Q3 2023 Woodward Inc Earnings Call
Participants
Charles P. Blankenship; CEO, President & Chairman; Woodward, Inc.
Daniel Provaznik
William F. Lacey; CFO; Woodward, Inc.
Christopher D. Glynn; MD & Senior Analyst; Oppenheimer & Co. Inc., Research Division
David Egon Strauss; Research Analyst; Barclays Bank PLC, Research Division
Gautam J. Khanna; MD & Senior Analyst; TD Cowen, Research Division
Louis Harold Raffetto; Research Analyst; Wolfe Research, LLC
Matthew Carl Akers; Senior Equity Analyst; Wells Fargo Securities, LLC, Research Division
Michael Frank Ciarmoli; Research Analyst; Truist Securities, Inc., Research Division
Noah Poponak; Equity Analyst; Goldman Sachs Group, Inc., Research Division
Peter John Skibitski; Senior Analyst; Alembic Global Advisors
Robert Michael Spingarn; MD; Melius Research LLC
Sheila Karin Kahyaoglu; Equity Analyst; Jefferies LLC, Research Division
Presentation
Operator
Thank you for standing by. Welcome to the Woodward, Inc. Third Quarter Fiscal Year 2023 Earnings Call. At this time, I would like to inform you that this call is being voted for rebroadcast and that all participants are in listen-only mode.
(Operator Instructions)
Joining us today from the company are Chip Blankenship, Chairman and Chief Executive Officer; Bill Lacey, Chief Financial Officer; and Dan Provaznik, Director of Investor Relations. I would now like to turn the call over to Dan Provaznik. Please go ahead.
Daniel Provaznik
Thank you, operator. We'd like to welcome all of you to Woodward's Third Quarter Fiscal Year 2023 Earnings Call. In today's call, Chip will comment on our strategies and related markets. Bill will then discuss our financial results as outlined in our earnings release. At the end of the presentation, we will take questions. 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 August 14, 2023. 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, including our guidance and are based on our current outlook and assumptions for the global economy and our businesses more specifically. Those elements can and do frequently change. Our forward-looking statements are subject to a number of risks and uncertainties surrounding those elements, including the risks we identify in our filings.
In addition, Woodward is providing certain non-U.S. GAAP financial measures. We direct your attention to the reconciliations of non-U.S. GAAP financial measures, which are included in today's slide presentation and our earnings release and related schedules. We believe this additional financial information will help in understanding our results.
Now, I will turn the call over to Chip to comment further on our results, strategies and markets.
Charles P. Blankenship
Thank you, Dan, and good afternoon, everyone.
We delivered strong sales growth in the third quarter, driven by robust demand and our improved ability to deliver products to our customers. We expanded margins through productivity improvements and price realization, partially offset by increased material and labor costs. We continue to make progress on our strategic initiatives focused on enhancing the customer experience, simplifying operations and increasing profitability through improved execution. Output is increasing, pricing actions are yielding results, and we are seeing efficiency gains as our new members come up the learning curve and become more proficient in their job.
We've seen improvement in our supply base performance, however, the environment remains challenging and we continue to actively manage and problem solve with our suppliers. Our team has done a great job responding to the fluctuating delivery risk landscape. We remain focused on this work stream with significant resource allocation and the goal of identifying risks further upstream and launching countermeasures earlier in the process.
Moving to our markets. In Aerospace, commercial airline utilization rates continue to rise with U.S., Europe and China domestic passenger traffic now surpassing 2019 levels. In addition, international travel continues to improve, nearing 2019 levels. In Defense, due to geopolitical developments and government spending proposals, we expect R&D and procurement to increase, which bodes well for Woodward's future opportunities.
In Industrial, demand for power generation remained strong, driven by growth in Asia, increases in aftermarket activity and continued demand for backup power.
In Transportation, the global marine market remains healthy with increased ship build rates and higher utilization driving current and future aftermarket activity. Marine customers continue to launch more projects that incorporate alternative fuel capability in their specifications. This should drive expanded OEM and aftermarket opportunities as multi-fuel engines contain greater Woodward content.
In addition, Chinese heavy-duty truck output increased significantly in February, as did the portion that is natural gas powered. The natural gas-powered production rate has been relatively stable since February but future demand remains uncertain. In Oil and Gas, global investment in LNG infrastructure development continues. Rig counts increased globally, though U.S. activity declined year-over-year.
In summary, the market signals we are receiving indicate continued strong demand. We remain focused on operational excellence, developing talent and innovating for the future, which we believe will drive long-term sustainable growth and deliver enhanced value for shareholders.
Before we move on to our financial results, I'd like to introduce Bill Lacey, who took the helm as CFO in May. Bill has a distinguished track record in financial operations and business leadership. With 3 months in role, Bill has well integrated into Woodward, and he is already contributing to the team.
Bill, welcome to your first Woodward earnings call. I'll now turn it over to you to share our financial results.
William F. Lacey
Thank you, Chip. It's great to be here.
Net sales for the third quarter of fiscal 2023 were $801 million, an increase of 30%. Aerospace segment sales for the third quarter of fiscal 2023 were $481 million compared to $402 million, an increase of 20%. Commercial OEM and aftermarket sales were up 41% and 28% respectively, driven by higher OEM production rates, continued recovery in both domestic and international passenger traffic, increasing aircraft utilization and price realization.
Defense OEM sales were down 12% in the quarter, primarily due to lower sales of guided weapons. Defense aftermarket sales were up 17%. Aerospace segment earnings for the third quarter of 2023 were $83 million or 17.3% of segment sales compared to $57 million or 14.1% of segment sales. The increase in segment earnings was primarily a result of price realization and higher commercial OEM and aftermarket volume, partially offset by higher annual incentive compensation.
Turning to Industrial. Industrial segment sales for the third quarter of fiscal 2023 were $320 million compared to $213 million, an increase of 51%. The increase was driven by higher volumes across all markets as well as price realization. Industrial segment earnings for the third quarter of 2023 were $58 million or 18.2% of segment sales compared to $21 million or 9.9% of segment sales.
Industrial segment earnings increased due to higher sales volume, price realization and favorable product mix, partially offset by higher annual incentive compensation. Industrial sales and earnings benefited from significantly increased on-highway natural gas truck production in China, although future demand beyond the fourth quarter remains uncertain.
Nonsegment expenses were $24 million for the third quarter of 2023, compared to $19 million. At the Woodward level, R&D for the third quarter of 2023 was $35 million or 4.4% of sales compared to $32 million or 5.2% of sales. SG&A for the third quarter of 2023 was $65 million compared to $46 million, primarily due to higher annual incentive compensation. The effective tax rate was 20% for the third quarter of 2023 compared to 21.6%.
Looking at cash flows. Net cash provided by operating activities for the first 9 months of fiscal 2023 was $156 million compared to $86 million. Capital expenditures were $57 million for the first 9 months of 2023 compared to $37 million. Free cash flow was $98 million for the first 9 months of fiscal 2023 compared to $49 million. Adjusted free cash flow was $103 million for the first 9 months of fiscal 2023 compared to $52 million. The increase in free cash flow and adjusted free cash flow was primarily due to increased earnings, partially offset by higher capital expenditures.
Leverage was 1.7x EBITDA at the end of the third quarter compared to 2x EBITDA.
During the first 9 months of fiscal 2023, $64 million was returned to stockholders in the form of $38 million of dividends and $26 million of repurchased shares under a Board-authorized share repurchase program.
Lastly, turning to our fiscal 2023 outlook. We continue to expect year-over-year improvements in the fourth quarter of fiscal 2023. Due to the continued strong end market demand and our improved ability to deliver for our customers, we are raising certain aspects of our full year guidance. Total net sales for fiscal 2023 are now expected to be $2.85 billion and $2.9 billion. Aerospace sales growth is now expected to be between 16% and 18%. Industrial sales growth is now expected to be between 28% and 30%. We now expect the full year price realization to be approximately 7% of prior year sales.
Aerospace segment earnings as a percent of segment net sales are still expected to increase approximately 150 basis points to 200 basis points. Industrial segment earnings as a percent of segment net sales are now expected to increase approximately 340 basis points to 440 basis points. The adjusted effective tax rate is now expected to be approximately 18%. We still expect adjusted free cash flow to be between $200 million and $250 million and capital expenditures to be approximately $80 million. Adjusted earnings per share is now affected to be between $4.05 and $4.25 based on approximately 61 million fully diluted weighted average shares outstanding.
This concludes our comments on the business and results for the third quarter of 2023. Operator, we are now ready to open the call to questions.
Question and Answer Session
Operator
The question-and-answer session will begin at this time.
(Operator Instructions)
Our first question comes from the line of Robert Spingarn of Melius Research.
Robert Michael Spingarn
Chip, these -- first of all, very good numbers, clearly. I wanted to focus in on the Industrial side where some of these numbers are really higher than what we've seen before on a quarterly basis. And just to understand, is this a new normal? Was there some pent-up inventory that got sent out? Just -- if you could run us through maybe through the major business lines within Industrial and talk a little bit about where you are in terms of a new normal, or maybe it's benchmarked against the recovery versus '19?
I'm not sure what the right way to do it is. But especially because a quarter like this almost implies the fourth quarter in Industrial would -- or for the company would be even flat to down. I just want to understand if you're being conservative, really how to framework this entire thing.
Charles P. Blankenship
Sure, Rob. So the -- I mean, we don't really give out detailed numbers at the subunit product line levels, but I would like to say that the Industrial performance has a very high mix of China on-highway shipments in it. And as far as the new normal, we do not forecast this as a new normal, but we are enjoying quite a high demand from our customers in China for products that we had a significant amount of inventory for and we're able to respond quickly last quarter. And our supply chain and plants there in China performed very well, serving the customer this quarter.
It's a line of business that we've talked about in the past. It's very hard to forecast. We have limited forward sight to orders. When the orders come in, our strategy has been to try and be in a very good inventory position with a flexible supply chain to respond, and that's the approach we're continuing to take. We do have some limited visibility through the fourth quarter, which gave us confidence to raise our guidance for the fourth quarter. But as far as China on-highway volume, we don't have enough visibility beyond that to make any statements about it.
As far as the other lines of business, we did see sequential and year-over-year improvements in efficiency and amount of product delivered sales for the other product lines. Our plants here in Fort Collins as well as the L'Orange facilities in Germany have all been improving with our focus on the elements of lean manufacturing and the transformations we're trying to foster and put in place and lead. So good results by all parts of the Industrial portfolio. However, I would not forecast this sort of margin level as a sustainable type of benchmark.
Robert Michael Spingarn
Okay. And then if I could just follow up on that, 2 quick things. One, is there a way to think about $320 million in Industrials and to allocate that across the businesses or to rank order, what's the biggest, what's the smallest?
And then Bill, for you. Just curious, it sounds like there's some moving pieces and maybe a little bit of conservatism, but why no increase in the cash flow guide?
William F. Lacey
Yes. So first, on the -- on giving a little more detail, as Chip said, we typically do not give sublevel sales below the segment. On cash, we continue to see good improvement there overall and we are holding our guide. We will see good delivery from earnings, and we are -- we will see our inventory continue to improve from an efficiency standpoint. And so we believe that the investment that's required for us to deal with the higher volumes are also baked in there, but we think we will deliver a good strong cash number.
Operator
Your next question comes from the line of Sheila Kahyaoglu of Jefferies.
Sheila Karin Kahyaoglu
Bill and Chip, great quarter. On this Industrial business, just obviously, we're not Industrial analyst. So what's your visibility? It looks like your backlog typically is 1/3 of your revenues. Kind of what level of visibility do you have at the moment? How big is the China business? I think it used to be $100 million run rate. Are you guys on an annualized basis higher than that?
Charles P. Blankenship
So like Bill and I said, Sheila, we're really not breaking out the business to those level of details underneath the Industrial segment. But I think it's fair to say that we enjoyed a strong quarter, and we don't have much visibility to China OH volumes post fourth quarter of this fiscal year.
We sit back and we look at some pretty lagging indicators to tell us how that overall market is behaving. And we saw an uptick in February both in terms of the number of heavy-duty trucks being manufactured in China as well as the fraction of them that are natural gas powered versus diesel. And we can surmise a number of factors that might go into why that's happening post COVID and with natural gas availability. But really, we're just speculating a little bit on that. And we had that backward-looking explanation, but we don't have much forward visibility for China OH.
Sheila Karin Kahyaoglu
Okay. And then maybe if I could ask one on price. I think you raised your price assumption for total company from 5% prior to 7%. What drove that across the segments? And where are you sort of in the cycle of pricing increases flowing through?
Charles P. Blankenship
So on the price realization, we did raise the forecast for the total year. We had good performance of the escalation indices that drive most of our OEM contracts, and we work through the spare parts pricing catalogs and our general catalogs for those not on long-term contracts. And we've been able to achieve those pricing targets that we laid down in the marketplace. And that result of that price realization is delivering the 7% versus the 5%.
Sheila Karin Kahyaoglu
So mostly Aerospace then?
Charles P. Blankenship
I think they're both kind of in line with that top level number.
Operator
Your next question comes from the line of Christopher Glynn of Oppenheimer.
Christopher D. Glynn
Chip, I think maybe another crack at Industrial. I think the press release kind of isolated the upside to the NG business. So I was wondering versus your internal plan, did the natural gas China account for really all of the preponderance of the upside?
Charles P. Blankenship
While it was a large portion of the upside, like I was saying earlier with Sheila that all of our other product lines, be it the liquid fuel diesel products from Woodward L'Orange in Europe to the natural gas and actuation types of business units here in Fort Collins, all of our plants had increased output and we've improved efficiencies based on our supply chain performing better and having parts to the line on time as well as our people just getting more proficient at their roles.
We're also practicing continuous improvement processes that are delivering additional benefits in terms of both capacity and efficiency, so it's really across the board. It's not the case of 1 segment performing really well and masking malaise or poor performance in others. It's just that it's a little bit of an outsized performance from the China OH. But all product lines improved this quarter.
Christopher D. Glynn
Okay. And last quarter, you commented that the Industrial sort of turnaround, so to speak, you weren't out of the woods. And it's impressive kind of top to bottom, look at all the operations and processes in Industrial, so I appreciate that. What's the status update in terms of in the woods, out of the woods?
Charles P. Blankenship
So I like the fact, and I congratulate the team, that we've turned the ship in the right direction in all of the product lines and we've made progress on the product rationalization that I talked about earlier. We continue to make progress on that. I'd say that our next areas for improvement are really driving the inventory down to serve the demand and then -- and as well as meet the customer demand. Right now, we are improving our capacity and we're planning to our capacity, but the customer demand is even higher. So in order to say we're really out of the woods on the turnaround, I would have to see us meet the customer demand, which the team is working really hard on, as well as get our inventory levels down even further. And then I'd say I think we're out of the woods and in great shape.
Christopher D. Glynn
Great. I appreciate that update.
And last 1 for me. You talked about -- you had a comment about Defense, expecting R&D and procurement to increase in the macro sense boding well for Woodward. I'm curious if you could elaborate on that? What kind of ramp curve do you envision? What sort of contours are you seeing reasonably take shape?
Charles P. Blankenship
Well, as you know, in most cases, in Defense-related processes, the ramp is relatively modest. And what we've been spending our time doing is investigating and responding to opportunities, which both -- there are more opportunities lately, and the urgency with which these opportunities are being handled is greater. So that's why the words -- one of the reasons that I think there's some confidence that opportunities will continue to evolve, but these are not near-term opportunities that will make an impact to the sales anytime soon.
Operator
Your next question comes from the line of Matt Akers of Wells Fargo.
Matthew Carl Akers
I wanted to kind of take a step back kind of on just earnings visibility broadly, right? I mean so this quarter, relative to consensus, to a big positive surprise. I think last quarter, it was also a big positive surprise. Q1 was kind of a negative surprise. I guess you guys have been managing through supply chain uncertainty and uncertainty around China. So I guess as we go forward, is there a point as we get into maybe it's next fiscal year that sort of settles down and we get a little bit more visibility? Or just sort of how you think about the outlook there?
Charles P. Blankenship
So I think the outlook, I would say on that is we're just getting much better about our visibility upstream to supply chain kinds of issues, and we're able to take these issues on with more mitigation to avoid having a line down stoppage or impacting our customer shipments. So I think our ability to forecast around our delivery models is improving and will continue to improve as the supply base continues to perform better, and our factories also continue to perform better.
But as far as on the customer side for something like China OH where we have very limited visibility, I wouldn't predict that to get better. We just don't have -- we don't have the tools or visibility in our toolbox to help with that. But as far as the supply chain avenue, our visibility has improved quite a bit there.
Matthew Carl Akers
Yes. Okay. And I guess just latest thoughts on the share repurchase? I think the plan at one point was to complete that authorization by January. Is that still how you're thinking about it?
Charles P. Blankenship
We're still have an open plan and we are evaluating opportunities for capital deployment with our Board, and we'll continue to go forward and do what's prudent.
Operator
Your next question comes from the line of Pete Skibitski of Alembic Global.
Peter John Skibitski
Yes, Chip, pretty impressive quarter, at least. I was wondering if you could kind of update us, a little bit of a follow-up to Chris' questions, I think, but maybe you could update us on where you're at with your various initiatives? I'm thinking of in-sourcing -- is the in-sourcing push over now? Training the new employees, has that been completed? And you mentioned customer experience in your opening remarks, I think. I'm not sure what's going on with that. And then this whole -- you had some thoughts about SKU rationalization as well. Just wondering what the SaaS of that was?
Charles P. Blankenship
Great. So you have to remind me about 1 or 2 of them there that you rattled off, but I'll hit what I can. As far as in-sourcing, we're continuing to do quite a few part transfers both between suppliers as well as in-sourcing to make sure we've got enough flexibility to -- and sourcing options to serve the customers. So right now, we have -- like we did last quarter, they're not the same parts. Some of them are different parts. We have over 1,000 parts in part transition either between suppliers or in-sourcing.
We've made 16,000 parts through the rapid response machining centers that we have set up. We've got all the equipment on the floor right now at those locations. So that's very active, and that will continue probably for multiple years as we try to simplify our supply chain and also make it resilient by having multiple sources where required, but having fewer sources in total.
Keeping with that thought process on SKU rationalization, we've continued to make progress getting -- rightsizing our product offering to what customers are really demanding as well as allowing us to serve them efficiently. So we have taken thousands of more offerings off the books this quarter. We intend to reduce the neighborhood of 10,000 to 15,000 SKUs this fiscal year, and we'll continue to evaluate that and become more efficient next year as well. That initiative will continue.
Labor productivity, we continue to get better at this. Our drive to hire new employees and direct employees for manufacturing has reduced. But we still have levels of attrition at some locations that require onboarding training and a little bit of support from experienced machinists and assembly technicians that, I would say, we're not completely out of the woods to that. And maybe the new normal is that we have a little bit higher attrition than we're used to in the past, so we need to stay capable on that front. And I -- but I see continued labor productivity going forward.
The last one was customer experience. So part of the Industrial reorganization and the Aerospace reorganization was focused on serving these 2 segments with like 1 Aerospace approach and 1 Industrial approach mostly centered around how we serve customers. We had multiple teams calling on some of the same OEMs and service providers, and we've worked hard to streamline that customer experience. But maybe mostly from a customer experience standpoint is delivering the right amount of orders on time with the right quality at the right price, so that's something we're focused on as well.
Peter John Skibitski
That's great. Very helpful. And then just I had to ask on the macro. I know sometimes visibility is tough there, but you're in a lot of different industrial niches. Any sign that any of those niches are peaking or customer pull is kind of slowing down a little bit, cycles changing?
Charles P. Blankenship
So the one that I mentioned a little bit was that the global oil rig count is up, but U.S. activity, including fracking is not keeping pace, even declining. And so we're watching that, but it hasn't resulted in any order intake for us slowing down yet. But we've got a kind of looking around the corner watch on that, and that's the only 1 that really comes to mind that's a little bit -- has some soft indications in the macro that we haven't seen in terms of what orders we're getting.
Everything else is up and to the right. I mean as far as revenue passenger miles, build rates at OEM, airframers, shop visit rates for engines coming in for overhaul, everything that we see on that is up and to the right in the current forecast.
Operator
Your next question comes from the line of Gautam Khanna of TD Cowen.
Gautam J. Khanna
I have a couple of questions. First, on the Industrial side. I remember last quarter, the backlog did not go down, right? There was not a supply chain catch up that drove a big recovery in shipments. Did that occur in this quarter just reported, the June quarter?
Charles P. Blankenship
Just to be clear, when you say backlog, it was our past dues didn't go down. So...
Gautam J. Khanna
Past dues.
Charles P. Blankenship
Yes. But again, that was the same thing this quarter. We are not capacitized at a level right this minute to both satisfy current customer demand and burn down past due, so Industrial past dues stayed largely the same.
Gautam J. Khanna
Okay. And to an earlier question on the mix impact from the natural gas business in China, it sounded like it was broad based strength within Industrial. Is there any way for us to isolate what piece of that might be nonrecurring if it is CNG and if it is only here for a quarter or 2? Is there any color you can give us on that to where margins would have been, but for CNG?
William F. Lacey
Yes, not much more than what we already have provided.
Gautam J. Khanna
Okay. Have you guys provided anything on that? Or did I miss it? It wasn't clear to me.
Charles P. Blankenship
No, we just don't break out our product lines at levels below the segment, Gautam.
Gautam J. Khanna
Okay. But is CNG particularly rich mix?
Charles P. Blankenship
It's a healthy business for us. It's just -- it's healthy when it's high volume and it's not healthy when it's low volume, and that's why we should keep using the word volatility, because it has some really good marginal delivery on high volumes. At low volumes, it doesn't look quite as good.
Gautam J. Khanna
Okay. And then in terms of the SKU rationalization, how far along are you in that journey? And how much of that was influential in the actual June quarter numbers?
Charles P. Blankenship
I don't think -- we haven't really seen the SKU rationalization hit the bottom line yet in terms of just like moving the needle. What we think we'll see first is improvements in efficiencies in both the supply base as well as our plant operations, and that's mostly in Fort Collins. So it will show up alongside just general productivity. That's where it's going to help us in terms of realizing flow through the factory and more standardization.
We did some of the easy part really this -- so far, this first 10,000 to 15,000 is a little bit easier than the next ones where we have to work a lot more closely with customers to move them to the latest configuration of some product family member in order to eliminate an offering.
Hope that makes sense.
Gautam J. Khanna
Yes. No, it does. And then last one, and perhaps I missed it. But the commercial Aero aftermarket on a sequential basis looked up minimally. I didn't know was there any -- a, is that right? I think that's about right. But is that right? And any reason for the pause? Because we're seeing pretty strong sequential aftermarket prints from some of the other companies in the space. But any way you can discern what trend is going on there?
Charles P. Blankenship
Yes. We're not showing up sequential, but we are showing healthy double digits year-over-year.
Operator
Your next question comes from the line of Michael Ciarmoli of Truist Securities.
Michael Frank Ciarmoli
Real nice results. Maybe Chip, I know we -- a lot of guys are trying here. But I guess if the visibility isn't great in the China on-highway, I mean, how are you guys actually planning for this? I mean what -- do you have typical lead times? What are your turnaround times? I mean I'm just trying to get a better understanding of how you're actually trying to run your facilities given kind of the lack of total visibility here?
Charles P. Blankenship
Yes. Right now, I mean, our strategy is to, like I said earlier, have enough inventory to be responsive to the customer if we have short lead time orders, which we have had. But also not carry too much inventory so that it's a big rock around our cash flow. So we're trying to get that optimized. We're doing things like looking at what the rates have been over a longer period of time and try to plan for a low level that we can respond to if it goes up. So it's more like the -- protect the ability to get upside if we get orders, is kind of how we're thinking about it right now.
I mean, Bill and I are both relatively new to this market and we're relatively new to this business line. So we're trying to make sure we don't miss the opportunity right now and get good cash flow and earnings for shareholders and figure out if there's a better way to understand and plan for it.
Michael Frank Ciarmoli
Got it. And then I mean, you're not going to give us '24 guidance here, but I mean, trying to model this segment now and looking at the volatility just on the margins last quarter, 13.4% over [18]. I guess the fourth quarter is back down to 13% or so. How should we think about this? I mean, I think the [Street] has you for 11% in '24. Is this more of a 13 to 14 business right now? And then the on-highway, depending on volumes, would drive those upside pops that we're seeing like in this quarter?
Charles P. Blankenship
Yes, I'm sorry. We're just not ready to talk about '24. I know why you want to know the answers to all those questions, and we're working through all of our plans right now of trying to make sure we close out '23 strong, and we have a really solid '24 plan that will be compelling for investors and that we are sure we can achieve.
Michael Frank Ciarmoli
Got it. And just last one, Aero. OEM looked like it was up 17% sequentially. Any material change or orders or just specific platforms, rates that you've broken higher to? Any color on that?
Charles P. Blankenship
Well, we just -- no real change to rates and nothing really out of the ordinary except for specific customers wanting more parts to support both OEM as well as the inventories positions that they want to be in based on what they see in the future.
Operator
(Operator Instructions)
Your next question comes from the line of Louis Raffetto of Wolfe Research.
Louis Harold Raffetto
I just want to go back to the cash flow because I think you've kind of talked about wanting to bring inventory down, but it looks like this is your best inventory turn quarter in years. Inventory is now sort of well below where it was in 2019. So just -- are we going to go lower? Or are you going to go up in the fourth quarter? And how is that translating to the impact on cash flow? Because you've raised net income 20% plus the last couple of quarters and still no increase.
Charles P. Blankenship
Yes. So we still feel like we're carrying a substantial amount of inventory to support the sales level and that world-class performance would have us at higher turns overall. And so that's what our lean folks, our operational leaders, our planners, everyone striving to figure out how to do better than we are right now. So it is our desire to improve that.
Louis Harold Raffetto
Okay. And then maybe trying to tackle this another different way. I think fourth quarter industrial margin guidance is somewhere between 13%, 13.5% to like 16%, which I assume that's kind of bounding some variability around China natural gas, is that right?
Charles P. Blankenship
That's a good way to think about it. I mean that's we're -- we don't give quarterly guidance, but we're in this tide and we changed guidance this quarter, so the math is self-evident.
Louis Harold Raffetto
Okay. And so I guess, is the -- at the low end of that is kind of -- is that where the normalized margin rate is, if we excluding (inaudible) natural gas at 13%, 13.5% margins is kind of run rate-ish?
Charles P. Blankenship
I think it's still early for us to give guidance on what our Industrial go-forward margin rate is going to be. We're very happy with the improvement that we've had in the base business, and we're going to continue to work on that. And I think when we're ready to give FY '24 guidance that we'll be able to put a nice bracket around that as well as give even more forward look to the -- at the Investor Day in December.
Louis Harold Raffetto
So maybe just one more I may ask. Last quarter, the back half guidance for Industrial was 9% to 10%. And that -- like I guess what changed to give you a 400 -- 300 basis points to 400 basis points more in 4Q than what the implied guidance was before?
Charles P. Blankenship
Two things changed. One was we are turning the corner in the performance of our factories, our people, our material flow, our suppliers, our operational improvement in the base business is improving. We were -- our plan was to improve it, and now that we've started to deliver on those plans and show progress and milestones and achieving the targets. So that was 1 thing that changed, and the other thing was the sheer volume of the China on-highway natural gas business and visibility for orders through the end of fourth quarter.
Operator
Your next question comes from the line of Noah Poponak of Goldman Sachs.
Noah Poponak
Can you quantify how much China on-highway revenue you have in the quarter?
Charles P. Blankenship
No. Sorry, Noah.
Noah Poponak
Okay. Did you have significantly more in this quarter than last quarter?
William F. Lacey
Quarter-on-quarter, sequentially, we did see an uptick and in our China on-highway business.
Noah Poponak
Okay. And fundamentally, what is it that makes that volatile? What is it that makes it not have visibility? Just in terms of what the customer is doing and thinking fundamentally when they're buying that product from you.
Charles P. Blankenship
Well, I think I tried to stay out of trouble on this one. But I think in one of our conference calls, I did say that it doesn't behave like other markets I'm used to and some of our business team is used to working through and garnering forecast around, appears to be government policy at play and other factors that we don't have a full handle on. So that makes it really difficult to forecast from where we sit. But we do -- as soon as we get orders, we kind of have a good level of confidence that that's how much the customer wants for that month, so that's been our mode for a while.
Noah Poponak
Okay. And when you have revenue that comes out of existing inventory into China OH, is the margin nearly entirely -- is it near a 100% incremental margin drop-through, like it becomes a multiple of the segment? Or is the -- segment margin? Or is it something where it's more like several hundred basis points better than the segment margin?
Charles P. Blankenship
Well, I guess the way I'll answer that, Noah, is that we carry a full cost of our inventory. And it's largely -- our business is largely in China for China. So that hardware and those systems that are -- we ship to our customer are largely coming from China and staying in China. And we carry that at cost and when we get our order, if we get pretty high volume, then the margin rates can be fairly high. If we have low volume, then we've got a lot -- we've got fixed cost to spread across that operation just like normal. The reason I'm saying all of that is I'm just trying to tell you it's a normally-functioning business where there's quite a lot of productivity for volume.
Noah Poponak
(inaudible). Lastly for me, on the Aerospace side, are you able to tell now where your aftermarket unit stands versus pre-pandemic? And what kind of pricing are you seeing in Aerospace aftermarket relative to that enterprise-wide number that you gave us?
Charles P. Blankenship
I got the first part of the question, but I didn't get the last part. But as far as Woodward units cycling through repair, we're closing in on 2019 volumes from both a shop visit and a Woodward LRU standpoint, we're not quite there yet.
Noah Poponak
And the second part of that was pricing. How does the Aerospace aftermarket annualized pricing you're seeing right now compared to the enterprise-wide level?
William F. Lacey
Yes. We do not go down pricing at that segment level -- at that level below the segment. As we talked about both segments are contributing to that 7% guide that we gave to total year price realization.
Operator
Your next question comes from the line of David Strauss of Barclays.
David Egon Strauss
Aerospace, it looks like from a revenue standpoint that you should be back to kind of 2019 pre-pandemic levels next year or even higher. And back when you were at those revenue levels, Aerospace did close to 21% margins. I know you don't want to give '24 guidance, but how should we think about the puts and takes on Aero margin next year relative to where you were at a similar revenue level a couple of years ago?
Charles P. Blankenship
Well, like you said, we're not prepared to give '24 guidance at this time, but it is our intent to continuously improve our performance from an efficiency standpoint and ability to serve customers. So we intend to improve from where we are today, and the fact that we were able to achieve better numbers before with good volume bodes well for us able to do it in the future.
David Egon Strauss
Is the -- I would think the revenue mix, Dan, is more favorable than what you saw in '19? It looks like you're going to have more aftermarket revenue, maybe a little less Aerospace OE and maybe less Defense. I would assume that revenue mix is positive.
Charles P. Blankenship
I'm not sure I'd make that assumption just yet. We're still working through our plans and looking. This is why we're not talking about FY '24. But right now in the early planning stages, we're looking at what rates the airframers are planning to achieve and what sort of inventory levels they'd want before they do rate breaks, and that propagates the engine manufacturers and then to us. So there may be quite a good amount of OE demand in '24, which is not necessarily a bad thing at all because that's creating the installed base for the future.
So it's good news, good news, I think, but it's too soon for us to say what we think the mix will be.
David Egon Strauss
Okay. And Chip, where is your aerospace headcount today relative to what it was prior, back in 2019?
Charles P. Blankenship
That's a question that I don't have the answer to in front of me. It's -- yes, we -- I don't have it in front of me.
David Egon Strauss
Okay. I can follow up with Dan on that.
Operator
Your next question comes from the line of Robert Spingarn of Melius Research.
Robert Michael Spingarn
Chip, I just want to come back on Aerospace and just ask you briefly. With regard to the LEAP and the GTF and some of the durability and time on wing issues, to what extent is that factoring or impacting your aftermarket? Are you shipping more because of these cycles being shorter?
And then as a follow-up to that, how might we think about this latest issue at RTX with the GTF and how that might impact with all the inspections, maybe taking shop time and so forth, how might that impact Woodward as that plays out over the next year or so?
Charles P. Blankenship
Yes, I think it's early to say on how that inspection and potential replacement program for the GTF would affect us. There's a number of like you were referring to earlier shop visits, hospital shop visits, quick-turn kind of activities to support infant issues with the fleet. Most of these have little effect on Woodward because our LRUs can stay on the engine typically. And we might get some check and repair kinds of work out of those. But for us, it doesn't have that big of an effect.
The 1 thing that it might -- the effect that it might have is the spare engine count that's required to support the overall fleet, but it just -- it would show up in our regular OE versus service numbers, and that will normalize itself over time. I think as far as we're concerned, it's minimal impact for us.
From a control standpoint, we do have some other hardware that there are some design changes on that, we are supporting our customers on those parts.
Operator
Mr. Blankenship, there are no further questions at this time. I will now turn the conference back to you.
Charles P. Blankenship
All right. Well, thank you very much, operator, and thanks for all the folks online and all your questions today.
Operator
Ladies and gentlemen, that concludes our conference call today. If you would like to listen to a rebroadcast of this conference call, it would be available today at 7:30 p.m. Eastern Time by dialing 1-800-770-2030 for our U.S. call or 1-647-362-9199 for a non-U.S. call, and by entering the access code 4278216. A rebroadcast will also be available at the company's website, www.woodward.com, for 14 days.
We thank you for your participation in today's conference call, and we ask that you please disconnect your line.
