Woodward Inc (WWD) 2003 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 2003 earnings conference call. At this time I would like to inform you that this conference is being recorded for rebroadcast and that all participants are in a listen-only mode. Following the presentations, you'll be invited to participate in a question and answer session.

Joining us today from the company are Mr. John Halbrook, Chairman and Chief Executive Officer. Mr. Thomas A. Gendron, President and Chief Operating Officer and Mr. Steve Carter, Executive Vice President, Chief Financial Officer and Treasurer. I would now like to turn the call over to Mr. Steve Carter. Please go ahead, sir.

Thank you, operator. We'd like to welcome all of you to Woodward's fourth quarter fiscal 2003 conference call. I'm Steve Carter, Woodward’s Chief Financial Officer. With me today at our corporate headquarters in Rockford is Woodward's Chairman and CEO, John Halbrook and President and Chief Operating Officer, Tom Gendron.

Most of you have probably seen a copy of the earnings announcement we released at 5:00 pm yesterday. Or you may have received a copy by fax or email For those who have not seen a copy, you can find one on our website, at www.woodward.com. An audio replay of the call will be available through Friday, November 21. The phone number was on the press release announcing the call and will be repeated by the operator at the end of the call. In addition a replay of this call will be accessible on our website for 30 days.

Before we begin, I'd like to provide our cautionary statement. In the course of this call, when we make comments or answer questions, any statements we make other than actual results or business facts may contain forward-looking statements. Such statements involve risks and uncertainties that may cause the actual results to differ materially from those we currently anticipate. Factors that might cause a material difference include but are not limited to economic conditions that would impact sales in both the industrial and aircraft markets, the effect of product mix on margins and the ability of the company to maintain and add to its customer base. We caution investors not to place undo reliance on these forward-looking statements as predictive of future results. In addition, the company disclaims any obligation to update the forward-looking statements made herein. For more information about the risks and uncertainties facing Woodward, we encourage you to consult the press release and our public filings with the Securities & Exchange Commission.

Now I'll turn the call over to John to discuss some of the events that occurred during the last quarter and review our full fiscal year operating results and to provide some insight into our strategic goals and opportunities.

Thank you, Steve. Welcome to all of you who have joined us today. Tom, Steve and I will be available for your questions following the call. I will cover the key issues that affected our performance and provide some detail on our progress this year.

Woodward's fiscal year 2003 presented many challenges, from a slow global economy to declines in the specific markets in which we participate. Yet, we maintained focus on our customers, gained share in our core markets, and preserved a strong balance sheet. As a result, I believe we have set the stage for superior long-term return to shareholders.

Market conditions in fiscal 2003 were more severe than we anticipated. We experienced sharp declines in diesel and gas engine products, in addition to the more publicized declines in the large industrial gas turbines and aerospace engines. To put those declines into context, our aerospace business was down 6%, 2003 over 2002. And our sales to large gas turbine manufacturers were about 45% lower in 2003 than they were from their all-time high in 2002.

While we took corrective actions to align our operations with market conditions, the sudden reduction in sales volume significantly affected our profitability, despite decisive actions throughout the year to bring our cost structure in line with the reduced sales volumes. We expect these actions to result in savings of approximately $20 million, most of which will be realized throughout 2004.

Demand from our customers for new energy control solutions to meet impending stringent emission regulations required a continued high level of product development expenditures in the year. Our ability and willingness to work with customers in early stages of product development enables Woodward to provide critical components and system solutions for engine programs and thus secure future opportunities for growth.

Reducing emissions, improving operating efficiency and lowering costs remain the dominant drivers in our markets and in the allocation of our research and development investment.

Product development, integrated systems, product costs and quality are critical to our position as a preferred supplier to the world's leading original equipment manufacturers. We prove our commitment to our customers every day by understanding their needs and investing in product development and technological innovation throughout industry cycles to address these needs. This commitment helps win projects and has led to a pipeline of new products to drive future revenues.

We are also integrating or bundling our energy control technologies into systems that optimize performance and reduce emissions for engine and turbine EOMs around the world. This bundling strategy enables us to provide our customers with complete solutions, reinforces our market share and generates healthy returns for Woodward. We are leveraging the benefits of our foundation of applied integrated systems to our customers and shareholders.

An example of Woodward's bundling strategy is this year's introduction of our most comprehensive, integrated fuel control system and our first aircraft ignition system for the Pratt and Whitney Canada PW-615-F engine which was selected to drive the six-seat Cessna Citation Mustang business jet. The PW-615-F is the first of the first of the promising PW-600 series of engines and an important win for Woodward. The medium bypass PW-610 [six] turbo fan is another engine in the series and is the selected engine for the six-seat twin turbo fan Eclipse 500 aircraft.

Disciplined cost management helps us meet our customers' demands while ensuring our profitability and creating long-term value for our shareholders. As an example of cost management in 2003, we consolidated our Buffalo, New York servo valve operations into our existing Rockford, Illinois plant. At the completion of this consolidation project, while we have many opportunities for operational improvement, we are delivering on-time to our major customers. And we do expect an annual savings of about 2.5 million as a result of this consolidation. Also, we licensed the aftermarket business of the our turbo prop controls to Honeywell Aerospace. This agreement allows us to continue to generate revenues through royalties while reducing costs and enabling us to focus our resources on growth markets. Furthermore, we unified our business operations to leverage joint development investments, common product platforms, and the sharing of best practices and resources across our locations. Doing so allows us to realize economies of scale throughout our supply chain and creates the potential for added value for our shareholders and customers.

One example of a joint development investment is the electric driven variable metering pump for [Nagada] power systems. Woodward will apply aircraft pump design resources to support this industrial mini turbine application. The Nagada turbine is scheduled for commercial launch in 2004.

Despite the markedly reduced activity in many of our markets, we posted notable key wins this year and gained share in several of our markets. Among OEMs was our selection as a key supplier for Caterpillar's new series of generator and compressor sets which included Caterpillar 3500-C series advanced natural gas engines. Our military sales account for a quarter of the aerospace business. We're supplying main engine fuel nozzle assemblies, augmenter spray bar manifold assemblies and pilot burner valve nozzles for the Pratt and Whitney F135 engines that will power the joint strike fighter and we're aggressively working to win more content on this engine. There are production forecasts of more than 6,000 joint strike fighters over the life of the program. Woodward is also supplying augmenter spray bar assemblies in the Pratt and Whitney F119 turbo fan engine that will power the FA-22 Raptor. The Raptor is scheduled to be flying in 2005. [inaudible] power generation will use our ST Excite ignition exciter on the W-501 heavy frame turbines. This is our first industrial application of ignition technology for heavy frame and aero-derivative gas turbines. The ST Excite's all digital design facilitates advanced diagnostics and combustion feedback that can improve start reliability and extend turbine life. Woodward's fuel metering units will control fuel to the GE CF-34 H 10A engines that will power China-designed ARJ-21 regional jet.

Our strong OEM presence, large installed base and global support capabilities enabled us to secure service and maintenance agreements with major airlines and aircraft engine repair shops around the world such as Air China, United Airlines and Snecma services.

The commercial after market, while affected in the first half 20603 by the Iraqi war and the SARS epidemic, continued to be an important source of revenues and profits for us. After market sales helped compensate for the decline in OEM commercial sale this year. Although we expect aerospace sales to remain flat for 2004, our systems and components are on many of the commercial aircraft flying today and they represent a large potential for future service business. We are enhancing our aerospace aftermarket with the addition of new products and services for both commercial and military customers. We're also working to apply our systems on the engines that will power such new aircraft as the Boeing 7E7 Dreamliner.

Product expansion has been an important growth strategy for Woodward. Innovative offerings capture market share. Along with organic product development, acquisitions are an integral part of our product offering expansion and growth strategies. This year, we acquired two businesses. Synchrostart products and Barbara Coleman Dinah products to form a cluster of technology offerings that began with the acquisitions of [Knowles Calibration] and the joint venture with [Mototron] Corporation. These offerings place Woodward in a market leading position in the 300 million industrial high speed engine market.

During the year, we announced two major contract wins for the MI-04 control system with Daewoo and Clark for propane fueled lift trucks and we are aggressively seeking additional opportunities to help customers meet forthcoming emissions requirements. The Synchrostart acquisition, along with our joint venture in Tianjin has enhanced our position in China. We're strengthening our production presence in China to serve this fast-growing Asia market.

Based on discussions with customers and our analysis of industry forecasts, we believe that most of our markets will be at or near bottom by our first fiscal quarter of 2004. How soon and to what degree our markets will return for more normal levels is hard to predict. As our markets normalize, we believe Woodward will emerge with strengthened positions in our key niche markets and able to leverage the increases in sales volume to respectable increases in profit margins. While fiscal year 2003 was a tough year for Woodward, we emerged with our strengths intact. We expect 2004 to be a better year for sales and earnings as we see the benefits of this year's activities unfold. We will use our strengthened market position and our operational efficiencies to leverage the increased sales volumes that we should see as our markets recover.

Now, I'll turn the call over to Steve to give more details on the financial results.

Thank you, John. As I review financial items today, I will first talk about our fourth quarter results, followed by the results for the year, comment on some balance sheet items and our outlook for the future. Our net sales for the quarter were 154.1 million, a slight increase over last year's fourth quarter, however, the fourth quarter included 10.4 million of sales from businesses we acquired in fiscal 2003. If we'd not made these acquisitions, our fourth quarter sales would have decreased almost 6% from the prior year's fourth quarter. Net earnings in the forth quarter were $1.7 million or 15 cents per share, compared to $3.2 million or 28 cents per share in the fourth quarter fiscal 2002.

Fourth quarter earnings in fiscal 2003 were impacted by workforce management activities and the consolidation of our servovalve operations. Expenses associated with these activities reduced our net earnings in the fourth quarter by approximately 1.9 million. In the previous year's fourth quarter, expenses associated with workforce management activities and the reduction in the carrying value of certain manufacturing equipment together reduced net earnings by approximately $3.3 million.

Net sales for Industrial Controls were $88.8 million in the fourth quarter, which includes $10.4 million from businesses that we acquired in fiscal 2003. Without the sales from these acquired businesses, industrial control sales would have been 7.4 million in the quarter, a 14% decrease from the same quarter a year earlier. We were impacted most in the decrease in sales for large gas tur bins used in power generation, although the decline was widespread among all industrial products and markets.

Industrial Controls incurred a segment loss of almost $7 million in the fourth quarter, compared to a segment loss of 4.2 million in the previous year's fourth quarter. These results include pre-tax expenses associated with workforce management activities totaling approximately $2 million in the recently completed fourth quarter and approximately 2.1 million in the previous year’s fourth quarter. In addition, the fourth quarter year ago included a pre-tax loss of $3 million to reduce the carrying amount of certain manufacturing equipment to its estimated fair value.

Aircraft Engines Systems fourth quarter sales were $65.3 million, represents a 5.5% increase over the previous year's fourth quarter sales. The increase was largely due to higher sales for helicopter engines used in military applications. Segment earnings for Aircraft Engine Systems were 13.8 million in the fourth quarter, compared to 12 million in the prior year's fourth quarter. Segment earnings in the fourth quarter included expenses totaling approximately $1 million that was associated with the consolidation of the servo valve operations into our Rockford facility. The previous year's fourth quarter, segment earnings included approximately $200,000 for workforce management activities.

Now let's look at the full fiscal year results. Consolidated net sales for the full year were 586.7 million, down 13.7% from $680 million in the previous year. Net earnings for the year were $12.3 million, or down eight cents per share, compared to $45.2 million or $3.90 per share in the prior year, as measured before the cumulative effect of fiscal 2002 accounting change. Annual sales for Industrial Controls decreased 18.6% to 332.8 million. Businesses acquired in the last two fiscal years accounted for $19 million of incremental sales in fiscal 2003 over 2002. Without these acquisitions, the decrease in industrial control sales in 2003 would have been 23%. We experienced declines in virtually all of our industrial product lines and markets with the most significant decreases occurring in sales to customers shipping large gas turbines used in power generation as noted by John in his comments. Industrial Controls incurred a segment loss of 11.6 million during the year, compared to earnings in the previous year of 33.3 million. The decrease was the result of lower sales volumes and reduced segment earnings margins. The reverse leverage effect of the reduced sales volume versus fixed costs and product development costs was the primary cause of lower margins. Also, Industrial Controls incurred expenses associated with workforce management activities in each of the last two years totaling 5.1 million in fiscal 2003 compared to 4 million in fiscal 2002.

There were several other noteworthy items as well. In the most recent year, we expensed $1.1 million for the write-off of certain advance license fees, $1 million for lease termination expense and 700,000 associated with the transfer of an overseas pension to a different plan. In the previous year, we recognized a $3 million charge to reduce the carrying value of certain manufacturing equipment to its estimated fair value. The total of all these highlighted items, including the work force management expenses, were $7.9 million in fiscal 2003 compared to $7 million in fiscal 2002. Aircraft Engine Systems sales this year decreased 6.4% to $253.9 million. The decrease reflects weakness in the commercial aviation industry. Generally, commercial aftermarket sales have held up better than OEM sales. We estimate about 51% of our total Aircraft Engine system sales resulted from the aftermarket in the most recent year, compared to 46% in the previous year.

Aircraft Engine Systems segment earnings were $47.6 million for the year, down 16.8% from $57.2 million in the preceding year. As was the case with Industrial Controls, the reverse leverage effect of reduced sales volumes versus fixed costs and product development costs resulted in reduced margins for Aircraft Engine systems. We expensed $4 million for workforce reductions in each of the last two years. In addition, in the year just ended, we expensed approximately $2.6 million of other costs directly related to consolidation of our servovalve operations into the Rockford, Illinois, facility.

On an consolidated basis, our SG&A Expenses for the year increased by 6.3 million or 11% over the previous year. The most significant cause of the increase are due to the effects of business acquisitions, changes in foreign currency exchange rates and workforce management activities. As a percent of sales, SG&A expenses were 11.1% in the year just ended, compared to 8.6% in the previous year. For fiscal 2004, we expect SG&A expenses to be about 11% of sales.

Both depreciation and amortization expense remained at similar levels in each of the last two years, approximately $32 million. Our capital expenditures were $18.8 million past year, about $4 million lower than the previously levels. We expect capital expenditures in fiscal 2004 to be around $20 million.

The effective tax rate for the year was 38.1%. Compared to 36.1% in the previous year. In fiscal 2002, we reduced certain deferred tax valuation allowances, which resulted in a lower rate. We expect our tax rate in fiscal 2004 to be around 38%.

Now, I'd like to make a few comments on the balance sheet. In spite of the difficult economic environment we're competing in today, our balance sheet remains strong. Accounts receivable increased 15% this past year to $88 million driven primarily by higher sales toward the end of the fourth quarter as compared to the same period a year earlier. Inventories were about the same at the end of each of the last [two years], around $127 million. Our total debt to debt equity at the end of the year was 25.8%, up slightly from 21.4% last year. This increase can primarily be contributed to borrowings used to finance business acquisitions made during the year. Our long-term debt at the end of the year was approximately $90 million and the vast majority is payable in equal annual installments in fiscal 2006 through 2012.

In closing, I'd like to comment on our outlook for the current year, fiscal 2004. As we've been saying for several quarters now, the timing and magnitude of recovery in the global economy, in our targeted industries, remains uncertain. However, we've taken actions in the last year that have enhanced our market position, broadened our product portfolio and reduced our costs. As a result of these actions, we reaffirm our expectation that net earnings will be higher in the cent year, fiscal 2004, than they were in the year just ended. When the economic situation becomes clearer, we will be able to better quantify the expected results for 2004.

That concludes our comments on the business and results for the fourth quarter of fiscal 2003. Now, operator, we're ready to open the call to questions.

Thank you, sir, the question and answer session will begin at this time. [OPERATOR INSTRUCTIONS]

Our first question, comes from Mike Harris of Robert W. Baird.

Good morning, gentlemen. Starting off on a company-wide basis, I want to get an appreciation for how overall orders progressed during the quarter. I saw that sales increased on a sequential basis by 9%, but overall receivables increased 13% sequentially. Steve, I believe you alluded to the fact you did see maybe a pickup in sales towards the end of the quarter? Just want a little more detail here.

I think the main thing we saw Mike, was that the increase -- one of the things we were looking at was the increase in prior year that we've seen. And typically, when the receivables, we saw a good month in the month of September and therefore, we saw some increase in receivables. It's really hard to have much more flesh around it than that.

We have pretty good control over our receivables. I mean, they've remained at a, I think, a very solid days outstanding number for several years now. And I think we have that pretty well under control.

Okay. So if I understand you correctly maybe business, the tone of business did pick up a little bit towards the end of the quarter?

I don't think you could -- I don't think we could make that characterization. Our sales does not come in even time periods. So, you know, we do have little bumps and valleys even throughout the year. And I think that's really when we see here is that, you know, we had a pretty good September this year compared to last year, and, you know, the receivables went up.

Fair enough. Steve, perhaps you can answer this question. I was a bit confused with the press release. On the first page, you talked about you know, cost saving actions in the quarter of about $1.9 million. In the segment detail, you know, you go -- you break out, you know, cost savings type actions of totaling about 3 million. How should we think about these actions in the quarter? Is it the 1.9 or is it 3 million?

Just looking here to get the numbers you're talking about. I think the one thing to remember is that when you're looking at the segment earnings, those are on a pre-tax basis. When you're looking at it on the -- the effect on net earnings, it's an after-tax basis.

Got it. That answers my question. Then when you -- obviously, you have implemented a significant amount of cost savings actions in recent quarters. My question here, is the majority behind you now or are the additional actions planned during the first half of '04 still going to be meaningful in?

I'll let Tom comment on that.

I think what we would highlight is that all actions that we received for fiscal year '04 were planned and if we took charges, they were taken in September, but we don't see any additional restructuring charges to current and fiscal year, '04, other than what was already planned.

All right. And then just within Industrial Controls, can you give us -- I know this is hard and maybe an unfair question, but can you give be us an idea of the timeframe you're targeting for the return to profitability for Industrial Controls? Maybe I ask this a different way. Can you estimate what you believe to be the level of sales you need in that segment to reach breakeven?

We expect to be profitable in 2004.

Okay. As far as a level of sales that you think you'll need to get to breakeven, can you help us there? If possible?

We can't. I'm don't think we have that number at our finger tips, but -- you know, just to answer that question right off the bat here I don't think we have that data.

Okay. Sticking on Industrial Controls, obviously, the large IGT area is still searching for a bottom here. But when considering the recent high profile power outages that we saw in recent months and also the incremental demand being generated from Iraq, can you talk about recent order trends or quoting activity you've been seeing in the [jen] set switch gear market as well as the smaller turbine area?

Sure. Maybe comment first on large industrial gas turbines. We expect that in this first quarter, for our financial year, we'll have hit bottom.

Okay.

If we move to second half of your question, that's what we refer to as distributed power.

Yeah.

We're seeing some pickup in the distributed power market. The power outage in the east coast highlighted the problems with the transmission lines in the states. One of the solutions to the transmission lines is distributed power and that's what we refer to as under 50 megawatt. Whether it's a turbine, but more predominantly that's either a diesel or a gas driven jen set. We see those markets under 50 megawatts starting to turn.

Okay. And then --

Just one other comment.

Quickly talk about the transportation market. Are you seeing any improvement in the off highway equipment or the locomotive area?

One last comment on power.

Sure.

We would say, and we are starting to see orders coming from the reconstruction in Iraq.

Okay. So you're see something benefit from that as well?

We are, yeah.

Okay.

So the questions on the transportation side, we really, when we define transportation, we define it in several markets. We have our C & G and LPG bus and truck activity. We have locomotives and the marine market. I would say VCNG/LPG markets are improving and growing. Locomotives is down. If you just look at the most recent data, the marine market is turning and has already turned a corner. And one of the ways to watch that trend is look at the freight costs moving between North America and Asia. It’s skyrocketing right now. The new builds are going up for tankers and freighters. We believe that's a nice turning point in the marine market so, you know, at least two of three major markets for us in the transportation sector that we define are improving.

Okay. That's interesting. And just in the process side, oil and gas, are you seeing some strength there?

Yeah, we are. The oil and gas is holding well. We're seeing some good activity. We've highlighted for a while. We're starting to see some orders materialize. In China, which has had a fair amount of activity.

Just two quick questions here. Steve, what was the foreign currency benefit to the topline during the quarter?

The foreign currency benefit to the top line was really pretty minimal.

Okay.

The one other thing, I guess, is what we've seen, sometimes we'll see different foreign currency effects, both in the top line and expenses. The net foreign currency for the year was very minimal.

That's fair. And can you just quantify what cash flow from operations was, specifically, for fiscal Q4? Don't you love that question?

Yeah, I do. Let me look for that and come back to that if I could.

I'm hogging up the Q and A session here so I'll step off.

Let me look for that for a second here.

Sure.

Did you ask for the year, Mike, or the quarter?

For the quarter.

I don't have it handy for the quarter. I do have it handy for the year.

That's fine.

Net cash from operations around $61 million.

Great. I appreciate all the help.

Our next question comes from Tom Lewis of Risk Reward Advisory.

Tom Lewis Good morning. First question, the reference to 56% of your aircraft business coming from the aftermarkets that was compared with what the prior year?

It was 51%.

51%.

Compared to 46 the prior year.

Okay. And during the fourth quarter, would you say that it was in line with that or more than that or less than that?

I think it's in line -- it was basically in line with the same number.

Pretty much in line, okay. With respect to industrial -- your industrial control business can you tell us how much the contribution from the recent acquisitions in the third quarter was as compared to the fourth quarter? Was it a lot more in the fourth quarter?

It was, because we only had one month of one of the acquisitions in the third quarter.

Okay.

The acquisition was made around the end of May. We had one month in the third quarter, and then a whole fourth quarter in there and then the Dynaproducts acquisition was made toward the end -- we had a couple months worth or one month I guess, in the fourth quarter.

Can you give us a sense of the level of what we would call develop -- product development type expenses? Were they any different in the fourth quarter than they were in the third quarter?

No, they've been holding fairly steady all year long. That's a number that doesn't really vary month to month or quarter to quarter.

We made the decision to keep our investments, product development, solid through the year. The reason for that is maybe a higher percent of sales than wee rough run in the past due to the decline in sales. The amount of demand for our products and for new machines that are coming out from the OEM base, we felt it was the right decision to keep investing customers. We've held it steady through the year.

Okay. As far as development spending goes, I mean, can you flesh out be, I mean, you spoke to having an awful lot on your plate. Can you speak to how you're doing, both with respect to you estimate cost to develop and how well you track. Do you find, have there been any instances of customers either asking you to -- that are either moving out the timeline or moving it up and affecting you that way?

We haven't had too much problem with customers moving out their timeline. They've been holding pretty consistent. A lot of the reason why they've been holding consistent, is – I think in past discussions we’ve talked -- there were new regulations, EPA regulations coming online in 2004. So there's a big push by a lot of our customers to get their machines updated in time for these new regulations. What's in the product development cycle for a lot of our customers is 2007 engines. Those have another degree of more stringent emission requirements. The timelines are pretty tight and they have to maintain these or they get in a place where they're noncompliant. So we haven't had a lot of issues with push-outs. In other areas, our aircraft programs, we have a lot of development going there, but those programs, they try pretty hard to keep on schedule. We haven't seen any major shift on those either.

Great. Thanks a lot.

Tom, one last add-on. You may recall in some of our conversations we had and presentations, we said we've spent just under $40 million on research and development last year. We expect to spend a very similar amount this year.

Okay.

Our next question comes from Richard Leader of Barnes Securities.

Good morning. John, you made several references to your business in China. I guess for many people, China is somewhat of a controversial subject, ranging from currency to just how strong their economy is and how competitive their products are in World Markets. Can you kind of address and tell us if you're tracking your Chinese business within your Asia Pacific business, just generally what your outlook is, how your products stack up competitively and what kind of growth prospects do you forsee for the company in that part of the world going forward?

I'll give you my position on it and Tom can jump in here when they thinks it's necessary. First of all, we do turn a profit in China today with our operations. It's taken us a couple years, several years to get though that point, but we have solid business there so we're not losing money in China. We look at China that in two ways, both as a source of products that are lower cost that we can help drive our total costs for all of our customers down. So we look at it as a source to get certain kinds of material and products out of China. We also look at China as a growth market in and of itself. We want to position ourselves that, in such a way that we are able to take advantage of the growth in China. The infrastructure, I know there's some controversy about can they, you know, maintain this kind of dramatic growth rate and are the -- is the banking system solid and so forth. Yeah, I think there are some uncertainties there, but I think the infrastructure that they're going to need in any case, okay, is -- we see it as a very good opportunity across all of our product lines. So we're reasonably bullish that it's a good, it's a good place -- we think it's necessary for us to be there.

A couple comments on areas of opportunity that we're pursuing in China. And where we see -- what we see as the best opportunities. Today in China, the Chinese OEMs manufacture over 7 million diesel engines a year, industrial diesel engines. A lot of these are small engines and that's one of the reasons we've acquired Syncrostart and Barbara Coleman businesses. And with Synchrostart, we did acquire their operations in [inaudible] China. They also are having a very large growing business in natural gas engines, they are using these both on highway and bus applications to clean up the air pollution. If you've been there, you'll know that the air pollution is very severe. We see that growing and that's something that plays to our strengths. The third area is they use a lot of steam turbines, again manufactured by Chinese OEMs. That's another one of our strengths is in steam turbine controls. That's what we're concentrating on. In China, steam turbines are used a lot for power generation. That's what we're putting our area of concentration and we're look at what we need to manufacture in China to serve those markets. As John said where we can, we use the cost base to help us lower our costs in Europe and the U.S. So it is a good market. There's a sizable amount of machines that play to our core, that are being built there today and we see that growing in the next decade and we think we're getting ourselves well [situated] to capture some of that business.

Good. Thanks a lot.

Ladies and gentlemen, if there are any further questions at this time, express star one on your push button telephone. Mr. Halbrook, at this time, there are no further questions. I'll turn the conference back to you.

Well, thanks for joining us today. Tom, Steve and I look forward to reporting to you in the first quarter of '04. And I guess we'll see you then. Thank you very much.

Thank you; sir. Ladies and gentlemen, that concludes the conference call for today. If you'd like to listen to rebroadcast it's available at 930 a.m. Central time by dialing 800-428-6051 or 973-709-2089 and by entering the I.D. number 312384. A rebroadcast will be available at the company's website, www.woodward.com for 30 days. We thank you for your participation on today's conference call and ask you to please disconnect your line.--- 0