Woodward Inc (WWD) 2008 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Woodward Governor Company second quarter 2008 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, Chairman 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. Sir, you may begin.

Thank you, operator. We would like to welcome all of you to Woodward's second quarter 2008 conference call. In a few minutes Tom will talk about the highlights of our second quarter and our markets. I will then 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 seen the Release, you can find one on our website at www.woodward.com. As noted in the Press Release, we have included some visual presentation materials to go along with today's call that are accessible on our website under our investor information tab at www.woodward.com.

An audio replay of this call will be available through Wednesday, April 23, 2008. The phone number for the audio replay is 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 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 aerospace, power and process industries, and transportation 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 2007, and 10-Q for the quarter ended December 31, 2007.

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

Thank you, Bob. Welcome to all of you who have joined us.

I'll begin by highlighting our financial results for the second quarter. Sales were up 19%, compared to the second quarter of fiscal year 2007. Our earnings were $0.43 per share, up 48% from last year. Our operating earnings increased 38% over last year, and we generated 22.8 million in cash from operations during the quarter.

We experienced excellent growth in sales and operating earnings leveraged this quarter. Our sales growth resulted from continued global growth in our key markets, and increases in our market share. In particular, we are realizing the benefits of our expansion into global markets, whether directly through our overseas operations or indirectly through our multi-national customers whose products are key to expanding global energy, transportation and commodity infrastructure.

Aerospace industry orders remain strong, with continued growth expected in both backlogs and deliveries for the next four years. Boeing and Airbus are on track for growth of approximately 10% on their deliveries this year and worldwide traffic remains on a growth trend of approximately 6%. We continue to see sustained growth in the business and regional jet markets with orders in these areas being driven largely from outside the U.S.

In military aerospace, we continue to see strength in the aftermarket support of the installed fleet. We're also making good progress on the joint strike fighter program, where Woodward has significant content of both engine offerings.

With respect to the new Boeing 787 Dreamliner, the GEnx-1B engine recently received FAA certification. To specifically address the recent delay announcement, first let me say, Woodward continues to ship product to GE, although in small quantities.

Our 2008 Turbine System forecast included sales of prototypes, original equipment and aftermarket units for the GEnx. With the recent Boeing 787 extended delay, our total Turbine System sales will be impacted by approximately 1% this fiscal year.

Looking to 2009, the announced delay will impact Turbine System sales by approximately 2%. For both years, we believe this impact will be more than offset by strength in other OEM programs and aftermarket sales. The 2008 fiscal year impact is included in our updated outlook.

We are seeing an increase in shipments of our Control Systems for the Pratt 600 engine family for the Cessna Citation Mustang and the Eclipse 500. These Control Systems, together with our suite of components on the GP 7200 engine for the Airbus A380, and the GEnx fuel system will be contributors to our growth for many years to come.

In our other markets, Industrial Turbine demand continues to be robust, driven by power generation projects internationally. Diesel engine demand strength is being driven by large Marine applications. This quarter, we also saw interest in alternative fuels driving greater demand for compressed natural gas engine systems. Investments in oil and gas, both expansions and upgrades, are driving turbine control sales to customers in the Middle East, Russia, India and China. And global emission regulations continue to drive demand for enhanced engine control solutions across all our applications.

With this broad strength in demand for a variety of engines, we are seeing major OEMs adding capacity and planning for increased production for the next several years. The ongoing growth in worldwide power generation, more specifically in distributed power, and increasing demand for distribution products, incorporating our AC measurement digital control technology.

In wind power, orders and sales for the industry remain strong. We continue to expand our market share, including the addition of a major Chinese wind turbine manufacturer to our customer base. We announced our intentions to build wind turbine inverters in Colorado to support our customer's efforts to grow their North American market presence. We are strengthening our customer relationships and technical offerings to continue our success in this market.

Overall, our energy control strategy remains unchanged and our focus will be on areas where we delivered the greatest value to our customers, typically in the areas of efficiency, emissions and control. Looking forward, despite problems in certain areas of the economy, such as global financial services and the U.S. home construction market, our order volumes and other specific market information do not indicate that these difficulties have spread to our markets. Our sales growth has been robust so far this year and we expect this to continue at a strong but somewhat more modest pace for the remainder of the fiscal year.

Now I'll turn the call over to Bob to review our financial results and update our outlook.

Thank you, Tom. I will comment on the second quarter and first half of 2008 for Woodward as a whole, and each of its business segments. I'll then cover some specific financial measures of interest and finish by commenting briefly on our outlook for the future.

At the 2007 annual meeting of shareholders on January 23, 2008, a two for one stock split was approved. The stock split became effective on February 1, 2008. The number of shares reported in the consolidated financial statements has been updated from amounts reported prior to February 1, 2008 to reflect the effects of the split. During the quarter, the dividend payment per split adjusted share was increased 9% to $0.06 per share.

In addition to dividends, we have also been returning value to our shareholders by repurchasing shares. In the second quarter we repurchased over 1 million shares in the open market.

Turning to our financial results, at the Woodward consolidated level, net sales for the quarter were 306 million, a 19% increase over last year's second quarter sales of 256 million. Approximately one quarter of this sales growth relates to the impacts of foreign exchange.

Operating earnings for the quarter were 44.2 million, or 14.5% of sales, compared with 32.1 million or 12.5% of sales in the same period a year ago.

Net earnings for the quarter were 29.7 million or $0.43 per share, compared with 20.3 million or $0.29 per share for the same quarter a year ago. Foreign exchange accounted for approximately a penny of the increase year-over-year.

Net sales for the first half were 577.8 million, a 20% increase from 482.5 million for the first half of the prior year. Net earnings for the first half were 55 million, or $0.79 per share, compared with 38.1 million or $0.54 per share in the previous year's first half.

At the segment level, let me first discuss our Turbine Systems segment, which includes both aircraft and industrial turbines. Turbine Systems net sales for the quarter, including inter-segment sales, were 147.5 million, an increase of 13% over second quarter sales of 130.8 million a year ago.

Turbine System segment earnings in the second quarter of fiscal 2008 were 31 million, compared with 23.8 million for the same quarter a year ago. Segment earnings as a percent of sales were 21% in the second fiscal quarter of 2008, compared to 18.2% in the prior year. Our sales performance reflects sustained growth across our portfolio of aircraft and industrial offerings. Earnings increased largely due to our ability to successfully leverage our fixed cost base for the increased volume. As in recent quarters, our sales mix was moderately favorable to our long-term experience and expectations.

Turbine Systems net sales for the first half, including inter-segment sales, were 278.2 million, an increase of 12% from 247.8 million for the first half a year ago. Segment earnings for the first half increased 35% to 58.2 million, up from 43.1 million for the first half a year ago. Segment earnings as a percent of sales were 20.9% in the first half of 2008, compared to 17.4% in the first half of the prior year.

Moving to our Engine Systems results. Engine Systems net sales for the quarter, including inter-segment sales, were 125.8 million, compared to 110 million a year ago, an increase of 14%, reflecting the continued strength in demand for our customer's products outside the United States. Segment earnings for the quarter increased 10% to 13 million, compared to 11.8 million for the same quarter last year. Segment earnings as a percent of sales were 10.3% in the second fiscal quarter of 2008, compared to 10.7% in the same quarter of the prior year.

Our results reflect higher operating costs, which slightly more than offset the leverage on increased volume. Some of these costs resulted from supply chain issues, as we manage our increased volumes. Other costs resulted from our efforts to transition production locations, and methods for enhanced long-term savings and efficiency.

Going forward, we continue to focus on activities to reduce these costs and enhance margins in this segment over the longer term. Engine Systems net sales for the first half, including inter-segment sales, were 239.9 million, an increase of 13% from 212.9 million for last year's first half. Segment earnings for the first half were up slightly at 25.1 million, from 24.4 million for the first half a year ago. Segment earnings as a percent of sales were 10.5% in the first half of 2008, compared to 11.4% in the first half of the prior year.

Now turning to Electrical Power Systems. Electrical Power Systems net sales for the quarter, including inter-segment sales, were 64.9 million, compared to 45.2 million a year ago, an increase of 43%. Again this quarter, wind power sales were very strong. Power generation and distribution markets also experienced good growth, as overall demand for power protection and power distribution controls was very good.

Segment earnings for the quarter were 9.5 million, compared to 6.4 million for the same quarter last year, an increase of 49%. Segment earnings improved as a percent of sales to 14.7% in the second fiscal quarter of 2008, from 14.2% in the prior year, reflecting our ability to successfully manage the significant increase in volume across our fixed cost base, and our efforts to improve our manufacturing processes, particularly at our Kemp and wind inverter manufacturing facility.

Electrical Power Systems net sales for the first half, including inter-segment sales, were 122.4 million, an increase of 58% from 77.5 million for the first half a year ago. Segment earnings for the quarter increased to 16.7 million, from 10 million for the same quarter a year ago. Segment earnings improved as a percent of sales to 13.7% in the first half of 2008, from 12.9% in the first half of the prior year.

Now I'd like to focus on certain specific elements of our consolidated financial statements. Gross margin, defined as net sales less cost of goods sold, as a percent of sales was 31.2% in the second quarter of 2008, essentially flat with 31.3% in the second quarter of 2007. Gross margin as a percent of sales was 30.6% in the first half of 2008, also about the same as 30.8% in the first half of 2007.

Selling, general and administrative expenses as a percent of sales decreased to 10.4% of sales or 31.7 million in the second quarter of 2008, compared to 11.9% or 30.6 million in 2007. In the first half, selling, general and administrative expenses decreased to 10% of sales, or 57.6 million in 2008, from 11.8% or 57 million in 2007.

Research and development costs were 18.8 million in the second quarter of 2008, or 6.1% of sales, compared to 15.9 million or 6.2% of sales in the second quarter of 2007. Research and development costs were 34.4 million in the first half of 2008, or 6% of sales, compared to 29.9 million or 6.2% of sales in the first half of 2007. This level of spending is consistent with our expectations and longer term requirements, although some quarterly variability will continue.

Total depreciation and amortization expense for the first half of 2008 increased to 18.3 million, from 17.4 million in the first half of the prior year. Our capital expenditures were 16.5 million for the first half of 2008, compared to 13.1 million in the first half of 2007. We continue to expect capital expenditures to total approximately 100 million for the years 2008 and 2009 combined, with fiscal 2008 capital expenditures approximating 40 million, supporting our advanced test capabilities and core manufacturing process improvements.

Our effective tax rate for the quarter was 31.9%, compared to 35.5% last year. As a result of certain favorable tax resolutions, we now expect our full year 2008 tax rate to be in a range of 33 to 35%.

To turn briefly to our balance sheet, working capital increased to 305 million at March 31, 2008, compared to 276 million at September 30, 2007, supporting our increasing sales volumes. Our total short term and long-term debt was 74 million at March 31, 2008, an increase of 7 million from September 30, 2007. The ratio of debt to debt plus equity was 11.4% at the end of the second quarter, compared to 10.9% at September 30, 2007, and 11.8% at March 31, 2007.

Turning to our guidance for 2008, despite turbulence in the financial and consumer segments of the economy, we continue to see strong organic growth in our markets, although not at the almost 20% pace of the first half. We are increasing our expected full year, company-wide sales growth to 14 to 16%, and earnings to $1.61 to $1.66 per share. That concludes our comments on the business and results for the second quarter of fiscal 2008. Operator, we are now ready to open the call to questions.

Thank you, sir.

The question-and-answer session will begin at this time. (OPERATOR INSTRUCTIONS). Please stand by for our first question, sir. First question comes from Peter Lisnic from Robert W. Baird. Sir, you may ask your question.

Good afternoon, gentlemen.

Hello, Pete, how you doing?

Good, how are you?

Good.

Excellent. I was wondering if we could get behind the top line forecast that you have. If we're going from 20% organic growth in the first half, it sounds like the second half is somewhere around 10%. Can you just give us some of the pluses and minuses that sort of lead to that more conservative growth outlook for the back half of the year?

Well, I think some of that is the comparables to the second half of '07, where we started to see a ramp up. We still believe those markets are strong. We just had real rapid growth here in the first half, so looking forward, we're not really seeing any differentiation in terms of the outlook, in that the markets are still strong, sales are still going up. It's just we're -- the 20% is a tough rate for year-over-year comparisons to keep going at.

Okay. Fair enough on that one.

And then I guess if I look at the supply chain issues that you had again in this quarter, you had I think it was a million three is what you quantified in the queue for the first quarter. Can you help us get a sense as to what the supply chain costs were, the expedited freight, those sorts of things in the quarter?

The number was -- I think it was one, if I recall. But basically what we're seeing is, we called out last quarter, we called out some incremental freight that we're experiencing related to some mature product orders that came through that we had some expediting costs related to. That was part of it.

In addition, we've moved some product from our Niles facility to our China facility, so there's been some increased freight related to that, and also we have some investments in efficiencies going forward that are impacting that number a little bit.

Is the overall number then still a million dollars? Is that -- ?

Yes, for the quarter, yes.

Okay. All right. I will jump back in queue. Thanks.

Our next question comes from Tyler Hojo from Sidoti and Company.

Hey, good afternoon guys.

Hi, Tyler.

I have a quick question, actually. In late March, one of your local Colorado newspapers put something out, just in terms of expanding the wind inverter business. I guess it specifically said you guys were looking to hire about 100 new people. And I guess a couple questions based on that. Is this going to be kind of complementary to what you already have or is it something new? And how is that tracking, just in terms of the -- of finding the new employees.

Tyler, the reason we are expanding into the U.S. here, and the Colorado site in particular, is our customer base is predominantly European today, and they're looking -- two hot growth markets in wind are the U.S. and China. Obviously Europe will continue to go. We struck some arrangements with our customer base, which allowed us to capture more of their business with the expectation that we would support them with local content, local application support and local service.

So it's really about helping them develop the U.S. market, and for Woodward to capture more share. Our plans right now are to do our initial units for certification type testing here in the fall, and really start to get to full ramp up in 2009. We do anticipate this as part of continuing the growth. It's not substitute. It's incremental growth that our customer base is looking for U.S. penetration of the market.

We also will be and have made the statement too that we're also going to support the same customer base in China, and that will be probably coming in late 2009, where we're continuing, as that market develops and localization is required that we intend to be there to support the wind business as well.

I see. And just to get some sort of frame of reference, I know -- I think the acquisition you made last year added something like almost $93 million in '07. I mean, obviously Electrical Power Systems is seeing a pretty significant growth rate. I mean, where do you think that 93 goes, and maybe if you could give us some sort of idea of company-wide, what portion of your revenue came from the wind market in the second quarter of the year?

Yes, one, the wind business is ramping rapidly and I would give a real compliment to our German colleagues in terms of their ability to ramp up with the market. We're anticipating annual sales to well exceed $100 million this year, you can see the growth on just the wind piece has gone up dramatically. The outlook as we go forward, we intend to continue to grab share, and the wind business is robust. So we expect rapid growth to continue in that market.

The other part of the Electrical Power Systems business, is power generation distribution controls, and those too are going up. The rate is probably increasing at the same amount but the dollar content isn't quite the same as the wind turbine inverters. But the Power Systems business and the markets we're focusing on are strong globally, and we're continuing to see good demand across all their products.

So if you were to look at that subsidiary, I guess you classify it as a subsidiary, would it be more wind or more power distribution? I mean, how should we look at that piece of the business?

Well, we went -- we started out, wind obviously was a fairly small portion of the overall entity when we first acquired it, and of the segment in total. That's grown significantly, and if you take the total now for that segment of the business, you can see it's getting rapidly close to about a 50/50 sort of rate, wind to other parts of the business. So, at those growth rates, you can kind of do the math on how it will end up. But clearly, wind is becoming a very significant part of that segment as a whole.

Okay. I see. And just kind of a follow-up to the first question, do you have any -- are there any opportunities for you, just in terms of wind, with maybe one of the U.S. customers that you've historically had a very good relationship with?

Yes, the -- which I think you're referring to GE.

I guess I can say it, GE.

Right now, GE brought a lot of the inverter business in-house, vertically integrated on it. I think at the time we weren't in the business and they were really looking at I think supply constraints and making sure that they could support their business. We always have ongoing dialogue with GE about every aspect of their business and we're continuing to talk with them, and what we've done in other parts of GE is we always -- this is the way I always refer to it. We complement them. We don't compete with them. If there's a complementary turbine range that we can step in and help them, we're going to try and do that. But it will definitely be a strategic sourcing decision on their part, and so we can't really predict that very well.

Okay. Great. I'll let somebody else ask. Thanks a lot.

Thanks Tyler.

Our next question comes from Ned Armstrong from FBR.

Thank you. Good afternoon. My first question that really entailed your markets, it really looks like everything's for the most part hitting on all cylinders, so the first part of the question would be, is there any area that concerns you right now or what might come out of left field that could catch you by surprise?

Well, right now I think you're asking a question we ask of ourselves regularly. We're seeing the demand pretty strong, mainly, as we highlighted in our prepared comments, was global demand is drawing through and overcoming the softness. And what I would say in the U.S., some of the construction equipment and some of that type of equipment is low but some of that demand is being picked up by other countries around the world.

So right now, that would be one. Obviously when we look at it, the construction equipment is more of what I call short cycle. When you get into some of our other major markets, like marine, power, and the like, there's a little longer cycle market and we're seeing pretty steady there.

So the first thing if we felt anything would be in construction equipment but right now the exposure we have is being pulled up by the global demand.

The only other thing we always caution is if some catastrophe happens in the aircraft world, obviously that would have an impact. But today, just in terms of passenger miles, the order books, the delivery rates, that looks really robust. So right now, we do feel it's fairly strong outlook.

The second part of the question would be, are there any adjacencies to your existing markets that are particularly appealing to you right now, from a strategic perspective.

Well, there are. I think a little bit, if we went back to when we announced the segment, the change in segments at Woodward, part of that was recognizing the Electric Power System market globally, and we really look at that as three areas.

One, we call power conversion. That would be our inverter type business and various applications of inverters. We look at the power protection and distribution, that would be like our relays, our switch gear controllers, our gen set controllers. That's something we've been in but we're growing and we think there's market opportunity there.

Another area that we're really focusing on, which we would say is an adjacency there, would be power quality. And power quality we see as going to be an extremely growing segment of the Electrical Power Systems market. And what happens there, and one of the reasons we're really focused on it is, the more renewable or variable type power applications you put on, like wind or solar onto the grid, you have issues with the quality of the power and we think the need for equipment to help with that is going to grow and grow, and that's an adjacency we're very attracted to.

By power quality you mean the consistency of the voltage and that type of measure.

Voltage frequency, voltage sags, making sure that you don't get voltage dips that would take out a plant, knock out your processes, that type of, yes, that type of activity.

So those are some adjacencies we're very interested in. The other one that we've spoken to that we think is a very positive one is, in the after treatment area, where we're looking right now, we have a development partnership with Tenneco on a system for a diesel particulate filter, and some of that adjacent area we think provides some nice growth opportunities for our Engine Systems business.

That would be on the exhaust end of the engine business?

Correct.

Okay.

We spent a lot of effort on what we would call primary emission controls and that's trying to reduce the emissions when it's in the cylinder. But with the new regs there's also going to have to be secondary emission control and that's really these after treatment systems. There's a niche in there for some of our technology to be applied, and also lot of control technology going into that, so we see a nice adjacency that we're pursuing at the moment. So those are kind of the big ones on our list at the moment.

Thank you. I'll get back in line.

Our next question comes from J.B. Groh from DA Davidson.

Good afternoon, guys.

How are you doing?

Good, congratulations on the quarter.

Thank you.

Wanted to check on the SG&A expense, relative to Q1 it was a little bit higher. I know as a percentage of sales it's down. Was Q1 kind of an anomaly or is Q2, what's going on there, in particular? Is that just a function of the sort of big growth at Electrical Power Systems.

Somewhat, yes. You're looking at specifically SG&A?

Yes, correct.

Okay. We had -- hold on one second here.

Looks like last year in Q2 there was about a 4 million bump-up too. I was wondering if it is a seasonal thing or something else. I mean, Q2 last year was the highest quarter of the year.

Yes, if you recall, last year we had a subsequent event, subsequent to the Earnings Release. We had an unfavorable --

Right, right.

And that's really the big ticket item.

Okay. But now this quarter, it was up 6 million or 5.5 and change from last quarter but there wasn't anything in this quarter in particular that drove it up. I'm just trying to figure out what the run rate we should look for for the balance of the year. Is that maybe closer to the 26 million we saw in the first quarter or closer to that 32 that we saw in the second quarter?

We would say closer to the 26 if we're able to execute on everything. There are a number of items that we have, we've kind of referred to the fact of continuous improvement activities, productivity enhancements and so on. We did have some IT costs, system costs in the quarter. We would anticipate that those would moderate as we go forward the rest of the year, and then you would see that percentage come down somewhat.

Things like your expedited shipping, those show up in costs of goods, correct?

Yes, those are all in costs of goods sold.

Is there any way to quantify what you saw in aerospace on aftermarket growth? Trying to kind of relate it to some of the other guys that leveraged the aftermarket and compare their --

I guess what we would say is, our aftermarket growth continues to be strong and I guess that's what you're seeing with it. We have, once in a while, I've highlighted on past calls, some variability in the aftermarket which kind of comes around complete, what we've called spare unit controls that are used for fleet expansions or initial provisioning. And those kind of are the ones that come in and out that can sway the aftermarket from quarter-to-quarter.

The steady -- let's say the steady repair and overhaul revenue, and spare parts revenue that comes from -- what I would say, when the engines turn, we make money. That's pretty consistent and is really a basis of the size of our installed fleet, which has -- continues to grow and is quite good.

I think what we saw in the second quarter was slightly less initial provisioning type controls than we saw in the first quarter, but the demand on services in terms of repair, overhaul and spare parts, was steady.

But does that grow at a little bit better rate than capacity would imply?

In the capacity --

The global available seat miles, that kind of thing, that's probably the best driver, correct?

Yes, I think it's probably more consistent with that number.

Yes.

Okay. And then maybe Tom you could just address what you're seeing on the acquisition front, given that you've got a pretty solid balance sheet and capability to do something there. Multiples come in, I mean, is your deal flow stack on your desk higher or lower than it was 90 days ago?

I think what I would say is, our opportunities have increased, part of that is that we're pursuing, part of that is we've put more resources to identify companies that would be a good fit with Woodward and our strategy, that would fit with our growth goals, and we're putting a lot more effort in there. So we're seeing opportunities out there today and probably about the extent we can comment on it. But we, it's more of an internally focused allocation of resources, to spend more effort in that area and that's increasing the opportunities we're looking at.

Okay. Thanks a lot.

Our next question comes from William Bremer from Maxim Group.

Good afternoon, gentlemen. Great quarter.

Thank you.

Excellent. Just, can you touch base a little bit on the aerospace. There's been a few bankruptcies, mergers this last quarter. Just an update there, how that affects your business.

And second, any -- I know International markets have been pretty strong, but any of them in particular, have they surprised you in terms of the -- not just the volume of orders, but maybe the higher ticketed items there.

And then third, know that the -- know that some acquisitions were possibly mentioned but looks as though if you can't pull one in the wind division domestically, then I guess we'll pretty much do a greenfield start-up here. Just want to hear your comments on that.

Okay. Bob chime in with me.

Sure, I will.

Okay. On the aircraft front, what I would -- we have to kind of look at with bankruptcies or airlines going out of business, I'll start with those, generally where we've seen some of this bankruptcies, most of the time they're still flying in bankruptcy. And I would go back, what I always say, as long as the engines are turning, we're going to make money, and so we don't see an impact from that.

The other is that if these start to ground airplanes, and right now what we're seeing, just a little bit when you see some of the fleet announcements, is that they're trying to take out the older, less fuel efficient airplanes. A lot of those are the JT8 powered aircraft and we really don't have much content on those. So in terms of those being parked, it's not really going to have any impact on us. So right now, from those, the bankruptcy and the airplanes being parked, really aren't impacting our aftermarket. We're on the newer fleets, the more fuel efficient fleets, and so far we're not seeing anything sitting. So far, no impact on our aftermarket.

The mergers, that I think hopefully will create stronger U.S. airlines and finally get them around to ordering. So that's the big wild card that everybody talks about and how long the legs on this aircraft industry expansion will go, and it really kind of comes back to when will the U.S. fleets start to order, and the planes are old and they're going to have to.

So I think that's more of an opportunity that they'll get together, consolidate their fleets, look at some new orders and should be a positive to us, longer term. Because we're well-positioned on all the newer aircraft. So from that standpoint, we're still seeing things strong. The only thing is we said before would be if there was a massive grounding of aircraft, which we don't see or anticipate. So other than that, I think the aftermarket will continue on a good pace. In terms of international markets, --

want me to jump in?

Yes.

Two areas come to mind. One, you saw we mentioned some strength in the marine side of the equation. That equates to some of our European customers predominantly. Obviously those are shipped worldwide. So there's some strength there.

Also, in China, we've seen some added strength in the alternative fuels area, predominantly. So two areas that I would think of that kind of respond to specifically international.

But by and large, we've mentioned that across the board on the International side, we've seen strength. So international in general has been a good area for us.

Great.

I think your third question was around market adjacencies.

Greenfield operations, possibly.

What we're looking at, and I would highlight some of the ones I mentioned earlier on attractive adjacencies, the after treatment for our Engine Systems group, that's all organic development. We're bringing that activity up. It's not -- it doesn't require brand-new facility of Woodward. It's being incorporated in our existing engine system facilities.

The power quality area, we find that a very attractive area, and we are making plans for organic growth in there as well as looking for other opportunities. So those are ones that we will invest in and look to develop product lines from the ground up.

Okay. Great. Thank you. Congrats again.

Thank you.

We have a follow-up question from Peter Lisnic from Robert W. Baird.

Hi. Any issues or concerns about materials costs going forward? Or are we pretty comfortable being able to pass through price at this point?

That's kind of I would say a mixed bag. We do have some long-term supply agreements that do include banding and the ability to pass some material cost increases through, but we also have absorbed some. So when we kind of go back to those higher operating costs that we referred to, they're clearly embedded in there. There are some, and as I say, some of which are offset.

Okay. Fair enough.

And then on the -- if I just look at the Turbine Segment, looks like through the first half of this year, incrementals are running around a 50% incremental margin rate. Is that -- can we just ascribe that to just straight leverage or is there a price there or -- I'm just trying to figure out what the back half of the year could look like, or should we expect the leverage to come down at all?

Well, what you have with that is, that is leverage, and the product mix will impact how much we can leverage through. And what I'm trying to say with that is, we had very strong after market in the first half of the year with strong initial provisioning type spare sales, and those are good margin products and we were able to leverage very well. So we will have a little bit, possibly lower on par with that, depending exactly how the after market mix comes through.

Okay. All right. And then any commentary on the U.S. industrial gas turbine market? Sounds like GE saw some orders at least this quarter. Can you give us an idea of what that end market is looking like?

Yes, the industrial gas turbine market is doing well. We had a good increase, so you saw the GE numbers and the like, and we had good increase there. Some of the -- and we talked about this in past phone calls. Depending on where the turbines are sold and what emission regulations they're being purchased under, will determine how much content we have on a turbine. So every GE turbine has Woodward content but it varies, and with the high efficiency, low emission turbines, we have a lot more content. So they're doing well. We've gone up with that, so our industrial turbine business has increased.

Some of -- when you see some of the sales going to the Middle East and the like, those generally aren't the low emission units, so we don't have as much content in those. But overall, it's a positive outlook.

Also, on the -- what we refer to as the aero derivative industrial turbines, we're seeing good ramp-up there and those are used in compression, power gen and marine, and those were up in the quarter. And that's covering all three GE and Pratt and Rolls, and so those aero derivatives are going strong as well.

Can you give us an order of magnitude of content on a high efficiency versus a lower efficiency IGT.

On the order a million a ship set to 100,000 a ship set.

All right. And then just to go back to the second half kind of revenue projection, what are you seeing in terms of order rates right now? Are we still kind of running at double-digit order growth rates or, I'm just trying to get behind some of the conservatism outside of the tough comps for the back half of the year.

We're still seeing strong order rates. I think when you take a look at the comment we made regarding foreign exchange, obviously we don't forecast foreign exchange for the second half, so you can kind of modify a little bit, based on that. We do -- obviously, we always plan for some degree of uncertainty. But I would say we're above 10%, I think that was estimated, slightly, in the second half. But other than that, I don't think we see anything specific from the order rate standpoint.

Okay. But that doesn't include FX, which is an important assumption--

That's right.

Okay, thank you very much.

Our next question is a follow-up from Ned Armstrong from FBR.

Thank you. Just a couple quick little fact bits here. Do you have the FX effect on sales for each of the three segments?

What I can tell you is that largely the impact is -- our EPS, our Electrical Power segment is predominantly Euro based, so most of our impact is there.

You don't have it broken out per se.

It's not really significant to the other businesses.

Okay, thank you.

We have another follow-up question from Tyler Hojo from Sidoti and Company.

Hi, I think, back when you guys reported under the different business segments, you always used to break the guidance per business segment. I was just wondering if you would be willing to do that, just in terms of revenue growth per the three business segments with the updated guidance range that you provided?

We predominantly, because the wind is putting so much uncertainty with respect to the growth, I mean, it's obviously much higher than all of us originally thought it might be. We have not attempted, in particular in the Electrical Power Systems, to call out what would be a long-term growth rate on that. And that really was the only way we referred to it in the past. We tried to kind of target long-term growth patterns. I don't think those have changed significantly from turbine going from aircraft to turbine.

Okay.

We said that there wasn't a significant change there. We also, in the engine side of the equation, we targeted, I think we said that could be in a 7 to 9 sort of range, long-term. I don't think we see much different from that either.

I see. Okay. And just one kind of follow-up. Again, just in terms of the guidance. Do you have a diluted share count, just in terms of what's implied and the updated EPS guidance?

It's slightly under 70 million shares, about 69 million, 500, roughly.

Perfect. Thank you.

We are showing no further questions at this time. I would now like to turn the conference back over to you for any closing remarks.

Okay. Appreciate everybody calling in today and your questions, and we look forward to talking to you in July. Have a good evening.

Thank you, everybody.

Ladies and gentlemen, this concludes our conference call for today. If you would like to listen to a rebroadcast of this conference call, it will be available at 9 P.M. Eastern Standard Time by dialing 888-266-2081 or 703-925-2533 for non-U.S. calls. And by entering the access code 122-0291. A rebroadcast will also be available at the company's website, www.woodward.com, for 30 days. Thank you for your participation in today's conference call and we ask that you please disconnect your line. Thank you, and have a nice day.