Woodward Inc (WWD) 2008 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Woodward Governor Company third 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 the 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.

Thank you, operator. We would like to welcome all of you to Woodward's third quarter 2008 conference call. In a few moments, Tom will talk about the highlights of our third quarter and our markets, I will then comment on today's earnings release, and at the end of the 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, July 23rd, 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 quarters ended December 31st, 2007, and March 31, 2008.

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

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

I'll begin by highlighting our financial results for the third quarter. Sales were up 23%, compared to the third quarter of fiscal year 2007. Our earnings were $0.47 per share, up 38% from last year. Our operating earnings increased 31% over last year. And we generated $56 million in cash from operations during the quarter, an increase of 54% from the prior year.

We experienced excellent growth in sales and operating earnings leverage this quarter. Our sales growth resulted from continued strength in each of our core markets of aerospace, power generation and process industries, and transportation.

Our focus on global end markets and further increases in market share was reflected in our results. Our overseas operations in multi national customers again contributed to our performance, and positioned us well to take advantage of opportunities in multiple markets and regions. We continue to focus on delivering energy-control solutions to our customers, who are providing much of the equipment that supports the global infrastructure. Continuing high cost of energy and environmental concerns drive increased Woodward's content in many of our customer's applications.

Aerospace industry orders remained strong again this quarter, notwithstanding the announcements that some airlines were deferring delivery of previously ordered aircraft. The backlogs for Boeing and Airbus remained strong. Their stated production rates will remain at current or increased levels. That said, we continue to monitor the pace of orders, deferrals and cancellations while also pursuing activities that will lead to increased content and share in key platforms.

This past quarter brought announcements by some airlines of their intention to withdraw less fuel-efficient aircraft from service. We do not expect these actions to impact our fiscal 2008 results, as a majority of the parkings are not expected to occur until after the summer travel season. Potential redeployment in other regions or use in freight service may create new opportunities, partially offsetting the overall impact.

Additionally, it is unclear what ultimate effect these actions may have on our overall growth, considering the more global nature of fleet, the increased usage of aircraft outside of the US, and our increased content on newer and more fuel-efficient aircraft such as the Boeing 777 and the Airbus A-380.

We recently announced a long-term supplier agreement with Pratt & Whitney which extends a key relationship for Woodward and secures our position on Pratt's geared turbo fan platform. Their engines, now renamed the PW1000G and PW810 will initially be on business and regional jets such as the Mitsubishi regional jet, the Bombardier CSeries, and the Cessna Citation Columbus.

Our turbine combustion operation deal in Michigan was awarded an Ace Gold Supplier status by Pratt & Whitney, a select status in which we take great pride. At the recent Farnborough Airshow, Boeing announced it is on target to fly the 787 Dreamliner in the fourth calendar quarter of this year and they completed a successful power-on test this past quarter. As you all know, Woodward provides the fuel control system on the GEnx engine offered on the Dreamliner.

Industrial Turbine demand continued to be robust, driven by power generation projects internationally. Additionally, aero-derivative turbines are seeing growth related to backup power sources for renewable energy projects. Production at our key customers remains at high levels and demand for Woodward content improved during the past quarter. Emission regulations, growing global energy demands, and newer projects such as coal gasification, all should provide opportunities for Woodward in the turbine industry.

Diesel engine demand was again led by strength in large marine applications. Also, high commodity prices are driving demand for mining equipment, powered by diesel engines. This quarter, we saw continued interest in alternative fuels driving greater demand for compressed natural gas Engine Systems, and a higher level of Woodward sales to existing and recently added Asian customers. High oil prices are driving expanded investment in oil and gas production, which is leading to increased demand for steam turbine and engine controls throughout the world.

In the steam turbine controls market, we are leveraging our control and actuation technologies to address opportunities such as the rapid expansion of coal-fired plants in China. With the strength of each of these engine markets, some of our customers have announced expansion of their capacity and continue to plan for increased production levels for a number of years.

Demand for wind turbines continues to grow at a remarkable rate. We continue to expand market share and execute on our plans to support our customers locally as they expand in both North America and Asia. Delivery to these key customers remains our primary focus. In wind inverters, our team has successfully completed the design of a scalable inverter, which will improve manufacturing efficiency, use a common platform for turbines of various sizes, and deliver solutions to a broader geographic market with a variety of grid requirements. This advanced design should launch before the end of the calendar year.

In addition, concerns of power quality and security are driving demand for our sophisticated power management controls. We recently entered into a long-term supplier agreement with a key electrical equipment customer to provide protective relays, further expanding and securing an important relationship.

As always, Woodward's involvement in each of these markets is based on energy control and optimization. Our strategy remains unchanged and our focus will be on areas where we deliver the greatest value to our customers. That being in the areas of control, efficiency and emissions.

Looking forward, despite problems in certain geographic regions and segments of the economy, our order volume suggests continued strength in global infrastructure spending. 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 third quarter and nine month period 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 Woodward consolidated level, net sales for the quarter were $330 million, a 23% increase over last year's third quarter sales of $269 million. This growth was attributable to the market strengths and Woodward positioning that Tom referred to, as well as the impacts of foreign exchange rates. Growth without the positive effect of exchange rates was approximately 17%. Operating earnings for the quarter, defined as earnings before income taxes and interest, grew 31%, and were $49.7 million, or 15.1% of sales, compared with $37.8 million or 14% of sales in the same period a year ago.

Net earnings for the quarter were $32.4 million, or $0.47 per share, compared with $24 million or $0.34 per share for the same quarter a year ago. Foreign exchange accounted for approximately $0.01 per share of the increase year-over-year. Net sales for the nine month period were $908 million, a 21% increase from $752 million for the nine month period of the prior year. Net earnings for the nine month period were $87.5 million, or $1.26 per share, compared with $62.1 million or $0.88 per share in the previous year's nine month period.

At the segment level, let me first discuss our Turbine System segment, which includes both aircraft and Industrial Turbines. Turbine Systems' net sales for the quarter including intersegment sales were $153.7 million, an increase of 16% over third quarter sales of $132.3 million a year ago. Turbine Systems' segment earnings in the third quarter of fiscal 2008 were $29.3 million, compared with $23.2 million for the same quarter a year ago. Segment earnings as a percent of sales were 19.1% in the third fiscal quarter of 2008, compared to 17.5% in the prior year. Our sales performance reflects sustained growth across our portfolio of aircraft and industrial offerings, with particular strength in Industrial Turbines, and OEM aircraft offerings.

Earnings increased largely due to our ability to successfully leverage our fixed cost base on the increased volume. Turbine Systems' net sales for the nine month period, including intersegment sales, were $431.9 million, an increase of 14% from $380.1 million for the nine month period a year ago. Segment earnings for the nine month period increased 32%, to $87.5 million, up from $66.3 million for the nine month period a year ago. Segment earnings as a percent of sales were 20.3% in the nine month period of 2008, compared to 17.4% in the nine month period of the prior year.

Moving to our Engine Systems results. Engine Systems' net sales for the quarter, including intersegment sales, were $130.9 million, compared to $117.6 million a year ago, an increase of 11% reflecting the continued strength in demand for our customers' products outside the United States and positive impacts of foreign exchange rates. Without foreign exchange rate impacts, growth was approximately 7%. Segment earnings for the quarter increased 10% to $17 million, compared to $15.4 million for the same quarter last year. Segment earnings as a percent of sales were 13% in the third fiscal quarter of 2008, compared to 13.1% in the same period of the prior year.

Our sales growth this quarter came largely from our transportation market, with Marine and alternative energy leading the way. Our improved earnings relative to recent quarters, reflect the benefit of operational changes implemented to reduce some of the supply chain and transitional operating costs we experienced earlier in the year. Some of these costs will continue through the balance of the year at a reduced rate. Going forward, we remain focused on activities to reduce these costs and enhance margins in this segment over the longer term.

Engine Systems' net sales for the nine month period, including intersegment sales, were $370.8 million, an increase of 12% from $330.5 million for last year's nine month period. Segment earnings for the nine month period increased 6% to $42 million, from $39.8 million for the nine month period a year ago. Segment earnings as a percent of sales were 11.3% in the nine month period of 2008, compared to 12% in the nine month period of the prior year.

Now turning to Electrical Power Systems. Electrical Power Systems' net sales for the quarter, including intersegment sales, were $77.2 million, compared to $49.2 million a year ago, an increase of 57%. Again this quarter, wind power sales were very strong. Power generation and distribution markets also experienced robust growth, as overall demand for power protection and power distribution controls continued. In this segment, without the effects of exchange rates, growth was approximately 38%. Segment earnings more than doubled for the quarter, to $10.8 million compared to $5.2 million for the same quarter last year. Segment earnings improved as a percent of sales to 14% in the third fiscal quarter of 2008, from 10.6% in the prior year. In this segment too, we continue to focus on process and product design improvements that will further enhance margins.

Electrical Power Systems' net sales for the nine month period, including intersegment sales, were $199.5 million, an increase of 57% from $126.8 million for the nine month period a year ago. The vast majority of this growth was organic. Segment earnings for the quarter increased to $27.5 million, from $15.2 million for the same quarter a year ago. Segment earnings improved as a percent of sales to 13.8% in the nine month period of 2008, from 12% in the nine month period 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 29.7% in the third quarter of 2008, as compared to 30.8% in the third quarter of 2007. Gross margin was negatively impacted by both product mix and inventory adjustments related to product line transfers mentioned in earlier quarters. Gross margin as a percent of sales was 30.2% in the nine month period of 2008, compared to 30.8% in the prior year.

Selling, general and administrative expenses as a percent of sales decreased to 8.6% of sales, or $28.4 million in the third quarter of 2008, compared to 10.2%, or $27.3 million in 2007. In the nine month period, selling, general and administrative expenses were 9.5% of sales, or $86.1 million in 2008, compared to 11.2% or $84.3 million in 2007.

Research and Development costs were $19 million in the third quarter of 2008, or 5.8% of sales, compared to $17 million or 6.3% of sales in the third quarter of 2007. Research and development costs were $53.4 million in the nine month period of 2008, or 5.9% of sales, compared to $46.9 million or 6.2% of sales in the nine month period 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 nine month period of 2008 increased to $27.2 million, from $26.5 million in the nine month period of the prior year. Our capital expenditures were $25.1 million in the nine month period of 2008, compared to $22.7 million in the nine month period of 2007. We previously announced that we expect capital expenditures to increase to total approximately $100 million for the years 2008 and 2009 combined. We expect fiscal 2008 capital expenditures of between 40 and $45 million, and 2009 to be somewhat above 2008. This increase includes a $50 million investment over two years to modernize the Love's Park facility in Illinois. It includes a state-of-the-art systems test facility for Aircraft Engine Fuel Control Systems. In addition to the Illinois expansion, systems test capability expansions in Colorado and a new facility in Poland account for the majority of the increase in spending from fiscal 2008 to 2009. We continue to support our advanced test capabilities and core manufacturing process improvements.

Our effective tax rate for the quarter was 34%, compared to 35.4% last year. We expect our full year 2008 tax rate to be in this range or slightly below. To turn briefly to our balance sheet, working capital, defined as current assets less current liabilities, increased to $342 million at June 30, 2008, compared to $276 million at September 30, 2007, supporting our increasing sales volumes. Our total short-term and long-term debt was $47 million at June 30, 2008, a decrease of $20 million from September 30, 2007. The ratio of debt to debt-plus-equity was 7.2% at the end of the third quarter, compared to 10.9% at September 30, 2007, and 10.9% at June 30, 2007.

Turning to our guidance for 2008, considering the outlook for the markets and Woodward initiatives described by Tom earlier, we believe that our fiscal fourth quarter sales growth will remain strong, though somewhat more moderate than we have seen recently. We expect our full-year sales growth rate to be approximately 20%. We are also increasing our expected full-year earnings to approximately $1.75 per share. That concludes our comments on the business and results for the third quarter of fiscal 2008. Operator, we are now ready to open the call to questions.

Thank you. The question-and-answer session will begin at this time. (OPERATOR INSTRUCTIONS). Please stand by for your first question, sir. Our first question comes from Tyler Hojo of Sidoti & Company.

Hello?

Hello, Tyler.

Hi. I guess my first question, and you kind of touched on it, just in your prepared remarks, was just in regards to some of the capacity reductions that we keep reading about in the papers. I know you guys don't have exposure to CFM-56, but what do you think -- how do you think this plays out for you guys after Labor Day, just in terms of capacity coming offline?

Tyler, first, we are on CFM-56, so there is an issue. What we're not on in any quantity or any significance is the JT-8 fleet. So that would be like your MD-80s, your DC-9s, your old original 737s. Those are the worst fuel efficient of all the aircraft and are being parked. So those really have negligible to no impact on us.

What we saw here in the last quarter was some announcements for 737 classics. That would be with the CFM-56-3 engine. We do have good content on that engine. So that's the one we're kind of referring to. Some of those are being parked.

We see -- our anticipation is that those will be picked up elsewhere in the world, leasing companies will replace or will place those elsewhere. So we think it's a temporary drop. We don't think it's going to be significant and we think the increase we're seeing in the OEM side of our business will more than offset that. Right now we're seeing continued growth in there. I mean, under terrible scenarios, could we see a lot more aircraft parked? That's possible, I guess. But right at the moment we're not anticipating a dramatic increase in parked aircraft with where we have high content.

Okay. I guess last week during GE's report, they were kind of saying that they were -- they anticipated seeing something like $100 million headwind in the back half of their calendar year. Do you think the impact would be somewhat similar to your business? Or you're just not seeing what they're seeing? Is that kind of what the read is here?

Well, I think we see some of it. I think what you probably have is the scale difference. On the engine manufacturer side, they make huge amounts of their profit on the blades, blade replacements. We make our money on repairing the Control Systems. It's not the same order of magnitude that they have. Obviously, we make good money on that. But we are right now anticipating that we're still going to continue to grow going forward into the next year. So what you're seeing is we will feel some. It will not be overly material, and we believe that the real ramp-ups in the OEM business are going to offset it.

Fantastic. Just one more for you. I don't think you addressed it in your prepared remarks, but if you could just give us an idea of what you're seeing, just in regards to acquisitions. Obviously, the balance sheet's in good shape and what your plans are for that cash. Thanks.

Yes. Well, on the acquisition front, we've been putting more resources on what we call filling the funnel. We're looking into areas of interest. Obviously, we would like to do something in aerospace. It's a very difficult market, as everybody knows. It's very consolidated. We're looking a lot more in the supporting our Electrical Power Systems business. So we're looking at ideas in that area. And we're looking at whenever something does arise that would support our engine business. So we're getting a -- with the bigger emphasis we put on it internally, we're seeing a better flow under our funnel. But it's M&A and that always means it's totally uncertain to say when the timing or when the activity is.

I would also like to emphasize, we're very focused. We're not going to do something that's out of energy control and optimization, and so that's what we'll weigh everything against. But we are -- that would be our prime choice for how to spend or how to use our balance sheet strength.

Thanks very much.

Thank you. Our next question comes from Peter Lisnic of Robert W. Baird.

Good afternoon, gentlemen.

Good afternoon.

I was wondering, I know in the press release you gave some color on OEM versus aftermarket. I'm wondering if you could give us a little bit more detail in the aerospace business, what OEM was growth-wise versus aftermarket and how that trends into next fiscal year and your expectations?

Yes. The split is still 50/50, approximately on OEM to aftermarket. Our aftermarket revenue is still ramping up. What we are seeing on the OEM side as we move into fiscal year '09 is continued ramp-up on some of the new wins that we had, so those are the Pratt Whitney Canada projects, you're also going to see the towards the end of the year, shipments starting to occur on the GEnx and so those will start bringing OEM sales up. But right now the production rates are doing well at our customers. I think you probably even saw Airbus announced they're going to even up some their production rates on the A320 family. So those are all drawing our OEM sales up. But our aftermarket sales are holding in and, you know, the split still, like I said is 50/50.

Could you maybe give us just an order of magnitude as to what aftermarket grew in the quarter, top line growth? Mid single digits? Low?

I'd say low. I'm looking at -- I'm trying to grab some numbers for you here, Pete. Give me a second.

Okay. I can ask another question if you want to take some time.

Okay. Why don't you do that.

It sounds like in the wind business with this whole move to, I guess what would be a scalable inverter product, I'd sounds like one of the things you're trying to target there is the margin or improved margin profile for that business. Could you maybe give us a sense as to relative profitability of that business and then kind of where you think it could go in terms of over the next like 12 or 24 months.

In terms of relative profitability, it's right in the hunt with the rest of our industrial businesses. So from that standpoint, it's not an issue there. We're doing quite well with it. The highlight on that scalable inverter, the opportunity for us to grow and grow rapidly is to go more global. What that's going to do is reduce our overhead in terms of application cost, customization for local markets and that's going to help us by -- in that way. And secondly, we should have a better contribution margin on the product too, because we've gone into it designing it for lower cost, so that should be an upside as we go into 2009 and 2010. And I think the second part of your question was the market growth rate or -- ?

No, no, I'm sorry, just what the margin profile could look like a couple years out with the implementation of the scalable platform. Sounds like the scalability is to address different turbine sizes and different markets more than it is a specific margin expansion opportunity.

It will ideally help margin a little bit but when you wrap up all the costs of applying the various turbines to the various markets, there's an expense there. That's what we're trying to reduce as well. So that's really in the overhead area.

Are we still targeting wind at around $100 million of revenue for this year?

Yes, it will be slightly over that.

Okay. All right. So if you have that aftermarket number, I would be totally done then.

Yep. Pete, it looks like it will be high single digits overall. There's a mix in there between commercial and military. We're seeing slightly less in military and we're seeing slightly less growth on military than we're seeing on commercial. So, but overall high single digits.

Is that for this quarter or for the year, Bob?

That's for this quarter versus the prior year quarter.

Okay. Great. Thank you very much.

Sure.

Thanks.

Thank you. Our next question comes from William Bremer of Maxim Group.

Very nice quarter, gentlemen. Excellent.

Thank you.

Thank you.

Peter just touched upon the scalable inverter. Can you give us a little color on whether or not that's going to be geared toward more the domestic market here and will you be manufacturing that here or potentially abroad? And then just want to get a sense on in terms of the Electrical Power Systems in terms of the ratio between wind and power generation. Are we getting closer to that 50/50% there?

Okay. I'll start with the wind inverter. First, the scalable platform we refer to our platform as the NGX and the platform was designed to be a global product and our intention is to produce it in Europe, the US and in China.

Right now, the main -- well, right now, all of our inverters are being built in Germany at our Kempen facility that we acquired two years ago. We announced that we're also going to start production in our facility here in Colorado, and what we are able to do is we had leased out part of that facility because we had excess space. The lease expired on the tenant. We're taking that space over. We're going to use that space for inverter production, and we just recently leased a building adjacent to our building in Tianjin, China to also build the inverters.

So our plan is to take that -- that's a global product that was part of the scalability and the architecture, and we're going to produce it in each region, and that regional focus is also what's been allowing us to capture share and grow a little faster. Our customer base wants -- they're going to -- they're expanding and putting factories in the US and in China as well. So by being there, we're able to pick up more share and they'll grow with them. I think the second part of the question was on wind to --

Wind to total. And it is getting much closer to kind of a 50/50 out of the total business. Both are seeing pretty good rates of growth. Obviously, power generation and distribution is nothing like the wind side but it will be slightly below 50%.

And going into '09, where do you think that ratio stacks up? Or I should say the conclusion of '09.

It will start to flip.

Wind is going to continue to grow at really remarkable rates for us. So we would see the wind picking up going into next year, higher percent of the business.

Okay. Great. Let's switch to Engine Systems, had a real nice improvement in terms of operating margin, about 263 basis points. How much more do you think that you could sort of squeeze out of there or what should we sort of be using there in terms of operating margin?

Right now, we're pleased with if you want to say our industrial businesses, the engine and the electrical power system that we're -- we're bringing the margin up. We think we still have several points of opportunity out there and we'll be working on that over the next few years, continuing to improve our processes and a lot of that too is we're improving these margins even while absorbing some of the inflationary pressures that are out there today. So we think there's still margin expansion even in this environment.

Great. Thank you. I'll hop back in.

Thanks.

Thank you. Our next question comes from Greg McKinley of Dougherty.

Good afternoon.

Good afternoon.

Could you talk a little bit more about your operating expense trends? I know you've highlighted a couple items that drove some variance from quarter-to-quarter in recent quarters, but if we look at non-segment expenses, those were down nicely sequentially, as were the operating expenses applied to your segments, and can you just remind us what are the big moving parts in those numbers and how should we think about that as a run rate moving forward?

If I focused first on gross margin, we mentioned throughout the last couple of quarters that we were incurring some charges relating to moving some product lines to other low cost locations. We had some freight charges, et cetera, related to that. We think we have moved through a good piece of that. There's still smaller amounts that we'll see in the fourth quarter, but that's part of that improvement.

We also, as you move product lines and so on, you get completed with those sometimes you have some inventory that needs to be written off. We had some of that during the quarter as well. So we believe that when you take out some of those items, and I don't want to refer to them as unusual, but they're not really recurring with respect to these types of activities, we expect to be slightly above 30% for the full year for gross margin standpoint.

Okay.

We've been also as we mentioned, we've been trying to really get some infrastructure reduction, so we've been looking at a lot of our facilities and consolidating some activities and so on. So that's been conscious over a fairly long period. But a number of facilities this last year, and so we believe we will continue to see whether it's SG&A or some manufacturing expenses, fixed costs spread over our sales base, we'll expect to see some continued decline there. So, as Tom mentioned, we expect there's a couple of points of profit available to us, and those are kind of the areas that we expect them to come.

And is there a particular segment from an operating expense standpoint where you feel that you have more of that available to you with the initiatives you have on the table today?

Well, with electrical, we've mentioned that we have had some manufacturing process improvements that have been implemented over the last few quarters, and that's what's caused the fairly significant improvement in profitability there. I think we still have more of that, although the curve is probably flattening a little bit, because if you look at the last three years, it's been pretty dramatic.

Yes.

So I think that's probably the largest opportunity we have. We still believe that getting all of these costs of product line movements out of engine is still also an opportunity. In the turbine side of the business, it's probably more of a mix issue than it is having lots of opportunities for continued profit improvement from design changes or manufacturing process changes and so on. So you'll continue to see the moderation there as OEM and aftermarket move around that 50%. I think in the past we've said that that -- there's a plus or minus two points kind of impact when we see these kinds of changes.

Yes.

So it's not significantly more than that.

Thank you.

Thank you. Our next question comes from JB Groh of DA Davidson.

Can you hear me okay?

Yes, now we can.

Okay. I had a question on R&D. Looking at the new geared turbo fan win, is that going to trend up as a percentage of sales or dollar volume? How should we think of that? I think you've been running kind of high 5%, low 6% over the last couple years and I think back in '06 it was up a little higher and maybe that was GEnx related. But I'm just curious as to how you see that panning out. Are you going to stay below 6% or what are you -- ?

That's a good question. The real nice thing about the timing of that new program is some of the resources that will be working on that that's right now primarily in our turbine combustion group. Those -- we have resources that are rolling off the JSF and so basically we have a hold on our R&D expenditures. So it's a good timing for us on that. So we shouldn't see much of an increase at all.

So as a dollar volume, dollar level would stay kind of flat with this year?

Yes, we kind of expect close to that.

Okay. Thanks. That's all I had.

Okay.

Thank you. Our next question comes from Ned Armstrong of FBR Capital Markets.

Thank you, good afternoon.

Good afternoon.

In your Engine Systems segment overview, you noted that the transportation market was particularly good and called out the Marine and alternative energy applications. Can you just touch on some the other applications in that particular market and how they did during the course of the quarter?

Sure. Couple -- another very large part of the engine market is power generation. A lot of these engines are used in standby or backup applications. We also do a lot with natural gas engines and those are sometimes used in prime applications. The power side was growing. It was more like about 6%, so it was still doing well. The transportation was our largest portion of that and it was for the highlighted what we had the Marine and the CNG powered vehicles is doing real well right now.

The other area where you see some of the applications in engine is what we call mobile industrial, that would be for forklifts or small vehicles and that probably was the lowest performing in the area. I think those are what I would call more the short cycle business, where they're going to be impacted by the local economy, construction or some of that type of activity. But overall, the two -- if you want to say the larger parts, the power, the natural gas and Marine were all doing well.

Okay. And just a small question regarding the Turbine Systems. Did you have an organic growth number for that business?

It's all.

It's all organic.

All organic.

Okay.

Yes.

Great. Thank you.

Sure.

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

Well, thank you, everybody for joining us today. We'll look forward to talking to you again, which will be actually our year-end results and we look forward to providing those to you and also our outlook for 2009. So thanks once again.

Ladies and gentlemen, that does conclude our conference call today. If you would like to listen to a rebroadcast of this conference call, it will be available today at 10 p.m. Eastern time by dialing 1-888-266-2081 for US calls or 703-925-2533 for non-US calls. And by entering the access code 1253874. A rebroadcast will also be available at the company's website, www.Woodward.com for 30 days. We thank you for your participation in today's conference call and ask that you please disconnect your line.