Mark D. Hartman, Woodward, Inc. - CFO [24] -------------------------------------------------------------------------------- Yes. It's split generally evenly across both Industrial and Aerospace. -------------------------------------------------------------------------------- Operator [25] -------------------------------------------------------------------------------- Your next question is from Gautam Khanna of Cowen. -------------------------------------------------------------------------------- Gautam J. Khanna, Cowen and Company, LLC, Research Division - MD & Senior Analyst [26] -------------------------------------------------------------------------------- I echo my thanks and congratulations to Don. So pleasure working with you. You'll be missed. Tom, I was just going to follow up on the aftermarket. So are you seeing -- what are you seeing month to month? Were you seeing kind of an improvement throughout the quarter? Are you seeing fits and starts still? How would you characterize kind of the trend line? Where still kind of... -------------------------------------------------------------------------------- Thomas A. Gendron, Woodward, Inc. - Chairman, CEO & President [27] -------------------------------------------------------------------------------- Good question. We're seeing accelerating aftermarket activity. And you're asking you're specifically on Commercial Aerospace, I take it? -------------------------------------------------------------------------------- Gautam J. Khanna, Cowen and Company, LLC, Research Division - MD & Senior Analyst [28] -------------------------------------------------------------------------------- Yes, yes. -------------------------------------------------------------------------------- Thomas A. Gendron, Woodward, Inc. - Chairman, CEO & President [29] -------------------------------------------------------------------------------- Commercial Aerospace, we're seeing accelerating activity. We're also seeing initial provisioning pickup. So all good signs. Obviously, fleet utilization is a big driver of that. We feel very positive that the fleet flying has very good Woodward content. So that's a positive tailwind. Initial provisioning, like I said, has come back. We anticipate good increase in '22. But that also still is dependent on the production rates being met and China certification coming through. But we believe those will happen. So the aftermarket is looking good. We still anticipate tail end of '23 is where you'll see closer to 2019 levels. But we're on a good path. -------------------------------------------------------------------------------- Gautam J. Khanna, Cowen and Company, LLC, Research Division - MD & Senior Analyst [30] -------------------------------------------------------------------------------- Okay. And on the Commercial Aero OE side, in the past, you guys have indicated those shipments are profitable. And I'm just on a follow-up to one of the earlier questions on inflation and your escalators, are you seeing compression in OE profitability next year? Or should I say, did you see it throughout this year, and therefore, there is -- it's a positive year-to-year dynamic next year as price resets? Or favorably... -------------------------------------------------------------------------------- Thomas A. Gendron, Woodward, Inc. - Chairman, CEO & President [31] -------------------------------------------------------------------------------- Actually -- right, right. We will have price changes due to the escalation clauses taking effect in '22. I would highlight and we talked on previous calls that during the downturn, we invested more in our True North continuous improvement activity. We actually did quite good on OE margins, and we really anticipate driving those up through productivity improvements. Now we have to offset all this inflationary pressure. But I think overall, we're still in good shape there, and we're still working hard to drive that through. Obviously, as volume increases through our factories, that's a big plus as well to get that volume leverage. -------------------------------------------------------------------------------- Gautam J. Khanna, Cowen and Company, LLC, Research Division - MD & Senior Analyst [32] -------------------------------------------------------------------------------- Yes. And last one for me. You guys are capacitized for much higher levels of demand. So CapEx through the cycle from here presumably will be subdued relative to the last cycle. What is the plan with capital allocation, kind of like what are you hoping to do? Is there -- is M&A the priority from here? Is it share repurchases? Like what do -- you besides organic growth and the core business stuff? -------------------------------------------------------------------------------- Thomas A. Gendron, Woodward, Inc. - Chairman, CEO & President [33] -------------------------------------------------------------------------------- Yes. No, good question. Mark might jump in here with me. But just to highlight, you're correct on CapEx, and Mark were approximately looking at the $50 million plus or minus. -------------------------------------------------------------------------------- Mark D. Hartman, Woodward, Inc. - CFO [34] -------------------------------------------------------------------------------- It's just timing on CapEx, right? So we've guided in the past, we anticipate to be around $50 million because you're accurate. We're fully capacitized. So we're in a maintenance mode for CapEx. There's timing differences. That's why we're lower than $50 million in fiscal '21, higher than $50 million in fiscal '22, but you're right on that. -------------------------------------------------------------------------------- Thomas A. Gendron, Woodward, Inc. - Chairman, CEO & President [35] -------------------------------------------------------------------------------- Yes. And so on the capital deployment, we are -- last quarter, we talked about we were returning to our capital deployment strategy and returning 50% of net income to shareholders through dividends and buybacks. And you saw that we were buying back in the quarter. In addition, we do have a very strong balance sheet. And with that, we will continue to look for growth. So both in good investments in organic growth. And if we can find attractive M&A that builds on our strategies fits our business, we will look at that. So it's a combo of that. And as everybody knows, M&A is not something you can predict timing of. So if we have excess cash, we'll return it to shareholders. -------------------------------------------------------------------------------- Operator [36] -------------------------------------------------------------------------------- Your next question is from David Strauss of Barclays. -------------------------------------------------------------------------------- Bradley Kyle Barton, Barclays Bank PLC, Research Division - Research Analyst [37] -------------------------------------------------------------------------------- Brad Barton on for David. I was wondering if you could talk to working capital and how much of a headwind you expect to see from here? -------------------------------------------------------------------------------- Mark D. Hartman, Woodward, Inc. - CFO [38] -------------------------------------------------------------------------------- Yes. As sales returns, obviously, we're anticipating good growth in 2022. We do anticipate having that working capital need investment, but it's mainly going to be in receivables. One thing that you've probably seen throughout the last couple of years, we've done a very good job of managing our inventory balances. We're anticipating to continue to do that as we move forward. So really, it's just really going to be related to the sales overall. And as we're growing here quarter-to-quarter, we will have to invest into accounts receivable overall, and that would be the main working capital component that we'd be speaking to going forward. -------------------------------------------------------------------------------- Bradley Kyle Barton, Barclays Bank PLC, Research Division - Research Analyst [39] -------------------------------------------------------------------------------- Got it. And then just quickly looking at headcount in Aero and Industrial. How much have you increased from bottom? -------------------------------------------------------------------------------- Mark D. Hartman, Woodward, Inc. - CFO [40] -------------------------------------------------------------------------------- Yes. So we've been hiring. Overall, obviously, as growth has come. I don't have the number off -- right off the top of my head, but it's been significant, especially as we've anticipated the growth as we're moving forward here. It's mainly been on the direct labor side, and some of that's been bringing back members that were laid off and then others are bringing in new members and getting them up and trained on the line overall. But it's several hundred across the company over the last year time frame as growth has been occurring. -------------------------------------------------------------------------------- Thomas A. Gendron, Woodward, Inc. - Chairman, CEO & President [41] -------------------------------------------------------------------------------- And we do anticipate the need to hire a significant number of members in the coming year, and we put together hiring strategies and plans to get ahead of the curve. So with that growth, yes, we've got the capital, we've got the facilities. We will have to add headcount to support the growth. -------------------------------------------------------------------------------- Operator [42] -------------------------------------------------------------------------------- Your next question is from Michael Ciarmoli of Truist Securities. -------------------------------------------------------------------------------- Michael Frank Ciarmoli, Truist Securities, Inc., Research Division - Research Analyst [43] -------------------------------------------------------------------------------- Congrats, Don. It's been a pleasure working with you over the years. Good luck. I guess, Tom, just on -- I guess, back to what Gautam was asking around kind of your facilities, what you're sized for. You mentioned kind of that end of '23. But how should we think about Aerospace margins? I mean do you need Aerospace revenues to get back to the prior peak? Or do you think you can get back to that level of profitability given some of the actions with True North? And I realize inflationary environment, labor costs that might be an open-ended kind of challenge right now. But what are the thoughts there? -------------------------------------------------------------------------------- Thomas A. Gendron, Woodward, Inc. - Chairman, CEO & President [44] -------------------------------------------------------------------------------- Yes. Right now, our outlook is that as we hit the end of '23, we'll be at that 20% plus run rate on Aero. -------------------------------------------------------------------------------- Michael Frank Ciarmoli, Truist Securities, Inc., Research Division - Research Analyst [45] -------------------------------------------------------------------------------- Got it. I want to make sure you said run rate at the end of '23. I just want to make sure. -------------------------------------------------------------------------------- Thomas A. Gendron, Woodward, Inc. - Chairman, CEO & President [46] -------------------------------------------------------------------------------- Yes, yes. -------------------------------------------------------------------------------- Michael Frank Ciarmoli, Truist Securities, Inc., Research Division - Research Analyst [47] -------------------------------------------------------------------------------- Got it. Got it. Okay. And then I guess, just staying within Aero. Defense, it sounds like you're pretty cautious in general or did aside from the guided weapons, anything incremental? I mean, obviously, you've got some good content on the Joint Strike Fighter, those rates coming down. Some of the other legacy platforms that you've got big exposure to V-22, Black Hawk, Apaches. I mean is defense seemingly all manageable? And again, it seems to be a cautious view, but have you contemplated all that into the forecast? -------------------------------------------------------------------------------- Thomas A. Gendron, Woodward, Inc. - Chairman, CEO & President [48] -------------------------------------------------------------------------------- We have. We are well represented in some of the new programs you're all familiar with, but there's been a new buy for F-15EX including the GE F110 engine, those have good content for us. F-18 is good content. So some of those legacy are still moving along and provide a good base for us. We're kind of in that flattish area with guided weapons taking us down single-digit, low mid-single digit. As we move forward, I don't think the world is getting any safer. So we may just right now say, hey, it's more towards the flat, plus or minus single digit, low single digits, up or down around that. That's kind of what we're planning. -------------------------------------------------------------------------------- Mark D. Hartman, Woodward, Inc. - CFO [49] -------------------------------------------------------------------------------- Yes. I mean the other opportunity on the defense side of the business of course, is on the aftermarket with upgrade programs and the like. So that's always been a good positive for us. -------------------------------------------------------------------------------- Thomas A. Gendron, Woodward, Inc. - Chairman, CEO & President [50] -------------------------------------------------------------------------------- Another area that it's not really defense -- we're not categories categorizing it under defense, but we've been making a bigger push into the space market. So some on the defense side, but a lot of that is commercial. And we're starting to win programs there and moving quickly on some of that activity. So that over the next few years, will fill in some growth as well. -------------------------------------------------------------------------------- Michael Frank Ciarmoli, Truist Securities, Inc., Research Division - Research Analyst [51] -------------------------------------------------------------------------------- Got it. Got it. And last one I had, just back to the pricing. Obviously, the OE pricing, but what are you seeing in the aftermarket presumably some of this used and serviceable material, green time maybe runs its course. Are you able to get kind of real-time price increases? Or are you seeing a better pricing environment in the commercial aftermarket? -------------------------------------------------------------------------------- Thomas A. Gendron, Woodward, Inc. - Chairman, CEO & President [52] -------------------------------------------------------------------------------- We're still able to get reasonable price in the aftermarket. And so we are seeing price increases. You got to look at some of the -- those program by program, on what's being retired or what's being parted out. And maybe you've seen some of the data on this. A lot of the aircraft that we're on that some people thought were going to be retired or not. And they're in service, they're being brought back in service. So right now, we're not seeing that pressure. And so we still have good pricing position. -------------------------------------------------------------------------------- Operator [53] -------------------------------------------------------------------------------- (Operator Instructions) Your next question is from Noah Poponak of Goldman Sachs. -------------------------------------------------------------------------------- Noah Poponak, Goldman Sachs Group, Inc., Research Division - Equity Analyst [54] -------------------------------------------------------------------------------- Congrats and all the best to you, Don, with retirement. So the revenue guidance for '22, up low double digit to mid-teens, that would be an acceleration in the quarterly revenue growth rate pace compared to what it's been over the last several quarters despite the compares getting tougher. I guess I'm wondering, are there some outsized big contributors to '22 that you didn't have in '21 that I'm missing, whether that's the initial spares provisioning on the aftermarket that can be pretty sizable or just what's happening in the energy world, in your oil and gas business? Or is there the capture of the slipped revenue from supply chain and logistics, does that land in the second half of next year and create a big growth rate in the back half? I guess I'm just struggling a little bit on how the pace will accelerate on tougher compares. -------------------------------------------------------------------------------- Mark D. Hartman, Woodward, Inc. - CFO [55] -------------------------------------------------------------------------------- Yes. No, actually, you're hitting on a lot of them. So I'll just knock them all off as you went and maybe start with the latter. And yes, our assumption on the supply chain disruption and the holdback there is that abates in the second half of fiscal '22. So that would be a tailwind there. But if I step back just generally to our markets, Commercial OE is going to be growing with the build rates. Tom mentioned previously, we're anticipating that the OEMs, both Boeing and Airbus reach the build rates that they're have signaled out there overall. So that would be a significant growth for us on a year-over-year basis. I mean the other thing you have to be thinking about as early FY '21, it was -- we were down at the bottom, right? And so we've been growing off of that, but it was a significant reduction from prior periods. We've talked some already about on the Commercial Aftermarket side with the utilization, the use of the green time on engine, the fleet that's actually flying has more Woodward content on it overall. So we would anticipate significant aftermarket growth in 2022 and ramping as the year progresses. As we've been talking, the summer season was a busy season overall, anybody that was at an airport traveling all, I think, saw that. And so that green time continues to get used and overall, that will have to come in for repair and upgrades as we move forward. Moving over to the Industrial side of the business, you hit on some of it. If I start -- first start on the power generation side of the business. Power generation needs in Asia and developing countries is growing. You can kind of see that across the -- a lot of the companies in that space overall, are anticipating growth there. As they either have the generation needs or in the more developed world, trying to replace coal power plants with natural gas and even turbines overall would be positive for us. The other, I'll say, major driver for us is the return of the marine market. The utilization for marine transportation is high. So twofold. One is the ship order activity has increased, and that's a lagging market for us overall, that it typically takes a couple of years that as those ships get ordered that we would see the -- recognize the revenue and the unit shipments there. But overall, we did see that increase. But the other opportunity for us, of course, is with the strong utilization in the freight world today, those are going to have to come in. We mentioned it early, I'll say, in the pandemic that a lot of the aftermarket covers were run bear. They destocked everything, they use everything they could, and they didn't ramp back up. So we're anticipating that to be an opportunity also. The other on the Industrial side. Tom mentioned a little bit earlier on the oil and gas obviously, with prices where they're at today on the oil side, we're anticipating that there'll be growth there from production needs and people actually looking to drill more. And so that will be positive for us. And so that's how we get to even on tougher comps as you move forward since we've been ramping. But with all those opportunities and those favorable market dynamics and the Woodward position in those markets, that's how we get to that growth that we're talking about. -------------------------------------------------------------------------------- Noah Poponak, Goldman Sachs Group, Inc., Research Division - Equity Analyst [56] -------------------------------------------------------------------------------- Okay. I appreciate all that detail. The first half will have the easier compares but still have the lingering supply chain issues. Second half, maybe you're making that up, but you have the tougher compares. I guess the growth rate, total organic revenue growth rate for the year, should the quarterly progression be somewhere near that growth rate every quarter? Or is the growth back-end loaded? -------------------------------------------------------------------------------- Mark D. Hartman, Woodward, Inc. - CFO [57] -------------------------------------------------------------------------------- Yes. I mean, Tom mentioned it some earlier too, right? I mean so year-over-year, of course, we're going to have the Q1. It's going to -- both Q1s have the less number of working days with all the holidays and all of that. But we do see the markets ramping as the year progresses. The supply chain disruption is going to be abating in the back half. So I wouldn't anticipate it to be significantly different, but there will be an upward trend as the year progresses from a sequential basis. -------------------------------------------------------------------------------- Noah Poponak, Goldman Sachs Group, Inc., Research Division - Equity Analyst [58] -------------------------------------------------------------------------------- Okay. And then just lastly, going back to the Aerospace segment margin, it looks like the implied incremental in the guidance is kind of 35%, maybe even a little higher. You've done that before, but sometimes it's not quite that robust. So -- and Tom, I think you made a comment about getting to the 20-plus on a run rate basis exiting '23, but it would seem like to get to the guidance, you'd have to kind of be they're exiting '22. So maybe if you could just speak a little bit more to the margin progression this year and how much of it's mix versus cost out versus something else? -------------------------------------------------------------------------------- Thomas A. Gendron, Woodward, Inc. - Chairman, CEO & President [59] -------------------------------------------------------------------------------- Yes. Well, we definitely have a number of factors coming in. Mix plays in, the aftermarket is picking up. So that's a positive. We're going to get leverage on the volume that's coming through. So you're going to see that. As you can see, Mark highlighted that we do have a nice increase in margins anticipated in '22, and we anticipate to continue that improvement as we move forward into '23. So I think we're tracking pretty well. I think that will be pretty accurate. And I did put a 20-plus on that. -------------------------------------------------------------------------------- Noah Poponak, Goldman Sachs Group, Inc., Research Division - Equity Analyst [60] -------------------------------------------------------------------------------- When do you think you achieve the 20-plus? -------------------------------------------------------------------------------- Thomas A. Gendron, Woodward, Inc. - Chairman, CEO & President [61] -------------------------------------------------------------------------------- Well, that's what we said on a run rate basis exiting '23. And we'll be making steady progress through '22 into '23 and all that. -------------------------------------------------------------------------------- Operator [62] -------------------------------------------------------------------------------- Next question is from Christopher Glynn of Oppenheimer. -------------------------------------------------------------------------------- Christopher D. Glynn, Oppenheimer & Co. Inc., Research Division - MD & Senior Analyst [63] -------------------------------------------------------------------------------- Curious, had an OE question for the Commercial OE markets. Looking at the narrow-body, the MAX and the neo, obviously, you've got really nice content step-up from prior cycle. I'm wondering with the supply chain stresses going way down and then way up if you're seeing any potential reallocation of awards that might accrue to your narrow-body ship sets even more. -------------------------------------------------------------------------------- Thomas A. Gendron, Woodward, Inc. - Chairman, CEO & President [64] -------------------------------------------------------------------------------- We are talking to a variety of our customers where they're having problems with other suppliers. And can we help them out of those problems that -- and we're looking at those and we're working some. It does take a little time for those type of transitions to occur. But, yes, there is a possibility to add to our content. -------------------------------------------------------------------------------- Christopher D. Glynn, Oppenheimer & Co. Inc., Research Division - MD & Senior Analyst [65] -------------------------------------------------------------------------------- Okay. And just a housekeeping question. What are we thinking for corporate spend levels, the kind of unallocated expense for fiscal '22? -------------------------------------------------------------------------------- Mark D. Hartman, Woodward, Inc. - CFO [66] -------------------------------------------------------------------------------- Yes, it's in the -- in our normal range, 2.5%, 3% of sales. Somewhere in there. -------------------------------------------------------------------------------- Operator [67] -------------------------------------------------------------------------------- Mr. Gendron, there are no further questions at this time. I will now turn the conference back to you. -------------------------------------------------------------------------------- Thomas A. Gendron, Woodward, Inc. - Chairman, CEO & President [68] -------------------------------------------------------------------------------- Well, I appreciate everybody joining us today, and we always appreciate the questions. And just as a reminder, we're still planning March to have an Investor Day in person where we get more details out to everybody, and I hope many of you can join us for that. Thanks, and I hope you all have a great holiday coming up. Good night. -------------------------------------------------------------------------------- Operator [69] -------------------------------------------------------------------------------- Ladies and gentlemen, that concludes our conference call today. If you would like to listen to a rebroadcast of this conference call. It will be available today at 7:30 p.m. Eastern Standard Time by dialing 1 (855) 859-2056 for a U.S. call or 1 (404) 537-3406 for a non-U.S. call, and by entering the access code 7551843. A rebroadcast will also be available at the company's website, www.woodward.com for 14 days. We thank you for your participation on today's conference call and ask that you please disconnect your lines.