Woodward Inc (WWD) 2005 Q3 法說會逐字稿

Welcome to the Woodward Governor Company third-quarter earnings conference call. At this time I would like to inform you that this conference call 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 of the Board, Mr. Tom Gendron, President and Chief Executive 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 would like to welcome all of you to Woodward's third quarter fiscal year 2005 conference call. Most of you have probably seen a copy of the earnings announcement we released after 5:30 PM yesterday. 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 July 29. 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 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 obligation to update the forward-looking statement 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 will turn the call over to John, our Chairman of the Board.

Thanks, Steve, and good morning. As most of you should know, I have stepped down effectively July 1st of this year from the CEO job, and Tom Gendron is now assuming all those responsibilities. Also just to review a little bit, for the past several years we have been -- our strategy has really been to expand our technological base so that we could have the capabilities to do more functions on each engine, and then in addition to that, to really fully integrate those functions into really superior solutions for our customers. So far that strategy has been successful, as marked by our market successes and our financial performance.

Tom has been a primary architect of that strategy and has been very important in its implementation, and he will continue to build on this strategy. And I am confident that he will lead Woodward to continued success. So what I would like to do now is to turn this over to Tom and let him share with you some of the current state of the business and what is going on right now. Tom?

Thank you, John. Welcome to all of you who have joined us today. I would like to discuss our third-quarter and year-to-date performance and give you our best insights about the outlook for the remainder of our fiscal year. Steve, John and I invite your questions when we open the lines following the presentations. First I will address our business segments' performance, and then Woodward's consolidated performance.

Starting with our aircraft engine systems business, sales for the third quarter were up 9% from the same quarter a year ago. Our market position and installed base are strong, which has led to increased OEM sales and aftermarket revenues.

On the OEM side, engine orders are robust. At the 2005 Paris air show in June, more than 450 airframe orders were announced, with anticipated increases in line rates to occur at both Boeing and Airbus. Approximately 75% of the announced orders at Paris are expected to use aircraft engines equipped with one or more Woodward products. General Electric Aircraft Engine Group, our largest aircraft customer, is continuing their leading position in the industry. Woodward's position on the GE90 and the new GEnx engines, which power the Boeing 777 and the new Boeing 787 aircraft, have increased our share in the wide-body market.

In the regional jet market we're seeing steady demands, but more in the 70 to 100-seat segment than in the 50-seat segment. Our military and general aviation programs remain stable and our aftermarket products and service businesses for both commercial and military customers is strong, as revenue passenger miles and military flight hours continue to increase.

Turning to our industrial control segment, sales were up 21% over the third quarter in fiscal year 2004. For the remainder of the year, we expect sales to track the second and third-quarter rates. We anticipate a flattening of the growth rate in our industrial segment as some of our customers are experiencing capacity constraints either within their own operations or within their supply chains. While Woodward is not one of the constraints, we do anticipate a tempering of our industrial segment growth rate compared with the double-digit revenue increase of the recent recovery. Segment earnings, however, should grow faster than revenues as operating leverage and benefits from our restructuring activities are realized.

Our European consolidation activities continue to be on schedule and for the most part will be completed by the end of this fiscal year. We will start to see savings in the fourth quarter of this year with increased gains realized in fiscal year 2006.

We're continuing our solid investments in product development in both our aircraft and industrial segments. We are planning to continue our R&D investment at the current percent of sales rate. Through these R&D investments we have broadened our product portfolio and have enhanced our market share position.

Looking at Woodward's total business, we anticipate sales for the last quarter of this fiscal year to match the second and third-quarter levels. Looking to fiscal year 2006, we anticipate organic sales growth of 6 to 8%.

Our business segments are in good shape. The global markets for our products, especially in Asia and Eastern Europe, continue to grow. We have gained market share in each of our segments and we are well positioned as we move towards our next fiscal year. We will provide further information on the earnings outlook for 2006 when we report the fourth quarter. I will now turn it over to Steve for a financial analysis.

Thank you, Tom. As I review financial items today, I will first talk about our third-quarter results, follow by the nine-month results and comments on some balance sheet items.

Net sales for the third quarter of fiscal 2005 were 210 million compared to 180 million in the third quarter a year ago. Net earnings for the quarter were 19.7 million, or $1.68 per share -- per diluted share compared to 8.2 million, or $0.71 per diluted share last year.

This year's third-quarter earnings before tax included a curtailment gain of 7.8 million as a result of changes to the Company's retirement health-care plan and workforce management and facility consolidation costs of 1.3 million. Net earnings also benefited from a lower effective tax rate due to changes in estimates of income taxes provided for previous periods. These changes were related to certain tax credits and deductions that we either have claimed or taken, or expect to claim or take. The result of these changes reduced our third-quarter rate by 11.5% of pretax earnings, or $2.9 million. We currently anticipate the applicable rate for our fourth quarter will be 34%.

Third-quarter sales for industrial controls were 137 million, a 21% increase over the same quarter sales last year of 113 million. This increase is due to a broad industrial recovery led by demand from Asia and Eastern Europe as they undertake infrastructure improvement projects in those regions. Segment earnings for industrial controls were 9.5 million compared to 2.7 million in the third quarter last year.

Workforce management and facility consolidation costs of 1.3 million affected this year's earnings. Current workforce management actions primarily relate to the consolidation of our European operations, which we plan to complete by the end of March 2006. We currently expect to incur additional costs for these actions totaling almost 1.4 million over the next three quarters. Although some savings have been realized in the third quarter of fiscal 2005 from the consolidation, we expect to recognize increased savings in the fourth quarter of 2005 that will gradually increase through the second quarter of 2006. When fully implemented, we expect to realize savings ranging from 9 to 11 million annually from amounts that would have been incurred prior to the actions.

Aircraft engine systems sales for the third quarter were 73.7 million, a 9% increase over last year's third-quarter sales of 67.4 million. The sales increase reflects favorable trends in commercial aviation. We experienced growth in commercial OEM sales and increased demand in the commercial aftermarket. Segment earnings for aircraft engine systems were 14.3 million compared to 15.2 million in the same quarter last year. The decrease was due to normal quarterly sales mix variations and increased product development activity. Now let's look at the year-to-date results.

Net sales for the nine-month period ended June 30 were 610 million, up 19% from 512 million a year ago. Earnings before income taxes were 64.8 million compared to 39.8 million for the same period a year ago. Pretax earnings this year included a 3.8 million first-quarter gain on the sale of certain product rights and the 7.8 million curtailment gain related to the change in the Company's retirement health-care plan. Net earnings were 44.7 million, or $3.83 per diluted share, compared to 24.7 million, or $2.14 per share last year. The changes in estimates of income taxes for previous years that we recognized in the third quarter reduced our nine-month effective tax rate by 3%, or 1.9 million.

Year-to-date sales for industrial controls were 395 million compared to 315 million last year, an increase of 25%. Industrial control segment earnings were 24.6 million compared to 12.7 million in the first nine months of fiscal 2004. Aircraft engine systems sales were 215 million, an increase of 9% over the prior year's sales of 198 million. Segment earnings were 48.6 million compared to 40.3 million last year. This year's earnings include a 3.8 million gain on the sale of aircraft engine system's propeller synchronizer product line in the first quarter.

Double (ph) company cost of goods sold increased 76 million in the first nine months this year compared to the prior year due primarily to an increase in sales. This year cost of goods sold represented 75.3% of sales, up slightly from 74.8% a year ago. SG&A expenses were 9.5% of sales in the first nine months this year compared to 10.6% last year. As you might expect, we have seen increase in the expenses this year as a result of the Sarbanes-Oxley Act of 2002 which are reflected primarily as non-segment expenses.

Interest expense year-to-date was 4.4 million, just slightly under -- higher than the 4.1 million interest expense a year ago. Depreciation and amortization expense for the nine months was 24.3 million, about the same as last year. Capital expenditures were 19 million. 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 26 million.

Our effective income tax rate for the first nine months is 31% compared to an effective tax rate of 36.3% for last year's full fiscal year. As I have already indicated, changes in estimates of income taxes for previous years reduced the effective rate for this year's nine-month period by 3%. The mix of earnings among various tax jurisdictions worldwide and the effects of credits claimed or expected to be claimed and deductions taken or expected to be taken influence the current tax rate. We currently expect our tax rate for the fourth quarter to be around 34%.

Now I would like to make a few comments on the balance sheet. Comparisons are to the September 30th year-end amounts.

Inventories increased 16.7 million to 155.4 million, reflecting the higher level of sales activity. The current portion of long-term debt reflects changes due to the timing of future payments. The first payments of the senior notes payable are due in October 2005. Long-term debt decreased as a result of the reclassification of the current portion.

Shareholders equity increased primarily as a result of net earnings for the first nine months. Dividend payments and stock repurchases were largely offset by the sale of treasury stock and the tax benefit applicable to stock options. In January 2005, the Board of Directors authorized the repurchases of up to 30 million of our outstanding shares of common stock on the open market in private transactions over a three-year period. Under this authorization we purchased 49,909 shares at a cost of 3.8 million in the three months ended June 30, 2005. In closing, I would like to comment on our outlook for the current fiscal year 2005.

For the past two years our industrial and aircraft engine markets have experienced impressive recoveries in demand, which helped us increase revenues and improve earnings. Indications suggest the strength will continue in both markets. However, some of our industrial customers are experiencing production capacity limitation and supply constraints from other suppliers. Although we are well positioned for increased capacity, these constraints may moderate the growth of sales we have seen over the past two years, which would influence our revenue growth.

Our previous estimate of earnings for fiscal 2005 of $3.85 to $4.15 per diluted share included the gain on the sale of certain product line (indiscernible); it did not include the third-quarter curtailment gain or the lower expected effective tax rate. Considering all of these items, we now anticipate 2005 fiscal year earnings to be in the range of $4.70 per share to $4.85 per share.

This completes our comments on the business results for the third quarter of our fiscal year 2005. Operator, we're now ready to open up the call for questions.

(OPERATOR INSTRUCTIONS). Ned Armstrong.

In talking about the performance in industrial controls in your press release, you note that you were led by demand from Asia and Eastern Europe. Can I infer from that that the U.S. and Western European markets were flattish, or what conclusions can one draw from that?

I think the conclusion to draw from that is in those regions sales are growing more rapidly than in the U.S. or in Western Europe. But in both the U.S. and Western Europe sales are continuing to increase.

Then going to your remark that you see industrial sales growth moderating, is that moderation spread evenly throughout the regions or will it be disproportionately recognized in the U.S. and Western Europe?

The reason we see some of the sales moderating is what we were highlighting about capacity constraints, so I think it will affect all the regions somewhat equally. Obviously, there is capacity being added in Asia and in Eastern Europe. So over time those growth rates should continue pretty healthfully. But in the near-term, we do expect the capacity constraints to come into play.

My final question would be regarding -- I guess if you could talk about any new areas you're looking at to establish platforms or new markets to penetrate on the industrial side.

We're continuing to look at opportunities to broaden our portfolio. We are approaching a lot of the machines that we -- with a systems approach. So looking at that, and we continue to look for new market investments. I think at this time we have not -- or we're not ready to disclose some of those areas, but we will continue to look at broadening the portfolio, being able to provide better systems solutions, and to enable us to support our customers in a broader fashion than we have in the past. So those are the primary areas where we're going to make investments.

John Haushalter (ph).

Were there particular pockets of strength in industrial controls? Like, could you kind of break it out by gas turbines or transportation?

Sure. What I would say is it is actually fairly strong across the board. We do see gas turbines picking up over the next two years, so we're starting to see some increase. We also have over this last year seen some increased demand for spares and repairs in that area from (indiscernible) that's basically from the large amount of equipment that was put in the 2000 and 2001 timeframe.

The marine market, which falls under transportation, as well as our alternative fuel C&G bus applications, both those are robust in the marine market and most of the shipyards are sold out. So we see steady, strong demand there. Our alternative fuel business is increasing. The off-highway market which we refer to as construction equipment -- that is going strong. And we are seeing power generation applications in the below 50 MW range also strong. So it is across the board, and each of the segments has been performing pretty well.

And then for aircraft, kind of thinking about margins, as you guys kind of shift to a more OEM mix relative to aftermarket over the next couple of years, is that going to impair your margins?

No, I think what you'll see is that we have a tremendous installed base of products and we are on the newer applications. So as time goes forward, we think our mix of OEM and aftermarket is going to remain fairly close to the same percentage as it is today. What you see in this quarter is what I would just highlight as absolute normal variation -- timing of spares revenue, timing of when we have certain expenses on development programs. I view it as totally consistent in that the earnings capability and the earnings expectations for our aircraft group will remain stable going forward.

Final question. Could you comment, just give a little bit more color as to what the actual supply constraints are on the industrial controls side?

Yes. Without going into individual customers, one example that is out there if you look at construction equipment is they're having a problem getting tires. There's other things such as that that are out there, where there is more demand than they can fulfill today, and the supply chain does not -- it's more of a supply chain issue, I think, for some of our customers. As such, the line rates are not going to continue to grow at the high double-digit rates we have seen in the last two years. So that is really where it looks at the moment. There's still very strong demand for -- in almost all of our markets for the products we provide. But just that double-digit -- high double-digit growth rate, we just don't see it continuing.

(OPERATOR INSTRUCTIONS). Gregory Macosko.

Could you talk about growth versus -- in the aircraft systems aftermarket versus the OE growth in the quarter?

You're asking which --

What was the growth rate or what was the mix last year versus this year?

Greg, right off I don't have the mix year-over-year difference, but the OEM and aftermarket balance was fairly close and has not shifted much in the last year. And as I said, I think it was more of a timing of certain high-margin aftermarket sales and also R&D expenses that once in a while we get these ones that occur where we have an expense that has to be paid. And I think it's just absolutely the timing of those that brought the operating margins down slightly. There has not really been a shift in the mix of OEM and aftermarket through the year. And going forward, as I said earlier, I don't see any change in the operating margins really occurring from the rate we have been running.

So, at the sort of 19, 20% we're talking about?

Correct.

And then with regard to industrial controls kind of the same question relative to aftermarket versus OE.

Once again, we haven't seen any real shift in the percent differences. It's been fairly consistent. On the industrial side maybe a slight increase in the OEM side with the production ramp-ups that we have had in the last year. But there hasn't been any material change in our aftermarket versus OEM percentages.

Good. Steve, finally, with regard to the estimates or the guidance for this year. I am assuming that that range includes all of the past gains and losses, whether they are kind of onetime in nature or restructuring in nature?

Yes. As we indicated, the forecasts we have done in the past included the gain on the sale of the aircraft portion of the aircraft business in the first quarter. The original one we had given did not include the curtailment gain to that, so we have now -- the number you have out there now includes all of those items.

Good. And then I'm assuming also then the expected charges, albeit it looks like they will be somewhat small going forward for the cost savings in Europe -- that would be included in the estimate as well?

Correct.

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

Well, I guess we'll just wrap it up with that. Thanks to all of you for attending the conference and we will see you next quarter. Thank you.

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 1-800-642-1687 or 1-706-645-9291, and by entering the conference ID number 7970638. A rebroadcast 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 we ask that you please disconnect your lines.