Woodward Inc (WWD) 2010 Q1 法說會逐字稿

Welcome to the Woodward Governor Company first quarter fiscal 2010 earnings call. At this time, I would like to inform you that this call is being recorded for rebroadcast and that are participants are in a listen-only mode. (Operator Instructions).

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 call over to Mr. Weber.

Thank you, operator. We would like to welcome all of you to Woodward's first quarter fiscal 2010 conference call.

In a few minutes, Tom will talk about the highlights of our first quarter and our markets. I will then comment on today's earnings release and at the end of our presentation, we will take questions.

For those who have not seen the release, you can find it on our website at Weber.com. 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 January 22, 2010. 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 our cautionary statement as shown on slide three.

In the course of this call when we present information and answer questions, any statements we make other than factual 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 and defense, power generation, and distribution 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 fiscal 2009 and 10-Q for the quarter ended December 31, 2009 which we expect to file shortly.

In addition, segment earnings, operating earnings, EBITDA and free cash flow are non-US GAAP operating measures that we use in the press release and during this call. A description of these measures and a reconciliation of each to the most comparable US 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 toward achieving our strategic goals.

Thank you, Bob, and welcome to all of you joining us today. I will begin by briefly reviewing our quarter's financial highlights.

Sales for the quarter were $339 million compared to $345 million in the same quarter last year. This quarter's sales reflect the acquisition of HRT in April of 2009. Organic sales declined 18% for the quarter.

Reported earnings per diluted share were $0.32 for the quarter compared to $0.39 for the same quarter last year. Free cash flow for the quarter was $52 million, allowing us to reduce debt by $48 million.

Turning to our markets, many of our markets continue to show sequential sales declines this quarter although this trend appears to be reversing. Some early cycle businesses are showing signs of recovery in the form of pockets of sales improvements, increased drop-in orders and orders for delivery in the second half of this year.

Other markets may remain challenged for several more quarters. In addition to the state of the global economy, other factors will play key roles in the timing and the strength of the recovery of these markets, including regulation and incentives regarding clean energy, commodity costs, continued recovery of the credit markets, the timing and pace of major new product platforms such as the Boeing 747-8 and 787 and then the power grid upgrade equipment market.

Regarding the markets that comprise our aerospace and defense related businesses, in the aero after aftermarket, consistent with our original assumptions underlying the 2010 market conditions, we have seen some recent improvement in air traffic which should benefit the aftermarket portion of our business. We expect that this will provide some support to second-half profitability.

As we have stated previously, we expect our aircraft engine platform exposure to allow us to outperform the general market. We are working to continue to expand our level of aftermarket service on our airframe systems segment offerings through sales channel management and reduced turnaround times. Also, we have been working on a variety of projects to offer our customers upgrade opportunities on existing platforms in the area of fuel efficiency, weight and other key performance factors.

With respect to the OEM market, regional and business jet OEM sales decreased compared to the first quarter of 2009, reflecting the continuing softness in this market. Also, some of our airframe customers took actions to more tightly control their levels of inventory this past quarter as they adjust to the previously disclosed lower levels of production for certain business and regional jet platforms.

We expect to see some continued depression in the near term on our OEM sales as production levels decline modestly from previous levels. However, we believe the successful first flight of the 787 are positive signs with respect to future sales of our GEnx engine fuel system as we close out 2010 and in future years.

As you may recall, the GEnx engine fuel system represents a significant advance in both content and responsibility for Woodward. In 2011 and beyond, 787 along with the 747-8 is expected to result in a significant increase in Woodward commercial OEM sales and volume in the wide-body segment of our business.

As anticipated, the defense markets have remained fairly steady during the extended downturn. Our exposure to key military programs in rotorcraft, weapon systems, and manned and unmanned fixed wing aircraft continues to provide a degree of revenue stability.

We did see some decline in defense orders this quarter related to year-end inventory management initiatives that we do not expect to continue through the balance of the year. Now, turning to markets that comprise our energy related businesses.

The industrial turbine OEM market is expected to be challenging in 2010. We anticipate that OEM delivered units will decline significantly from 2009.

In the near term, some of our customers' projects are expected to face uncertainty as they await clarity regarding proposed government regulation. However, we anticipate the aftermarket sales related to turbines put in service around 10 years ago will continue to provide some stability throughout 2010.

Longer term, we expect that emission requirements and increasing power needs will eventually lead to increased levels of turbine production with a favorable mix that we believe will continue to drive demand for Woodward controls. In respect to wind, wind turbine installations appear to be showing signs of stabilization as improving credit markets and government support helped the alternative energy markets.

We remain focused on both our geographic and market share expansions in wind markets. Our announcement of the five-year REpower agreement to supply converters for the Hydro-Quebec project is an excellent example of this effort. Also, our facility modifications and workforce training in the US and China support our customer's growth initiatives in these regions.

We anticipate that wind converter volume sales will continue to improve in the second half of this year. The electrical generation and distribution market was impacted early in the downturn and now is one of the first markets to be showing some improvement.

We believe that return of infrastructure project financing and government support of grid improvements should lead to increasing 2010 volumes in this area for Woodward. Our results were positively affected by the successful introduction of our new [high ProTech] relay platform which provides protection and control for intelligent electronic devices.

Additionally, we saw significant growth this period in our power station project business where revenues can be somewhat volatile quarter to quarter. Our reciprocating engine markets again experienced a difficult quarter but there are differences in each market.

In 2010 we expect to see declines in the levels of large engines produced compared to 2009. This reflects our customers' outlook and the long cycle nature of power generation and shipbuilding projects. We have however started to see some sequential growth related to small industrial engines and alternative fuel vehicles.

Also, we believe strengthening commodity prices will support increased demand from mining and certain industrial applications. Lastly, we have been successful in pursuing increased levels of content on new customer platforms and remain focused on delivering efficiency in emission solutions.

Next, I would like to make some points about our operational and business priorities. In preparation for the downturn and eventual recovery, we focused on two key strategies. First, executing on initiatives to lower costs and reduce risk which were intended to improve profitability and leverage when our markets recover and anticipating the return to growth and assuring that we are able to take advantage of opportunities and emerge a stronger competitor going forward.

We believe we are well positioned for the eventual return to growth in our markets as a result of the actions we have taken over the last three years. These actions are part of an integrated strategy to deliver improved financial performance.

We successfully expanded our presence in aerospace and defense where our experience provides engineering and manufacturing synergies in an attractive market. We expanded our presence in energy and particularly the electrical power market to take advantage of long-term growth opportunities.

We continue to invest in systems and technology to ensure alignment with our customers' innovative programs. We have strategically expanded our global foot prints to address our customers' growth initiatives.

We improved improved our key business processes to more tightly align our operations with our customers. While we have made significant progress, we continue to pursue improvements in these and other areas. 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 $339 million compared to $345 million for the first quarter of last year. Organic sales which excludes the impact of the HRT acquisition declined $64 million or 18%.

$58 million of the sales increase was attributable to the acquisition of HRT. Foreign currency exchange rates favorably impacted quarterly sales comparisons by approximately $9 million. Operating earnings for the quarter, defined as net earnings before interest and income taxes, were $39.6 million or 11.7% of sales compared with $44 million or 12.8% of sales for the same period a year ago.

Net earnings attributable to Woodward for the quarter were $22.4 million or $0.32 per diluted share compared with $27.1 million or $0.39 per share for the same period a year ago. Net earnings were favorably impacted by foreign currency exchange rates by approximately $2 million.

Interest expense increased as a result of debt incurred to finance our HR Textron acquisition. Free cash flow for the quarter was strong at $52.3 million compared to an outflow of $3 million for the prior year's first quarter as a result of significant reductions in working capital.

Turning to our segments, turbine systems net sales for the quarter including inner segment sales were $142 million, a decrease of 9% over first-quarter sales of $157 million a year ago. Turbine systems segment earnings for the first quarter of 2010 were strong at $32.1 million on lower sales compared with $33.2 million for the same quarter a year ago.

with segment earnings as a percent of sales improving to 22.5% for the first quarter of 2010 from 21.2% for the prior year first quarter. Our sales performance reflects the very difficult business jet market as well as declines this quarter in industrial turbine products. Segment profitability was strong, largely related to savings from workforce management actions and stable aftermarket sales. Moving to our airframe systems results.

Airframe systems contributed $92 million in net sales, including intersegment sales for the quarter, compared to $52 million in the prior year first quarter, reflecting the acquisition of HR Textron, partially offset by organic sales declines. Segment earnings for the quarter were $2.4 million compared to $1.8 million for the prior year.

Reported segment earnings were 2.6% of sales, a decrease compared to the prior year first quarter segment earnings of 3.4% of sales. After adjusting for $7.5 million, the amortization of acquisition intangibles, segment earnings as a percent of sales was 10.8%.

The amortization of acquisition intangibles is a non-cash charge. Now turning to electrical power systems, electrical power systems net sales for the first quarter, including intersegment sales, were $57 million compared to $62 million a year ago, a decrease of 8%.

Foreign currency exchange rates favorably impacted sales by approximately $6 million. Segment earnings for the quarter were $7.3 million compared to $9.2 million for the same quarter last year. Segment earnings as a percent of sales were 12.9% in the first quarter of 2010 compared to 14.8% for the first quarter of the prior year.

This quarter's results reflect a considerable slowdown in wind converter sales. Intersegment sales to our engine and turbine segments were down significantly as well. Earnings were negatively impacted by the decline in sales volumes, partially offset by favorable foreign currency exchange rate impacts of approximately $1 million.

Moving to our engine systems results, engine systems net sales for the quarter including intersegment sales were $68 million compared to $105 million a year ago, a decrease of 36% reflecting the continued demand declines in the industrial equipment transportation and power generation markets. Segment earnings for the quarter decreased to $3.2 million compared to $7.6 million for the same quarter last year.

Segment earnings as a percent of sales were 4.8% in the first quarter of 2010 compared to 7.2% for the same quarter of the prior year. Cost control initiatives in the engine systems segment contributed significantly to maintaining profitability.

Non-segment expenses were $5.4 million for the first quarter of 2010 compared to $7.8 million for the same quarter last year. This decline results predominantly from reductions in variable compensation and cost reduction efforts. We anticipate that our ongoing quarterly rate of spend will be slightly above this quarter's rate. Now I would like to focus on certain specific elements of our consolidated financial statements.

The gross margin, defined as net sales less cost of goods sold as a percent of sales, was 29.4% in the first quarter of 2010 compared to 29.1% for the first quarter of 2009. Selling, general and administrative expenses were essentially flat at $32.8 million or 9.7% of net sales compared to $32.5 million or 9.4% of net sales in 2009.

Research and development costs were $18.3 million for the first quarter of 2010 or 5.4% of sales compared to $19.1 million or 5.5% of sales for the first quarter of 2009. This decrease relates to the timing of certain expenditures.

Total depreciation and amortization expense for the first quarter of 2010 increased to $18.9 million from $14 million in the first quarter of the prior year, largely related to the HRT acquisition. Our effective tax rate for the quarter ending December 31, 2009 was 28.7% compared to 29% for the same quarter last year.

The rate for both of these quarters was favorably impacted by the resolution of prior-year matters. We estimate that our effective rate for the full fiscal year 2010 will be approximately 31% with quarterly variability.

Capital expenditures were approximately $9 million for the first quarters of both 2010 and 2009. We expect this approximate rate of spending to continue through the balance of this year. Looking at cash and our balance sheet, Woodward generated $61 million of cash flow from operations for the first quarter of 2010 and $52 million of free cash flow.

Cash generation continues to be a priority and we expect free cash flow for the full year to be similar to 2009. Working capital, defined as current assets less current liabilities, decreased to $428 million at December 31, 2009; $434 million at September 30, 2009; and $463 million at December 31, 2008.

Our total short-term and long-term debt was $525 million at December 31, 2009 compared to $572 million at September 30, 2009. From a high of $757 million immediately after the HRT acquisition, the quarter end balance reflects total net debt repayments of approximately $232 million.

The ratio of debt to debt plus equity was 41.8% at the end of the first quarter compared to 44.6% at September 30, 2009. Debt to EBITDA was slightly below 2.3 times at December 31, 2009. Lastly, let me turn to our outlook.

We are managing the business for a challenging environment through the first half of fiscal 2010 while planning for improved revenue opportunities that we anticipate in the second half of our fiscal year. We continue to expect fiscal 2010 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.

That concludes our comments on the business and the results for the first quarter of fiscal 2010. Operator, we are now ready to open the call to questions.

(Operator Instructions) Fred Buonocore.

Just first and foremost to make sure I'm clear, on the airframe systems profitability, it looks like you had a pretty substantial sequential decline and I just kind of wanted to see if I could get more detail on that. It looked like you were close to 11% in the previous quarter, including the amortization, and this quarter you were down below 3. Could you just elaborate on that a little bit please?

Yes we did. That looks more like it is a quarterly aberration for us but nevertheless, we did see a significant decline in business and regional jets and we did see a larger than what would be normal, because of the decline, flowthrough in the lack of profitability this quarter.

We do believe that will return to levels that we have projected as we go forward through the year.

Okay, great. So in terms of the levels you projected somewhere in the -- back in the double digits and potentially approaching mid-teens as we get towards the end of the year?

Well, the teens we had talked about was a little more longer-term. When we talked about that, there was a lot of discussion also regarding getting their aftermarket up. So we will be back into double digits as we close out the year and as we go into the next year, we'll start moving up from there.

That's helpful and just a quick follow-up on Tom's comment on the wind turbine end market. You said you had started to see a little bit of pickup there. Could you just elaborate on that a little more please? Thank you.

If you look sequential quarters from the fourth quarter of last year to the first quarter this year, we had a nice pickup in wind convertors shipments. What we think is we've -- fourth quarter was the bottom.

We talked last time about kind of this pause that occurred in the market because of financing and also waiting on stimulus funding. We have seen that turn. We've seen the orders come in and we expect that that was the worst quarter we're going to see and that as we go into second half of the year, the orders are coming in and we expect them to pick up.

Peter Lisnic.

I guess first question, I just want to clarify on the airframe systems margin. Bobby said it was an aberration. Can you maybe give us a little bit more detail on was it -- it sounds like it was the regional jet business.

But that seems to be a pretty significant falloff if you look at just $10 million of operating income going away relative to the fourth quarter. Were there other costs in there that maybe were one time? Or maybe just carve it out a little bit better for us so I understand exactly what's going on there.

Yes and maybe aberration may be a little bit of a strong term from the standpoint that when you see sales declines at this level, you can get to the point where you see the larger than expected flowthrough because you're not covering your fixed costs as well either.

So, it was both obviously in business jet and regionals. So, they did get kind of the double whammy from their perspective. They do participate in those markets fairly heavily. So it has a fairly inordinate impact to them when those are down.

I would not point out anything specific in terms of incremental costs. There are always quarterly variability on the timing of expenses but, there is no particular one-time item in there that I would give you that has an impact there. They are continuing to go through a fair amount of integration activities and responding to the downturn and so on and as you know, that does generate some incremental costs going forward.

Okay but effectively it boils down to an absorption issue for the business jet and regional jet business?

That's right.

And is the profitability in the military business kind of holding up or tracking to where you would like to see it track?

Overall profitability is holding up. It is impacted by the mix of some of our product sales there. And that will from time to time move around but it has been -- both on the revenue line, it has been very stable and we anticipated that and we are seeing that. And at the current point, overall profitability is as anticipated.

Okay alright and since I'm not that creative I guess, the next question is sort of similar but for turbine systems where I guess the margin was at least stronger than I thought it would be again, and it sounds like its aftermarket is holding up or at least becoming an increasing proportion of the mix relative to last year or year over year. And what you mentioned was in the second half of this year, you expect even further aftermarket contribution as aerospace picks up. So, is it reasonable to assume or not relative to the first quarter that we could see margins in line with the first quarter or even higher?

As we progress through the year, the level we are at as you guys followed us for a long time know is a pretty good level. And so, I would not call out an increase from there as we go forward through the year.

We are being cautious on the aftermarket while we see some of the trends. I would say it still remains to be seen as to whether or not we'll actually realize those increases. So I would say we have a very good quarter.

We did have timing of some of the expenses in terms of first quarter after the close of the year. So we'll see some increased engineering beginning in the latter half of the year and so on which will perhaps moderate some of that aftermarket increase. So I would not want to guide you that we see increases from this level.

And maybe just to add a little bit, one of the things that we do anticipate as we go into the second through fourth quarter this year; as you're probably aware of, there's a fair amount of discussion in the industry about narrow body reengineering programs and a couple of other product launches.

We do intend and expect to be participating and probably seeing a little bit of an engineering expense increase to support that activity. So, we expect margins to continue to be good and hold. Like we said, this business we are confident in but we do expect a little more engineering investment as we go through the year.

That is very helpful. Thank you for your time.

Greg McKinley.

Can you guys talk a little bit about how the commercial OEM business is performing relative to your expectations in aerospace and if you see that as a source of risk or opportunity relative to your plan as you head into the second half of the year?

Right now I would say that commercial OEM market is as planned. You've got to kind of -- obviously you've got to -- when we say commercial OEM, we talk about the larger commercial aircraft. I think we appropriately planned production rates into our profit plan and so that's coming through as we anticipated.

We had I think all of the anticipated changes in the regional jet market. So those are going through. And then if we turn to the business jet market, I think Bob already hit on that. It was a down -- definitely a down quarter.

We've seen some signs that the market has bottomed and we're pretty sure of that. But, it's going to take a little while to recover there. So that was also in our anticipation. So as we're looking at it, there weren't really surprises to the market. I think we were on top of them and second half of the year we anticipate will continue per our forecast and so we're confident in the outlook there.

Since developing some domestic production capabilities in the electrical power business, particularly wind inverters, are you seeing that local presence create an opportunity to get into some of these customers that have been vertically integrated in the past? Can you give us any update there?

We are always having conversations with the vertically integrated customers and there's a number of larger ones that are. What we are seeing the opportunities come in I would say more on is the wind turbine customers that are establishing a US presence. And as they do that, they are looking to have a supply chain here in the US and we are getting very favorable reaction to our production line, our capabilities and our goal is to try to capture some of those.

And second part of that which I think we've highlighted in past quarters is that it has helped us solidify some market share gains and also global contracts with our customer base. So that has also happened. So I think it's working.

The pause that we had -- I keep calling it a pause because I think it really was this pause in the market while the credit and incentives were getting solidified -- is now reversing. We should start to see increasing sales. We believe we will capture share going forward as well.

Okay. In terms of the airframe business, now that you've had both entities under the Woodward umbrella for a little while, is there any sort of systems integration from these component producers if you will that you acquired that you're now able to come to market and try to sell more simplified single source vendor solution to these customers and is that going to create some second-half market share grabbing opportunities? Any thoughts along those lines?

I think that the -- I always say it's the three companies coming together under the Woodward umbrella. So, our Woodward systems capabilities combined with the HRT and NPC product and capabilities.

We've been out talking to our target markets here and getting a very good response and it is -- we are presenting a capability -- we always say do components to systems and helping them from the cockpit to rotor tip or wing tip. We are getting very favorable responses to that.

That I think will drive long-term sales growth and long-term value. But those programs take a little bit of time. We're working on capturing where we can component sales to try and increase that and there is some opportunity there. We are are pursuing that.

We organized that business into three, if you want to say, subsegments. One is a component and so we are aggressively going after component sales to the whole industry. We've got what we call aircraft controls which is working on fixed wing and rotorcraft, cockpit to actuation systems and then we have weapons systems.

That organization is getting good focus. The groups are coming together very well. Customers are responding well. I see good sales growth opportunities in front of us (inaudible) timing. The big opportunity on sales growth, and Bob mentioned this in his discussion, is in aftermarket.

As we said in previous quarters, the aftermarket percent of sales for the airframe system business is below what we think that business can operate at. So what we've done is we've organized and have strengthened the sales channel to the aftermarket, combined it with the other Woodward aftermarket sales channel and we are working on the operational performance.

In aftermarket, if you can turn repairs and overhauls very rapidly, you can pick up share. That's why Woodward I think has done so well and we are bringing that capability and some of the processes and that takes a little time. We're working hard on that.

So we anticipate we could generate some aftermarket sales that will help going forward. Longer term I do believe we're going to see some very good system sales. But you have to let the platforms mature -- go through development and move their way into production. So there's a little time lag on that part of it.

Okay. Thank you. And then just one last question, Bob. I think here in the December quarter, we saw a much smaller number in terms of non-segment operating expenses than what the past run rate had been. Can you comment on why that was and if that's representative of a new run rate moving forward? Thank you.

Sure, last first. It will be slightly above that run rate. And the main reasons are variable comp and cost savings in that area as well. So, some portions of that will obviously continue but not at down at the 5.4 level I think. So it will be slightly above that as a run rate level.

Tyler Hojo.

I guess just first question and I hate to do this but just to go back to the airframe systems margin, I think Bob, in your prepared commentary, you mentioned what the amortization expense was in the operating income line. Could you repeat that -- if I heard that correctly?

I would say 7.9 I think is the number.

7.9?

7.5.

7.5, okay. Thanks for that clarification. And then just on -- I'm having a little bit of difficulty just with the addition of the new businesses. Perhaps if you could just broadly tell us kind of where the business is in terms of sales in the different end markets. I know sometimes you break out aerospace and defense, power gen and process and transport, if you could just provide like a percent of sales for each of those end markets.

If you can just hold on one second, Tyler, maybe we could get some -- the main -- I don't know if I can give you a breakdown specifically. I think Tom has kind of commented. One, they are very strong in rotorcraft. They are not necessarily consistent if you (multiple speakers)

(multiple speakers) for clarification, are you asking at the Woodward level?

Yes, now with the new businesses at the Woodward level.

Hold on, we will get it. We have right now is we are half aerospace and defense. And then -- we'll get the exact numbers. About 14% transportation.

Yes, we are about -- this has not changed since the end of the year. So we're about 50% aerospace and defense, 49; power generation and distribution is another 41% and transportation is about 10%

Okay, perfect. All right. So really not much of a change there. And then just lastly, well I guess you didn't comment on the CapEx budget. Is that still in the $40 million range this year?

Yes I did. I mentioned that we were about $9 million this quarter and we expected that level to continue through the year. So, 36-ish.

My apologies. And then, the last thing I just would like a little bit of clarity on is, I mean clearly there's good free cash flow progress here in the first quarter but I guess how do we think about kind of the targeted debt to EBITDA level of two times by the end of the year and what perhaps you will do with the excess cash that you will have on the balance sheet if you do indeed achieve your free cash flow forecast?

The target remains. So we mentioned 2.0 is what we would like to get ourselves down to by the end of the year. We are very confident, as you have been able to see in the last couple of quarters, on our ability to generate the cash.

And, so, that number -- going to what we might do with the excess cash, I would say we don't have any -- there's nothing specific to call out. We've always mentioned that we would be ready and from our strategic standpoint, if something came up on the horizon or we identified a great opportunity, that we're not going to necessarily stand in the wings as long as we were on our path here.

But there's really nothing to talk about on that front at this point in time. Other than to say we are not sitting with our hands tied. We've shown we can get the debt down. We are doing that and we're prepared to move forward strategically if that becomes an opportunity.

Okay but the two times isn't some sort of steadfast number? You would feel comfortable bringing your debt levels below that. Is that accurate?

Oh, yes. Yes, it's not -- it was obviously an aggressive target at one point in time. Now it's looking a little more achievable but it is not a hard and fast. It's a target.

Very good. Well I appreciate the clarification.

William Bremer.

I think the airframe division has taken us all a little bit by surprise this quarter. Is it just timing in terms of topline or is it just we are seeing continued sluggishness in the business jets and regional jets there?

It is timing. So this quarter is an inordinately large decline which we do believe will moderate as we progress through the year. And it is a combination as I mentioned of topline and then obviously the cost structure and absorption contributing to an inordinately large bottomline impact at this point in time.

Bill, you can also look a little bit -- you know the first quarter here, as we said, we had the drops in business jets, regionals along with a short quarter in terms of workdays. I think our customers are bringing their lines down and brought inventory down.

We do believe it's bottomed and so it's kind of one of these ones -- I don't know if you want to call it timing. But a couple factors all played all at once. Our outlook, as Bob highlighted, it's going to turn up, it bottomed out.

We expect margins for the full year to get back into the double digits and we are confident to track onto that. So still being in a recessionary environment, we saw it across a number of our customer bases. People shut down probably longer than they normally would, particularly longer than they did in 2007 and 2008. So, that played a little bit into it.

Let's switch gears and go into the electrical power arena. The [high ProTech] line, the relay power programs there, can you give us a little more color there and how many units have been sold and give us a little more clarity on what this product does for the grid?

What you have there is we call protective relay and metering devices. These go at every -- if you want to say, interconnect on a grid where you come from the grid to a user. Sometimes you hear the term switchgear.

This is what really provides safe, reliable power into a plant or into a facility. The [high ProTech] line is an advanced line that we launched -- really started with the acquisition of SEG, really kicked it off.

We've been accelerating it and what you're seeing right now is the lines -- we're rapidly putting out products. There's probably on the order -- excess of 20 different derivatives of the product line. They are coming out every month. It's being well received.

We are working on taking it global. And so it is starting to add to sales. It's in advance to what we had, filled in some holes in our product line. It does tie into -- and when you hear the term smart grid, a lot of times people think of that -- that's sometimes the -- you hear more about the IT part of the smart grid.

But everywhere there is intelligence, something has to control and actuate, sense, measure. That's what we do. And so these devices play into that. We think it's a very large market, expanding its area of focus for us both organically and potentially inorganically, some we are highly focused on. The launch has been successful and over the next quarters, we are continuing to launch derivatives of the product platform.

I like this, Tom. Two follow-up questions on this. Number one being this is on the distribution side. In terms of kilovolts, what's the highest line that you could handle with this technology; and two, how are you selling it?

What we do -- the market is usually broken into high voltage, medium voltage, and low voltage. And the high voltage is really on the high-voltage transmission lines and there's protective gear around that. We're not focused in that market.

Some of our products get up in that range but mostly we focus medium voltage. So that's when it steps down like at a substation and then you go to low voltage where it will step down more at a plant.

That's our market focus. The reason really is the high voltage is dominated and controlled by only a few big players such as GE, Siemens, Alston, ABB. It's not a market [tenor]. The medium voltage, low voltage is a multibillion dollar market, lots of opportunities there and good fit for what we do.

Our channel strategy really is we are working -- it varies by region. It's more of a direct channel approach some areas in Asia, in others we use reps. We also have some large industry partner collaborations that we're working that also helps move the products. So it's kind of a mix of channel strategies depending on what region we are in the world.

Peter Lisnic.

Just a couple of quick clarifications if you could. In the electrical power business, ex-wind, you talked about the fundamentals there maybe bottoming or getting a little bit better. Can you give us a little bit of color on where exactly that's occurring? Is it domestic, is it global? And which segments of end markets are actually starting to improve?

First, on the wind, we did see sequential quarters a good increase in delivered wind converter shipments. So when we talked last quarter, I think during the conference call, we talked about what happened there and now it's at pause.

So we have seen it. We expect second quarter to come along but the order book is really filling in for the third and fourth quarter. So we see wind turning and so we are highly confident fourth quarter was the bottom.

Second, you think of the second half of the year, because there's leadtimes and everything, second half of the year, the order book is filling in nicely and we're going to see some good sales increases coming. The comment on -- what we would refer to as our power generation and distribution controls, these are electronic controls -- we classify as a fast cycle business for Woodward. We also classify small diesel and gas engines as fast cycle.

What we are seeing is both those, the power generation and distribution controls and the small gas and diesel engines, have turned. And what we really look at is that they turn and we kind of track based on typical economic cycles that our long cycle businesses will follow six to nine months behind those.

So, we are seeing the turn. We are confident the bottom has occurred. We are looking at the upturn now. The big -- there's still uncertainty. What's the slope of the upturn? So we've got our forecasts. We think we're tracking well. I think our economic analysis is on the mark.

And so we are pretty -- at least upbeat that we are seeing that turn on the fast cycle businesses. What we call [PG&D] is one of them and those devices go into equipment that could be sited quicker. The fast cycle usually means there isn't a whole lot of time to site the equipment, there's not the long lead times. And so that's why it's a leading indicator for us on that. I don't know if that answered your question, but --?

It does, it does. That's fine. The other thing I also wanted to ask on the demand front was, it sounded like there still could be maybe some -- I don't want to call them inventory issues -- but maybe some customers that could be trimming inventories. Is there anyway to give us a sense as to A, how much of an impact that was maybe in the first quarter here; and then B, just to what extent will inventory rationalization continue to be a headwind maybe in the second quarter and how quickly that dissipates through the year?

I think overall, our belief is that has occurred. And it did occur and it's a little hard to break down but you know that we were shipping a certain rate, we look at their production lines and all of a sudden the orders aren't coming through which means they are depleting the inventory.

Bob mentioned in his prepared remarks -- both of us did a little bit. But we're seeing drop-in orders and drop-in orders usually means they are coming because the inventory position is not there. And so we think overall, best of our estimating is that that has already occurred and we don't really anticipate seeing more of it.

What we don't know is that we're going to see a lot more drop-in orders. Those a little harder to predict. We are predicting the production lines and those things but drop-in orders means they depleted their inventory, they don't have it for their service business or line disruptions or things like that. So it's a long-winded answer but I don't think we're going to see any more of that inventory but we did see it, inventory reductions in line with the ramp-down in demand.

That is very helpful again. Thank you.

Fred Buonocore.

Just a quick follow-up to what you were discussing with William on the [high ProTech] line. It's my understanding that really utility related investment even for kind of upgrades expansions and such has sort of come to a halt at least in the US market and I'm just trying to understand how you are seeing a pickup in order with this new product line and kind of what your expectations are for that end market as we move through the year? Or maybe I'm kind of misunderstanding what the end market for this is. So, if you could clarify that for me, that would be great.

Some of it is utility. It's kind of at that interface of utility and industrial. We are not seeing a continued shutdown in market. Actually, we are starting to see a pickup.

Money is starting to flow a little bit and it's -- I'm not sure if you're referring to large-scale transmission projects, things like that. Those are tough because there's a lot of permitting, siting.

But at this -- we're seeing people put in more intelligent devices, upgrading equipment out there. There's -- a lot of the equipment especially in the US, it's a massive market with a lot of old equipment. So there's upgrades going, there's new and it's kind of at that interface between utility and industrial, is kind of where our products are.

And so we do some utility, we do some industrial. We do a lot of sales to switchgear equipment suppliers like Eaton or Siemens. Those are customers of ours. So, that's kind of where it's going and we are seeing it pick up.

So this would kind of fall into that broad category that people refer to of US grid upgrade?

Exactly.

Got it. Okay. Thank you very much.

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

Okay. Well I would like to thank everybody for joining us again today. We always appreciate the questions and discussion and we look forward to talking to you next quarter. Thank you.

Thank you.

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 today at 8 PM Eastern Standard Time by by dialing 1-888-266-2081 for a US call or 1-703-925-2533 for a non-US call and by entering the access code 141-6455. A rebroadcast will also be available at the Company's website, www.Woodward.com, for 14 days. We thank you for your participation on today's conference call and ask that you please disconnect your lines.