Woodward Inc (WWD) 2008 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Woodward Governor Company fourth quarter and fiscal year 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 fourth quarter and fiscal year 2008 conference call. In a minute Tom will talk about our 2008 highlights 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 question. For those of who have not seen the release you can find it 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 Friday, November 21, 2008. 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 cal. 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 any questions any statements we make other than actual results or historical 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 earning release and our public filings with the Securities and Exchange Commission including our 10-K for 2008 which we expect to file later today. Now I will turn the call over to Tom to discuss our progress toward achieving our strategic goals in the fourth quarter and throughout 2008.

Thank you, Bob. And welcome to all of you who have joined us today. I'll begin by highlighting our financial results for the fourth quarter. Sales were up 21% compared to the fourth quarter of fiscal year 2007. Diluted earnings per share for the quarter were $0.50 compared with last year's $0.51. Last year's results though included a $0.15 per share favorable tax adjustment. Our operating earning increased 42% over last year's fourth quarter. Our continued excellent growth in sales and related operating earnings leverage allowed to us achieve the following full year 2008 highlights.

Sales were up $216 million, or 21% over last year, our earnings were $1.75 per diluted share, up 26% from 2007, operating earnings increased 38% over last year, and we generated $125 million cash from operations during the year, an increase of 6% from the prior year. Sales growth this quarter resulted partly from strengths once again in each of our core markets of aerospace, power generation and process industries and transportation. Our three key strategic focal points of globalization, energy and emissions continue to position us well in our markets and with our customers. Our overseas operations and multinational customers allowed to us capture opportunities in multiple markets and regions. An example is our expansion to serve our wind customers in North America and China where our existing presence gifts us an advantage.

Aerospace industry orders remained strong again in this quarter. Backlogs at Boeing and Airbus remain solid and are expected to hold over the next couple of years with stated production rates remaining at approximately current levels. Resolution of labor issues at Boeing is a positive sign that production of current aircraft in the 787 development will return to levels that would drive growth opportunities for Woodward. Business jet activity however has seen an order slow down with the reduced production outlook. In the after market the past quarters showed that airlines were following through on some of their announced plans to withdraw less fuel efficient aircraft from service. We expect some of these plans to in fact be removed from service despite the potential for redeployment in other regions of the world or use in freight service.

It remains unclear what ultimate effect these actions may have on our overall growth considering the more global nature of the fleet, the increased usage the narrow body aircraft outside of the U.S. and our increased content on newer and more fuel efficient aircraft such as Boeing 777 and Airbus A380.

This quarter we were certified as a UTC gold supply by United Technologies and Pratt and Whitney. We received this award for achieving bouncing performance in the areas of delivery, quality and customer satisfaction. We are proud of this recognition which is given to less than 5% of the UTC supply base. We also recently announced the execution of a long-term supply agreement with Pratt and Whitney which extends the key relationship for Woodward and secures our position on their geared turbofan platform.

Internally we are focused on business processes that drive our operational and financial performance. We believe that these process are critical to retaining and adding to Woodward's growth opportunities in both sales and earnings. Industrial turbine demand remained robust driven by international power generation projects. Arrow derivative turbines are seeing continued growth related to back up power sources for renewable energy projects and in the oil and gas market. Production in our key customers remains at a high levels and demand for Woodward contents remain at improved levels relative to the first half of fiscal year 2008.

Continuing global energy demands both traditional and renewable and more stringent emissions regulations pride opportunities across Woodward. While uncertainty related to credit availability and lower oil prices could dampen growth in this area we are encouraged by the more long-range views that appears to be developing with respect to energy policy in the US and globally.

We continue to see strong 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. This demand which can vary is a function of local variability of natural gas, infrastructure related to fuel delivery and national policies with respect to dependence on foreign oil.

Large marine applications and mining equipment again led to demand for diesel engine systems products this quarter. While economic uncertainty and commodity prices will have an effect on demand in these markets much of our infrastructure and related cost consolidation efforts have been focused in this area. As a result we believe Woodward is better positioned to deliver sustained profitability during a recessionary environment. Steep turbine controls again provided strength in the quarter. Where high oil prices have been driving expanded investment in oil and gas production.

I'd now like to make some general comments about power generation and infrastructure projects. While global demand for electrical power continues to increase as world population gross it is unclear what impact the current credit crisis will have in this area. Consumers and governments around the world will continue to demand increasing availability and reliability of electrical power regardless of economic conditions. Which may lead to government support of financing in this area.

Wind turbine sales continue to grow at a remarkable rate. We delivered our first NGX scalable inverter platform during the quarter 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. Additionally we shipped the first 6 megawatt inverter in the industry for use in an offshore application. We are expanding market share and continuing to execute on our plans to support our customers locally as they expand in both North America and Asia.

We are on track to complete our expansion of wind turbine inverter projection in both Colorado and Tianjian, China, while the current economic environment has raised risk level with regard to large infrastructure projects our customers continue to plan for significant growth. Distributed powers are a growing trends with respect to electrical power. It can consist of standalone power sources or multiple sources serving the grid system. Distributed power brings with it more complexity and control requirements where Woodward sophisticated power management control technology helps solve these challenges. As always, Woodward's involvement in each of these markets and centered around energy control and optimization. Our strategy remains unchanged and our focus will be on areas where we deliver the greatest value to our customer. In the areas of control, efficiency and emissions. Now I'll turn the call over to Bob to review our financial results and update our outlook.

Thank you, Tom. And good evening, everyone. I will comment on the fourth quarter and fiscal year 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 $351 million, a 21% increase over last year's fourth quarter sales of $291 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 define as earnings before income taxes and interest grew 42% and were $50.9 million, or 14.5Z% of sales, compared with $35.8 million, or 12.3% of sales in the same period a year ago. Net earnings for the quarter were $50.7 million or $0.50 per diluted share compared with $36 million or $0.51 per share for the same quarter a year ago. Fourth quarter 2007 earnings benefited from the $10.3 million favorable income tax issue resolution. Without the 2007 income tax benefit same quarter per share results would have been $0.36. Foreign exchange accounted for approximately $0.01 per share of the increase year over year. Going forward, with the rapid weakening of the euro and British pound we expect to see sales and earnings pressure as compared to 2008. Our continuing growth in Europe predominantly related to our wind business will increase the effects of currency in 2009 as compared to 2008.

Net sales for the fiscal year 2008 were $1.258 billion, a 21% increase from $1.042 billion for the prior year. Net earnings for the year were $121.9 million, or $1.75 per diluted share, compared with $98.2 million, or $1.39 per diluted share, in the previous year. At the segment level let me first discuss our turbine systems segment.

Turbine systems net sales for the quarter including intersegment sales were $163.8 million, an increase of 14% over fourth quarter sales of $143.8 million a year ago. Turbine systems segment earnings in the fourth quarter of fiscal 2008 were $28.7 million compared with $21 million for the same quarter a year ago. Segment earnings as a percent of sales were 17.5% in the fourth fiscal quarter of 2008 compared to 14.6% in the prior year. Our sales performance reflects the sustained growth across our portfolio of aircraft and industrial offerings with particular strength in industrial turbines and OEM aircraft offerings. Earnings increased year over year largely due to our ability to successfully leverage our fixed cost base on the increased volume. Sequentially the higher mix of OEM sales in both industrial and aerospace impacted earnings.

Moving to our engine systems results. Engine systems net sales for the quarter including our segment sales were $128.5 million, compared to $124.7 million a year ago; an increase of 3% reflecting favorable currency impacts and the continued strength of demand for our customers products outside the United States. Segment earnings for the quarter decreased 16% to $14.4 million compared to $17.2 million for the same quarter last year. Segment earnings as a percent of sales were 11.2% in the fourth fiscal quarter of 2008 compared to 13.8% in the same quarter of the prior year. Our sales growth this quarter came largely from our transportation market with marine and alternative energy leading the way. The decline in earnings as a percent of sales is primarily attributable to normal variation in the mix of our products sold during the quarter.

Now turning to electrical power systems. Electrical power systems net sales for the quarter including intersegment sales were $89.7 million compared to $54.6 million a year ago; an increase of 64%. Again this quarter winds 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 53%. Segment earnings almost tripled for the quarter to $14.8 million compared to $5.1 million for the same quarter last year. Segment earnings improved as a percent of sales to 16.5% in the fourth fiscal quarter of 2008 from 9.3% in the prior year. In this segment, too, we continue to focus on process and product design improvements that will further enhance margins.

Now I would 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 28.7% in the fourth quarter of 2008 as compared to 28.2% in the fourth quarter of 2007. Gross margin as a percent of sales was essentially flat at 29.8% in fiscal 2008 compared to 30.1% in the prior year.

Selling, general and administrative expenses as a percent of sales decreased to 8.4% of sales, or $29.3 million in the fourth quarter of 2008 compared to 9.3% or $27 million in 2007. For the year SG&A expenses were 9.2% of sales or $115.4 million in 2008 compared to 10.7% or $111.3 million in 2007. Research and development costs were $20 million in the fourth quarter of 2008, or 5.7% of sales, compared to $18.4 million, or 6.3% of sales in the fourth quarter of 2007. R&D costs were $73.4 million in 2008, or 5.8% of sales compared to $65.3 million or 6.3% of sales in 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 2008 increased to $35.5 million from $32.9 million in the prior year. Our effective income tax rate for 2008 was 33% compared to 25.6% last year. Income tax expense for 2007 included adjustments with a net favorable impact of $10.3 million. Or $0.15 per diluted share, which reduced our effective rate by about 8-points. Specifically we received a favorable outcome related to prior year tax examinations of $13.3 million, partially offset by a decrease in our deferred tax assets resulting from a reduction in the German statutory tax rate of $3 million. We would expect that our effective rate for 2009 would be slightly blow this year's rate reflecting the research credit extension.

Our annual capital expenditures were $41.1 million in 2008, compared to $32 million in 2007. We previously announced that we expected CapEx to total approximately $100 million for the years 2008 and 2009 combined. Given the current level of economic uncertainty we have recently reviewed our planned 2009 CapEx and will defer some of these expenditures where time something not critical. For 2009 we now expect CapEx to be closer to or slightly below our 2008 levels. In 2009 we will remain focused on our low cost strategy continuing our expansion in Poland and supporting our wind growth through expansions in Colorado and China. We will continue moving forward with our systems test capability but at a more modest pace.

To turn briefly to our balance sheet. Working capital defined as current assets less current liabilities increased to $369 million at September 30, 2008, compared to $276 million at September 30, 2007; supporting our increasing sales volumes. Woodward generated $125 million of cash flow from operations in 2008 and $84 million of free cash flow with increased CapEx over the prior year. In 2009 we believe liquidity and cash generation will be critical when we plan to generate over $125 million in free cash flow, a 42% increase over the current year. We believe this level of cash generation coupled with our strong balance sheet adequately supports our operations going forward and the strategic initiatives we have identified.

Currency impacts, while impacting our reported earnings, do not significantly impact our economic results as we have strategic investment opportunities in Europe. Our total short term and long-term debt was $49 million at September 30, 2008, compared to $67 million at September 30, 2007. The ratio of debt to debt plus equity was 7.2% at the end of the fourth quarter compared to 10.9% at September 30, 2007.

As previously announced Woodward acquired MPC Products on October 1, of this year. During October we issued $400 million of additional long-term debt which funded the acquisition. MPC Products is now in our our new airframe systems segment. We remain confident that this acquisition with annual sales of approximately $220 million will be neutral to slightly accretive to Woodward's earnings per share in fiscal 2009. We expect that synergies and cost savings will be realized as originally expected and these will be significantly greater in the second half of fiscal 2009 than in the first half and with further benefits to be realized during fiscal 2010. We also acquired MotoTron in early October for $17 million. We expect this acquisition to be neutral to EPS in 2009. Integration is proceeding on schedule.

Turning to our outlook on the future. As we are all aware the economy over the last several months has been significantly impacted by the financial institution credit crisis ultimately affected the broader credit markets and the financing available to many companies both in the US and abroad. Additionally the euro has weakened significantly and given up ground that has been accumulated over almost two years. This historic drop and the potential for further impacts has a considerable impact on our 2009 outlook. Preparation for the impacts of market fluctuations has been a strategic objective for a number of years and Woodward is well-positioned to maintain liquidity and relative profitability throughout the business cycle.

We have been investing more broadly both regionally and across our markets to reduce specific risks with respect to any one economy or market. Our focus on energy control and optimization across a wide range of applications and resources mitigates fluctuations in any one area. Further or products are key components of critical infrastructure projects where government backing of funding may supplement private investing. We are focusing on our core competencies to better serve our customers, driving improvements in the cash conversion cycle, reducing operating costs in many areas and have locked in favorable long-term financing.

To summarize the outlook for our business segments, at this time our order volumes indicate a modest increase in sales volumes in 2009 with turbine systems being up slightly, engine systems as our short cycle business seeing the impacts of the economic downturn earliest and electrical power systems still seeing strength in wind.

At the Woodward level the significant effects of rapidly weakened European currencies may offset the modest volume increases that Tom and I have mentioned and we now anticipate organic sales to be flat to slightly up with overall sales including our recent acquisitions to be approximately 1.4 billion to $1.5 billion. And related EPS of $1.65 to $1.90. That concludes our comments on the business and results for the fourth quarter and fiscal year 2008 earnings conference call. Operator, we are now ready to open the call to questions.

(OPERATOR INSTRUCTIONS) Our first question, Peter Lisnic at Robert W. Baird and Company.

Good evening, gentlemen. Bob, I guess the first question I had was on the organic growth forecast from flat to up 6%. And you commented a little bit about turbine being up slightly. Can you give us a little bit more granularity there in terms of what you're expecting in commercial aerospace OEM versus aftermarket and then just some more granular detail within the businesses in engine and electrical power?

Let me bounce that to Tom. He's probably in a better position to give you a better answer there.

Yes, I'll start with our turbine business, if we are looking at the aircraft market, we are really looking and the feedback we are getting from the industry, we expect the civil aviation, the larger from regional to the larger commercial aircraft to remain pretty steady. And talking with the customers, and the air framers, we believe that the order book is still sound and that the financing is lined up to carry it through 2010. So in that area we feel good about that. The one thing that, I know you've seen out there is that the ramp ups at Airbus had planned are probably not going to occur but they are going to hold their rates steady and Boeing is talking about pretty much the same thing. So from there we see steady production and then ongoing some of the newer programs where we have gained market share will start coming online late in '09 with shipments and start to pick up there.

The defense side it's our belief and again talking to many in the industry that defense spending will hold through '09 and into '010. I even believe this will hold with the change in administration. So from that standpoint that looks real good. The after market business for Woodward right now is still solid, still growing, the big question mark if you look at the installed base, we've got a great base. We are well represented on all the new aircraft. The one area that we are keeping an eye on are the 737 classics and this time we have not seen much impact from some of the announcements that we are going to park some of those planes. What we are watching is -- what's happening right now, the parking of those planes is being mainly driven by oil prices, obviously everyone knows the oil has come down dramatically. What we are watching is economic issues now. And we are keeping our eye on are those planes going to get parked and how many. And we still believe our after markets will hold and not go down. That's our outlook at the moment. So for the turbine side we expect steady to slightly up sales.

And do you mind just addressing industrial turbine in that before you maybe go to engines and electrical power?

I will. The only area of the aircraft I think, once again we are keeping our eye on are the business jets and there we've seen and I know most of you have seen the softening in some of the outlook. Production rates I think what's really going on is that the biz jet manufacturers are going to keep their lines running so they are not going to ramp up, they are going to hold the lines at a rate that they feel comfortable with to allow the backlog to keep them in production to the next two years. So that's the only area that we've seen a little bit of slight decline. But overall still looking positive. On industrial turbines, right now the order books are still strong. The backlog looks good.

The question, right now -- so we don't have any question on that, looking out into late '09 maybe going into '10 is what we have to watch is financing and I think Bob highlighted a number of areas during this prepared remarks. And the issue is if financing does not come through later in '09 or 2010, you can see a reduction there. But the demands there, the projects are still moving forward at the moment, but we are just putting a cautionary note on watching for financing and these projects are huge, they all are based on financing. So that's something we are watching. We don't have any news that is -- that you don't have but we are being cautious on that.

Just to be clear that means, no cancellations out of your backlog, is that a safe way of putting it?

Yes, we have not had any cancellations.

Okay.

So the backlog still looks solid. It's more moving in to make sure that follow-on orders and the like will continue where the demand has been there. On the engine side, we highlight, engine is probably parts of our engine business are, have a shorter cycle than aircraft or turbine type infrastructure projects. So we are starting to see and our customer base is starting to see some slowing in the short cycle. Now long cycle would be things like the marine market where the order books are large and they have long, long lead times. So we have a concern about the short cycle with the economic conditions and the other area that we have some concern on though the order books I think will be fulfilled is in mining where we've had dramatic commodity price reductions. So engine is our short, of all of our businesses, it's the shorter cycle, and where we are seeing right now where we expect to feel the pressure the soonest. We are not seeing it exactly today but we are anticipating some downward order pressure there.

The last areas are electrical power systems, where the wind business is doing great, orders are, our backlog is full, talking to our customers, they believe the backlog is solid, you probably have seen the announcements for a number of the wind turbine manufacturers which are still seeing sizeable growth going into '09. And we see that in our orders and in our planning. As always we caution even wind turbines require financing so anything that requires financing we are, which is basically our entire business we are keeping a good eye on. So but the other books are doing well there. We continue, we've cashed in a lot of market share. And as we bring on our lines in Colorado and China we expect to see continued growth in that area.

Okay. And just if I could just, I had a question on this concept of I don't know what to call it but maybe government picking up the tab in terms of if the financing market on the private side continues to feel pressure. In your forecast of flat to up 6%, what are you assuming in terms of financial market health? If that's a fair question?

Well, I think we are assuming a lot of uncertainty, all joking aside I think its too early for us to understand what the impacts may be. I think we do view that possibility of government back stopping some of this funding as a global phenomenon not only a US phenomenon. In some areas for example electric power is very much a function of population growth and there governments may make policy decisions that the need is acute enough that they will not let financing get in the way. So as Tom mentioned so many of our businesses are a function of available financing to our customers customers. And given all of the uncertainty and banks at the moment not really lending to their customers it's very difficult to see how that may impact us going forward.

Okay. And then just sorry about this but last question, in terms of again the order book not really seeing cancellations but are you seeing some projects move around because of the environment? In other words, are you seeing some customers say, hey, we'll take delivery at a later point in time and other customers moving up in the production slots if you will?

No, in terms of, in terms that we are a tier one supplier to primarily engine OEMs or the turbine manufacturers we have not seen any moving around of our order book. Now we know, we know that in discussions with the airframers that they have seen a very little amount of that and as soon as they had a movement others moved up in their slots but that has not trickled down to us in any order of movement at this time.

Is that true in the wind business too.

The wind business we have not seen any movement like that at all.

Okay. All right. Thank you very much, I'll jump back in queue.

Our next question comes from Greg McKinley at Dougherty & Company.

Yes, thank you. Guys, wonder if we could get a little more color on your view for engine systems? Looking back to 2008, I think even you cited here in your press release certainly enjoyed some benefits from natural gas vehicles I think that's the Asian bus business, I think you've previously talked about some contract manufacturing volumes from Caterpillar. Are those lumpy enough that the -- what are you expecting from those contributions in 2009? Are those things that you would expect to recur and how much pressure could that cause on that segment if they did not?

It's, they are kind of separate. The natural gas vehicles are, there are a lot driving those due to energy and dependence but also to emission regulations or the desire to reduce pollution in the cities especially in the Asian cities where most of our sails are. As long as the regulations and the governments continues to support that those sales should continue to come in. However, the lumpiness we've always referred to as the production systems of our customers in Asia are not as sophisticated as the US or Western Europe so we get this lumpiness in orders which we are anticipating still holding.

Now some of the other transportation products you highlighted some of the work to Cat, Caterpillar is not really defining their outlook at the moment. Some of that equipment is used on older machines and the outlook is very uncertain. And so that's while we are taking the approach we are and saying it's a little uncertain and not anticipating much growth there and maybe even declining sales. But it's an environment where -- this is a unique time where it's a little difficult to forecast those.

Yes.. On the wind market could you give us a comment for what did your winds market revenues end up being for the year? And then secondly with your modular inverter product are you seeing any opportunities to get your product involved in new customers? I know you've had certainly presence in the past with guys like Repower, et cetera, but have you found that some of the manufacturers who you exclusively did inverter production inhouse are more open to your modular solution?

The modular solution has definitely allowed to us capture share with our existing customers, we have one, some new Asian customers. We have some real active campaigns going right now. We continue to expand our market share with knew, additional customer base. Some of that's with the vertically integrated. Some is with the ones that are not vertically integrated on inverters many I think the products being extremely well-received in the marketplace and this year as we get it on to more new turbines and also into the field I expect that to help drive up our share. We are just trying to get the number on--.

And I wouldn't want to give a specific. We really don't go down below the segment level but I can tell you it's a substantial portion of our total EPS sales and it's obviously the fastest growing of any portion of our businesses.

Okay. I think you previously mentioned an expectation for $100 million or a little bit north. Is that still sort of the ballpark that we should have thought about in terms of--?

A little bit north is accurate. It was over.

Okay. And then last question, with your balance sheet changes here with the acquisitions, could you give us a sense for how much interest expense you're expecting on implied in your $1.65 to $1.90?

Sure. I highlighted the approximately $400 million, actually it was $400 million in debt, that we took out related to the acquisitions. And we were very successful in just previous to kind of the major downturn catching long-term rates at a very good position. So we are kind of around the 6% rate overall.

Okay.

So you can kind of work that out. So we are in the neighborhood of south of $30 million forecasted for next year.

Yes, and net interest expense.

That's right.

Very good. Thank you.

Sure.

Our next question comes from J. B. Groh at D.A. Davidson.

Good afternoon, guys.

Hello there, J.B.

Had a question on sort of the G.E. impact from the Boeing slow down, did you experience anything that's probably going to show up in Q1, Q2, correct, is there anything you could share with us on that front?

We have to look at it, Boeing and the reason why we have highlighted in the past that it hasn't impacted us too greatly is if you look at their existing in production aircraft which is really the 737, 777, 767, 747, we are represented on the 777, a little on the 67 depending on the engine choice but we are not on the 737, we are on the A320 platform. So with that coming down we saw a little reduction in G90 orders for the 777 but primarily we are still shipping them. So very little impact. The delay, it's an interesting, at least this is my point of view, the delay with the strike and the delay in the 787, I think is actually going to smooth out the cycle. Because the 787, 747-8 had moved out to the right but they are kind of moving in an area that's not too bad and it's going to smooth out the cycle I think in the airline acquisition area. And we are starting to see those kicking in late '09 and 2010. So it's going to be good for our 2010. So I, really look at it we had a great year in '08 and this is pushing to the right is just going to help our 2010.

So in terms of your lead time it's maybe what, six to nine months pre-Boeing delivery?

Yes, we are starting to see some shipments in our fourth quarter, that's when we are starting to see them.

But right now you are doing pretty much nothing on GEnx?

We are doing a lot of work.

A lot of work, not a lot of revenue.

Not any revenue, right. We we are doing a lot of work. And our products just to highlight are doing great. Everything is working well. We don't have any issues with the certification activities and it looks like the products are going to go into service very nicely.

And so when do you start to see kind of a little bit of an R&D ramp down, does that happen in 2010 or do you expect to spend kind of the same amount in terms of percentage of sales or on a dollar basis however you want to look at it on R&D 2009?

I'm glad you asked the question because I m going to answer it more generally across Woodward. We definitely had a tough economic cycle looking forward. We highlighted it in our prepared remarks that we are, we have never been this prepared for a down cycle. One of the things you are going to see Woodward do is continue our R&D through the cycle. We've got the financial strength. We've got a lot of opportunities, a lot of chance to gain market share. And so we are probably going to hold around that dollar amount fairly close, maybe a little down, over the next two years. And we are going to be very opportunistic. We are going to go for share. We are going to look at new business opportunities. We are going to look at acquisitions. We feel like we have the cash flow and the financial wherewithal.

So we are looking at this, looking into we don't know how much of a downturn we are going to hit but we are looking into the strongest we've ever been and we are really intending to grow organically and grow inorganically during this downturn. So that's a philosophy we've taken and we are communicating to our leaders and kind of driving into our business planning.

So R&D wouldn't go up even with the two acquisitions on a dollar basis?

Yes, on a dollar basis because of the acquisitions it will go up, yes.

But percent of sales maybe roughly, okay.

Maybe you're seeing some slight fluctuation as we go from quarter to quarter and so on but, yes, the dollar amount of the acquisitions will go up for that.

Okay. Thank you for your time.

Sure.

Thank you. Our next question comes from Tyler Hojo at Sidoti & Company.

Hey, good evening, guys. I know you put the $220 million revenue expectation out there for the MPC acquisition, just wondering if you could give us either what it was in fiscal '08 or just kind of a ballpark what kind of growth that entails year on year?

Sure. I think, roughly we were slightly, a little bit north of $200 million. And it's about a 7% increase slightly less than 7% year on year.

Okay. And what's, what are you looking at kind of driving that for the acquisition? I think if I recall I think when you announced the acquisition you said they were up about 8% year to date in 2008, that could be wrong, but--?

Some of it's the mix of the calendar year and the fiscal year. So I think that's causing the difference between the 8 and the 6. But it's right in that neighborhood, or the 7, excuse me, did I say 6? 7%.

Okay. All right. Fantastic. And then just on the for ex you spent quite a bit of time talking about that but just with regards to what the benefit to EPS was for the full year I think you gave it for sales but not EPS. Do you have that number?

Yes, the reason, at an earnings level for last year it was fairly insignificant. Less than 10 million, about $7 million.

Okay.

And kind of leveraging on that a little bit. What we've seen over the last couple of years has been a fairly gradual, in hindsight a fairly gradual increase in those weights and now we've seen a dramatic weakening in those rates. What you are going to see is a much more dramatic impact in '09 as a function of basically two years of currency growth has been wiped out.

That's fine. And then just if you wouldn't mind just commenting electrical power systems saw a heck of an improvement in the operating margin. Just wondering what the expectation for profit is in that segment as we go into fiscal '09 and beyond?

Yes, a little bit what you could take and go across the three traditional segments within Woodward. Turbine systems we expect if you look at the year, if you look at segment operating margins, okay, for the fiscal year, turbine will be relatively flat. We expect engine to be flat to slightly up and EPS or electric power systems to be slightly up.

Okay.

Over the annualized percent on segment earnings.

Okay. That's very helpful. Then just going back, you touched on it a little bit but I know one of the growth drivers for EPS is kind of making inroads into some of the more verbally integrated winds guys out there namely G.E. I know they do their own inverters inhouse. Have you made any progress on that front specifically? I don't know if you can talk to that but maybe if you just want to broadly comment on it.

I can't -- I'd rather not give a specific on any customer but I can tell you that we are speaking with several of the top manufacturers of wind turbines about the opportunity to use our NGX and those are kind of, I don't, long-term campaigns and I believe we should be successful on one or more of those in '09 but we have not factored that in and it's very difficult to ever predict the outcome of winning new business like that.

Okay. So.

We are actively working it and we are also are actively working continuing to pick up more from our existing customers.

But just to be clear, you said that was not included in the forecast that you provided here today?

That's correct, not included.

Okay. Very good. All right. Thanks very much.

Sure .

Thank you. Our next question comes from Peter Lisnic at Robert W. Baird & Company.

Back again, I guess just a couple merging questions if I look at the engine business I'm not sure I understand why the fourth quarter was I guess down as much sequentially as it was. It sounds like mix was one of the issues. Can you just help with that answer?

I think it was a combination mostly of the mix issue. So we mentioned that we had some product mix issues, I think we've talked about some of those in the past in terms of lower margin products that were expanded in the quarter. We also had during the year we had been calling out some operational cost increases related to the transfer of product lines from Nyles to China. Those began tapering off in the fourth quarter. And are no longer impacting us but there was a tale to them slightly in the fourth quarter. So that, combination of those two were were really what impacted the relative profitability.

Okay. And then just in the EPS segment, I may have missed this but the impact of FX on the change in operating income there did you disclose that or should we wait for the 10-K to get that number?

I thought we did. $1.4 million.

Okay, 1.4.

And it will be the in the 10-K.

If I kind of look at that margin for that business, I mean you're getting good volumes and I imagine that leverage on those volumes is pretty good but I also get the impression that there's probably something there going on structurally particularly in the wind product, maybe it's mix, maybe it's just more efficient manufacturing. Could you maybe talk about the structural changes that you've made in that business over the past, I don't know, two, three, four quarters to change the profitability profile of the business? Yes, what I'd want to do is give credit to the management team that we put in place there.

It's primarily huge operational improvements. We are moving the production from let's say more of a job shop type approach to lean manufacturing. We've also done I think a tremendous job on our purchasing activities, our supply chain management. And obviously with the growth, we are able to get some leverage out of there. So the amount just to give you a flavor for what we've done since we've picked up this business, we were below 25 inverters a month and we are well over 110 right now and growing on that. And we are doing it within the same facility. So it's been tremendous operational improvements. And what I'd like to also highlight it kind of goes with the question, we really never made much call outs for the year and we are not going to give a number but if you look at fiscal year '08 we absorbed all the commodity increases, freight increases, oil surcharge increases, and what I always look at is kept our margins about flat on the gross margin basis. And so that's always picked up through productivity. As they all know there's a lot of pressure out there. Our challenge now is to with all the things kind of doing a reversal here is to eke more productivity out of that. So I think we did a real nice job operationally during the year which is kind of hidden in the numbers but when you reflect on what is going on in the marketplace I think those numbers came through well.

But I also imagine that this year with material costs coming down you will get some benefit or tale winds from that, is that a good way of thinking about it?

Well, that's the goal, you also have to recognize it's going to be a little slow because we've got supply chains with inventory already in place at, so we have to bleed off both internally and at our suppliers the higher cost material but we do see the opportunity in '09 and 2010 to get improvements due to commodities.

How much of your customers come back and said give backs on price because of commodity declines, have those conversations begun to occur?

Well, not really because they didn't come back and offer us price increases.

They are not supposed to.

So we'll work on that. We don't expect -- we expect pricing to hold.

Okay. That is very good. Thank you for your time.

Thanks.

Thank you. Our next question comes from William Bremer at Maxim.

Good evening, gentlemen.

Good evening.

Tom, you just nailed my last question on commodity pricing. And did a fantastic job articulating it there. I want to go back to the engine systems segment with that drop off on the margin side there. I mean, was there a lot of one timers there that potentially going into '09 we get a more normalized type of margin especially in the first part of it? I know you commented overall on the all the segments but really on the first, say, first half of '09?

I wouldn't, I wouldn't want to characterize some things as one timers. Yes, there are costs that we do not anticipate recurring. But we have been working on slimming the infrastructure in this business for quite sometime. And there are costs that will come up associated with that. And as we pointed out the freight cost us last time around. On maybe looking at it more on the long-term basis we are still committed and we believe we are on an appropriate long-term path. To get this back I think we called out a 13 to 14% sort of range with potential upside depending upon product mix and efficient use of the infrastructure. But we believe we are still on that path. We believe it will have quarterly fluctuation and has had that in the past and we think that will continue to some extent going forward .

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

Okay. Well, thank you everybody for joining us today and appreciate the questions and hopefully we were able to give you some clarity. We look forward to speaking to you in January at the end of our first quarter. So thank you for joining us today . Operator, that ends our

Thank you, sir, ladies and gentlemen, that concludes our conference call today. If you would like to listen to a rebroadcast of this conference call it will be available at 10:00 p.m. Eastern time by dialing 1(888)266-2081 domestic or (703)925-2533 international. And by entering the access code 1299787. A rebroadcast will also be available at the Company's website at www.woodward.com for 30 days. We thank you for your participation on today's conference call. And ask that you please disconnect your lines.