Woodward Inc (WWD) 2009 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Woodward Governor Company fourth quarter 2009 earnings conference call. 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 fiscal 2009 conference call. In a few minutes, Tom will talk about the highlights of our fourth quarter and our markets; I will then comment on today's earnings release, and at the end of our presentation we'll take questions. For those who have not seen the release, you can find it on our website at woodward.com under our Investor Information tab. As noted in the press release, we have included some visual presentation materials to go along with today's call that are also accessible on our website. An audio replay of this call will be available through November 20, 2009. 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 14 days. Before we begin, I would like to provide a 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 on 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 2009, which we expect to file in a few days. In addition, adjusted earnings per share, segment earnings, operating earnings, EBITDA and free cash flow are non-GAAP operating measures that we use in the press release.

A description of these measures and reconciliation of each to the most comparable GAAP measure is included in the appendix to our slide presentation, or in our earnings release and related schedules, all of which are posted on our website. Management uses this information in monitoring and evaluating the ongoing performance of Woodward and each business segment. Now we will turn the call over to Tom to discuss our quarter's highlights, our markets and our progress towards achieving our strategic goals.

Thank you, Bob, an d welcome to all of you joining us today. A number of years ago, we began preparing for the current downturn. We reduced our infrastructure, invested in our core competencies and kept our balance sheet strong. We believe that these actions positioned us to take advantage of the opportunities that presented themselves during the downturn and mitigated some of the negative effects of an extremely challenging global economy. Overall, we had a solid quarter. We delivered good earnings and record cash flow. We significantly reduced our debt and made considerable progress at our Airframe Systems segment on integration and profitability initiatives.

Some of our quarterly highlights include, sales were up 4%. However, organic sales declined 27%, consistent with our expectations and overall economic conditions. Reported earnings per share were $0.34 for the quarter compared to $0.50 for the same quarter last year. Free cash flow for the quarter was 92 million compared to 27 million for the same period last year. This, combined with the 48 million received in connection with the sale of the HRT fuel and pneumatics business allowed us to repay in the fourth quarter 121 million in debt, which reduced our financial leverage ratio to 2.3 -- even better than our goal of 2.5. Since the quarter ended, the government has lifted its suspension of MPC, and we reached an agreement with the Department of Justice to settle its investigation consistent with our previously stated expectations that existed at the time Woodward acquired MPC.

Moving on to some market and business highlights, across the board our markets have been in a difficult period. However, in each of our markets, we've seen recent signs of stability and improved market visibility. Some markets, like our small reciprocating engine and our power management controls are early cycle businesses for Woodward that we believe are at or near the low point in the cycle. Others like aerospace are later cycle businesses that we still expect to see some sequential decline before improving. With regard to the aero aftermarket, despite a continued downturn in commercial miles flown, our results reflect stable turbine aftermarket revenues. Our Turbine Systems platform mix has compared favorably to the overall market, and we expect this to continue. In recent years, our installed base on the G90, B2500 and CSM engine platforms has grown significantly, and many of these engines are just coming into their first or second maintenance cycles.

Going forward, we believe aftermarket revenues may show slight improvements as we progress through the year. We anticipate that this should help us maintain healthy operating margins in our Turbine Systems business through the balance of the cycle. On the aero OEM side, our regional and business jet OEM sales were down significantly when compared to the fourth quarter of 2008. This reflects a very depressed business jet market and a tough comparable to the fourth quarter of last year. We expect continuing pressure on our OEM sales in 2010. However, we believe recent improvements in passenger and freight demand, as well as financing availability, should provide some stability for OEM production in the second half of our fiscal year. Our defense markets remain steady. Our exposure to workhorse military programs in rotorcraft and weapon systems has provided sales stability. Military aftermarket work, tied to the support of the ongoing war efforts, has been consistent throughout the cycle.

We expect the current volumes on our mature weapons control products to continue at their current rates and to be supplemented by the launch of next generation smart weapon systems. In 2009, the industrial turbine market was challenging. We have outperformed the market on favorable sales mix and strong aftermarket sales related to turbines put in service at the start of this decade. Going forward, we believe the aftermarket side of the industrial turbine business should hold, but there may be a near-term decline in industrial turbine OEM demand. We expect that emission requirements will lead to a mix of turbine sales that will continue to drive demand for Woodward controls. To provide better focus in alignment, we have moved our steam turbine product line from our Engine Systems business segment into our Turbine Systems business segment. Our reciprocating engine business is specifically focused on controls for fuel efficiency and reduced emissions for non-automotive and largely non-highway applications. Increasingly stringent emission regulations impact more and more applications to drive long-term growth in this business. The current economic environment has hit this business very hard, but we are seeing some light at the end of the tunnel.

Small gas and diesel engines are beginning to see modest improvement, with increased demand for alternative fuel vehicle systems and some resumption of industrial activity. We are also seeing some encouraging signs in large engine demand, specifically as some customers are decreasing the amount of planned engine production shutdowns. Also, higher commodity prices appear to be supporting some increased demand for mining and other industrial equipment. The longer cycle markets in marine and power generation remain soft. As we look forward to the eventual recovery ,we believe the necessity for clean and efficient engine technologies will drive a return to long-term growth and increasing profitability in this business segment. With respect to wind, we gained market share and added new customers in a soft market in 2009, resulting in a slight increase in unit volumes for the year, although our fourth quarter unit volume were down significantly.

This decrease was driven by ongoing tightness in credit markets and delays in stimulus funding and tax credit availability. With the recovery in the credit markets and improved government supported wind projects, we anticipate an improvement in wind turbine sales in the second half of 2010, although near-term shipments will remain near fourth quarter levels. We believe that our geographic expansion and alignment with several successful turbine makers positions us well to participate the anticipated market rebound. The electrical generation at distribution markets were hit early in the recession and had another tough quarter. We anticipate that the return of infrastructure project financing and government support of grid improvements should support more stable, and then improving 2010 results in this area for Woodward. Next, I'd like to make some points about our Airframe Systems segments. While aerospace markets are challenging, we have been pleased with the performance of our Airframe Systems segment for a number of reasons. Through significant cost reduction actions taken during the year, we substantially improved operating profit. Airframe's operating results for the quarter were consistent with the potential we identified during the acquisition process.

Airframe Systems continues to make steady progress on integration, unlocking improved marketing opportunities, customer satisfaction and returns for our shareholders. We're pleased that the government investigation and related suspension of MPC have been resolved. This gives us and our customers clarity as to our contract in future government programs. Looking at our business cycle, we are preparing for its next phase. Just as we prepared for the downturn, we are challenging our teams to prepare for the eventual recovery. First we are continuing to focus on the fundamentals, driving customer satisfaction through attention to quality, on-time delivery and responsiveness in all of our businesses. We are targeting market share gains through innovative solutions to our customers' challenges, and we continue to focus on cash flow to further reduce debt and support our pursuit of strategic opportunities. Economic cycles are always challenging, and this one is no exception.

But we believe successful execution of our long-standing strategic plans positions us well to capitalize on opportunities that will arise during the recovery. Now let me turn it over to Bob for the financials.

Thank you, Tom. At the Woodward consolidated level, net sales for the quarter were 365 million, 4% increase over last year's fourth quarter sales of 351 million. 110 million of growth was attributable to the acquisitions of MPC and HRT. Organic sales declined 27%. Foreign currency exchange rates negatively impacted quarterly sales comparisons by approximately $5 million. Operating earnings, defined as earnings before interest and income taxes, for the quarter were 42.1 million or 11.5% of sales compared with 50.9 million or 14.5% of sales in the same period a year ago. Operating earnings for the quarter were significantly impacted by the current economic downturn across almost all of our businesses. Net earnings for the quarter were 23.8 million or $0.34 per share compared with 34.4 million or $0.50 per share for the same quarter a year ago.

Net earnings, while reflecting the economic downturn, were only minimally impacted by the foreign currency exchange rates. Interest expense increased as a result of debt incurred to finance our recent acquisitions. Net sales for fiscal 2009 were 1.43 billion, a 14% increase from 1.26 billion for the prior year. The acquisitions of MPC and HRT, our Airframe Systems segment, contributed 319 million of external sales growth. Organic sales declined approximately 12%. Net earnings as reported for the year were 94.4 million, or $1.37 per diluted share, compared with 121.9 million or $1.75 per diluted share in in the previous year. Excluding the special charges highlighted on page 3 of our earnings recession, net earnings for the year were $1.57 per diluted share.

Free cash flow for the quarter was strong at 92.5 million, compared to 27 million for the prior year's quarter, reflecting significant reductions in working capital and a somewhat reduced need for capital expenditures in the current environment. To finance the MPC and HRT acquisitions, our total debt increased by 725 million, at an average interest rate of 4% during fiscal 2009. However, during the year, we utilized our cash flow to reduce both preexisting and acquisition-related debt by approximately $200 million. Turning to our segments, our segment results for 2007 through 2009 now reflect the move of our steam turbine product line from Engine Systems to Turbine Systems. Steam turbine sales for 2009 were approximately $40 million. Earnings as a percent of sales were substantially consistent with Turbine Systems segment earnings as a whole. Turbine Systems' net sales for the quarter, including intersegment sales, were 148.4 million, a decrease of 15% over the fourth quarter sales of 175.2 million a year ago.

Turbine Systems' segment earnings in the fourth quarter of 2009 were strong at 32 million on lower sales, compared with 32.6 million for the same quarter a year ago. Segment earnings as a percentage of sales was 21.6% in the fourth quarter of 2009 compared to 18.6% in the prior year. Our sales performance reflects the very difficult business jet market, as well as declines in other OEM aerospace and industrial turbine products. Aftermarket sales were essentially flat in a down market as a result of our presence on more fuel efficient platforms and increasing content. Segment earnings were strong, aided by the steady aftermarket sales and our cost control efforts. Moving to Airframe Systems, Airframe Systems contributed 110.4 million in net sales, including intersegment sales for the quarter. Segment earnings for the quarter were 12 million. Reported segment earnings were 10.9% of sales.

After adjusting for 6.3 million in amortization of acquisition intangible, segment earnings as a percent of sales were 16.7%. The amortization is a non-cash charge. In the fourth quarter, MPC and HRT were both accretive to earnings. Now turning to Electrical Power Systems, Electrical Power Systems' net sales for the fourth quarter, including intersegment sales, were 53.7 million compared to 89.7 million a year ago, a decrease of 40%. In this segment, without the effects of foreign currency exchange rates, sales declined approximately 35%. Segment earnings for the quarter were 5.1 million compared to 14.8 million for the same quarter last year. Segment earnings as a percent of sales was 9.5% in the fourth quarter of 2009 compared to 16.5% in the prior year. This quarter's results reflect a significant slowdown in wind converter sales.

Customers are just now recovering from the collapse of the credit markets that was followed by uncertainty and delays in stimulus legislation and tax credit availability. We believe we will see some recovery in the second half of 2010, as Tom mentioned. The power generation and distribution markets continue to be significantly depressed, although some signs of recovery are beginning to appear. The reduction in volumes and costs associated with the expansion of production in the US and China were the primary reasons for the decline in profitability. Moving to our Engine Systems results, Engine Systems' net sales for the quarter, including intersegment sales, were 73.8 million, compared with 120 million a year ago, a decrease of 38%, reflecting the very distressed condition of the markets served.

As I mentioned earlier, our Engine System segment results now reflect the move in steam turbine product line from Engine Systems to Turbine Systems for all periods presented. Segment earnings for the quarter decreased to 2.1 million compared to 10.5 million for the same quarter last year. Segment earnings as a percent of sales were 2.8% in the fourth quarter of 2009, compared to 8.8% in the same quarter of the prior year. The decline in profitability was driven by the reduction in volumes, partially offset by significant cost control initiatives. 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 28.1% in the fourth quarter of 2009 as compared to 28.7% in the fourth quarter of 2008. Gross margin as a percent of sales decreased to 28% for the full year fiscal 2009, compared to 29.8% in the prior year. The full-year decline was largely related to previously discussed one-time inventory related purchase accounting effects on cost of goods sold.

Selling, general and administrative expenses as a percent of sales increased to 9.3% of sales or 33.9 million in the fourth quarter of 2009, compared to 8.4% or 29.3 million in 2008. For the year, selling, general and administrative expenses were 9% of sales or 128.7 million in 2009, compared to 9.2% or 115.4 million in 2008. Research and development costs were $20 million in the fourth quarter of both 2009 and 2008, or 5.5% of sales in the fourth quarter of 2009 compared to 5.7% of sales in the fourth quarter of 2008. Research and development costs were 78.5 million for the full-year 2009 or 5.5% of sales, compared to 73.4 million or 5.8% of sales in 2008. This level of spending is consistent with our strategy of continuing to invest in future technologies. Total depreciation and amortization expense for 2009 increased to 63.9 million from 35.5 million in the prior year, including 19.5 million of amortization recorded in 2009 related to the acquisitions. Our effective tax rate for 2009 was 22.9% compared to 33% last year.

Income tax expense for 2009 included adjustments with a net favorable impact of approximately $5 million or $0.07 per diluted share, which reduced our effective rate by about 4 percentage points. We estimate that our effective rate for 2010 will be approximately 32%. Our full-year capital expenditures were 28.9 million in 2009, compared to 37.5 million in 2008. Considering the impact of the acquisitions, but given the current level of economic uncertainty, we expect 2010 capital expenditures to be slightly less than $40 million. Looking at cash on our balance sheet, Woodward generated $219 million of cash flow from operations in 2009, and $190 million of free cash flow. In 2010, liquidity and cash generation will continue to be a strong focus area.

We believe we will generate similar amounts of free cash flow, including approximately a 38% increase in capital expenditures. We continue to target financial leverage of 2.0 times adjusted EBITDA by the end of this coming year. We believe that our cash flow, coupled with our strong balance sheet, adequately supports our operations going forward and the strategic initiatives we have identified. Working capital, defined as current assets less current liabilities, increased to 434 million at September 30, 2009 compared to 369 million at September 30, 2008, predominantly as a result of the acquisitions. We were successful in improving both DSO, days sales outstanding, and inventory as a percent of sales in both our acquired and organic businesses, in spite of the effects of the economic downturn. Our total short-term and long-term debt was 572 million at September 30, 2009, compared to 49 million at September 30, 2008.

From a high of 757 million immediately after the HRT acquisition, the year-end balance reflects total net debt payments of 185 million. The ratio of debt to debt plus equity was 44.7% at the end of the fourth quarter compared to 7.2% at September 30, 2008. We closely monitor our financial leverage, measured as total debt divided by trailing 12-month adjusted EBITDA. At September 30, 2009, our financial leverage was 2.3 times, a decrease from 2.7 at the end of last quarter. Approximately 67% of our debt is at fixed interest rates, which we believe are at relatively favorable terms. Speaking to our outlook, though near-term visibility has improved somewhat, we still expect the environment to remain challenging through at least the first half of fiscal 2010. This may include sequential revenue declines in some of our businesses.

For fiscal 2010 as a whole, we expect our sales to be approximately flat with fiscal 2009. Airframe Systems sales are expected to increase due to the mid-year 2009 acquisition of HR Textron, but we'll see sequential declines through the first half of the year. We are optimistic that most of our businesses are at or near the low point of the cycle now or in the very near future. Signs of stabilization and possible second half recovery are beginning to appear in many of our markets. Therefore, for fiscal 2010, we expect our sales to be between 1.4 billion and $1.5 billion, and our diluted earnings per share to be between $1.40 and $1.60 per diluted share. That concludes our comments on the business and results for the fourth quarter of fiscal 2009. Operator, we are now ready to open the call to questions.

(Operator Instructions). Our first question comes from Tyler Hojo from Sidoti & Company.

Hey, good morning, guys -- or good evening. Wow, boy.

Almost, not quite.

I wish, I guess. Hey, just if we could start on -- just on the guidance. Is it possible to kind of parse that out just in regards to what your expectations are for the individual business segments?

Yes, I can probably give you kind of a rephrasing, maybe some of the comments regarding each of them. I think in general, hopefully you caught that we do expect the first half to be -- in most cases, continued sequential declines in some of the businesses. In the second half, to see starting the recovery. That's fairly flat across most of the businesses. So commercial OEM we talked about -- the aftermarket we believe will offset that somewhat, because of the mix considerations that we've outlined. Airframe will follow similar pattern. Military will hopefully remain stable, which is what we see at the moment. But the commercial side -- regional business jet, I should say -- will be where we will continue to see the declines. In the engine business, we're starting to see the turnaround. We're starting to see some signs.

But we do believe that this first half -- first off, in our first quarter, as you know, there is a fair amount of inventory management on the part of our customers; and with the downturn, the first quarter will probably continue to be challenging. Second quarter, maybe we start to see the bottom and then we start coming back out again. The electrical business, two main pieces. The wind side, we described that right now we're definitely seeing kind of holding back. And the order of items, because of the confusion, if you will, over what will the incentives be, how do I read the stimulus packages, et cetera, we believe that we'll see in the second quarter, we're starting to see some order volume input for the second half of the year. Power generation, some of those customers we're starting to see come back a little bit, and so that may be more of a flattening as opposed to sequential declines, and then hopefully increasing in the second half. Is that --

No, that's helpful. And then, I mean, would you characterize kind of your outlook that you've provided here as, perhaps, a little bit more pessimistic than, perhaps, your end customers, GE and Caterpillar ?

Well, I would say with some of our customers; different dynamics, obviously, with Caterpillar.

I think, Tyler, one thing you have to look at is, we're talking fiscal year and they're talking calendar year.

Yes, that's -- I mean --

Okay, so you have got to phase that in, so I think we're actually pretty consistent with theirs, just due to the fact that we're offset by a quarter.

Okay. And just one last thing for me and I'll hop back in the queue. I'm a little bit confused as to why you are moving the steam turbines from the Engine to Turbine? Could you just give a little bit more detail there?

Yes, sure. The -- that was always a business we looked at that could have gone in either business segment when we reorganized the business segment a few years ago. The reason we put it in Engine originally was they shared some common distribution channels. And at that point, we were putting a focus on getting -- revitalizing and working on our distribution channels, and so that commonality of distribution channels, we thought, was the reason we should put it in Engine Systems. As we hit the severe downturn for the engine market, we really made the decision that on the product side, the steam is very much close to our industrial turbine products, especially on the electronics. And so we decided to put more focus and have the management team of engine systems focus solely on the resip market, and moved the business over to Turbine where there is product commonality, and now that the channels we think are in good shape, we think that's the right place for it. So it's enhanced focus on engine, and then enhanced product synergies now with Turbine.

Okay, and I mean, is that really -- I mean, if you just look sequentially, is that basically coming out of engine? Is that really the bulk of kind of the margin differential that you saw sequentially, or how does one think about that?

No, I mean, it definitely was running at higher margins, as Bob highlighted in the -- it definitely runs like our Turbine Systems margins. So that transfer did have a margin impact, but it was not the majority. Engine Systems really took a huge volume reduction. They did a fabulous job on cash management through this downturn. I'm really proud of the group, that they never went negative on earnings. But with the huge reduction in sales that they encountered was the primary reason for the margin decline.

I'll hop back into queue. Thanks a lot.

Our next question comes from the Fred Buonocore from CJS Securities.

Hi, yes. Good evening, gentlemen.

Good evening.

I kind of wanted to drill down into the Electrical Power Systems profitability during the quarter. It just seems like -- excuse me -- kind of a pretty huge decline, even with the volume decline. Can you talk a little bit about -- I think you got into some detail in the call, and if you could review that with me in terms of what the major factors were, and was it -- did it have something to do with -- that the mix got worse as the wind turbine inverters, which I believe have been at higher margins, sort of declined? Could you give a little more detail on that, please?

Sure. The predominant impact is the volume decline. So there are a couple of other factors. The mix is something that it does move around, but there's nothing about the fourth quarter, vis-a-vis any other -- the volatility of any other quarter that is really impacting that. So I think from time to time, every quarter that I can recall, we've mentioned that there can be volatility. It is the primary driver in that business, if you will, from a volatility standpoint. So it has a greater than average impact on the earnings potential. One thing we pointed out as well was that we did incur -- I'll call them start-up costs, if you will, related to increasing our production capacity in the US, where we were able to make our first shipments in the third quarter of this year. And in China where we are now production-ready, were production-ready in the fourth quarter of this year. So as with any start-up -- and in this case, two new locations -- you do incur some additional cost related to that, that we will see flow back out of the profitability over the next couple of quarters.

Got you. And Electric Power Systems was one of the segments that you indicated you probably see sequential declines through the first half on the revenue side, correct?

They'll see -- we'll be semi-flat, let's call it, in that business. It will be marginal declines, if at all. And the -- but the second half we do see some fairly decent recovery coming back.

But even with those marginal declines through the first half, we could be -- with the start-up behind us, or moving behind us, we could see the margins come back up in that area?

Yes, profitability will increase sequentially.

Got it. Okay. And then I wanted to move over to the mix on the turbine side. You talked about that your aftermarket aerospace, aftermarket was actually flattish to maybe seeing some pickup. Just in general and as we move here into Q1, are you starting to see increasing momentum on that after-market business? I mean, some other aerospace aftermarket businesses have been talking about continuing to go suffer from inventory compression and such, but that doesn't seem to be really what you're experiencing.

Yes, I think what we would say on the -- we're talking about our Turbine Systems aero aftermarket.

Right.

We really have a great platform there. The programs we were on during the cutbacks that occurred in the commercial world, we didn't see near the cutbacks that a lot of, may I say, pure companies did, and that was really the programs we were on versus the ones we were not. So some of that was a lot of the older JT8, JT9 type fleets that we were not really very much content on. But very strong content on the newer programs, the ones that did not 7-- aircraft that did not get parked. So what we did, is I think we weathered that very well. I'm not sure we're going to see a huge spike, because we weathered it well. We didn't have so many planes parked. They were operating. So we saw continued slow of aftermarket revenue coming in, and we expect that to hold and potentially go slightly up. So I think we did quite well during the downturn, and it was really the good product platform portfolio we have.

Got it. And then finally just on the Airframe Systems margins, you've talked about reaching a mid-teens margin, maybe kind of by the end of your fiscal 2010. Does it look like maybe you're meeting your objectives faster than you had expected and that that margin goal could be achieved sooner than, say, Q4?

Yes, well, we would say -- Bob and I have always highlighted that we believed that that was 15 to 18% plus operating margin business. Obviously, we're there. I think we've done a great job. Our team there has done a great job. We believe we will stay in that stated range, so we think we're ahead of schedule. It's showing its potential, and we're very optimistic about the outlook for that business.

Great. Thank you very much.

(Operator Instructions). Our next question comes from Peter Lisnic from Robert W. Baird.

Good afternoon. This is actually Josh [Chan] filling in for Pete.

Hey, Josh.

Could you talk about some of your moving parts on your margin in 2010 versus 2009? I mean, it sounds like you have a better aftermarket mix but maybe volume could be a little pressured. What are you thinking in terms of margin?

I think that's a very accurate assessment. I think across the board after markets are holding up fairly well, and that's a positive pressure on the margins. The volume declines, obviously, put negative pressure on the margins, and the two of those are somewhat offsetting each other. The one thing that will have an impact is the overall mix of the businesses as we go forward.

Okay. Could you talk about, also, the industrial gas turbine market? I mean, I think previously you said that the seller aftermarket could somewhat offset the OE? Is that still accurate, or do you think OE has gotten a little weaker than you thought?

No, one thing that -- if you recall a little history on our industrial turbine market is, we really grabbed a lot of share and put out a lot of product during late 1990s, early 2000, up to like 2001, which was kind of called the "turbine bubble sausage" that was out there. What we're seeing right now is all of those turbines going into maintenance cycles, so we believe we're going to have good aftermarket revenue coming through based on the large installed base that was put into place. On the OEM side, what you have to look at is with the economic cycles -- it's kind of like what happened in a wind, but more on a normal cycle -- is that you kind of get this pause where things slow down, and then to get financing permitting and getting construction going, you get a little bit of delay. So we do think there is going to be a little delay for OEM to come back. We think we are going to have a strong industrial aftermarket, and then with the mix of products that we have -- we always talk about that -- we have very good content on the high efficiency, low emission turbines, and we think that is what is going to be sold more as we come out of the recovery, so we should come out well with those. But in the next couple of quarters, we still have to wait for some of the orders to get in there and start processing them with the long lead times that are associated with this market.

Okay. And then finally, did you give interest expense estimate for next year?

It's approximately 30 to 32 million, in that range. Obviously, that is dependent upon currently on our forecasted debt reduction for the year.

Right, right. All right, thanks for your time .

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

Hi, guys. This is actually Chris [Denney] in for J.B.

Hi, Chris.

I had a quick question. What kind of tax rate are you guys forecasting for 2010?

About 32.

About 32%? And then with your acquisitions, I don't know if you guys have ever talked about this before, but what kind of percentage of revenues is business jet now?

Good question overall.

It increased, definitely, because we have quite a bit of product in the Airframe Systems on business jet. I apologize, I don't have the number right off. But it has gone up slightly from where it was.

Okay. And then is the weakness in wind, is that coming pretty much from European markets?

Well, what I say -- you've got to look at it kind of across the board. We've described it as, the wind market had like a -- somebody put the DVD on pause, in terms of we had a little bit of financing issues for a while. And then a lot of the customers sat waiting to make sure tax and stimulus money, that they could maximize that. So we've seen in -- the US and Europe both had this pause, and as we come out of it, we expect Europe to kick back in. We do see the long-term outlook for the US to be very positive. That's why we made the investments in production facilities here. We think China's long-term outlook is positive. And a little bit with the wind market, you've got to remember that it still relies on subsidies, and the fact when a subsidy or a tax credit comes into question, everybody kind of waits, and that's the effect we saw. So it is kind of a normal pattern, made a little worse by obviously the financial markets. But what we're seeing right now is all markets were down; we do see Europe coming up, but we do see the US coming up -- I should say the North American markets, including Canada -- coming up strongly the second half of the year.

Is North America going to kind of lag Europe in terms of that?

I don't think so. No.

Okay. Great .

Sure.

(Operator Instructions). We have a follow-up question from Tyler Hojo from Sidoti & Company.

Hey, guys, what level of aftermarket business is the -- are the two acquired businesses running at -- the Airframe Systems business?

They were -- we mentioned, I think, on our last quarter -- or maybe even at acquisition -- that both of them are significantly lower. We run around a 45%. We mentioned that the industry average is a 35, and we believe they were 20, or slightly below 20 in one case. So we are focusing on that. I can't tell you that at this point I have a new number, but it's somewhere in that 20% range.

Yes, low 20s. Tyler, it is a big focus area for us. And with aftermarket revenue, or aftermarket sales, I would say the first thing you have to have is outstanding operational performance in terms of what we call turn-around times on getting the unit in, repairing and getting it out. We have some work to do with the acquired businesses. They were not at the same levels as our business. We've -- we always put a huge focus on that because we knew turnaround times make sales. So right now we have got a big effort on operational improvements and improving the turnaround times. We're enhancing the sales channels, and what we've done with the sales channels is we've integrated the after-market sales out of the two acquired businesses -- with Turbine Systems' aftermarket sales -- which we think we got great presence around the world. So we enhanced the aftermarket channels, we're putting a huge focus on operational, and we expect over the next couple of years you're going to see that aftermarket revenue tick-up and become a bigger percent of total sales. But there is a lot of hard work to get that number up, but the potential is there.

Okay, so backing out the purchasing -- purchase accounting in the quarter, you are basically already in that range where you thought you could be?

Right.

So I guess what I'm trying to understand is, was there some favorable mix this quarter that you don't expect to either -- I mean, just given that you think aftermarket mix basically doubles from kind of the level it's running at right now?

I think as we enhance aftermarket we are going to start moving to the top of our range.

Okay.

I mean, I think what we did right now is get cost control, integration, synergies, supply chain synergies -- those type of things that we knew we could get quickly. Now we're working on things that take a little more time. We'll start seeing some improvements. There's always normal quarter to quarter variability, too, so just -- I always to remind everybody of that. But we see the opportunity to get to the top of the range, but there's a lot of hard work to get there.

Okay. That's fair. And then I just want to drill down a little bit more on the wind business. Obviously you've made the investment in Colorado in the facility. But I guess, maybe if you could maybe just comment on kind of in-roads with some domestic piece wind turbine manufacturers, and what -- how far out you think you are from perhaps winning that market share?

Yes, that one is really tough and there is only a couple, I want to say, US-owned wind turbine companies. We continue to try. What the strategy was with opening the shop here is if you look, our major European customer base, they are opening production facilities in the US. What we've done is by positioning both here in the US and in China, we've been able to sign long-term agreements that allowed us to capture more share of their global business because we can be here present producing, supporting locally, which helps logistics, helps currency effects. And that was the strategy, was to help capture more of the customer base that was moving to the US, while targeting the two key US manufacturers. So we don't have any news on US manufacturers, but I can say we have captured more market share with the current European base, and they're -- a number of our bigger ones are opening production facilities here in the States.

So we continue to try and do that in support. And in China we have been picking up the support -- first purpose of the operation in Tien-Tsin was to support the European base, but we are picking up Chinese turbine manufacturers, and we have now, I think, three as customers. So that's expanding, too. So the local presence, the local support, local production and local currency is allowing us to capture share. So when we go back to the bigger picture of volume being down on the revenue, units are down, market share is actually up, so that's that -- you're seeing the effect of the pause in the market. We will come out of it stronger as the market turns back up, because we have positioned ourselves well.

Okay. That's helpful. And then just on CapEx, can you maybe talk about some of the investments that you're planning on making this fiscal year, and just -- I mean, obviously, you have the acquired businesses, but just curious as to what some of the key things on the list there are?

Sure. Probably one of the most notable, we've talked a lot about about low-cost country, and we have actually more than broken ground now. There's a --kind of a show of a building in Krakow, in Poland. So that -- I would say there is -- probably about half of that total expenditure was in '09 and the other will be in '10. So that's one big element. There have been a number of other expenditures still related to finalizing production facilities both here in Colorado and in Tien-Tsin, China, and then kind of returning somewhat to a little more normalized capital expenditure pattern. There are a number of -- we've talked about systems test capability that is still on our horizon, as to whether or not we will go forward with that in 2010. And engine test facilities, as well, that are in our kind of hopper of things to be looked at as we go forward.

Great. Thanks a lot.

Yes. Our next question comes from Peter [Mahan] from Daugherty.

Hey, guys, just one quick question. I just wanted to get your -- kind of your thoughts around your appetite for further acquisitions. To me, after you did the HR Textron and the MPC acquisition, it would make sense that maybe your next focus might be in the wind side of things, or maybe you're filling out your actuation portfolio with some electronic technology -- or electric technology. Could I get your thoughts around that?

Yes, I think the first thought is, we put a huge focus on debt reduction and making sure the debt levels got to where our risk profile was appropriate and supportive of the type Company we are. We definitely will look at M&A again in the future. We have a pretty robust strategic planning process, and we are filling funnels. So as the good opportunities come up, with the cash flow we have and the things going on, we will be able to look at them in the future.

Okay. Great. Thanks, guys.

I'm showing no further questions at this time. I'd like to turn the call back over to Mr. Gendron for any closing remarks.

Okay, well, appreciate everybody joining us today. We look forward to talking to you through the year and to have you track our progress. Thanks again.

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 today at 8:00 PM Eastern Standard Time, by dialing 1-888-266-2081 or 1-703-925-2533, and by entering access code 1403951. A rebroadcast will also be available at the Company's site, www.woodward.com, for 14 days. We thank you for your participation in today's conference call and ask that you please disconnect your line. Thank you.