Woodward Inc (WWD) 2007 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Woodward Governor Company first-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. I would now like to turn the conference over to Mr. Bob Weber. Please begin, sir.

Thank you, operator. We would like to welcome all of you to Woodward's first-quarter 2007 conference call. Today, Tom will update you on our strategic and operational direction. I will talk about the January 22 earnings release, and at the end of our presentations we will open it up for questions.

For those who have not seen the earnings release, you can find one on our Web site at www.Woodward.com. I would also like to point out that we have included some visual presentation materials to go along with today's call that are accessible on our Web site. Hopefully you will find it fairly obvious as to the flow of the slides with the audio presentation. To access the presentation for today's Web-cast, go to our Web site, www.Woodward.com, select the "Investor Information" tab at the top of the page, select "Presentations Conference Calls" from the left menu, select the Web-cast link for today's call and you can view the slides on the screen or download the materials. An audio replay of this call will be available through Thursday, January 25, 2007. And 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 as shown on Slide 3.

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 and actual results may differ materially from 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 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, including our 10-K for fiscal 2006.

Now I will turn the call over to Tom to discuss our progress toward achieving our strategic goals in the first quarter.

Thank you, Bob, and welcome to all of you who have joined us today. I will be discussing our first-quarter performance, and then I will talk about what we anticipate for the remainder of our fiscal year 2007. Bob and I will be available for questions when we open the line following the call. I will begin by highlighting our business in the first quarter. Our sales were up 16% compared to the first quarter of 2006. Our earnings were $0.51 per share. Our industrial control segment earnings improved to 12.8% of sales. Our aircraft engines systems segment earnings continued to exceed 20% of sales. We solidified customer relationships with several long-term supply agreements in the quarter. And our completed acquisition of SEG was accretive in the first quarter. Next I will speak to our Aircraft Engine Systems business segment.

The aircraft market continues to be strong for commercial aircraft. Woodward delivered content on more than half the engines produced in 2006 to power these planes. In addition, we will have content of one or more components on approximately 60% of the commercial aircraft ordered in the last two years. The business jet market the first Cessna Citation Mustang and the first Eclipse 500 light jets were delivered. Aircraft Engines systems sales posted a 9% increase compared to 2006 first quarter and are on track to meet our forecast of 10% to 12% sales growth for the year.

Our development activity for programs secured over the last couple of years is progressing well and includes the Pratt & Whitney 600 engine for the light jet market, the Pratt & Whitney 210 and GET700 engines for the rotorcraft market and the F135 and F136 engines for the Joint Strike Fighter. In this quarter we secured a contract to replace a competitor's fuel metering units on United Airlines' fleet of A320s. United operates the largest fleet of A320 jets among the major airlines. Now, outside of only one remaining airline, all A320 family operators are flying with Woodward. We also shipped the first development fuel metering unit for the upgraded T701 engine for the Black Hawk helicopter.

Turning now to the Industrial Controls business segment, sales were strong in power generation and in both commercial and military marine markets this quarter. We are positioned well with key customers on both turbine and reciprocating engine driven gen sets.

In this quarter we solidified our customer relationships with long-term supply agreements with major North American and European engine manufacturers in addition to the recently announced agreement with GE Energy.

We have made progress in creating future market opportunities, exemplified by the previously announced joint development agreement with Tenneco, who developed the leading-edge diesel particulate filter for the on-highway truck market. Additionally, we continue to develop new products, such as the next-generation diesel common rail fuel pump for large high-speed engines used in the power generation and marine markets. Production of this product is planned to begin in fiscal year 2008.

Industrial Control segment earnings were at 12.8% of sales for the quarter, reflecting our return to previous performance levels. Sales growth quarter over quarter was a positive mix of organic sales growth and new businesses acquired. In this quarter, we completed the SEG acquisition, which as we noted in the highlights has been accreted. As we capitalize on the synergies, we anticipate fully assimilating SEG into our power distribution portfolio over the next two quarters. We believe that our energy control and optimization solutions strategy positions us well in the markets we serve and we remain focused on our fiscal-year priorities to improve our operational and financial performance.

Looking at Woodward's total business, we're confident that we will deliver on our strategic and operational goals for fiscal year 2007.

Now I will turn over the call to Bob for a review of our first-quarter results.

Thank you, Tom, and good morning, everyone. I will comment on the first quarter of 2007 for Woodward as a whole and each of its business segments. I will then cover some specific financial measures of interest and finish by commenting briefly on our outlook for the future.

At the Woodward consolidated level, net sales for the quarter were $226 million, a 16% increase over last year's first quarter sales of $196 million. Consolidated earnings before income taxes for the quarter were $26.7 million compared with $19.1 million in the same period a year ago. Net earnings for the quarter were $17.9 million or $0.51 per share compared with $12.4 million or $0.35 per share for the same quarter a year ago.

Moving to our Industrial Controls segment, Industrial Controls' net sales for the quarter were $149 million, an increase of 20% over first-quarter sales of $124 million a year ago. Approximately one-half of the increase was attributable to the inclusion of SEG's sales for the first time. Industrial Controls segment earnings in the first quarter of fiscal 2007 were $19.1 million compared with $11.5 million for the same quarter a year ago.

Segment earnings as a percent of sales were 12.8% in the first fiscal quarter of 2007 and 9.3% in the prior year. SEG's earnings as a percent of sales are approximately consistent with the segment as a whole. Our Industrial Controls' operating margins this quarter benefited from continuing investment in the product portfolio.

Now turning to Aircraft Engines Systems, Aircraft Engines Systems net sales for the quarter were $77 million compared to $71 million a year ago, an increase of 9%. Segment earnings for the quarter were $17.1 million compared to $14.8 million for the same quarter last year. Segment earnings as a percent of sales were 22.1% in the first fiscal quarter of 2007 and 20.8% in the prior year.

Now I would like to focus on certain specific elements of our consolidated financial statements. Gross margin as a percent of sales improved to 30.3% in the first quarter of 2007 from 27.4% in the first quarter of 2006. This increase is consistent with ongoing efforts in the areas of productivity and overhead reduction.

Selling, general and administrative expenses increased slightly to $26.4 million or 11.7% of sales in 2007 from $21.1 million or 10.8% in 2006. This increase is primarily a result of higher professional fees and costs associated with business development activities.

Research and development costs of $14 million in the first quarter of 2007 or 6.2% of sales compares to $11.9 million or 6.1% of sales in the first quarter of 2006. Total depreciation and amortization expense increased to $8.2 million in 2007 from $7.2 million in the prior year.

Our capital expenditures were $5.4 million in the first quarter of 2007 compared to $5.1 million in the first quarter of 2006. We continue to expect capital expenditures in fiscal 2007 to be about $32 million.

Our tax rate of 32.9% in the current quarter included a benefit of $1.2 million or $0.03 per share related to the retroactive extension of the research and experimentation credit. We continue to expect the full-year tax rate to be in the range of 35% to 37% for 2007.

To turn briefly to our balance sheet, working capital decreased to approximately $233 million at December 31, 2006 compared to $260 million at September 30, 2006.

Our total debt remained approximately the same during the quarter at $72 million. This includes a debt of $10 million assumed as part of the SEG acquisition. The ratio of debt to debt plus equity was 12.7% at the end of the quarter compared to 13.3% at September 30, 2006 and 17.1% at December 31, 2005.

In closing, in November, we provided guidance that we anticipated Company-wide sales growth of 12% to 15% for 2007, including the effects of the SEG acquisition and earnings of $2.05 to $2.15 per share. For Industrial Controls, we expected sales would grow 13% to 16% and generate segment earnings of 10% to 12% of sales. For Aircraft Engine Systems, we expected sales growth of 10% to 12% and segment earnings of 20% to 22% of sales. Our current expectations are consistent with our previous guidance except that we now believe Company-wide earnings and Industrial Controls segment earnings will be near the high end of the ranges provided.

That concludes our comments on the business and results for the first quarter of 2007. Operator, we're now ready to open the call to questions.

(OPERATOR INSTRUCTIONS). John [Hoefshelter] with Robert Baird.

Good quarter. Just have a couple questions for you. I guess if you kind of look at development costs for the GEnx or other things like that, how far are we through the process and how much higher is kind of R&D spend going to go before that kind of tapers off?

Yes, a little bit -- that program will be going into service in 2008 so obviously we will be continuing development through this whole year as we go into engine tests and flight tests. We stated last quarter our expectation is for year-over-year R&D dollars to be about flat so as we go through the rest of the year we expect as you compare it to '06 you see about flat on the dollars so as a percent it will go down a little bit.

And then just one more and then I will get back in queue. Just should we kind of interpret your increased spending on business development -- and if you kind of look at your balance sheet right now -- as there are going to be more acquisitions kind of like SEG in 2007?

I would say yes. The expense there actually came from a business development activity that did not go through. But we're continuing to look for opportunities and are continuing to look at how to put our balance sheet to work in a productive and profitable way.

Okay, and is pricing somewhat reasonable in the market right now? Or could you just kind of speak to multiples you're seeing?

I would say pricing is very high in the marketplace today. And multiples are on the high end of what I've seen in my career.

Tyler Hojo with Sidoti & Company.

I guess can we start with the margin in the Industrial segment? Obviously very strong performance there at 12.8% of sales. But I noticed you didn't move the guidance at all from the 10% to 12% range that you are expecting. Is there something implicit that we should assume from that or I thought that the expectation was that margin was going to continue to improve sequentially. Your comments there would be helpful.

Sure. Tyler, we had a very nice quarter in industrial, as you can see by the sales growth and from the first quarter last year and also on the margins. We are progressing well and as I said we expect to get back to our historical levels and we think we are on a good path there. Quarter-to-quarter we sometimes see mix and so at this point we think the guidance of being towards 12% is appropriate. We will definitely be working hard to keep moving that debt indicator up, and we believe over time we will be back in the historical range, which we always said was in the 12%, 14%, where we feel comfortable.

Right. Was there something in particular that you could point to as far as product that came in that was higher margin than you normally see or something else that you could talk to?

We had a very good mix of products in the quarter. Some of it was a nice return of our turbine business. So both on turbine combustion, which is what we refer to as our fuel nozzles and ignition systems -- is in our fuel combustion products. And also in valves for turbine systems. Those are good margin products and we had a good mix in the first quarter.

I guess moving to one other thing. As far as the revenue in the Aircraft Engine segment goes, year-over-year pretty strong growth but looking sequentially I think it was off something like 10% from the fourth quarter, which if you go back the past couple of years was a little bit more of a drop than you guys had seen in prior years. Was there anything there? I know you said in the release that the outlook for aircraft just in general was pretty good but if you could speak there that would be helpful.

Sure. You know I think what you have is normally in the first quarter, in the aircraft industry, a lot of facilities are closed during the holidays. It's still a lot of it is due to the contracts with the employees. So there are fewer shipping days. We usually see a little slower in the first quarter. So we are comfortable with where the sales are there and are highly confident in the sales outlook for the whole year. And I think you will start seeing that picking up in the second quarter, which is kind of normal. I hate to use the term seasonality because it's not truly seasonality but it's working days and industry practices and the like that get you into this kind of low first quarter and then ramping second third quarter.

And just one more. Could you guys tell me what the organic revenue growth was in the Industrial Controls segment -- kind of breaking out SEG?

Well the -- roughly half of the increase was related to SEG. So you can kind of work into it from there. The actual number for the two months of the quarter was $13.8 million.

For SEG.

For SEG.

Gregory Macosko with Lord Abbett.

Nice. With regard to the aircraft area, you mentioned a number of different contracts -- Eclipse and helicopter and a number of areas -- the F135. What of those contracts would you say -- were those all pretty much expected? Which ones -- Give some color as to the maybe in terms of any kind of positive expectations with regard to the winnings of those or the revenue there.

Sure. Greg, what we had there is -- those are contracts that we really secured over the last couple of years. And I think what we were trying to highlight there is, we were extremely successful if you want to say in the last two, 2.5 years with winning programs. If you think about what we have highlighted numerous times is, we won the GEnx, the GP7200 programs. We are on the GE90. These are all now powering the 787, the 777, the A380, the A350. And what that all means to Woodward is, if you went back a number of years, we were almost out of the wide body market and now we have really a great market share and a great position in the wide bodies.

We went after the light jet market. And what you find there, there's different views of the light jet market. I think what you're going to find is the light jet market is going to be a good market. Whether it will hit the expectations of some of these really high delivery numbers I don't know, but it's going to be a good market. And we are on almost every aircraft -- and through the programs we won.

Then on the rotorcraft, the dominant players on the engine side is GE with the large helicopters, in particular with the military. And then on the smaller side is Pratt & Whitney. We are on their new programs. So all of these are going to be going into production over the next few years and that's going to increase Woodward's market share and that's why I think when we say in 2007 at 10% to 12% sales growth, that is above the market and we expect nice growth going into 2008 as well. So I think that is materializing and also one of the reasons we are highlighting that is, obviously we have had to ramp up R&D spending over the last few years. It's now flattening but I want all of our investors to realize is, we're going to give you a good return for that R&D money and it's on track, it's on progress, and our guys are doing a great job with those programs. So, that's kind of the message in there.

What about the Tenneco relationship -- the particulate filter? When would you expect that to develop revenue and when does that happen?

Prototypes -- with that won, the big date is going to be 2010. We will start seeing some revenue in 2008 but you get to 2010 emission requirements, right now, nobody has found a way to do it through primary emission controls, which means through the operation of the engine. So they're going to have to put on these after-treatment systems. They were having problems with how to regenerate these filters during certain cycles of operation. And just talking with customers and learning this we started thinking about okay they are having problems and they need to put a burner system in there. And what is interesting about this burner system and why we are in this market with them and proceeding is we are actually using our aircraft fuel nozzle capability, our ignition capability out of industrial, some of our sensing capability that we're using both in turbine and in industrial, combining it into this package that allows them to do this regeneration at any load profile at any time and that's going to be unique in the marketplace. And our relationship with them is, we are helping them develop it and it will primarily be later. We might sell maybe a component or two but most of it will be license revenue.

Then finally, with regard to GE, the relationship, that four-year agreement, what share of those components and systems for power generation that will be in that contract -- give me some feeling for how much of that is really new, that you really haven't sold or very, very small in the past to GE?

I think the key element of the agreement is that it solidified our very, very high market share with GE. And then, if you saw the agreement it also has a joint technology and product development side, which also -- the way to interpret that is that is going to also establish us as a great market share position beyond this four-year period. So they are committed to do all this development work exclusively with Woodward as well as we retained our high market share.

So does that imply that there will be some new products or systems sort of on the next generation past the four-year time-frame?

Absolutely, yes, because we are working on them right now.

Ed Armstrong with FBR & Company.

With respect to utilizing your balance sheet and some strategic initiatives you might pursue, are you thinking of any areas for business development that are outside the aerospace and industrial areas? And what might they be and what do you find attractive about those areas?

In fact it was two quarters ago we kind of walked through on one of the conference calls areas of growth. What we're looking to do is continue in the markets we know and do what we are referring to as market adjacencies. So we highlighted definitely in power generation to use a good example one that we are pursuing and where SEG fell in is, we definitely like the power generation market. We believe it's going to have long-term, steady growth. Today we are primarily on what we call the generation side. We are on the machines that turn the generators that generate the electricity. The market adjacency we are pursuing and SEG helped us launch is into power distribution. And that's taking electricity from the source of its generation to the user, and looking at doing all the controls and helping work with the manufacturers that provide equipment like switchgear and the like in that area. So we are actively pursuing growth in that area. We see also in the turbine market an adjacency which we refer to as the balance of the plant activity, where we are working on the process automation equipment but using our channels through the turbine OEMs and the packagers to get there. We are continuing -- the Tenneco agreement is a good example of looking to market adjacency. It's off of the engine, where we mainly operate or off of the gen sets, onto what we call the after-treatment system. And we see that as a market adjacency and where some of our competencies apply. So we're going to continue to look at these type of areas. We believe -- Bob and I really believe in the market adjacencies -- get to where you know the customers, you know the markets, you know the areas. So I don't think you're going to see some wild change in business mix with Woodward. What we're going to do is look for -- we see substantial areas and substantial amounts of growth in these areas, so we're going to continue to look at our core and the adjacent markets around the core. That's our plan.

Okay, good. Then kind of on the other side of the coin I guess is, are there market areas within either segment right now where performance may be lagging and you may want to consider either pulling back in that market or looking at other alternatives?

At the moment, no. I think in broader terms we have highlighted that. We had some issues with our industrial market in terms of overhead and margin issues. And hopefully what we've seen is that the results this quarter and moving forward, we have fixed those businesses and I think they are going to get back into where people are going to say those are very attractive industrial type businesses. So at the moment, no but we always evaluate our portfolio, so it's not something that we ignore. But right now I feel like we are on track to start producing some very nice results out of our portfolio and more of our emphasis is on adding to it in a productive way.

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

I had a question on your SG&A and you mentioned that there were some higher professional fees in there. Was everything for the settlement that you announced in early October? That was all accrued for in prior quarters, correct? Or is there any one-time expenses related to that settlement that show up in this quarter?

No, no one time. We've accrued for all legal matters in the prior quarters but there are ongoing continuing legal costs that go along with that that are still kind of flowing through. We do not expect those to continue in any substantive way past this quarter.

So $26 million on SG&A would be a little bit high as a run rate.

Yes, definitely.

Okay. Then last question. You got your tax credit this quarter. What is sort of the implied full-year tax rate by your guidance?

Well 35% to 37% is still kind of where we think the full-year rate will be. The impact we saw was the $0.03 in this quarter. That really goes back to the majority -- the three-quarters of last year. So the impact this year is included in that 35% to 37%.

So 35%, 37% for the full year, including the credit in the first quarter.

Exactly.

Okay. Hey, thanks a lot. Great quarter.

Mike McGeary with Sentinel Asset Management.

My questions have been answered, thanks.

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

Okay. Well thank you for joining us today and we look forward to seeing some of you maybe over the next quarter in New York and then also on our next call at the end of the second quarter. So, thank you.

Ladies and gentlemen, that does conclude our conference call for today. If you would like to listen to a rebroadcast of this conference call it will be available at 9.30 AM Mountain time by dialing 1-888-266-2081 or 1703-925-2533. Please enter the access code 486159. A rebroadcast will also be available at the Company's Web site, 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 at this time.