Woodward Inc (WWD) 2006 Q2 法說會逐字稿

Ladies and gentlemen, thank you tore standing by. Welcome to the Woodward Governor Company second quarter earnings call. At this time i would like to inform you that this 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. Tom Gendron, President and Chief Executive Officer, and Mr. Bob Weber, Chief Financial Officer and Treasurer. I would now like to turn the conference over to Mr. Weber.

Thank you operator. We would like to welcome all of you to Woodward's second fiscal quarter 2006 conference call. Today, Tom will update you on our strategic and operational direction. I will talk about the April 24 earnings release. And at the end of the presentation we will open it up for questions. For those that have not seen the release, you can find one on our website at www.woodward.com. An audio replay of this call will be available through Thursday, April 27, 2006. The phone number for the audio replay 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 web site 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 then actual results or business facts may contain forward-looking statements. Such statements involve risks and uncertainties and actual results may differ materially for those we currently anticipate. Factors that might cause a material difference include but are not limited to future sales, earnings, business performance, and economic conditions that would impact demand in the industrial and aircraft markets. We caution investors not the 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 here in. 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 Tom.

Thank you Bob. Welcome to all of you that have joined us today. I'll begin by addressing our Industrial Controls Business Segment, where most markets are made in an up cycle although we experience fluctuation in certain product lines. This quarter industrial control segment earnings were strong. Our profitability continued to improve due to our previous investments in our product portfolio and the actions we took to consolidate our European operations. Industrial s -- industrial sales were down compared to the second quarter of last year, as a result of fluctuation in certain product lines. For example, demand was lower for our large turbine combustion products as well as for components used on C&G and LPG buses in China. We are confident that these markets will rebound in the long term. On the other hand, the Distributor Power Generation market remains strong. We've seen significant growth in Power Management products particularly for nonutility distributed power applications such as emergency power and wind turbine applications. Another robust sector was the Marine Engine market. We provide electronic controls for military ships, as well as governors, actuators, and electronic controls for cargo and cruise ships. In the Process Industries market, we continue to apply our core technologies for industries for steam turbines for sugar refining, and petrol chemical process. Also, the Natural Gas Compression industry for which we supply fuel valves, controls, ignition and gas fuel injection components is strengthening as major gas pipelines are being constructed in China and Russia.

Now I'll turn to our Aircraft Engine Systems Business segment. Contributing to higher sales for the quarter for Woodward's systems and components for engines on both wide and narrow body aircraft, and for aftermarket services and support. Currently our fuel system components are in test for the General Electric, GEnx triple fan engine, which is GE's next generation propulsion technology. To date there are 575 orders for the GEnx engine, which will power Boeing 787 and 747-8 aircraft as well as the Airbus A350 wide body jet. The engine program is expected to enter production in 2008. On the business jet front, there are 230 firm orders for Cessna Citation Mustang which will be powered by the Pratt & Whitney Canada PW615 engine. We are providing the complete control system on these engines. Right now we anticipate that the first shipments will begin in the fourth quarter of our fiscal year 2006. The Pratt & Whitney 610 engine, for the Eclipse 500, another type of very light jet, will also use our control system developed as a platform for the PW600. The Eclipse currently has received deposits for 2400 aircraft. We continue to support many ongoing military programs such as the T700 engine for use on the U.S. Army Apache and Blackhawk helicopters. Our sales for military programs remained at a healthy, stable level. Across the entire Company, Woodward's strategy is to broaden our energy control and optimization solutions strategy, enhance the existing technology through development and acquisitions, and to improve our operational and financial performance. Now I'll turn the call over to Bob for review of our second quarter results and an update to our financial outlook.

Thank you, Tom. Good morning, everyone. Today I will begin by commenting on our second quarter results for fiscal 2006, followed by the year-to-date results. I will then comment briefly on our balance sheet and our outlook for the future. Net sales for the quarter were 209 million, slightly lower then last year's second quarter sales of 211 million. Earnings before income taxes for the quarter were 17.2 million compared with 20.3 million in the same period a year ago. These pretax results include the affects of accruals totaling $5 million for certain legal matters. Net earnings for the quarter were 11.5 million or $0.32 per share compared with 13 million or $0.37 per share for the same quarter a year ago. Woodward began accounting for stock compensation in this years' first quarter using the fair value method as required by recently released accounting standards. Had we accounted for stock compensation a year ago using the same method, employee compensation expense would have increased by $359,000, net of income tax benefits and next earnings for the second quarter would have been 12.6 million or $0.36 per share. Industrial controls net sales for the quarter were 132 million compared with 136 million a year ago, a decrease of 3%. Industrial control segment earnings in a second quarter of fiscal 2006 were 13.1 million compared with 10.1 million for the same quarter a year ago. The segment earnings as a percent of sales were 9.9% in the second fiscal quarter of 2006 and 7.4% in the prior year. As Tom said, our operating margins this quarter benefited from previous investments in our product portfolio and restructuring actions. Aircraft engine systems net sales for the quarter were 77 million compared with 75 million a year ago, an increase of 3.1%. Segment earnings for the quarter were 16.1 million compared to 15.9 million for the same quarter last year.

Now let's look at the six month's results. Consolidated net sales for the six-month period ended March 31st were 405 million, up from 400 million a year ago. Consolidated earnings before income taxes for the six months were 36.3 million, compared with 39.3 million in the same period a year ago. This year's pretax results include -- included the accruals for legal matters. Consolidated net earnings were 23.9 million, or $0.68 per diluted share compared to 25 million or $0.71 per share last year. Had we adopted the new accounting standards for stock compensation last year, employee compensation expense, net of income tax benefits, would have increased by $703,000 and net earnings would have been 24.3 million or $0.70 per share in last year's first six months. Year-to-date sales for industrial controls were 256 million compared to 258 million last year. Industrial control segment earnings were 24.7 million compared to 15.2 million in the first six months of fiscal 2005. Aircraft engine system sales were 148 million, an increase of 4.6% over the prior year's sales of 142 million. Segment earnings were 30.9 million compared to 34.2 million last year. Last year's earnings included a 3.8 million gain on the sale of aircraft engine systems, propeller synchronizer product line in the first quarter. Aircraft engine systems earnings reflect this year's higher R&D expenses due to investments in systems development programs for our customers.

Now I would like to focus on certain specific elements of our consolidated financial statements. Cost of goods sold as a percentage of sales decreased to 72.8% in the second fiscal quarter of 2006 from 74.8% in the same quarter of 2005. This improvement is largely due to the previous investments in product portfolio, productivity improvements and the actions we took to consolidate European operations in our Industrial Control segment. Selling, general, and administrative expenses increased from 9.3% of sales in the second quarter of last year to 12.1% in the current fiscal quarter. This reflects increased legal matters accruals, professional services and the effect of new accounting standards with respect to to stock compensation. Research and development costs in the second fiscal quarter of 2006 increased to 13.1 million or 6.3% of sales, from 11.7 million or 5.6% of sales in the prior year. This is a continuing result of our increased investments in System's Development Programs for our customers in both segments. Total depreciation and amortization expense decreased to 14.8 million in the first half of fiscal 2006 from 16.7 million for the prior year. The decrease in expense is primarily due to the effects of our European restructuring activities on capital investments in the region. Our capital expenditures were 13 million in the first six months of 2006 compared to 9.7 million in the prior year. We expect our full-year capital expenditures to be approximately 32 million. Our tax rate year-to-date was 34.2%, 2.3 percentage points lower then the tax rate for the same period a year ago. This decline is primarily the result of our ability to offset our increased German profits with previously unused loss carry-forwards.

To turn briefly to our balance sheet, working capital increased to approximately 254 million at March 31, 2006, compared to 241 million at September 30, 2005. This reflects our continued strong operating earnings and resulting cash flow. Our total debt decreased during the first half of this fiscal year by approximately nine million to 87 million at the end of the quarter. The ratio of debt-to-debt plus equity was 16% at March 31, 2006, down from 18% at September 30, 2005.

In closing, I would like to comment on our outlook for the current year, fiscal 2006. We expect our industrial control segment sales for fiscal year 2006 to be essentially flat when compared to last year. In our Aircraft Engine System's segment we continue to anticipate 7% to 9% sales growth for the full fiscal year. For the Company as a whole we anticipate sales growth of 3% to 6% for the full fiscal year, as stated in our January 2006, conference call. We expect net earnings to be in the range of $1.67 to $1.75 per diluted share as previously reported, exclusive of the legal matters mentioned earlier. That concludes our comments on the business and results for the second fiscal quarter 2006. Operator, we are now ready to open the call for questions.

[OPERATOR INSTRUCTIONS] J.B. Groh, D.A. Davidson

Hi guys.

Good morning.

A couple of questions, could -- could you give us more clarity as to what the legal accruals are -- are for? I mean I have a hunch, but, is there any more clarity you can give us on that issue?

As with with most of these matters, this is covered by a confidentiality agreement and I'm unable to elaborate much more then we already have. As you said you may have a hunch and your hunch is probably good.

So -- so -- so -- with -- is this just legal or is there settlement in -- in there as well?

As I mentioned, again, I can't go into much detail but it's basically, at this point in time, it is our best estimate of the costs involved.

I understand, okay. And then, for example, the aircraft margins were flat year-over-year, how does that change with the mix -- the change in sales mix from doing more OE work versus more aftermarket, can you make that up in volume?

I think -- I think what you're going to see, we're stilt looking at about half of sales coming from aftermarket. And as we stated, I think numerous times, we -- we fully anticipate to keep the segment margins for aircraft between 20 and 22%, with the mixed change and also with the higher R & D investment and we're still believe that's an accurate portrayal of what we're going to do.

And then -- and then also, with the industrial controls you still expect that to average about 10% for the full year?

Yes. That's still our guidance.

And then on aircraft controls, I assume that the higher R & D relates mostly to GEnx?

Well it's GEnx, the Pratt & Whitney 600 program. We're completing the GP7200 for the A380. We also have the T700 military new -- the new derivative program. And we also have the two engine programs for the the joint strike fighter. So -- so we are running a very high level of R & D right now in our aircraft group.

And so, this is maybe getting beyond the forecast period but, would -- would you that to increase in dollar terms in 2007 or do you -- is there a point at -- at which it starts to -- to decrease?

We're looking at, right now, that our R & D expenditure in aircraft is probably at a peak. I expect it to -- I don't expect it to dramatically drop but I don't see it going up.

Okay. So in '07, and possible -- I don't want to put words in your mouth -- possible that it could be flat, probably go down as a percentage of sales?

That would be a proper scenario, yes.

Okay. And then on -- I don't think you guys have disclosed like how -- how big GEnx is and I'm probably sure you don't want to get into specific numbers but, in relative terms, would your content on GEnx be greater -- greater or equal to what it is on say a GE90 type of an engine?

It's approximately, I'd say, not quite double, but approaching double.

Oh, wow, okay. So content is increasing, good. Okay. Hey, thanks for your time.

Sure.

John [Haushalter], Robert W. Baird

Yes, I guess two questions for you. One, kind of on the aircraft side. Could you split, kind of, out how military and commercial OEM did in the quarter? Or just how commercial OEM did relative to everything else?

Yes. In the quarter the OEM was up sli -- commercial OEM was up slightly and military was flat year-over-year. And we're looking at military as a little bit of our statement up front, to be about equal to last year. It's at a stable rate. It's at a nice rate. But we -- we don't expect to see any increase but we're not seeing a decrease either so it's going to be approximately flat.

Okay and then on the commercial side kind of given the build rates for Boeing and Airbus going up, that should kind of increase as the year goes on, right?

Yes, as you see from our -- Bob's statements on sales outlook, and if you do the math you can realize that the second half of the year is going to be up quite a bit from the first half of the year. And primarily that's new programs coming on-line. The second half of the year we expect these light jets to come on-line. We expect the -- to go into production on the GP7200 which is for the A380. We expect the ramp-ups in the Airbus A320 program to go up. You've seeing a higher volume on the triple seven. So yes, we anticipate these commercial order books as Boeing and Airbus are ramping up, we're going to start seeing that ramp up, as well as the anticipated launch of these new programs in the second half of our year, towards the ladder half of the year.

Okay, and then kind of continuing into your first quarter fiscal '07?

Yes, absolutely. Looking into '07, the market looks robust. So.

Okay, and then can you just comment, I mean, with your balance sheet kind of continuing to de-lever, could you kind of discuss the acquisition front and what you're seeing there in terms of multiples and then kind of potential targets being shopped?

Yes, there's -- there's a lot of money in the marketplace. Multiples are obviously high in many of the year areas that we're looking at so we are, as we have mentioned, we are actively searching for opportunities to grow and markets adjacent to the area that is we're currently involved in. But, obviously, we -- we don't feel a urgency to do that so we'll pick our opportunities carefully.

Okay. And just in terms of likelihood just given evaluations, are you kind of more looking towards the industrial commercial side given Aerospace evaluations or -- ?

We're more or less being forced, somewhat to that. We would like, we've stated, we would like to stay fairly balanced in our overall business mix. But as you point out, aircraft properties are a little bit more highly valued at present and more difficult to come by so we'll have to see how that plays out.

Okay. Thank you.

Yes.

Tyler Hojo, Sidoti

Good morning.

Good morning, Tyler.

I was wondering if you could give us a little bit more clarity as far as prior to this release you were -- you were looking for industrial control to be in the -- I guess it was the 2% to 4% growth range.

Right.

I know you gave a little bit of release -- or detail in the release, but if you could kind of expand on that as far as why you're seeing flat growth or no growth this year?

Sure Tyler, what we can -- can identify where the delta is, and this might help, and in terms of when we highlight our turbine combustion products that -- what that means is that's our fuel nozzles for -- primarily for large, industrial, gas turbines. And then we talked previously, I think in the last call, we had some issues with the ordering practice in China for -- really it's around two large programs they did, the alternative fuel buses and also for some diesel for the heavy equipment market. If you take those on an annual basis, we're anticipating the annual sales in '06 versus what we actually had in '05 to be $30 million less

Okay?

And then, so to do that you see that the rest of the business is doing okay.

Okay.

And it's really concentrated in those areas. We -- we -- I think it's -- it's a public document now, if you look at GE's earnings release, you'll see in the second half of their year, they're anticipating their turbine sales OEM to ramp up and we also believe the aftermarket will ramp up. The issue with that is that starts to fall into our fiscal year '07. So we've made this estimate and that, I think, accounts for really the short fall in the delta to what we stated earlier.

Okay. Now just moving over to the margin side of the equation, I know you guys have stated a 10% margin expectation for this fiscal year. Given the fact that we're already there, essentially, and we saw, mid-teen margins in 2000, '99 time frame. Does that really make sense that -- that margins kind of just plateau here for the next couple of quarters before maybe improving in fiscal '07?

We -- we fully expect that our -- our margins are going to ramp-up. We -- we're pleased with the progress we've made in terms of it ramp -- is up faster then our original plan but it's all part of what we were targeting. We have stated previously, we do expect to return Industrial mar -- in our Industrial Business segment to our historical margins and we're on that path. At this point we haven't given any time line to get there, but what I'd say is you see we're making good progress and we're determined to get there and we're working hard at it.

Okay. Great. And I guess one more question just regarding, I guess, the pending legal matters, is it your expectation to see anymore charges in the -- in the back half of the year?

As I mentioned, at this point in time this is our best estimate of the cost involved. Those costs could increase, could decrease. But most of these things don't have a habit of decreasing but as time goes on. So there could be additional costs involved in coming quarters.

Okay and I guess, Bob, if -- if you have it, that would be great. Do you have the free cash flow number for the quarter?

No, I don't offhand. Probably the easiest, roughly, we run a add about 30 million to the operating earnings, net earnings and that's kind of our pre cash flow number. Do you have it offhand?

I can follow-up with you after.

Okay. One thing you'll see when you look at -- got the operating cash flow in front of me here. It's about 16 million, but that's largely due to the payment for a retirement plan that was in the quarter so.

All right, great, well thanks a lot, guys.

Sure.

Ned Armstrong, Friedman, Billings, Ramsey Group

Good morning.

Good morning.

With regard to your Industrial Business, the soft spots in China and the large turbines aside, were there any businesses that were a little bit less then robust or less robust then the others or was it truly strength across the board?

We primarily saw strength across the board outside of those -- those two isolated product lines.

Okay. And then I guess looking at it a little bit differently, was there any one or two sectors that were enormously strong, much stronger then the others?

I think what you see is Distributed Power has done real well for us and what we always thought about Distributed Power, it's always below 50 megawatts but really where we were strong in that was in the under two megawatt range, so that's diesel power [jets], that's gas engine power jets. We've also seen a surge in wind turbines. We have a little bit -- we don't have a huge content on wind turbines but we do some protective relays that -- electronic control type devices that go into the wind turbines and that has before very robust, so that -- that market has gone up well. As we said in the conference call, the Marine Market is still positive. And we also have done well in Military Marine so that -- that's an area that's also been strong for us.

Okay and then how about from a geographic perspective?

In terms of one -- one area lar -- growing more then another?

Yes. What was stronger what might have been a little bit weaker? How would you contrast at different geographic areas?

What's actually interesting, we had this issue with as we -- how I had a couple product lines in China. The rest of China is growing very rapidly for us. Our op -- our operations, we have two wholly owned facilities there. Their sales are up substantially, they're not large at the moment but they're up substantially. Our North American market's still strong. Europe is not at strong, but it's -- it's up.

We highlighted both the wind and that's really a European phenomenon.

Right. Is that -- is that true of most countries in Europe? Or is -- are certain con -- countries pretty weak or do you see an improvement across the board there?

Well one thing I would highlight today in Europe, if you really look at most of our customer bases, German based or U.K. based, and that happens to be where the engine and turbine builders are, so we're tied into those two for the most part.

Okay, great. Thank you very much.

Take care.

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

Okay well we appreciate everybody joining us today and we look forward to meeting with you some in between now and the -- and our next conference call at the end of our third quarter. Thanks for joining us.

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 11:30 a.m. central time by dialing 1-888-266-2081. Or 1-703-925-2533, and by entering the access code 887960. A rebroadcast will be ava -- also 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.