Woodward Inc (WWD) 2005 Q2 法說會逐字稿

Thank you for your patience. The conference will begin momentarily. Please remain on the line. There will be music on hold. Ladies and Gentlemen, thank you for standing by. Welcome to the Woodward Governor Company second-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. Please go ahead, sir.

Thank you operator. We’d like to welcome all of you to Woodward second-quarter fiscal 2005 conference call. Most of you have probably seen a copy of the earnings announcement we released early yesterday evening 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, April 29th. The phone number was on the press release announcing this call and will be repeated by the operator at the end of this call. In addition, a replay of this call will be accessible on our website for 30 day.

Before we begin I would like provide a 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 complete the consolidation of its European operations 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 obligations 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 second-quarter results and progress toward our strategic goals throughout 2005.

Thank you, Steve. Welcome to those of you who joined us today. I would like to discuss our second-quarter and six-month performance and to give you our best insight about the outlook for the second half of the fiscal year. Steve, Tom and I invite your questions when we open the line following the presentations. First I will address our business segments and consolidated performance for the second-quarter, then I’ll discuss the future. Let’s start with our aircraft engine systems business. Sales for the second-quarter were up 9% from the same quarter a year ago. Our mix of OEM and commercial and military aftermarkets remain steady. On the OEM side, we are benefiting as the major commercial air framers Boeing and Airbus ramp up their line rates. We anticipate that our commercial aftermarket activities will remain strong as revenue passenger miles continue to increase. In the past four to five years, we have been gaining market share and it has paid off through increased OEM sales and aftermarket revenues. Regarding the business jet market, it is up slightly and is expected to improve in fiscal year 06, due to a ramp up in production of the Cessna Mustang and the Eclipse 500. Currently, our products are well represented on entry -level business jets, which are just mentioned, to the high-end business jets such as the Gulfstream 500 Series and the Bombardier Global Express.

Our military aircraft markets, both the OEM and aftermarket, also remain stable. Flight hours for fighter jets and helicopters have been at an expanded level and will continue to drive steady aftermarket activities.

The aircraft markets are in an upward trend and we expect to see a modest increase in our sales in the future. Now I will turn to our industrial control segment. Sales continue to be strong in all of our key markets demonstrating a year over year improvement. Sales are strong for new gas and steam turbines, used primarily for power generation, especially in eastern Europe, Brazil, India and China. Our power generation aftermarket sales and service in North America continues to increase due to the large installed base established several years ago.

The transportation market, which includes CNG and propane fuel buses, mobile industrial equipment and commercial marine applications, is robust. For instance, shipyards are near capacity and their order books are very strong. The process industries market is picking up as oil and gas companies are increasing their capital expenditure investments in exploration and production.

Our manufacturing and consolidation activities in Europe continue during the second-quarter. Our consolidation activities are on schedule and for the most part will be completed by the end of this fiscal year. We will begin to see savings from the consolidation in the fourth-quarter of this year, however, we will realize the most substantial cost benefits in fiscal year 2006. Our new product development efforts for both aircraft engine systems and industrial controls are driven primarily by customer requests for better engine and turbine solutions. Customer pressure for continued investments in new products remain strong. Additionally, we are funding our own research and development efforts targeted at both short and long- term industry needs. We continue to partner with our major OEM customers on new programs, which we anticipate will enter production in fiscal year 07 and fiscal year 2010 as new admissions regulations take hold. We are confident these investments will pay off significantly with increased OEM sales followed by aftermarket sales. We are developing the right systems and components to address our customers key market drivers. Looking at Woodward’s total business, we anticipate higher sales for the second half of this fiscal year compared with the first half. We continue to finalize the details of the European consolidation, knowing that our earnings will be affected through the remainder of this fiscal year. However, we do expect some of the additional consolidation costs to be offset by savings from these actions in the fourth-quarter. Our business segments are in excellent shape as we look to the future. Our global markets are solid and continue to improve. Barring any major disruption to the economy, we anticipate a similar business environment in fiscal year 2006. I will now turn it over to Steve for the financial analysis.

Thank you, John. As I review financial items today, I’ll first talk about second-quarter results, followed by the six-month results and comments on some balance sheet items. Net sales for second-quarter of fiscal 2005 were $210.6 million compared to $173 million in second-quarter a year ago. Net earnings for the quarter were $13 million or $1.11 per diluted share compared to $9.1 million or 79 cents per diluted share last year. Second-quarter sales from industrial controls were $136 million, a 30 per cent increase for the same quarter sales last year of $104.8 million. As John highlighted, this increase is due to greater market demand primarily in Asian, North America for many of our product lines. Segment earnings for Industrial Controls were $10.1 million compared to $5.4 million in the 2nd quarter last year.

Improved results, which were driven by higher sales, were partially offset by higher development and SG&A expenses. In addition, we adjusted the work force management accruals that were established in prior periods. Results of these adjustments improved earnings by $1.7 million this year.

Similar adjustments made a year ago, improved last year’s 2nd quarter earnings by $348,000. These accrual adjustments were made due to changes in our estimates of termination benefits payable. The current year change in our estimates were due to voluntary member termination, the expected transfer of member to a third-party distributor, and more members electing early retirement options at a lower cost to the company.

The current workforce management actions relate primarily to the consolidation of our European operations. We will begin to realize savings as members leave the company over the next 4 quarters, and we expect to incur additional cost totaling about $2.8 million during that same period.

As we mentioned at the end of the last fiscal year, upon full implementation we expect annual saving to range from $9-11 million.

Aircraft Engine System sales for 2nd quarter were $74.6 million, a 9% increase over last year’s sales at $68.1 million. The sales increase reflects favorable trends of commercial aviation.

We experienced modest growth in commercial OEM sales and increased demand in the commercial aftermarket.

Segment earnings for Aircraft Engine Systems, increased to $15.9 million compared to $13.7 million in the same quarter last year. The increase is due to higher sales, and the cost effect associated with the lower ratio of fixed costs to variable costs.

Quarterly comparison of Consolidated Earnings was also affected by changes in non-segment expenses. These expenses increased this year as a result of additional cost incurred for the assessment and audited of financial controls over financial reporting, which is required by Sarbanes-Oxley Act 2002, and other current recruiting activities.

Now let’s look at the 6-month results. Net sales for the 6-month period ending March 31, 2005 were $400 million, up from $332 million a year ago. Net earnings were $25 million, or $2.14/diluted share, compared to $16.5 million, or $1.42/diluted share last year.

Year-to-date sales for Industrial Controls were $258 million compared to $202 million last year, an increase of 28%. Industrial Control segment earnings were $15.2 million compared to $10 million in the first 6 month’s of 2004.

As with the quarter, higher sales showed improved earnings, which were partially offset by changes in our sales mix, and higher development, and SG&A expenses. For the full 6-month period, net reductions and workforce management accruals benefited earnings by $1.2 million this year and $280 thousand a year ago.

Aircraft Engine System sales were $142 million, an increase of 8.7 over the prior year sales of $130 million. Segment earnings were $34.2 million compared to $25.1 million last year. This years earnings include a $3.8 million gain on the sale of Aircraft Engine Systems, propeller synchronizer product line in the 1st quarter.

Total company cost of goods sold, increased $53 million in the 1st 6 months this year compared to prior years, due primarily to the increase in sales. This year’s cost of good sold represented 74.8% of sales, down slightly from 75.2% a year ago.

SG&A expenses are 9.6% of sales in the first 6 months this year compared to 10.6 last year. As you might expect, we have seen increase in expenses this year as the result of Sarbanes-Oxley Act of 2002, which are reflected primarily as non-segment expenses.

Interest expense due to-date is $2.9 million, which is slightly higher than the $2.87 million interest expense a year ago.

Depreciation and amortization expense for 6 months was $16.7 million, about the same as last year.

Capital expenditures were $9.7 million the first ½ of the year. We currently expect capital expenditures for fiscal 2005 to be about $26 million compared to $20 million in fiscal 2004.

Depreciation expense for the full year is expected to be about $27 million.

Our effective income tax rate for the first 6 months was 36.5%. Last year, our effective tax rate was 36.3% for the full fiscal year. A mix of earnings among various tax jurisdictions worldwide influence the effective tax rate.

Now I would like to make a few comments on the balance sheet. Comparison’s are to the September 30th year-end amount.

Inventories increased $14.6 million to $153.4 million, reflecting the higher level of sales activity and changes in foreign currency exchange rates.

Other liabilities increased $4.3 million, primarily as a result of changes in accruals, retirement healthcare benefits, and retirement pension benefits. The changes represent the excess of actuarially determined periodic benefit costs over cash contribution by the company.

In closing, I would like to comment on our outlook for the current year, fiscal 2005.

Our markets are strong, and we expect sales will be higher in the 2nd half of the year, as compared to the 1st half of the year. Although our earnings will be affected by costs associated with the consolidation of our European Operations, we expect these costs to be partially offset by savings from these actions.

As a result of these items, we expect our full year’s earnings, including the 1st quarter gain on the Synchronizer product line, to range from $3.85 to $4.15/diluted share.

That completes our comments on the business, and results of the 2nd quarter of our fiscal year 2005.

Operator, we are now ready to open the call to questions.

The question and answer session will begin at this time. [OPERATOR INSTRUCTIONS]. Our first question comes from Gregory Macosko, please state your question.

Yes. Lord Abbett. Nice quarter. Could you talk about the aerospace business? Clearly it was quite strong last quarter. Talk about the after market versus the OE business and how that affected the change in margins sequentially.

Okay. On the aircraft marked where we say our aftermarket has remained strong. The mix, what we were highlighting there, is a mix between OEM and aftermarket has remained pretty much constant. We do get variations quarter-to-quarter primarily due to sales of spare units, but you are probably seeing in terms of the margins improvement is the continued cost reductions that we have received from consolidating our Buffalo facility last year, more focus on the product, and a favorable mix. I wouldn’t say there was any substantial change in our aftermarket percent of sales compared to the OEM, but it remains very steady and at a good level.

So you expect that mix to continue throughout the year kind of what it has been in the 1st and 2nd quarter?

Yes we do.

Good. With regards to the sale of the operation of the three facilities in [inaudible], is that what I am seeing on the cash flow statement there? The change in investments?

[Inaudible]

The sale, I believe, was the sale completed in the 1st quarter of [Nocor], is that correct? or

Gregory, to clarify something, are you talking about the sales of Synchronizer line?

Yes that is what I meant.

Yes. That was completed in the 1st quarter.

Okay, and do we see that on the cash flow statement? I mean what was realized that from the cash?

Yes. That was reflected in the 1st quarter information.

The next question is from Ned Armstrong. Please state your question sir.

Ned Armstrong with FBR. I had a couple questions. First with regard to the Industrial Controls business, you mentioned that the sales group rate was 30%. How much of that was organic growth?

Year-over-year it was entirely organic growth.

Entirely organic?

Yes. What I would highlight, though, is if you look during the downturn we had, we made a couple of acquisitions and acquired a product line. Those businesses now have grown, so that what we would say is over the year it has changed from an acquisition to organic growth.

Okay. So you acquired it before the comparable period, but it has grown substantially since that acquisition because of value that you have been able to add to the acquired --- [inaudible].

The value we added, market conditions, and some of it was our existing product line as well, not just the acquisitions, but that combination from period-to-period is now organic growth.

Is there a foreign currency component in that 30%?

There is.

Do you know how much it is?

I would say, these are numbers I do know off the top of my head. For the year, we anticipate about $20 million positives on foreign currency.

For the entire year?

Entire year that is what our projection is.

Okay.

I apologize I don’t know what is in the 1st half of the year.

Okay, and then on the $2.8 million in costs that you anticipate occurring in the next couple of quarters for the consolidation benefits. Was there a comparable cost in the March quarter?

In the March quarter we had [inaudible] anticipating with a little bit higher level in the 2nd half of the year. We are in the process of moving machinery at the consolidated facilities, and modifying the facilities to accept the new equipment that is being transferred, so that is why the expenses are a little bit higher in the 2nd half, and then we believe it will be primarily completed by the end of September. Going into the next fiscal year, it will be a little cleaner.

Okay, so do you know what the amount of that corresponding cost would have been in the 2nd quarter?

There was about $400 thousand reflected in the press release on that earnings release on that back schedule and work force management there’s information on it, it costs $400,000.

The next question comes from J.B. Groh. Please state your question, sir.

J.B. Groh, D.A. Davidson. Hey Steve, I think -- just getting back to this $2.8 million, is that an increase from what you guys had prior? It seems, if memory serves, I think it was 1.5 million for this year and then the remainder would be in 2006, is that correct?

Yes, we’ve seen a little bit of increase from what we originally estimated. Part of it is due to some of the increase in changes in foreign currency that are causing it to be higher. But also as Tom highlighted, as we looked into the cost of moving some of this equipment and preparing the locations to accept the change, consolidation, it’s been a little higher than we originally estimated.

If I could add on, the other part of it is we’ve also accelerated some of the activity to get it completed this year. So some of the expenses that would have been in ’06 we’re incurring this year because we want to get it done at an accelerated rate.

But your original estimate was something like 2.5, correct?

Yes, 2.5, 2.7, I think, yes.

Okay, so it’s not materially different, then.

The next question is from Tyler [Hojo]. Please state your question, sir.

Just to get back to this workforce management charges, is the reason why that -- it seems to me that if you just take the high point of your guides of 415, that would really indicate some pretty -- no improvement really in operating profitability. Take 111 for the next 2 quarters, that would get you to 415, so somewhere in the midpoint would actually imply sequentially declining results. So what I’m wondering is if these workforce management charges being accelerated is the cause of that?

I think comparing the 2nd quarter to the 3rd and 4th quarters the way you’re doing it, there is a -- definitely the workforce management costs are significantly higher in the last half than the first half. So, yes, that’s -- we’re trying to offset as much of that with some of the savings but at this point in time it’s hard to estimate precisely how much of that will be offset.

Just to kind of switch gears here, any new news on the CFO search?

The CFO search is still continuing. I don’t think we have any update at the moment beyond it’s progressing.

Mr. Halbrook, that will conclude the question and answer session. I will now turn the conference back to you.

Well, thank you all for joining us today. We will look forward to reporting at the end of the next quarter. Thank you very much.

Ladies and gentlemen, that does conclude our conference call today. If you would like to listen to a re-broadcast of this conference call it will be available at 10:30am CT by dialing 1-888-203-1112 or 1-719-457-0820 and entering the passcode 4560149. A broadcast will also 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 that you please disconnect your line.

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