Woodward Inc (WWD) 2002 Q4 法說會逐字稿

Ladies and gentlemen. Thank you for standing by. Welcome to the Woodward Governor company fourth quarter and fiscal year 2002 earning conference call. Following the presentation, you'll be invited to participate in a question and answer session. I would now like to turn the conference over to Mr. Steve Carter.

Thank you operator. We would like to welcome you to Woodward's fourth quarter and fiscal year conference call. I'm Steve Carter. With me today in our corporate head quarters in Rockford (ph), is John Halbrook and Tom Jendren (ph). Most of you saw the earnings announcement yesterday. For those who have not seen a copy, you can find one at our web-site at www..Woodward.com. An audio replay of this call will be available Friday. A replay of this call will be assessable on our web-site for 30 days. Before we begin, I'll like to provide our cautionary statement. In the course of this call when we present and answer questions other statements that we make may contain forward looking statements. Such statements involve risks and uncertainties that cause actual results from differ materially from those certainly participate. Factors include but not limited to economic conditions that would impact sales in both central and aircraft markets. We caution investors not to place undue reliance on these forward looking statements for future results. The company disclaims any obligation made herein. For more information facing Woodward we encourage you to consult the news earnings release in the public filing with the securities exchange commission. Now I will turn the call over to John to discuss events in the last quarter. Now here's John to provide some insight into our strategic goals and opportunities for 2003.

Thank you, Steve. Welcome to all of you who have joined us today. We also have Tom Jendren (ph) with us on the call for the first time and the three of us will be available for your questions following the call. We'll cover the key issues that provide some detail towards our goals. We faced a number of challenges this is year with adverse conditions and several of our targets and weakened economy. I'll address our business segments first for the quarter and full year and then outline our consolidated business results and expectations for the future. Let's begin our discussion with the control business. In our last conference call we predicted a decline in industrial sales for the 4th quarter. Citing a severe downturn in capital investment and new power generation domestically and weakened sales across most of our other central markets. Sometimes it's hard to be right. The orders for our core manufactured products declined more than we had anticipated. Earning, however, were down disproportionately to the sales numbers. A result to the decline in sales volumes especially across our primary higher margin product lines. Part of our cost base includes expenses that are not that sensitive to changes in volumes. This can be a real boost when volumes go higher. We also had unanticipated special items as mentioned in the earning release totaling about 5 point million for the quarter. These costs incurred for work force management. As I noticed, sales for core products were down for if year. Total central sales increased because of the added sales for acquisitions and the series for shipments for the transportation markets that added lower margin components as discussed in previous quarters. Over the full year, we continued to work toward our goal of increased market share through new products, entering new markets, strategic acquisitions and delivering superior customer service. Organic growth is one of the developments in our success of growing market share. We have introduced 70 new products. The gs 6 and gs 16 fuel control valves provide fuel control for mid-sized gas turbines. In an easy to install package. The response to these and other new products has been highly favorable and we anticipate that those sales will ramp up over the rest of the year. We continue to develop systems that contribute to our overall portfolio and key target markets. Our pipeline contain a steady stream of customer-requested projects based on our ability to respond quickly to their needs. Such invasion not only presents opportunity for near term financial reward but also is at the heart of future growth opportunities for Woodward. Our acquisitions have helped accelerate our presence in several growing markets. We acquired [ inaudible ] last spring which completed our power-management control product line that targets distributed computer generation market. We now have a global customer base that enjoy network power generation control solutions. Our purchase of Noltz Carboration (ph) allowed us to join a joint venture with Motortron, establishing an edge in small industrial engines, a market estimated to be about 300 million. The real driver in that particular market will be our ability to help our customers meet admission standards, cost effectively and with high standards of system performance. We are achieving our market share growth goals both from expanded product offerings and through acquisitions. Our net industrial sales have increased over 20% in the past 2 years. Even as the industrial markets we serve have contracted about 20%year over year and the current demand is down even further. Our increased sales indicate that the markets we serve has increased significantly. While it remains difficult to project the timing of economic recovery, we believe that industrial control sales for 2003will likely be down from 2002.But with growing activity in the second half of the year. We took prudent cost management steps in 2002 but was difficult to anticipate the duration of the sales declining of our industrial markets. We believe that we have made significant improvements that should improve earnings in 2003. Let me enumerate several items that should provide some added benefits in the upcoming year. Cost associated with acquisition in the last 18 months will be greatly reduced and sales volumes should begin to wrap up with improved margins. Our overall product mix will return to more normal levels that generally company our core manufactured products. And as a result of cost management taken late in 2002 we should see improvements in manufacturing expenses and improved engineering and SG&A expenses. Structural changes toward a more global business approach were announced recently. These changes will assist line managers in focussing on global initiatives. For example, six sigma operations are improving productivity. In addition, global purchasing initiatives are securing cost savings on purchase content that will be realized as inventories are replenished and sold to customers. We believe these improvements will result in better earning in industrial controls in 2003 and should give us additional momentum as sales volumes increase in the future. For aircraft engine systems, our aircraft engine systems remain very healthy in the first quarter of 2002. It was clear from the beginning of the year however that cost management would be necessary to offset severe downturn in commercial air traffic. We accelerated cost cutting measures already being planned and were able to take out significant expenses almost immediately the clarity in the trends in the OEM market allowed us to take action early in the year and our earnings through the year showed benefits The after market portion of our aircraft engine business has been stronger than anticipated. As Woodward has more engine content on newer aircraft that still fly, even with the overall decreased commercial activity. Our customer service is exceptional and our relationships remain strong. During the year we have contract extensions with most of our key OEM customers. As an industrial controls, our aircraft OEM customers are seeking supplier consolidation to help provide cost efficiencies. Woodward has an excellent track record in all these areas and our growing relationships with our customers. Our customers publicly acknowledge their satisfaction. American airlines awarded us platinum status. The department of defense recognized Woodward with the quality and delivery performance award. This superior performance solidifies our performance on any new engines under development. We are also establishing a presence in China, for in-country repair and overhaul. We plan to actively seek opportunities available in Asia and other growing global markets to increase our share in both the manufacturing and after market business. Looking ahead into 2003, the indications we have of commercial travel volumes which affect OEM and after market sales as well as demands for military and other aircraft markets will likely keep aircraft engines sales at levels consistent with the second half of fiscal 2002 in the absence of any events. Military sales will contain a higher percentage of repair, upgrades and sales parts. With sales under pressure, special focus will directed to managing profitability. In order to meet customer expectations with the least effect on our margins we will pursue better efficiency, productivity and quality via (ph) six sigma and lean manufacturing initiatives. We are confident that we can sustain our improvement in those areas to preserve margins and position ourselves well with additional business with these customers. In summary the ability to achieve growth even with key marketing turned down and the economy softens. With what perspective although2002 was a difficult for year for anyone I believe Woodward has performed well. We strengthened market presence and customer relationships. Aircraft engines early in the downturn, we were able to deliver results that were very respectful given market conditions. In industrial controls, we remained steadfastly committed to the global market opportunities we have identified in energy-controlled technologies. We are taking great care to preserve or core competitive strength and sustain the momentum we believe is still present in our growth goals. Looking ahead, our operating results near term will reflect the weakness in our markets but the company remains financially sound. We have the resources to execute our strategies for growth both organically that meet our criteria although consolidated sales will be down slightly for the full year 2003 compared to last year. Our plans call for careful cost management and continuous improvement which should enable to fiscal year 2003 earning to approximate those in fiscal fiscal2002. Before I turn the call over to Steve to give more details about the financial results, I would like too briefly comment on our response to the Sarbanes-Oxley bill that was enacted recently. This bill addresses high profile malfeasance at US public companies. We have talked about the tradition of integrity at Woodward. It is a part of our corporate culture and will continue to conduct our business in an open and understandable manner. We believe our obligation to our stockholders is the same to our customers and members. Now, I'll turn the mic back over to Steve for more details on the financials.

Thank you, John. As I review financial items today, I'll first talk about our 4th quarter results, comments on our balance sheet items and our outlook for the future. Net sales for the quarter were 152.6 million, down 13% from 175.4 million a year ago. Net earning of fiscal 2002 were 3.2 million or 28 cents per share, compared to 16.6 million or $1.43 a share has adjusted to good will amortization in the final quarter of fiscal 2001. .Earnings this quarter were impacted by work force initiatives and the carrying value of equipment to its fair market value. These two items reduced those earnings by approximately 3.2 million. Without them, it would have been 6.4 million or 55 cents a share. Fourth quarter sales for industrial controls were 90.7 million down 11% from the 111.8 million in the 4th quarter a year ago. Core product sales declined over 15 million. While acquisition made in the past two years provide an additional 3.5 million in 4th quarter sales. Industrial controls lost 4.2 million this quarter compared to segment earning of 16.3 million in the same period last year. Sales volumes decreased particularly in our core products that carry higher margins. We also recorded costs of workforce management and manufacturing equipment. These items total 5.1 million in the quarter. Aircraft engines systems were 61.8 million, decreased by 16% from fiscal year 2001 4th quarter sales of 73.6 million. Segment earnings in 4th quarter were 12 million compared to 12.3 million last year. Management and productivity programs held earnings steady. Also the full fiscal year results. For the year end of 9/30, net sales were 680 million up slightly from 678.8 million a year ago. Net earnings for the year before the accounting change 45.2 million or $3.90 per share, compared to 55.9 million or $4.84 per share last year. Annual sales for industrial controls were 6.4% from 408.7 million from 384.1 million last year. Businesses acquired in fiscal 2001 and 2002 accounted for 24 million (ph) of the increase. Without the acquisition, sales would have been about the same in 2002 as they were in 2001. Segment earnings fell to 33.3 million from last year's 59.6 million. Decreases in sales in our core manufactured products carry higher margins were offset by sales that included low margin purchase products. We also recorded costs associated work force management issues. Aircraft engine systems sales this year decreased 8% to 271.3 million, compared to last year's 294.6 million. By the reduction of sales aircraft engines systems increased 57.2 million this year, 2% over segment earnings last year as adjusted for goodwill amortization. Earnings reflect cost containment measures and continuous improvement programs as well as work force management efforts initiated at the start of the year. SG&A expenses on a consolidated basis decreased 8.7 million, 13% compared to last year. Due to compensation expenses and lower debt expenses. In fiscal 2001, we increased our allowance due to uncertainties in the aircraft industry. This year we reduced a portion of those allowances because collections were not impacted to the degree. SG&A expenses are 8.6% this year, compared to 9.9% last year. With the anticipated reduced sales in fiscal 2003 we believe SG&A will be around 10%. Interest expense was 5.1 million this year compared to 7.6 million last year. This decrease was because interest rates were lower and had lower outstanding debt. Depreciation and amortization were the same last year at 32.1 million, compared to 32.7 million. The elimination of good will amortization was offset by an increase in depreciation for assets acquired in 2002. Capital expenditures were 22.9 million this year. About four million left from last year's expenditures. We expect 2003 expenditures to be around 21 million. Tax rate is 36.1% compared to 38.3% last year. In the first half of the year, we reversed certain evaluations allowances which contributed to the lower rate. We expect our 2003 tax rate to be around 38%. EBITDA was 107.2 million for 2002, compared to 125.3 million last year. We computed this measure before the effect of accounting change. Now for a few comments on the balance sheet. Accounts receivable decreased 26 million to 76 million this year due to reduced sales but also to improve collections. Inventory decreased 4 million to 127 million. Accounts payable decreased 16 million. Decreases due to lower fuels this year and lower accounts payable reduced expenses associated with lower sales and inventory. Our total debt to debt equity is 24.4% the lowest it's been in five years. Our long term debt. The remaining debt is pay able on installments in fiscal 2006 through 2012. We believe sales for the full year will increase to the 4th quarter level we expect 2003 sales to be less than the full year through 2002 sales. However, with our cost containment programs and an improved product mix is the same for the fiscal year 2002. That concludes our comments on the business and results for the 4th quarter and fiscal 2002. Operator, we're now ready to open the call for questions.

Please pick up the hand set before pressing any numbers. Should you have a question, please press star one on our touch-tone telephone. Our first question comes from Mark Heeler (ph) with CL King and Associates.

Good morning. Given the declines in the commercial aircraft and IGT markets, I was wondering if you could give us a fresh brevard (ph) county out of were your revenues come from in each market they serve.

Do you have that Steve?

Yeah, Mark, as far as the IGT which last year was 40% of our market this year it's about 37%.

37% of the segment?

Of total and transportation was 10% last year is 13% this year.

All right.

And I think the other two are roughly about the same. A couple per cent one way or the other aircraft in that and also the process industry. They were close to where they were last year but not too much difference.

In aircraft could you split that up between commercial and military jet?

Let me take it a different way, of the total aircraft business, around 35 to 40% is after market. Okay? Then the balance is new unit sales. The military part of the total is about 25% of the total. The military includes a little bit of repairs and new unit sales as well.

Sure. Okay when you look at -- let's go onto some margin information. You said on the call or press release that you think you're confident you can maintain the margins or have them erode just slightly but IGT and commercial aircraft I think -- you're going to see some pretty big declines there next year as well. Especially IGT do you have any additional cost reduction plans?

Well, we have our standard six sigma and lean manufacturing initiatives. We think that we have our business size appropriately for the volumes that we are anticipating. But certainly, if we are wrong on the volume guess, we'll have to address that issue. But we think we've got the business size with enough balance to give us adequate R&D expenditures and sales and marketing expenditure that we need to serve the business. So we're not planning any extraordinary cost reduction efforts of that nature. We're restructuring type.

So we shouldn't see any additional special charges in03?You're not planning at this time?

Basically, I think that's right. If we do have them, we'll probably offset them with increased profits. So I think in factoring into your model, I guess I wouldn't put them in there.

Okay. Then given that backdrop, where do you think segment operating margins can go for 03 an a four year basis?

Well, as I said, I think the aircraft margins will probably be reflective of the last six months as volumes and margins. We would expect the central markets or margins to increase okay? Not a huge amount because the volumes are low. But we do expect them to increase slightly.

Okay.

On a year over year basis. They will increase from the fourth quarter levels.

We would hope so. One other question. As the special charges that you took in the 4th quarter were any of those associated with acquisitions?

No.

So they were all pretty much from the core operations?

Yes.

Okay. That does it for me. Thanks.

Our next question comes from Steve Wartman (ph) with Sidoti and Company.

Good morning. I have a couple things total cost savings (ph) you implemented in the 4th quarter is there anyway you can quantify the income statement impact on FO3 in terms of cost cuttings savings.

Right off the top of my head. I'm not sure. Tom, can you quantify that at all?

Tom Jendren (?): We took quite a number of work force management issues. A number of them that we had identified that. The thing I would say is that we took quite a few of the workforce management issues and took those things in the 4th quarter and expect that those will be recovered in the first six months of next year and an additional benefit from that going forward. If you want to use the amount that we used in the release , I think that would give you the right number.

Also you indicated that in the last 18 months you had some costs related to acquisitions. Is there anyway you can quantify that.

Some of the things that we've done just two of the acquisitions we consolidated into other operations, the okayzution (ph) that we made last summer, we're in a process of consolidating that with our German operation. So these ones have all come together with restructuring or shut down some facilities. Restructured in terms of direct people we have on staff. So over the years, we've taken a lot of charges. We're selecting that activity. At the same time, we've been putting additional resources into shoring up some of their product development f we expect those to be stabilized and going forward.

You also indicated that you have a favor able product mix, give the decline in turbine (ph) sales, where's the mix improving?

One of the largest areas we have I think this is discussed in proportion calls. We have some alternative fuel systems that we do for gas buses. We had a contract that required that we ship a number of components that we manufactured so they were part of the system that passed through with very low margins. The contract has been renegotiated. We're not doing that at this time. At the same time we introduced the new products (ph). These products are carrying higher margins. Even though you've seen the decline in the gas market. Here, we've done a good job. So that's where the favor able mix will start to show up.

The 511 million charges that were taken, is there anyway you can class fi them as a cost of goods and I saw that other line item that looked a little high. Can you give us a feel where total (ph) charges are?

Well 3 million of that is in the underline because that's where we took on bringing some equipment down to fair value. The other 2.1 will be in SG&A (ph).It will be in the cost [ inaudible ]. Maybe 80% of it will be up in the cost good sale in 20% in the SG&A something like that.

Thanks a lot.

I have a reminder, should you have a question please press star one on your touch tone telephone at this time. Cary Rodham (ph) with Kennedy Capital.

Hello. My question is just something about the future. Do you guys get any fuel for the power generation market especially China and the Middle East whether that business is going to pick up at all?

Yeah. That's a good question to ask. One of the things I highlight from Woodward is we definitely play everywhere in the world. If power generation collapse was North American based. If you look, Europe has been held much more steady. We expect a large increase in China. We're working closely with all the major globals. We see other parts of Asia steadily growing. So power generation world wide does not reflect in our opinion what happened in the U.S. Obviously the U.S. is the biggest market so we feel that very much but we are very - our Asian sales went up slightly in the central side. Going into fiscal year 2003 (ph) we're expecting an increase (ph) in our Asian field.

Okay thanks.

Once again should you have further questions please press star one on your push button telephone. There are no further questions at this time I will now turn the conference back to you.

Thank you. Steve, Tom and I appreciate your interest in Woodward and for your participation on the call. The next call will be for first quarter fiscal 2003. . We do look forward to providing additional information about the outlook. Again, thanks for joining us today.

Ladies and gentlemen thank you for joining us on the conference call today. A rebroadcast will also be available at the company's web site www.woodward.com for 30 days. We thank you for your participation in today's conference call and ask that you please disconnect your line.