Woodward Inc (WWD) 2007 Q2 法說會逐字稿

(OPERATOR INSTRUCTIONS) Welcome to the Woodward Governor Company second quarter 2007 earnings conference call. Joining us today from the company, are Mr. Tom Gendron, President and Chief Executive Officer and Mr. Bob Weber, Chief Financial Officer and Treasurer. You may begin, sir.

Thank you, operator. We would like to welcome all of you to Woodward's second fiscal quarter 2007 Conference Call. Today, Tom will talk about our business and strong performance this quarter. I'll comment on today's Earnings Release, and at the end of our presentation we will open it up for questions.

For those who have not yet seen the release, you could find one on our website 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 website. 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 webcast, go to our website, www.Woodward.Com, select the investor information tab at the top of the page, select presentations, conference calls from the left menu, select the webcast link for today 's call, you can view the slides on the screen or download the materials. An audio replay of this call will be available through Wednesday, April 25, 2007. 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 webcast will be accessible on our website for 30 days. Before we begin, I would like to provide our cautionary statement as shown on Slide Three. 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 aerospace 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 10K for 2006. Now, I will turn the call over to Tom to discuss our progress toward achieving our strategic goals in the

Thank you, Bob, and thank you all for joining us today. We're quite pleased with our improved performance and excited about our prospects for the remainder of the year. Let me begin by highlighting our business in the second quarter. Sales were up 23% over last year. Our net earnings were $0.63 per share. Our Industrial Controls segment earnings improved to 12.7% of sales, and our Aircraft Engine Systems segment earnings improved to 23.6% of sales. The majority of our markets are performing well and we are seeing a favorable mix of sales in our aircraft and industrial segments.

In addition to the benefits from the strength of our end-user markets, our margin improvements also reflect the impact of actions we have been taking over the past quarters to reduce costs. Our Aircraft Engines systems segment had an excellent quarter. Our sales were up 22% compared to the prior year's second quarter. Earnings were almost 24% of sales and also were up compared to the prior period. Sales increased for Woodward systems and components for engines in all our aircraft markets, commercial widened aerobody aircraft, business jets and military aircraft and helicopters. We also had very strong commercial aftermarket sales which helped our margins exceed their normal range. As Boeing and Airbus Aircraft orders continued at a brisk pace and the business market ramps up, we anticipate continued growth for the near future.

In the second half of the fiscal year, we will see the first sales of our fuel systems for the General Electric GEnx turbofan engine - GE's next generation propulsion technology. The GEnx became the fastest selling aircraft engine in GE's history with more than 830 engines on order to date. The engine also flew successfully for the first time on GE's test bed this quarter. On the business jet front, we have products on a wide range of jets from large to small, from the Gulf Stream 5 to Cessna Citation Mustang very light jet. On the Mustang we provide the complete control system for the Pratt & Whitney Canada 615 engine.

The Pratt & Whitney Canada 610 engine for the Eclipse 500, another type of very light jet, will also use Woodward's control system developed for the Pratt 600 engine family program. This quarter we received several government contracts in support of our installed military fleet. Our T-701-E system, an upgrade for the GE T-700 engine, is progressing well. Currently our system is undergoing rig testing at GE. In summary, our aircraft content continues to grow as a result of our position on key engine platforms. Turning to Industrial Controls, segment earnings were 12.7% for the quarter, reflecting our continuing return to previous performance levels. Sales growth quarter-over-quarter was a positive mix of organic sales growth in new businesses acquired.

Our sales growth Industrial Controls was strong due to increasing global infrastructure demand supporting the worldwide increase in industrial production. In particular, power generation and marine applications were strong this quarter. Our customers utilized Woodward systems and components to improve fuel efficiency and reduced submissions on their engines and turbines that produces power, propel ships and generate on- ship power. Within Industrial Controls, demand for power generation and distribution continues to grow. Our electronic products complimented by our first quarter acquisition contributed to our continuing positive results. The demand for turbines, diesel engines and in particular wind turbines used to generate power has also been increasing.

We expect to see stronger sales in the second half of this fiscal year. Our Industrial Controls earnings continue to improve. Post-restructuring activities, productivity improvements and the favorable product mix this past quarter helped us realize better margins. Also we've been able to leverage both our increased sales and process improvements directly to the bottom line. Slide 12 provides an example where we have redesigned a product significantly increasing value for our customers while improving our margin. Our diverse customer base continues to be successful as you have noticed in the recent earnings announcements. We signed several sourcing agreements with our industrial customers this quarter including Cummins, Duson, Hyundai and a significant global wind power customer.

These multi-year sourcing agreements benefit Woodward and our customers by enabling a more efficient supply chain and production coordination. Across the entire Company, we believe that our strategy in energy control and optimization solutions positions us well in the markets we serve. We continue to remain focused on our strategic priorities to improve our operational and financial performance. We are confident that we will achieve our target sales and earnings growth for our fiscal year 2007. As noted in the release, because of our successful efforts, we have raised our outlook for the remainder of the fiscal year which we will discuss in a moment. Now I'd like to turn the call over to Bob to review our second quarter results and provide an update on our financial outlook.

Thank you, Tom, and good evening, everyone. At the Woodward consolidated level, net sales for the quarter were $256 million, a 23% increase over last year's second quarter sales of $209 million. Consolidated earnings before income taxes for the quarter were $34.2 million compared with $17.2 million in the same period a year ago. Net earnings for the quarter were $22 million or $0.63 per share compared with $11.5 million or $0.32 per share for the same quarter a year ago. Net sales for the first half were $483 million, a 19% increase over last year's first half sales of $405 million. Consolidated earnings before income taxes for the first half were $60.9 million compared with $36.3 million in the same period a year ago. Net earnings for the first half were $39.9 million or $1.14 per share compared with $23.9 million or $0.68 per share for the same period a year ago.

Moving to our Aircraft Engine Systems segment. Aircraft Engine Systems net sales for the quarter were $93 million compared to $77 million a year ago, an increase of 22 %. Segment earnings for the quarter were $22 million compared to $16 million for the same quarter last year. Segment earnings as a percent of sales were 23.6% in the first fiscal quarter of 2007 and 20.9% in the prior year. Aircraft Engine Systems net sales for the first half were were $171 million compared to $148 million a year ago, an increase of 15%. Segment earnings for the half were $39 million compared to $31 million for the same period last year. Segment earnings as a percent of sales were 22.9% in the first fiscal half of 2007 and 20.8% in the prior year.

Now turning to Industrial Controls. Industrial Controls net sales for the quarter were $163 million, an increase of 23% over Second Quarter sales of $132 million a year ago. Industrial Controls segment earnings in the second quarter of fiscal 2007 were $20.7 million compared with $13.1 million for the same quarter a year ago. Segment earnings as a percent of sales were 12.7% in the second fiscal quarter of 2007 and 9.9% in the prior year. Our Industrial Controls operating margins this quarter benefited from our broad based growth and continued focus on reducing overhead costs. Industrial Controls net sales for the first half were $312 million, an increase of 22% over first half sales of $256 million a year ago. Industrial Controls segment earnings in the first half of fiscal 2007 were $39.8 million compared with $24.7 million for the same period a year ago. Segment earnings as a percent of sales were 12.8% in the first fiscal half of 2007 and 9.6% in the prior year.

Now I'd like to focus on certain specific elements of our consolidated financial statements. Gross margin as a percent of sales improved to 31% in the Second Quarter of 2007 from 27.2% in the second quarter of 2006. Gross margin as a percent of sales improved to 30.7% in the first half of 2007 from 27.3% in the first half of 2006. This increase is consistent with ongoing efforts in the areas of productivity and overhead reduction. Selling, general and Administrative expenses as a percent of sales decreased in the quarter to 10.5% from 12.1% for the prior year. Actual dollars spent increased slightly to $27 million from $25 million.

In the first half of 2007, selling, General and Administrative expenses as a percent of sales remained at approximately 11% for both years. Actual dollar spent increased to $53 million in the first half of 2007 from $46 million in 2006. This year-to-date increase is primarily a result of higher professional fees and costs associated with Business Development activities. We do not anticipate that these higher costs will continue in the second half of the fiscal year. Research and Development costs of $16 million in the first quarter of 2007 compared to $13 million in the second quarter of 2006. Research and Development costs of $31 million in the first half of 2007 compared to $25 million in the first half of 2006. As a percent of sales, Research and Development costs remain constant period to period.

Total depreciation and amortization expense for the first half increased to $17 million in 2007 from $15 million in the prior year. Our Capital Expenditures were constant between the first half of 2007 compared with 2006. We continue to expect Capital Expenditures for the full fiscal year to be about $32 million. Income taxes for the first half of 2007 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 at March 31, 2007, approximated working capital at September 30 , 2006. Our total debt was $69 million at March 31, 2007, compared to $74 million at September 30, 2006.

The ratio of debt to debt plus equity was 12% at March 31, 2007, compared to 13% at September 30, 2006, and 16% at March 31, 2006. Turning to our outlook for the remainder of 2007, in light of continued strength in the majority of our markets, we now anticipate company-wide sales growth of 15 to 18% for 2007, including the effects of our acquisition. Additionally, we now believe our full year earnings should be more in the range of $2.35 to $2.45 per share, as a result of the higher sales and our continued focus on margin improvement and overhead reduction. For Aircraft Engine Systems, we anticipate sales growth of 12 to 15% with segment earnings in the range of 22% of sales. For Industrial Controls, we anticipate sales growth of 16 to 20 % generating segment earnings in the range of 12% of sales. That concludes our comments on the business and results for the second quarter 2007 Earnings Conference Call. Operator, we are now ready to open the call

Thank you. Our first question comes from [John Hoshalter] of Robert W. Baird.

Good afternoon, guys. Great quarter. Just kind of, if you look at your guidance on the margin front, it looks like you're forecasting a kind of second half decline in margin for both segments. Is that just conservatism at this point or is there a seasonality there with kind of aftermarket becoming less of the mix in Aircraft Engine?

If we said on the forecast looking forward on the aircraft side, we do expect to come in closer to 22% for the full year. We had a tremendous aftermarket activity here in the second quarter with primarily which was around complete spare unit sales which was very strong which in the second half of the year we don't anticipate that level, and that is the only part of the business that I would say would have any seasonality is the timing exactly of when we sell spare units can vary, so, and in terms of the industrial side, we think we're going to continue the strengthen industrial. We've realized some of our margin improvements a little faster than we've anticipated at the beginning of the year and expect to continue with some of the continued nice margin level there.

Okay, and then just kind of dwelling on the industrial side, it looked like the SEG sales number was higher than at least we had expected. And you guys kind of commented on getting that wind order. What's kind of the, should we take the kind of what the revenue was there for this quarter and annualize it because it seems like that's growing at a rate kind of above overall Industrial Control sales.

Actually, I think that's fairly accurate. The sales as we started the year, maybe started the year with SEG, we were looking at the business, looking at the markets they were in, we probably were a little conservative looking at their sales outlook just making sure we understood the business and that the sales would go from forecast to order. They have definitely, the orders have been materializing in all parts of their business. The wind power part of our market and we have sales both out of the acquisition in SEG, but we also had it in our controls business into the wind market, that market is doing better than we anticipated. The sales are ramping up a lot faster, so we do expect that type of sales rate to continue going forward here in the second half of the year and into '08 as well.

Okay. And just kind of final question. I mean, you guys are kind of continuing to generate cash here in the Balance Sheet is still under levered by any kind of means. What are your kind of priorities for cash use? Is it still acquisitions and I mean, what are you seeing in terms of multiples there?

Well, we definitely are still looking for acquisitions that fit our business model and that fit our energy control and optimization solutions strategy. I think as everybody knows that the market is pretty strong out there for, if you want to say, for pricing on acquisitions. What we're looking for is we're continuing to be out in the market. We're looking when we find the right one that fits where we think we can bring it into our business, where we can then leverage synergies out of it as we're doing with this current acquisition and grow them, that's the ones we're targeting, so it's always hard to time that but we are actively searching for that and so that and then continued investment in R & D and expanding our organic growth is really our current plan for the utilization of our cash flow.

Okay, I'll get back in queue. Thanks, guys.

Thanks.

Your next question is from Ned Armstrong of FBR & Company. Your question, please?

Yes, good afternoon.

Good afternoon.

You talked pretty positively about the prospects in your aerospace market looking good for really several more quarters. I get the feeling that the industrial is like that as well. Do you believe that you can maintain this type of momentum through '08 and beyond and if so, is that just the nature of the markets that you're serving or are you doing something different now that has enabled you to capitalize on those markets better?

Sure. Well let me start with first the aircraft market and then I'll come back and comment on the industrial market.

Okay.

On the aircraft market, what I'd say today is our long term investors that have been with us for awhile are getting the return that they deserve for all of the investments we've made in the aircraft market over the last 5, 7 years and what that means is if you take a look at our portfolio, we try to highlight the engines and the platforms we're on and we gained significant market share in content per engine on these new programs, and the market is healthy. These new programs are going to kick in starting 2008, 2009, and beyond, so we see Woodward doing better in terms of growth rate than the aircraft market, as a whole, and that is because of the programs we've won and the content increase per application and those are really just starting to kick in, and the market is very strong right now. And that strength as most people know has been fueled initially by global sales in terms of Asia, the Middle East, and we're waiting to see and we expect the legacy carriers to start ordering pretty soon as well, so I'm very positive about the outlook for the next several years in that market. The industrial side, the outlook we think is promising as well, and what you're seeing is it's driven again a lot from our activity to position ourselves better globally. There is a large demand for power, for ship applications, those we expect to continue. That's the global infrastructure expanding markets such as China and India growing and we're pretty well positioned in there and we expect those markets to hold pretty well for at least the outlook of 18 months to two years.

Okay, and your more traditional markets like the chemical Power Gen and so forth, are we just still catching those at the right part of the cycle to anticipate a couple more years of strength?

Well the Power Gen, we're highlighting now Power Gen and Distribution, and Power Gen globally is growing still at a nice rate and we really do expect,, you know that's still our traditional market plus we've added the wind power, we've added power distribution applications to that but that's continuing to grow at a nice rate and we've done some, you know we've put effort into better positioning ourselves to capture sales overseas and I think that's starting to pay off and so we see that going fairly well. The process, you know, when you refer to process industries, we've traditionally been strong in process industries and oil and gas applications, and we're up a little bit there, and oil and gas with the prices where they are should continue to be, you know, should be good market trends as well, but the ones we see with the stronger sales overall for Woodward is in the power generation distribution and then in the marine market in particular, those ones, the sales are quite promising.

Okay, good. Thank you very much.

Thank you.

Our next question is from J.B. Groh of D. A. Davidson & Co.

Afternoon guys, a couple questions. On the strength in the aircraft side, is, was there a balance there between commercial and military or was it mostly driven by commercial?

What I'd say there is every market was up. So, commercial was up, the military was up. Business jets were up, and even our roter craft were up. Where we had the, you know, I think all of you know, in the aircraft world the aftermarket produces very healthy margins and we had a very nice aftermarket quarter so that helped on the margin side, but the sales side, each of the key Markets were, for Woodward, were up in the quarter.

And so as someone else mentioned, implied, in your back half of the year guidance is a little bit of a mix shift to more OEM and hence not as strong as margins that you saw this quarter?

Yes, what I would say is the OEM sales are going to be growing faster than the aftermarket sales.

Okay.

Hence when you put the margins together, yes.

You get a little bit of a drag. And sort of on that point what does R & D spending look like in the second half and how does that relate to GEnx, how should we think of R & D as a dollar amount or a percentage of sales and when and if, if and when does GEnx related to spending kind of start to decline.

Yes, our R & D dollars will be flat to slightly up, compared to the first half. The percentage will decline somewhat, probably. GEnx, we said that when that fully launches here in the second half in 2008, you won't see an immediate significant decline in our overall spending. It will be awhile before you start to see a taper off into kind of serial production levels.

Maybe if I could add to Bob's comments there on the GEnx, we launch this year, but that's with the 787 application, but right on its heels is the 747-8 application, so we have some more effort as we continue with the derivatives of that platform.

So, some new program will take over, right?

Yes, and then we actually anticipate that the GEnx will also be on the A-350 extra wide body, so there will be probably some work to be done on that application. All good for Woodward. We're happy to have the extended application range.

And then between the sort of three Markets you serve in Industrial Controls process, power and transportation, was the strength broad based too or is there one that kind of shines above the rest?

Well what we said is they were all "up", but I'd have to say the one that shines is the Power Gen is up the most and again when we speak of Power Generation, we are talking about all types of equipment for Power Generation so it's diesel and gas engines, it's gas turbines, it's steam turbines applications and it's wind power, so when you take all those type applications in total, that is very strong at the moment.

And now this deal that you guys have with Cummins, it's sort off a new exposure to class eight, right? I mean, right now you don't have very much.......

No. The work with Cummins is actually, you know, Cummins does a lot of large engines that go into construction equipment and they actually do a lot of equipment in the Cummins Power Gen business division is a big customer of ours so it's really coming out of construction equipment, Power Generation applications and then some on their small industrial engines so actually, none on the Class eight truck applications.

Ok, great, hey, thanks for your time and congratulations on the quarter.

Thank you.

Our next question is from Tyler Hojo of Sidoti & Company. Your question, please?

Hey guys, how are you doing?

Good. How are you, Tyler?

Good, thanks. I was wondering if we could talk a little bit. Industrial Controls, I guess organic growth 6% plus, obviously that's a bit stronger than you guys have been expecting and seeing as of recent quarters. Do you think that's sustainable when you start looking out over the next maybe four to eight quarters?

Right now, Tyler, we're seeing, as I was highlighting to some of the other gentlemen, we're seeing some good demand and in some ways, from the start of when we forecasted at the beginning of our Fiscal Year and their outlook to today, we have seen higher demand than we thought, and in particular, in Power Generation applications and again the wide range of Power. We do anticipate positive market conditions carrying forward into 2008, but we have not detailed forecast those numbers yet, but the trends are continuing into '08.

Okay, and did you guys see any CN G Bus activity in the quarter?

We did see increases with our, in the Korean applications, did increase. China applications were kind of flat.

Okay, anymore visibility there, just as far as when a batch of orders might come in from China?

I don't have any, I don't know of any at the moment of when we'd see a large batch, we're continuing to work with them, we've expanded some of our applications there, and we've highlighted in the past, it's kind of sporadic ordering practices. But, on the other applications, with, not in China, but outside of China, the orders have picked up a little bit.

Okay,and I guess the first guy asked about a margin on the industrial side, I guess the [inaudible] you gave says you're going to do about 12% for the full year. In the first quarter you did, I guess, 12.8 and this quarter you did 12.7. I think you said in your prepared remarks that you had some favorable mix. One, I was wondering if you could quantify what that mix, what that favorable mix was, and then kind of what's driving the margin down here in the back half of the year, specifically in industrial.

Yes, a little bit, Tyler. What I'd say on the margins is we've had active planned for the last few years on how we were going to improve, or we used to always say, recover our industrial margins back to more the historical level. I think we've made really excellent progress on that, and that came from restructuring some of our researching - some of our facilities.

I remember.

Yes. It also came from targeting product mix which comes in two fashions. Some of it was not just waiting to see what happened with customer ordering. It was actively moving to improve margins on our products and also some product rationalization and improving on some of that activity of, and nailing improved margins on our product families, and certain areas we've been working hard on our productivity improvements. Looking forward on the margin, we see opportunity continue to recover more margin in our industrial market. We do have a wider range of products. We do once in awhile hit mix so as we're looking at right now, we feel good about where we are. We see opportunities for improvement and right now, we think in the range around 12, we think is about right.

Okay. Is there, but I guess if you could quantify specifically if there was some kind of high margin product that was hitting in the first and second quarter that you're not expecting in the back half?

Maybe the key, Tyler, is in the choice of words not to try to be too precise, but by saying in the range of 12, we don't mean to say 12. We mean that it will be 12 something.

Fair enough.

And just there is no one magical margin product out there , okay? It's a nice mix of our entire so that we don't have something that's going to change that mix

Great. Well, thanks so much. Appreciate it.

Sure, thank you.

Ladies and gentlemen, there are no further questions at this time. I would like to turn the conference back to you.

Okay. Well, we appreciate everybody joining us today, and we look forward to talking to you over the next quarter and definitely on our next quarterly earnings call. Thanks, again.

Thank you.

Ladies and gentlemen, that concludes the conference for today. Good day.