Woodward Inc (WWD) 2005 Q1 法說會逐字稿

Welcome to the Woodward Governor Company first-quarter 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 presentation you will 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. Tom 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 conference over to Mr. Steve Carter.

We'd like to welcome all of you to Woodward's first-quarter fiscal 2005 conference call. Most of you have probably seen a copy of the earnings announcement we released after 5:30 PM yesterday or you may have received a copy by email or fax. For those who have not seen a copy you can find one on our website at www.Woodward.com. An audio replay of this call will be available through Friday, January 28th. The phone number was on the press release announcing this 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 would like to provide our cautionary statement. In the course of this call when we present information and 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 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 ability of the Company to successfully implement cost control measures and to maintain and add to its customer base. We caution investors not to place undue 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 and Exchange Commission. Now I'll turn the call over to John to discuss our first-quarter results and progress toward our strategic goals throughout 2005.

Thanks, Steve. Welcome to all of you who have joined us today. I would like to discuss our first-quarter performance and then give you our best insight as to what the rest of the year might hold. Steve, Tom and I will also be available for your questions when we open the line following the presentations. First I will address our business segments and consolidated performance, then I will outline our expectations for the future. Let's begin with the discussion of the aircraft business. We continue to demonstrate positive sales and earnings performance in our aircraft segment. We have a good balanced mix of OEM and commercial and military aftermarket sales for the quarter.

Our military aftermarket remains strong, specifically for the T700 fuel controls used on the Blackhawk and Apache helicopters, and we continue to win new repair business with airlines. Aircraft had several noteworthy accomplishments this quarter. As we mentioned in the last conference call we were awarded a contract to be the fuel system integrator for GE's GEnx turbofan engine. This engine has been selected to power the Boeing 7E7 and the anticipated Airbus 8350. This win fills a strategic niche in our portfolio of systems and components on wide body aircraft which includes the GE90 and the PW4000 engines on Boeing 777 and the GE Pratt & Whitney GP7200 engine on the Airbus 8380.

In October of last year we sold our aircraft propeller synchronizer product line which resulted in a gain of 3.8 million pretax. This was a mature product line for the propeller general aviation market which is not one of our core focuses. The two major commercial air framers, Boeing and Airbus, are forecasting increases in deliveries for the next two years and we are particularly well represented on engines used by Airbus. The business jet market is recovering and we are well positioned as the fuel systems integrator for the Pratt & Whitney Canada PW615 and PW610 engines which will power the Cessna Citation and Eclipse business jets. Now let's look at our industrial segment. We continued our positive sales trend which reflected market share gains in fiscal year 2004 and the strengthening industrial economy.

While our earnings are still below their potential it is important to understand that we will not realize the benefits of the consolidation of our European manufacturing facilities which we announced in November, until the latter half of fiscal 2005 and into fiscal 2006. We remain committed to investing our broad portfolio of technologies so we will continue to be the leader in energy control systems for engines and turbines. In November we broke ground on our new combustion test facility at our manufacturing site in Zeeland, Michigan. The facility will be pivotal in the development of new combustion control systems for all of our markets. Completion of the facility is planned for early April 2005. We also opened our new 46,000 square foot manufacturing facility in Zhejiang, China and expanded operations at our Tianjin, China facility to better serve our Western and Asian OEM customers and to further develop our presence in the China market.

The transportation market continues to accelerate due to natural gas bus initiatives in Asia. We recently announced an $18 million contract with Yuchai Diesel in China to provide engine control systems for CNG and propane fueled buses. Shipments will begin approximately in the third quarter of 2005. The demand for small mobile industrial equipment is increasing and commercial marine and naval markets remain healthy. In the power generation market, the mid-sized steam turbine market is strong in Brazil, India and China. Gas turbine sales are increasing in Asia and Eastern Europe and we are starting to see increased aftermarket sales and service for the installed base of gas turbines we established in North America several years ago. Also demand is up for the small simple generator sets. Looking at Woodward's total business, we began the year with strong results and as the economy continues to recover, we remain focused on capturing operating leverage by improving our efficiencies. So now I'll turn it back over to Steve for financial analysis.

As I review financial items today I will first talk about our first-quarter results, followed by comments on some balance sheet items and our outlook for the future. Our net sales for the quarter were 189 million, a 19 percent increase over last year's first-quarter sales of 159 million. Net earnings in the first-quarter were 12 million or $1.03 per share compared to 7.4 million or 65 cents per share in the first quarter of fiscal 2004. There were a couple of items in the first quarter that I would like to highlight. First, earnings include a 3.8 million pretax gain on the sale of certain productline rights; and second, we recorded almost a half of a million dollars in costs related to work force management actions we previously announced. Net sales for Industrial Controls were 122 million in the first-quarter, compared to 97 million in the same quarter last year, an increase of 26 percent.

The sales increase reflects the ongoing recovery in industrial markets particularly in power generation and transportation. Industrial Controls segment earnings were 5.1 million compared to 4.6 million in the previous year's first-quarter. This year's results include additional expenses of a half million associated with the previously announced work force management actions. The workforce management actions remain on schedule and we expect to begin to realize some savings in the third and fourth quarters this year. As the actions are implemented realized savings will continue to increase through the second-quarter of 2006. At that time we expect to begin to realize annual savings at 9 to $11 million.

Aircraft Engine Systems first-quarter sales increased to 67 million compared to 62 million in the previous year's first-quarter. This increase is due to continuing strength in the aftermarket and ongoing recovery in commercial OEM markets. Segment earnings for Aircraft Engine Systems were 18 million in the first-quarter, compared to 11 million in the prior year's first-quarter. Segment earnings this year include the 3.8 million gain on the sale of product line rights for aircraft propeller synchronizer which is the primary reason for the increase in other income on the statement of consolidated earnings. This product line generated approximately $2 million in annual sales.

Cost of goods sold on a consolidated basis increased 22 percent in 2005 as compared to 2004, primarily due to the higher sales levels. As a percent of sales, cost of goods sold was 75.7 percent this year and 74 percent in the same quarter last year. The difference in percent is primarily related to changes in the segment sales mix. While sales increased in both Industrial Controls and Aircraft Engine Systems, the increase was higher in Industrial Controls and Industrial Controls average margins are not as high of those of Aircraft Engine Systems. On a consolidated basis our SG&A expenses in the first-quarter this year were slightly above last year's levels and represented 9.9 percent of sales compared to 11.3 percent in the first-quarter last year.

Research and development costs increased 10 percent in the 3 months ended December 31, 2004, as compared to the same period last year. Research and development activities have continued at a pace similar to the last half of fiscal 2004. Total depreciation and amortization expense in the first quarter was 8.5 million, just slightly more than the first-quarter last year. Our capital expenditures were 4.4 million in the first-quarter, about the same as the previous year's levels. We currently expect capital expenditures in fiscal 2005 to be around 26 million, about equal to our level of depreciation.

The effective tax rate for the quarter was 37 percent compared to last year's annual rate of 36.3 percent. The effective tax rate is influenced by the mix of earnings among various tax jurisdictions worldwide. Now I would like to make a few comments on the balance sheet. All comparisons are to September 30, 2004, the end of our fiscal year. Total current assets increased 15 million. The most significant increase is in inventory levels in anticipation of future sales. Total current liabilities increased 9 million. The most significant increase was a current portion of long-term debt. Our long-term debt is represented by 75 million in senior notes for a 10-year term. The principal is payable in 7 equal annual installments, the first of which is due in October, 2005.

The increase in the current portion is offset by a decrease in our long-term debt. In closing I would like to comment on our outlook for the current year, fiscal 2005. We continue to target sales growth at 4 to 7 percent. In last quarter's outlook we targeted earnings to be between $3.50 and $3.70 per diluted share. With the gain on the sale of the product line rights we now anticipate earnings per diluted share for the year will be in the range of $3.70 to $3.90. That concludes our comments on the business and results for the first-quarter. Operator, we are now ready to open the call for questions.

(OPERATOR INSTRUCTIONS) J.B. Groh of D.A. Davidson.

Hi, Steve. In the press release you mentioned 2.7 million in additional restructuring. Is that on top of what you released a couple quarters ago, the 15.6 number, or just kind of walk me through that. I know you have taken a big chunk in the fourth quarter and you took another half million this quarter. If I do the arithmetic there it looks like you have 1 point, or basically 2 million left. Is there an additional 700,000 or is there an additional 2.7 million there?

No. When we are originally announced the amount, the program to 17 million, we indicated we had taken 13.8 in the quarter last year. We had 3.2 left and we took 500,000 this quarter. That leaves 2.7 of that 3.2 still remaining.

Okay. So there is nothing incremental there?

There is not additional incremental.

Okay. That's what I thought. Good. And then on the sale of the product line rights, I mean the way you've phrased that it looks like there is no real assets attached to that sale, or very little?

There was very little; you are correct.

Could you maybe address raw materials pricing and any pressures you have there? I know in the past you've said it's pretty nominal in terms of cost of goods sold, but just give us an update?

Well we have seen some pressure on some of the raw materials. Two areas where we're seeing some increases is high nickel content, steels, stainless steels. And then we do a lot of brazing of our turbine fuel nozzles and in the brazing process, the brazed material has gold in it. So the increases in gold have impacted us. It's not a significant impact when you take it in the context of the whole business but we have been seeing inflation in our materials, particularly, in those two commodities.

Are you guys feeling any pricing pressure in that industrial controls area? You say you've got some market share gains. Sort of walk us through what is market share gains, what is pricing, how that sorts out, what's volume?

I would say in terms of increasing prices it's minimal, and in some areas we have been able to do that, other areas we have had pricing pressure. In total we think it balances out pretty close to flat. Market share gains over the last few years, we have picked up market share in the turbine market, industrial turbine market. We think that will start to show positive results as I think a lot of you have probably seen the forecast that the industrial turbine market is rebounding. We'll probably start seeing that in the latter half of this year and in '06.

The other area where we picked up new (indiscernible) business is what we reclassify as our transportation segment, and our definition of transportation is marine, locomotive, mobile industrial and CNG plus applications. As you see in our announcements, we have done quite well in the CNG bus applications, also in mobile industrial. Military and commercial marine are very solid. Shipyards are still booked out for many years. So those are areas where -- those are volume (ph). In the last few years we've picked up share in those and took volume increases. We expect to move a little bit with the market there.

Lastly, a pretty nice increase in Industrial Controls sales but even when you add back the restructuring, the margins slipped a little. Why is that? What is going on there that would cause that to happen? Is that just a function of this ongoing restructuring and does that all hopefully reverse in, like you said, third and fourth quarter of this year and into '06?

I think you will start seeing, or you will start seeing improvements coming in the third and fourth quarter and moving into 2006. Some of the things that you'll have seen is that we have all of our expenses still here. The restructuring were doing is taking place primarily in Europe and in Japan. And in those labor markets it takes a long time to process these activities. So we have completed all of our negotiations with the labor councils and the local government, and we're going to start proceeding beginning next month. So we're on track, so we have been really incurring the expenses. We've had to take some extra restructuring. You're going to start seeing the improvements third and fourth quarter.

Thanks.

David Giroux of T. Rowe Price.

I was hoping to get a little more color on the sales growth within the Industrial Controls business, the 26 percent. Could you talk about, maybe, the kind of growth in the various end markets you serve that makes it that 26 percent growth?

I want to make sure I understand the question. You want which end markets?

Just if you think about your business in terms of power generation, transportation, sort of some of the other general -- and maybe we could do the same thing on the aircraft business.

Sure. Where we are seeing some large gains in the industrial side have been in the transportation segment which I was defining earlier. What we are seeing there is -- also included in that segment is off-highway equipment and we have seen some increase in the off-highway equipment. A fair amount of that increase is for construction equipment going into the Asian markets. We are also seeing increases in the CNG applications, as I highlighted in mobile and industrial.

The other one that has been doing well is what we were calling the simple gen (ph) sets. Those would be used for backup or standby power and a lot of those are diesel applications and natural gas fired, or reciprocating engines. We just are starting to see increases in our large power generation market, that's large industrial turbines. One of the positive signs we have is our business is picking up there. Some of it is coming from service and spares for the installed fleet that was put into place back in 2000, 2001, 2002. It's a very positive sign for us and also we're seeing increases in orders in that market continuing primarily coming out of Asia, China in particular. We're starting to see more increases in Eastern Europe.

Is it fair to say that if you look at the 26 percent sales growth in transportation, sort of off-highway due to simple gen sets, grew faster than the 26 percent and that the large power generation, like you said, you're just starting to see very modest growth. Is that a correct characterization?

Yes, that is correct.

Could we do the same thing on the aircraft engine business? You look at the sales growth of 8 percent. Could you talk about how OEM did, how aftermarket did, how military aftermarket did, how military OEM did? What (indiscernible) 8 percent?

Well the OEM, I'd say it's the OEM side, is not growing at 8 percent but we're seeing good increases coming. We could look forward and when we see the line rates changes at Boeing and Airbus are projecting, we are very well represented on those airframes. So we look forward and that looks robust going forward. We did very well in the quarter with commercial aftermarket activities which I'd say grew better than 8 percent, and that is due to -- sometimes it's due to timing of when we sell spare units and also how our repair business comes in. Military has been steady. I would say that's below 8 percent year-over-year type projection, but it's very steady and we've got a good backlog of work coming through. Going forward, we anticipate that aircraft will continue at a nice rate for the next two years of forecast, both on commercial and on commercial new builds. And we also anticipate maintaining a good strong commercial aftermarket and our military aftermarket we expect to see steady.

Are you updating the guidance -- the thing with the aerospace, I think the previous guidance for fiscal year '05 had been sort of flattish. Are you still -- (indiscernible) one time gain in the aircraft business. Are you still looking sort of flattish process in aerospace or is that no longer the case? Because you said the OEM business is picking up, aftermarket is doing fine on the commercial side and the military is sort of steady. That would indicate sort of probably some growth, I guess.

Offset by the synchronizer business. We had all the profits of the synchronizer business and it's not a huge amount but that was all in last year. We have none of that this year. And then the sales will go with that, so that's really offset some of this other growth.

Yes, but that's $2 million and a $2 million and a $3 million -- in a $300 million segment. I mean is everything else only going to grow at $2 million this year on the topline?

One of the things we also talked about, Dave, was the fact that there is additional -- as we look at the thing in total and you can just look at any of the numbers up, and you've also got to figure the consideration we talked about with winning the GEnx 77 - GEnx work. We know additional development work we're going to have to do. So as you look at it today, that was one of the things we highlighted. We felt that could possibly happen as we looked at things being relatively flat this year. Again, we'll see how it plays out this year with the sales mix, how the aftermarket comes through which is obviously a higher profit level. We're looking at those things too.

Just one last question. The tax came in a little bit lower than I think the guidance, 37 versus 38. Could you talk about -- and I think when you're giving guidance for 2005, you talk about the tax rate being at the 38 percent level. Is there something about the gain that sort of moved it one way or another or should we refer back to 38 percent for the rest of the year?

Are you talking about the tax rate?

Yes.

Okay. Realistically as we were looking at, because we looked at, as you recall, last year and if you look quarter to quarter, last year's first quarter was at 38.5 percent. As you look to where we ended up the year, we ended up at about 36.3. And what we're seeing is a continuation of the -- again it's made up on where those earnings are made, generated throughout the world. As we are looking at it right now, we're looking at around, we think 37 is a more accurate reflection of what we're going to see this year. We'll just have to see how those earnings pan out.

All the future restructuring is not included in the 37 -- I mean you include the gain but you are not including -- in the new guidance, you're including the gain but you are not including any of the restructuring dollars that you are spending this year?

In the financial projection, what we're looking at it is some of the savings will offset the incremental expenses, so were holding to 3.70.

So that's 3 -- that's 3.70, 3.90 inclusive of another $2.7 million of restructuring over the next five quarters -- or however much of that closed the rest of the year?

That is correct.

Thank you.

Tyler Hojo of Sidoti & Company.

Good morning guys. Going back to the workforce management charges. Now that were a quarter further into this, I was wondering if you could give if any more clarity regarding the timing of how these charges are going to play out for the rest of the fiscal year?

Maybe I can give you some indication of the type of charges that we're going to have to take this year and why, due to accounting regulations, we could not accrue stay bonuses, move expenses and associated facility improvements with those move expenses. What we're going to see is we expect to complete almost all, if not all, of the moves and restructuring by the end of the fiscal year. So we will be seeing some of the final expenses role into the very end of the fourth quarter as we have to pay out stay bonuses and do the final moves of some these products around to other operations. So that is the reason we couldn't accrue much is the accounting regulations; we can't do that. We have to incur these as they happen.

Going back to the Aircraft Engine Systems segment. If you guys back out the $3.8 million gain that you saw from the sale of the product line, I'm getting operating margins of about 21.6 percent. Does that jive with what you guys get

That's about right.

Just given the mix in the quarter, would you say that's a pretty accurate reflection of what you're expecting for the rest of the year?

What I would say is we fluctuate around that range and the reason that happens is, and I think I've highlighted this on previous calls, is we cannot exactly predict the timing of spare sales and we carry very -- those are very healthy margins on those type of sales, and we had a very good first quarter. That can fluctuate from quarter to quarter but we'll always be plus or minus around that range. I think the business is healthy but I can't say that's an ongoing rate because we did have very good spares in the first. It's on the upper end of probably where we would normally be.

I know in the fourth quarter you guys did about 26 percent operating margins and that was based on a very high level of aftermarket mix. I mean, so we've come done quite a bit. So what I'm wondering is would you see, just as far as the mix goes within that business, you don't think that this is a sustainable amount of aftermarket versus OEM?

Where I guide you back to is the historical rate, if you go over the past couple of years. We will be in that range.

Okay.

There is nothing that has changed to drive it upwards, but we're not going to be down below the historical range either.

That is fair. And just one final thing. If you could just update us as far as what you are seeing within, just based on acquisitions, what you are seeing right now in your markets?

What are we looking at or what is happening?

Yes, what are you looking at. Right.

We usually don't comment on that in terms of exactly what we're looking at. In general terms, I mean obviously, we'd obviously like to be more in the aircraft market but that's a very difficult one to find a good fit. I mean that would probably be our top priority, is to add to that business segment. We continue to look.

You're saying that aircraft is your top priority right now?

All things being equal, we would like to put more into that segment. We're also looking at anything that would complement our portfolio to give us a better package of systems for our customer base in both markets. It's an ongoing process. I don't know if I can say a whole lot more than that.

That's about it.

I think we have come a long way in filling out our portfolio and there is -- we could always imagine we'd like to do this or that, but fundamentally our portfolio of technologies is pretty robust right now and we can do quite a bit with what we already have. So we are probably maybe expanding our horizon to maybe do more market share type acquisitions or we could get some operational leverage. We are kind of opening up our horizons just a little bit from what -- we've been very focused on obtaining the right technology in the last four or five years. We are kind of opening that window of opportunity in our own minds.

Thanks a lot guys.

(OPERATOR INSTRUCTIONS). John Haushalter of Robert W. Baird.

A lot of my questions have been answered, but I'm just curious about the status of the CFO search?

It is progressing. I can't really tell you more than. It certainly is high on our priority to get that filled and we're working diligently on it. We've hired a firm to help us do that. That's about all I can tell you at this point in time.

And then regarding your comment on aftermarket for large gas turbines, it sounds like from listening to GE last week that this was really going to help them in calendar '06 and '07. Do you see that kind of being a growth engine over the next couple of years or are you seeing it already?

We're starting to see the orders increase for service activity on that installed fleet that was put into place. Primarily, GE was the main beneficiary of the bubble in North America, and we have extremely good share at GE. So from that, yes, we expect to hang on their coattails there and be supporting that (indiscernible) fleet. The other activity though, we are seeing, and it's all in the 50 hertz market, which means Asia and Eastern Europe and Europe. We are seeing increased sales, new builds coming. And the projection is for the major industrial turbine manufacturers, they are highlighting that their order book is increasing. And we have very good share in the industrial turbine market. So we anticipate over the next two years, if those forecasts are correct, that we will be seeing increases in that sector.

And then regarding the CNG bus order that you got, are there other potential Asian bus manufacturers where you could have similar contract awards?

Yes, there are several. We are working, I would say, in China there are 3 to 4 major players that are providing engines for those type of applications. We are working with all of them in the development phases, proposal phases. So there's good opportunity there. In Korea, which is another big market for that, we are working with Daewoo and Hyundai. So we have been providing them systems for the last several years and we will continue to be doing that. We are continuing to look at other regions of the world that have had a demand for this type of application. Demand comes from countries that have natural gas resources and not oil resources, and have very high pollution in the big cities. So a lot of that is in Asia, but there is also opportunities we think in Eastern Europe. We have an excellent system for those applications and are recognized as a leader in providing those heavy-duty type CNG applications. We are working with all the major players worldwide.

Okay, thanks.

Mr. Halbrook, there are no further questions at this time. I will turn the conference back over to you.

I would just like to thank everyone for joining us today, and we will be talking to you this time at the end of next quarter. Thank you very much pretty.

Ladies and gentlemen, that does conclude our conference call today. If you would like to listen to a rebroadcast of this conference call, it will be available at 10:30 AM Central time by dialing 888-203-1112, or 719-457-0820, and by entering the pass code 647-0706. A rebroadcast will be available at the Company's web site at www.Woodward.com, for 30 days. We thank you for your participation on today's conference call and ask that you please disconnect your line.