Woodward, Inc. (NASDAQ:WWD) Q4 2023 Earnings Call Transcript
Woodward, Inc. (NASDAQ:WWD) Q4 2023 Earnings Call Transcript November 16, 2023
Woodward, Inc. beats earnings expectations. Reported EPS is $1.33, expectations were $1.27.
Operator: Thank you for standing by. Welcome to the Woodward, Incorporated Fourth Quarter Fiscal Year 2023 Earnings Call. At this time, I would like to inform you that this call is being recorded for rebroadcast and that all participants are in a listen-only mode. Following the presentation, you are invited to participate in a question-and-answer session. Joining us today from the company are Chip Blankenship, Chairman and Chief Executive Officer; Bill Lacey, Chief Financial Officer; and Dan Provaznik, Director of Investor Relations. I would now like to turn the call over to Mr. Provaznik.
Dan Provaznik: Thank you, operator. We’d like to welcome all of you to Woodward’s fourth 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. And 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 November 30, 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 or 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-US GAAP financial measures. We direct your attention to the reconciliations of non-US 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.
Chip Blankenship: Thank you, Dan, and good afternoon, everyone. Improved execution coupled with robust demand and progress on our strategic priorities delivered strong top line growth in fiscal 2023. Our focus on improving operations resulted in increased output which allowed us to serve customers better and deliver enhanced margins. I would like to thank our team members for their hard work in a challenging environment, their commitment to Woodward and our customers, resulted in a strong finish to fiscal 2023 and frankly a strong start to our fiscal 2024. As anticipated, the strategic investments we've made to strengthen our supply chain resulted in significant improvements in the second half of the year, a robust supplier escalation process proactively identifies at risk suppliers and creates mitigation plans to ensure continuity of supply.
Our rapid response machining centers are working as designed and we continue to leverage our machining capabilities to offload suppliers, and our internal shops as they run into short-term capacity constraints. Woodward's full engagement in proactive problem solving with our suppliers has vastly improved the stability and performance of our supply base has become integral to our overall supply chain management process. We believe we are well-positioned to deliver on future demand. Earlier in the year, we streamlined the Aerospace and Industrial segments and added experienced leadership to the company to accelerate our lean transformation. We integrated the turbine and reciprocating engines business units into one Industrial business. We reduced structural costs and achieved pricing to offset significant inflation.
We initiated a product portfolio rationalization effort, which focused on pruning lower performing products to both simplify operations and improve profitability overall. Through the fiscal year end, we eliminated approximately 18,000 SKUs. While these were relatively easy actions to take, the next wave will require more finesse and a customer connected approach to product lifecycle management. This is a multiyear product -- project and we will provide updates along the way. We integrated the engine and airframe business units into one Aerospace business. We brought the hydraulic and fuel systems business units closer together with a combined engineering and program management structure. The electromechanical systems and electronics team is also part of the streamlined organization, which uniquely positions Woodward to be competitive across the entire spectrum of aircraft electrification scenarios.
We simplified the way we interact with aerospace customers with one commercial team calling on and supporting customers. In its first year as an integrated organization, productivity improved as new members became proficient and pricing actions were successful, and offsetting the material and labor inflation that we faced in 2023. We doubled down on strategic investment in operations, excellence and talent development to accelerate our lean transformation. We started with one value stream analysis in each of the segments, motors in aerospace and gas flow valves for land-based turbines in our Industrial segment. Each of these actions required application of significant resources, with more than 30 people organized to detail all the process steps, lead times and inventory positions from customer order entry to shipping the product and collecting cash.
The results of this type of analysis allow us to identify and eliminate waste and deliver more value to customers. The output from each week long event is a 12-month transformation plan to cut lead time in half and double the inventory turns for the value stream under transformation. We have since placed two more value streams under transformation, SOGAV in Industrial and servo hydraulic valves in Aerospace. We were going narrow and deep as each of these efforts require dedicated resources. Turning to innovation, we continue to invest in and develop technologies that reduce fuel consumption and emissions in both aerospace and industrial applications. Our innovations enable multiple paths for a cleaner future, representing opportunities for Woodward in the years ahead.
Together with our customers, we are developing solutions that utilize a wide variety of alternative fuels to power the engine of tomorrow. As we mentioned earlier this fiscal year, we were selected by Airbus to provide a Balance of Plant Control Solution for the fuel cell system in their ZEROe aircraft demonstrator. This project leverages our leading fuel control technologies to enable sustainable air travel using hydrogen fuel. The Airbus Demonstrator Program aims to introduce a zero emission aircraft into service by 2035. On the Industrial side of the business, we have several projects underway with multiple alternative fuels across a diverse array of applications including power generation, marine, agriculture and mining. These projects are targeting new engines as well as conversions and upgrade opportunities for engines and service.
Moving to our markets. Commercial aircraft utilization rates continue to rise, with domestic passenger traffic exceeding 2019 levels, and international travel largely recovered. In defense, due to geopolitical developments and government spending proposals, we expect R&D and procurement increase. We continue to see strength across our industrial markets. In power generation, demand remains strong, driven by growth in Asia, increases in global aftermarket activity and continued demand for backup power. In transportation, the global marine market remains healthy with shipyards at capacity and higher utilization driving current and future aftermarket activity. Increasing demand for alternative fuels across the marine industry should continue to drive expanded OEM and aftermarket opportunities, as multi fuel engines contain greater Woodward content.
In oil and gas, global investment in LNG infrastructure development continues. Demand for natural gas, heavy duty trucks in China increased significantly over last year due to a number of factors including wide LNG diesel price spread and a steady supply of natural gas. Woodward benefited from this resurgence in demand beginning in our second quarter, followed by a sharp uptick in the third and fourth quarters, with sales approximating the historical quarterly peak level of roughly $50 million. We converted these orders into sales, utilizing inventory on hand and existing production capacity. Our market analysis, including recent customer visits, indicates continued strong demand for LNG heavy duty trucks in China. However, this is a volatile market and as history has shown, the promise of these sales can evaporate quickly.
We are evaluating the durability of the elevated market demand and are developing an operational plan that allows us to be flexible and resilient to significant swings and volume. In summary, our markets are strong and demand for Woodward products and services remains robust. Our strategic investments to stabilize and strengthen our supply chain and improve operations are yielding sustainable results. The resulting output increases and productivity are reflected in our financial performance. We have taken a lot of ground in 2023, but we have more work to do. As we look ahead, Woodward remains committed to operational excellence, talent development and innovation, which we believe will drive long-term growth and deliver value to our customers and shareholders.
I will now turn the call over to Bill to review our quarterly and full year results as well as our fiscal year 2024 outlook.
Bill Lacey: Thank you, Chip, and good afternoon to everyone. Net sales for fiscal fourth quarter were $777 million, an increase of 21%. Net sales for fiscal year 2023 were $2.91 billion, an increase of 22%. The increases in the quarter and full year were driven by continued strong demand across most of our end markets, increased output resulting from the strategic investments we've made in the business and price realization. Aerospace segment sales for the fourth quarter of fiscal 2023 were $455 million, compared to $408 million, an increase of 11%. Commercial OEM and aftermarket sales were up 19% and 21%, respectively, driven by higher OEM production rates, continued growth in both domestic and international passenger traffic, increasing aircraft utilization and price realization.
Defense OEM sales were down 13% in the quarter, primarily due to lower sales of guided weapons. Defense aftermarket sales were up 18%. Aerospace segment earnings for the fourth quarter of 2023 were $78 million, or 17.2% of segment sales, compared to $63 million, or 15.5% of segment sales. The increase in segment earnings was primarily a result of price realization, higher commercial OEM and aftermarket volume and productivity gains partially offset by inflation and higher annual incentive compensation. For fiscal year 2023, Aerospace segment sales were $1.77 billion, compared to $1.52 billion for the prior year, an increase of 16%. Aerospace segment earnings for fiscal year 2023 were $290 million, or 16.4% of segment sales, compared to $231 million, or 15.2% of segment sales for the prior year.
Turning to Industrial. Industrial segment sales for the fourth quarter of fiscal 2023 were $322 million, compared to $232 million, an increase of 39%. The increase was driven by higher volumes across all markets as well as price realization. In the fourth quarter sales for on-highway natural gas truck production in China exceeded 10% of total Industrial segment sales. Industrial segment earnings for the fourth quarter of 2023 were $54 million, or 16.9% of segment sales compared to $21 million or 9% of segment sales. Industrial segment earnings increased due to higher sales volume, productivity and efficiency gains, price realization and favorable product mix, partially offset by inflation and higher annual incentive compensation. For fiscal year 2023, Industrial segments sales were $1.15 billion compared to $863 million for the prior year, an increase of 33%.
This represents record sales for Industrial segment. Industrial segment earnings for fiscal year 2023 were $162 million, or 14.1% of segment sales, compared to $83 million or 9.6% segment sales for the prior year. As Chip mentioned, we continued to make progress on strengthening our Industrial business, with strategic investments we've made to improve operational performance, including increased output and price excellent drove approximately 200 basis points of improvement in Industrial segment earnings as a percent of segment sales in fiscal 2023. We are in the early innings of transforming the Industrial business. But once fully realized, we expect normalize Industrial margins as a percent of sales to be in the mid teens depending on the sales mix.
Nonsegment expenses were $24 million for the fourth quarter of 2023 compared to $17 million. Adjusted nonsegment expenses for the fourth quarter of 2022 were $21 million. Nonsegment expenses were $131 million for fiscal 2023 compared to $81 million for 2022. Adjusted nonsegment expenses were $96 million in fiscal 2023 compared to $78 million, primarily driven by higher annual incentive compensation. At the Woodward level, R&D for the fourth quarter of 2023 was $32 million, or 4.1% of sales compared to $30 million, or 4.7% of sales. For fiscal year 2023, R&D costs were $132 million or 4.5% of sales compared to $120 million or 5% of sales. SG&A for the fourth quarter of 2023 was $66 million compared to $50 million. For fiscal year 2023, SG&A was $270 million compared to $203 million.
For both the quarter and the year, the increase was primarily due to higher annual incentive compensation. The effective tax rate was 15.7% for the fourth quarter of 2023 compared to 6.5%. The full year effective tax rate was 15.7% for fiscal 2023 compared to 14.1%. For fiscal 2023, the adjusted effective tax rate was 16.8% compared to 14.3%. Looking at cash flows. Net cash provided by operating activities for fiscal 2023 was $309 million, compared to $194 million. Capital expenditures were $77 million for fiscal 2023 compared to $53 million. Free cash flow was $232 million for fiscal 2023 compared to $141 million. Adjusted free cash flow was $238 million for fiscal 2023 compared to $144 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 1.5x EBITDA at the end of the fourth quarter compared to 2.1x EBITDA. During fiscal 2023, $177 million was returned to stockholders in the form of $51 million of dividends and $126 million of repurchase shares under a Board authorized share repurchase program. Lastly, turning to our fiscal 2024 outlook. Woodward's fiscal 2024 outlook include a continued strong demand environment, and improving operational performance throughout the year. Total net sales for fiscal 2024 are expected to be between $3.1 billion and $3.25 billion. Our Aerospace segment outlook includes increasing revenue and margin expansion driven by continued strength in commercial markets, and increased defense activity. For fiscal 2024, Aerospace sales growth is expected to be between 10% and 14%, and Aero's earnings are expected to be 18% to 19% of Aerospace sales.
Our Industrial segment outlook includes broad based market strength, in improving operational performance. Given the volatility and limited visibility into the China on-highway natural gas truck market, the outlook assumes peak sales levels for the first quarter with minimum activity through the remainder of 2024. For fiscal 2024, we expect Industrial sales growth between 4% to 6%. Industrial segment earnings are expected to be 13% to 14% of Industrial segment sales. At the Woodward level, the adjusted effective tax rate is expected to be approximately 21%. We expect free cash flow to be between $275 million and $325 million and capital expenditures to be approximately $100 million. Earnings per share is expected to be between $4.70 and $5.15, based on approximately 62 million fully diluted weighted average shares outstanding.
This concludes our comments on the business and results for the fourth quarter and fiscal year 2023. Operator, we are now ready to open the call to questions.
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