Woodward Inc (WWD) 2010 Q2 法說會逐字稿

Ladies and gentlemen. Thank you for standing by. Welcome to the Woodward Governor Company second quarter fiscal 2010 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 listen-only mode. Following the presentation you will be invited to participate in a question-and-answer session.

Joining us today from the Company are Mr. Tom Gendron, Chairman and Chief Executive Officer, and Mr. Bob Weber, Chief Financial Officer and Treasurer. I would like to turn the call over to Mr. Weber.

Thank you, operator. We would like to welcome all of you to Woodward's second quarter fiscal 2010 conference call. In a few minutes Tom will talk about the highlights of our second quarter and our markets. I will then comment on today's earnings release, and at the end of our presentation we will take questions.

For those who have not seen the release, you can find it on our website at woodward.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 April 26, 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 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 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 result. 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-Qs for the quarters ended December 31, 2009, and March 31, 2010, which we expect to file shortly.

Going forward, as we speak to net earnings on these calls, we are actually speaking to net earnings attributable to Woodward. In addition, segment earnings, EBIT, 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 and 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 I 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 those joining us today. This quarter is important in that we believe we have reached the turning point of this difficult economic period for Woodward, and we see concrete signs of recovery. Leading indicators and order activity have begun pointing to the long-awaited upturn, although our mix of short and long cycle businesses will spread that upturn over future periods.

I will begin briefly by reviewing our quarter's financial highlights. Sales for the quarter were $349 million, compared to $335 million in the same quarter last year. Also, this quarter's sales represent a sequential increase of $10 million from our sales in the first quarter of 2010, a sign of stabilization and improvement in some of our markets.

Reported earnings per diluted share were $0.34 for the quarter, compared to $0.27 cents for the same quarter last year. Free cash flow for the quarter was $60 million, allowing us to repay $61 million of long-term debt and reduce our debt-to-EBITDA ratio to 1.9 times, ahead of our year-end target of 2 times.

Our market outlook this quarter is largely consistent with our earlier assessments that we would likely see some mid-year improvement. Our short cycle markets have been showing signs of recovery in the form of both production and drop in orders. Other long-cycle markets such as power generation and marine may be slower to recover as we move forward.

While these signs are encouraging, we are maintaining a carefully balanced approach to managing the business. We are poised to take advantage of volume increases by preparing our operations and suppliers while continuing to manage our costs cautiously.

We believe we are well positioned for the future through some of the specific actions highlighted on slide 9. We have the appropriate resources and capacity to support our customers through the upturn while delivering improved returns from operational leverage on our resources.

We continue to aggressively invest to win additional content on new programs, which will add to our large and diverse installed base. We have kept our processes and facilities lean, capable of delivering solid performance through uncertain economic cycles. These preparations have required the efforts and commitment of the entire Woodward team.

Turning to our individual markets. With respect to the aero aftermarket, consistent with our original expectations, modest improvements in air traffic have supported steady to improving aerospace aftermarket sales. Also supporting aftermarket growth is our positioning on workhorse platforms such as the A320. We generally expect our aftermarket sales to contribute to sustaining our profitability for the balance of the year.

We continue to focus significant effort on expanding aftermarket opportunities to improve profitability in our airframe systems business by offering improved and cost effective services and products to our customers. Also, we have been working hard on a variety of projects to offer our customers upgrade opportunities on existing platforms.

With respect to OEMs, recent news in the aerospace industry has generally been positive. Boeing 787 and 747-8 initial flights and testing have proceeded well, and Boeing has announced that it expects initial deliveries of both aircraft will occur near the end of this calendar year. As you may recall, the GEnx engine, which includes Woodward's fuel system, will be the exclusive engine on the 747-8 and has been ordered on a majority of 787s in the pipeline. This will represent a significant market share gain for Woodward in the wide-body market.

Separately Airbus and Boeing have recently announced that A320 and 777 production rates are expected to increase next year. These are programs in which Woodward has significant content.

Regional business jet OEM sales have remained challenged, though there are signs of future stabilization. Woodward has maintained strong levels of R&D in this cycle and will continue to invest in new products and technologies to pursue the many opportunities we see in aerospace.

The defense markets remain generally steady. As we mentioned last quarter, we have seen short-term softness in production rates of some defense programs. In general we expect to see improvement in our defense-related sales in the second half of the year. We remain heavily involved in key defense programs such as the Joint Strike Fighter, the V-22 and M1A1 tank.

Turning to the markets that comprise our energy-related businesses, while long-term energy demand represents the future driver of growth for industrial turbines, the industrial turbine OEM market remains challenging and will likely for a bit while longer. However, aftermarket sales have and will help to steady our results.

In electrical power we continue to experience near-term challenges and longer-term opportunities. Global installations of new wind turbines continue at a very low rate, but recent order volumes suggests that a recovery in this market may begin moving toward the end of this year. New projects are being initiated, such as our recently announced offshore project with REpower in Europe for which deliveries are expected in the 2011 to 2013 time frame.

We are working with our partners to take advantage of emerging opportunities, particularly in harsh offshore environments on 5 to 6 megawatt class turbines, where our new NGx modular platform is being well received in the marketplace. We have been investing in and have recently announced technology expansion of our wind converter product line to capture greater market share.

Our power generation and distribution business saw sequential increases in the current quarter.

Our industrial reciprocating engine markets are showing signs of improving, but not all segments of this market are responding at the same timetable. Demand has picked up for small engines used in construction and light industrial applications, as well as for alternative fuel engines used on buses and delivery vehicles. Throughout this cycle we have remained committed to our clean-engine technology strategy to support our customers' initiatives to deliver efficient low-emission engines. The large engine market has been stabilizing as well.

Engine demand for alternative fuel power generation projects is also increasing modestly. We are also seeing some increased interest in controls for mining applications, supported by higher natural resource prices and increased natural gas production.

In summary, we are encouraged by growing signs of economic recovery and are committed to take advantage as the upturn progresses. Now let me turn it over to Bob to review the financials.

Thank you, Tom. At the Woodward consolidated level, net sales for this quarter were $349 million, compared to $335 million for the second quarter of last year. Organic sales, which exclude the impact of the HRT acquisition, declined $44 million, or 13% compared to the same period last year. Sales increased $59 million due to the acquisition of HRT. Foreign currency exchange rates favorably impacted quarterly sales comparisons by approximately $5 million dollars.

EBIT, or earnings before interest and taxes, for the quarter were $43 million or 12.3% of sales, compared with $31.3 million or 9.4% of sales for the same period a year ago. The second quarter of 2009 included special pretax charges of $16.6 million or $0.16 per share.

EBIT was significantly impacted this quarter by organic sales volumes declines across all reported business segments. This decline was partially offset by approximately $11 million of savings resulting from cost-reduction actions primarily taken in the prior year and the impact of the acquisition of HRT. Foreign currency exchange rates also had a favorable impact on EBIT of approximately $1 million for the 2010 second quarter.

Organic EBIT in the second quarter of 2010 was $34.7 million, down 28% from $47.9 million in the second quarter of 2009, excluding special charges. The earnings impact of sales volume declines was partially offset by the cost reduction initiatives mentioned earlier.

Net earnings for the quarter were $24.1 million or $0.34 per diluted share, compared with $18.5 million or $0.27 per share for the same quarter a year ago. Net earnings were favorably impacted by foreign currency exchange rates by approximately $1 million.

Included in last year's second quarter were pretax charges of $16.6 million or $0.16 per share after tax for restructuring and other special charges. Additionally the tax rate for the second quarter of 2010 was 32.5%, compared to 25.5% for the same quarter of 2009. The 2009 quarter was favorably impacted by the resolution of prior year tax matters.

Turning to our segments. Turbine Systems net sales for the quarter, including inter-segment sales, were $147 million, a decrease of 12.5% over second quarter sales of $168 million a year ago. Foreign currency exchange rates favorably impacted sales by approximately $1 million. Turbine Systems segment earnings for the second quarter of 2010 remained strong at $32.4 million, compared with $37.6 million for the same quarter a year ago, with segment earnings as a percent of sales decreasing only slightly to 22% for the second quarter of 2010 from 22.4% for the prior year second quarter.

Our sales performance reflects the very difficult business jet market as well as declines this quarter in industrial turbine products. Earnings impacts of volume declines were largely offset by relatively stable aftermarket sales and cost-savings actions.

Moving to our Airframes Systems results, Airframes Systems net sales for the quarter were $90.9 million, including inter-segment sales, compared to $51.6 million in the prior year second quarter, primarily reflecting the acquisition of HR Textron, partially offset by organic sales declines. Net sales results reflected an increase of $59 million related to the acquisition of HRT at the beginning of the third quarter of 2009.

Segment earnings for the quarter were $5 million, compared to $3.2 million for the prior year. Reported segment earnings were 5.5% of sales, compared to the prior year's second quarter segment earnings of 6.3% of sales. The segment earnings increase reflects the HRT acquisition and restructuring savings, largely offset by the significant impact of the organic sales volume decline.

After adjusting for $7 million in amortization of acquisition intangibles, segment earnings as a percent of sales were 13.2%. The amortization of acquisition intangibles is a noncash charge.

Now turning to Electrical Power Systems. Electrical Power Systems net sales for the second quarter, including inter-segment sales, were $54.5 million, compared to $58.5 million a year ago, a decrease of 6.8%. Foreign currency exchange rates favorably impacted sales by approximately $3 million. Segment earnings for the quarter were $4.9 million compared to $9.1 million for the same quarter last year. Segment earnings as a percent of sales were 8.9% in the second quarter of 2010, compared to 15.6% for the second quarter of the prior year.

Improvement in nonwind power generation and distribution business and favorable foreign currency translation impacts were more than offset by decreases in wind turbine converter sales. Segment earnings reflected the decreased volumes and increased cost associated with expansion of wind converter production into the United States and China, as well as higher variable compensation costs.

Moving to our Engine Systems results. Engine Systems net sales for the quarter, including inter-segment sales, were $78.2 million. This represents a sequential increase of approximately $10 million from our first quarter of this year. However, compared to the second quarter of last year, sales declined by 8% from $85.2 million a year ago, reflecting year-over-year demand declines in power generation and certain industrial equipment transportation markets. Foreign currency exchange rates favorably impacted sales by approximately $1 million.

Segment earnings for the quarter increased to $6.1 million, compared to $4.9 million for the same quarter last year. Segment earnings as a percent of sales also increased to 7.9% in the second quarter of 2010 from 5.7% for the same quarter of the prior year. Cost control initiatives in the Engine Systems segment contributed significantly to the increased profitability.

Nonsegment expenses were $5.3 million for the second quarter of 2010, compared to $23.5 million for the same quarter last year. The prior year's second quarter nonsegment expenses included pretax special charges of $16.6 million. Without these charges, expenses decreased by 23.4% 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. Gross margin, defined as net sales less cost of goods sold, improved as a percent of sales to 30.1% in the second quarter of 2010, compared to 29.6% for the second quarter of 2009. Selling, general and administrative expenses were $34.1 million or 9.8% of net sales this quarter, compared to $29.1 million or 8.7% of net sales in the same period of 2009, largely reflecting the HRT acquisition impact.

Research and development costs were $19.7 million for the second quarter of 2010, compared to $18.8 million for the second quarter of 2009. As a percentage of net sales, research and development was essentially flat at 5.6% in both quarters. Total depreciation and amortization expense for the second quarter of 2010 increased to $19.1 million from $14.4 million in the second quarter of the prior year, largely related to the HRT acquisition.

Our effective tax rate for the quarter ending March 31, 2010, was 32.5%, compared to 25.5% for the same quarter last year. The rate for the current year quarter was negatively impacted by the December 31, 2009, expiration of the US research credit. The rate for the prior year quarter was favorably impacted by the resolution of certain prior year matters.

We estimate that our effective rate for the full fiscal year 2010 will be approximately 31% with quarterly variability in the future resulting from the outcome of prior year tax matters. The anticipated favorable net income of these outcomes was considered in our initial outlook and remains largely unchanged.

Capital expenditures were $5.2 million for the second quarter of 2010, compared to $6.8 million in the second quarter of 2009. We expect this approximate rate of spending to continue through the balance of this year.

Looking at cash and the balance sheet. Woodward generated a strong $65 million of cash flow from operations for the second quarter of 2010 and $60 million of free cash flow. We still expect free cash flow for the full year to be similar to 2009 at around $190 million. Our total short-term and long-term debt was $464 million at March 31, 2010, 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 $293 million.

The ratio of debt to debt plus equity was 38.4% at the end of the second quarter, compared to 41.8% at the end of the first quarter and 44.6% at September 30, 2009. With our strong first-half cash flow we were able to achieve our year-end leverage target of 2.0 earlier and more aggressively than planned. Debt was 1.9 times EBITDA at March 31, 2010.

Working capital, defined as current assets less current liabilities, was $414 million dollars at March 31, 2010, $428 million at December 31, 2009, and $434 million at September 30, 2009.

Lastly, let me turn to our outlook. Order activity and leading economic indicators are pointing to recovery in our markets. This is largely as anticipated and as a result, our overall outlook for the balance of the year remains consistent with our original guidance, which was that we expect net sales to be between $1.4 billion and $1.5 billion and diluted earnings per share to be between $1.40 and $1.60 per share.

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

Thank you. The question-and-answer session will begin at this time. (Operator Instructions). Our first question comes from Tyler Hojo. Your line is open. Please state your question.

Hey, good evening, everyone.

Good evening, Tyler.

First question, just on the Airframe business, can you comment on -- well, first I guess it is nice to see the sequential improvement in margin there, but perhaps if you could just talk about still being on track for double-digit margins by the end of the year.

And then also if you could perhaps comment, just within Airframe it looks like HRT is holding up a little bit better than MPC. I know you have consolidated the two businesses, but maybe if you could just talk about that a little bit.

Sure. Yes, we originally had mentioned that we thought we would be back on track by the end of the year. That is still a possibility. But I would say that currently, although the signs are improving on bizjet usage, et cetera, it is a little bit slower to recover than we might have earlier anticipated. So whether or not it will be a Q4 or a Q1 timing of the recovery is kind of open to discussion at this time.

With respect to the consolidation of the two entities, how it is going, the two -- our formal integration is largely complete. We are now focusing on a lot of the synergies that we had identified, and in particular we talked a lot about the opportunities to improve aftermarket business in both businesses and now as a combined entity. That's coming along well. We did mention that that was a longer-term cycle, but it is on track.

Lastly, while we are integrating the two entities into a different structure as opposed to the two separate acquisitions, MPC has seen a larger impact related to bizjets and regional than HRT has. HRT does have a higher defense-related business percentage, if you will, and therefore has seen a little more stability than MPC.

So -- but we do believe, and the signs as I mentioned are turning around -- so we do believe that is beginning to turn, and that the long-term view that we see for the combined business is actually a little rosier than we had originally projected.

Okay, that's certainly good to hear. And just on the debt to EBITDA, 1.9 times I guess your adjusted EBITDA. Where does that go by the end of the year now? I mean, clearly cash flow has been at least stronger than I had anticipated in the front half of the year, and the deleveraging has clearly kind of outpaced your expectations, but I mean how much more can you pay down this year?

Good question. We have approximately $100 million of prepayable debt remaining, and that -- if all of that were to be prepared -- would get us to a 1.5, 1.6 times EBITDA at current levels of EBITDA. So we anticipate that we will continue paying down, whether or not it will remain at the level of the first half.

As we kind of mentioned last time we are hoping that the recovery will continue gathering strength in the second half. That will require increased working capital utilization in the second half. And so whether or not the paydown in the second half continues at the same rate is still open to discussion as we go forward.

Okay, but is it safe to say that deleveraging is still the number one priority, or are you at a point now where other uses of cash perhaps might be more attractive, such as additional acquisitions or perhaps share buybacks?

Sure. We had mentioned way back that the 1.5 to 1.6 was our -- we would like to be in that area. That's our long-term objective, but that we would not -- one, we have not stopped looking at strategic opportunities. We will continue going forward with our GAAP analysis. And we are probably at the level where it would be not something we would shy away from. But we also don't have anything on the radar screen at this time that would cause us to go down that path.

Maybe in addition to that, we also, if you recall, a little over a year ago, a year plus ago, we talked about some major capital expenditures to facilitate organic growth for the long-term. We are now looking at, moving forward, that some of those capital expenditures would start to happen. So there would be some use of cash to facilitate organic growth as well.

All right. Great, that's helpful and just one more for me. If you can just talk -- I mean, it seems like turbine has held up pretty well. And I know we have talked about in some of the past conference calls seeing the good aftermarket mix and, it seems like you guys are following GE just in terms of seeing that cycle.

But maybe you could talk about how long this aftermarket cycle is going to persist, and how much offset you have from the actual equipment side of things, which clearly is considerably weaker than where your sales are.

Well, Tyler, if I fully understood your question, I would go back and say that our strong market presence -- I first should add, are you talking aero or industrial?

I am talking explicitly IGT.

I'm sorry. Okay. Yes, on the industrial side, exactly as you picked up, the installed base, which will be out there for a long time, these turbines have very long lifecycles, will continue to provide a nice steady base. We do expect and do look forward that industrial turbine is going to pick up. What you have with those though is that usually the lead time from the start of a project to when we sell the hardware, when it gets installed and starts running.

So, we're seeing signs and do believe it is going to pick up. We just are now in that period of long lead times to get the growth on sales. So we think the aftermarket will continue. The utilization on the natural gas turbines is doing well, especially with the gas prices the way they are. OEMs we do expect to start picking up.

During the downturn we put a real focus on even capturing more content on turbines. In the long-term here we are going to have more content going out in this area. So we are still very bullish on the long-term outlook for gas turbines.

So is that another way of saying that looking at turbines and kind of just trying to exclude the commercial aero piece of it, which I know is hard to do. But I mean is basically what you are saying is that we are at a bottom here, and the rate of decline has kind of bottomed? How should we think about that?

I would say yes on industrial gas turbines. We are down at the bottom.

On the commercial side -- if you go to the aero side, we are seeing things turn as well. The issue is -- on industrial gas turbines it can be lead times and phasing in. But I think we, as we said in some of the opening remarks, we see a turning point. Now you have to think about lead times and cycles. But for all of us we think we are seeing that right now.

Great. Thanks a lot.

Thank you. Our next question comes from Fred Buonocore. Your line is open.

Yes, good evening, gentlemen.

Hi, Fred.

First of all, I would like to just try and gauge relative to when you gave your guidance range and a lot of the good positive stuff and turning point comments that you are making. Do you feel maybe more optimistic or more toward the positive side of that range realizing that you are not going to pinpoint -- well, we're looking at the high end of our guidance.

But I mean do you feel more optimistic now than when you provided your guidance, or really this is kind of playing out -- this recovery is playing out as you had expected?

I would say first off that it is probably not more optimism as opposed to more confidence as we have progressed through the year. One thing I would like to point out is that our second half -- so if you take the mid-point of the range, our second half is considerably more aggressive than our first half. And that is kind of the way from the very start we called the year.

And so far it is progressing as we thought. So as we progressed through it, we are gaining a little more confidence that, well, the way it looked appears to be unfolding that way through the course of the year.

So I guess that also equates to optimism that indeed we are seeing the bottom. But nevertheless we had a challenging second half because of its relation -- and because of the relation to the first half that we had called out earlier.

Very good. That's helpful. And then just back on the Airframe margins, so you showed a good sequential pickup there, but not on increasing revenue. I'm sorry I jumped on the call late, so if you have already talked about this, I apologize. But can you talk about what resulted in this sequential margin improvement on kind of the same depressed volumes for bizjets?

When you say the same depressed volumes -- actually -- so HRT has had a -- going back to the difference between the two, has had a very good quarter. And they were not as impacted by bizjet compared to the MPC business. So there is that disparity between the two.

Right.

Ultimately as I mentioned, the signs that we see with respect to bizjet and regionals are very positive. And so we do believe they will be coming back. And in addition I think we are also seeing the impact of our cost controls having a substantial impact on overall profitability.

Would you also say that relative to Q1 you had some sort of mix shift within that segment that helped the improvements in margin?

Not substantially. Nothing that I would really call out.

Okay. And then -- go ahead.

No, no, go ahead.

And then just finally I wanted to ask you -- you mentioned seeing improvement in nonwind power generation, and just wanted to hear more about that trend, like what kind of orders and --

Yes, if I can comment on that, what we are seeing is in what we call our power generation and distribution controls. It is actually a faster cycle business. In that we started seeing the orders pick up sequentially.

What that is, is one of our internal leading indicators when we see the small recip engine pickup, the PG -- power generation and distribution business pickup, signs of the recovery, which then means our longer cycle businesses are right behind them.

So it is mainly just increasing demand intermixed with some of the increases, and we talked about even some drop in orders.

We do think there is some replenishment of inventory going on, which is very difficult to actually assess or calculate. But we see a combo there. So these fast cycle ones catch up quickly with that.

Actually it kind of is tracking per a normal business cycle and Woodward's normal modeling. And that's why, as Bob said, we at the beginning of the year saw these trends and now we have confidence that they are moving forward per our plan.

Great, thank you very much.

Thank you. Our next question comes from William Bremer. Your line is open.

Good evening.

Good evening, Bill.

Nice execution this quarter, gentlemen.

Thank you.

Tom, can you give me a little insight, just like you did on Electrical Power, on the Engine System components? In particular, are you seeing -- is it restocking or is it really some type of growth on the Engine Systems side?

Actually, Bill, it is both. We know, and many of you I think track companies like Caterpillar and Cummins. Caterpillar has got a specific program to restock. And so we have seen some of that. We are also seeing increased demand, so that is occurring as well. So it is kind of a combo of both.

So we're catching it first on the smaller side, which is normal for us. And looking out we are seeing positive signs on the larger engine business. So it is a little of both, normal business cycle, but yes we are seeing both.

Great. And then just on a consolidated basis on your gross margins, very impressive, over 30% in this second quarter here. Is that something we should be seeing going forward as the Company is definitely making initiatives on especially the newer Airframe segment to really push aftermarket?

I'll speak for Tom, and I'm sure he would say yes we definitely better see improving margins. No, that is directly a result. One, obviously we have mentioned that in some of our businesses our strong presence in aftermarket has obviously not hurt that at all. But we have gone through a lot of initiatives that have been related to more efficient use of infrastructure, lower overhead rates and so forth.

So, yes, we do believe that that sort of performance and trend -- but we saw a nice pop this quarter. I am not going to tell you we are going to see that kind of pop every quarter, but we do believe a positive trend is something that we will see going forward.

Okay, gentlemen, thank you.

Thank you.

Thank you. Our next question comes from Greg McKinley. Your line is open.

Yes, thank you. Guys, as you look toward the second half of this year, I'm wondering if you can just give us some commentary by business segment. I think you have indicated that in aerospace and IGT up in the Turbine Systems business, that's already bottoming, and my thought is that you would expect to see some sequential revenue improvements there.

But can you give us market commentary on what you think will be impacting the other segments? And how should we think about those performing in Q3 and Q4 relative to what we have seen in the first half?

Sure. If we start with Engine Systems. We're seeing Engine Systems is one of our faster cycle businesses, even with its mix of small and large engines. And we see a positive trend coming that the small engines will continue and large engines will start. A lot of this again, you've got to remember, takes some time. So we believe we will see sequential improvement and going into 2011 should be positive.

We made a number of comments early on in Electrical Power, fast cycle businesses there. We are starting to see the turn. We have today a high degree of confidence that -- I called it a number of quarters ago a pause in the wind turbine business. The reason I called it a pause is the financing kind of dried up, just like it did for a lot of the major projects. And so wind kind of went on a hold a little bit as the financing and questions about tax credits and incentives.

And what we're seeing right now are the orders filling in at the end of our fiscal year going into next year. So we feel real good that that market is turning. Once again it is lead times, but the outlook in the orders are indicating that that's going to start moving up. So --

And then we also do work on what is called our power solutions or power station business, and that's really putting together control systems that go on larger reciprocating engine power plants. And we've had good success winning business, and that's contributing to the outlook as well.

Okay, thank you. Bob, I think you made some comments around your operating expense outlook, your SG&A trend. So at the end of the day I guess your gross margins are a little higher than what people may have been looking for here, but maybe my sense is SG&A was also a little bit higher. Can you talk about how operating expenses you expect to trend moving forward?

Yes, there were two main pieces. One was the SG&A and the other was our overall nonsegment. Nonsegment this quarter was down a little bit more than we would call our normal trend.

SG&A was up a little bit due to the acquisition, and we do anticipate that that will moderate somewhat, but it is probably going to stay in that relative range dollar-wise, which means it will decrease somewhat as our sales increase over the remaining quarters.

Okay. And then just last question, am I imputing this correctly? You'd expect CapEx for the year to be in that mid $20 million range?

Yes, we are actually a little bit more in the higher end of the $20 million range. And as Tom mentioned, there are some projects that we have had on hold that we may release as we get towards the end of the year. But I would say at this point in time that higher end of the 20 range is a good number.

Thank you, guys.

Sure.

Thank you. Our next question comes from Peter Lisnic. Your line is open.

Good afternoon, everyone.

Hey, Pete.

I guess first question, you identified the $11 million of cost savings. Two questions on that, I guess. One, can you identify how much of that might be coming from Airframe, and then what is the run rate we should think about as we go through the second half or the third and fourth quarter on that number?

Sure. One thing I would like to point out that as we get further and further away, and as the recovery does continue, if you recall way back when, we kind of called it out in thirds. There was a direct piece, an indirect piece and an ongoing permanent element to it. So it will start to lose a little bit of its clarity, but a little less than half of that total is related to Airframe.

And we would anticipate and we had called out a $60 million total number last quarter. I think we did deliver approximately 15, so we were kind of right on that number. This quarter we are down in the $11 million range. That may be the type of rate we would see going forward. But as I say, that's because we are losing identifibility on some of the items as well.

Okay. But still realizing the savings, I guess, is a way to think about it.

Exactly.

Yes. Okay, and just continuing with Airframe, I guess I would like to see if maybe we could explore what sort of volume level you need to have on that business to hit that double-digit run rate. Is there a way that you can maybe give us a feel for -- because you have taken a pretty big hit on the bizjet and MPC side, and I'm just wondering -- it sounds like that has pushed out the profitability expectations. But at what point do we get to the double-digit margin level?

So we're running currently at the $90 million rate, and it doesn't take a lot more than that to get us back to that level. So I'd say you are talking in the 7 to 10, 11, 12 sort of increase level to get close to that double-digit.

7 to 10 --

So you would call it slightly over a $100 million.

Okay. So slightly over a $100 million.

100 to 110, somewhere in that neighborhood.

Okay. Now is that a function of just incremental leverage, or are there more costs coming out? Or is it potentially both I would guess.

Well we are still, as always, looking to streamline our operations and control costs. I think we are doing a really great job in Airframe Systems controlling; the team has done a great job and is continuing to work at it.

But what we really have is leverage on sales. And that is going to come through as we put a little more increase in there. We have the capacity to handle it, and you will see nice flowthrough.

As Bob mentioned, I just want to highlight too, we are working diligently at the aftermarket, and we're seeing signs of improvement. It is going to take time, but we are seeing that. So the combo of all of that will allow us, on not that much higher increased sales, to start getting to our targets.

And is there -- if I parse out the numbers a little bit more on MPC, it looks like the revenue there is down, call it 35% or 40% in the first couple quarters here. Is that simply a function of just bizjet OEM, or is there anything else there from an end market perspective that is causing that topline weakness?

I would say there's bizjet; regional jets were also down; and some NRE associated with some projects that were in the past. So you take that together, it's there.

We do think, as Bob highlighted earlier, we do think we have bottomed in these markets, and we are seeing the turn. So we feel good about that. But you are correct to say those three categories were probably where we saw the decline, and it was about on the order of magnitude you said.

Is there anything competitively as you are integrating the business, potential share losses, anything along those lines that could have made that topline worse than what we are seeing in the end markets?

No. We are actually feeling really good about the programs we are picking up right now. And the outlook going forward is very good. And I think we are -- we didn't lose any share. If anything, we picked up some share in the downturn, where we have continued to spend our engineering resources and development money on these new programs, things like the C series and others.

So we feel real good about the business. Those few markets took a pounding. We are confident and positive the bottoms occurred in them. And it is going to be a lag, but as they recover, we are in really good market position to grow in those.

Okay. All right, that is very helpful. Thank you for your time.

Sure, Pete.

Thank you. Our next question comes from JB Groh. Your line is open.

Hey, thanks, guys.

How are you doing?

Good. Wanted to ask on triple-7 and this reramp to 7 a month. I'm guessing your lead times there are pretty long and you have already been feeling the expected decline in the production rate this summer. When would you start to feel that reramp as we go back up to 7? Middle of, what, next year?

Usually we'd start feeling about 3 to 6 months before they start the Boeing line rate increase.

Okay. And then on 787, can you let us know how many ship sets you have shipped there? I mean, is it -- I mean I think other folks are saying around 20, depending on where they are in the chain, but they are supposed to have 30 built by year-end.

Well, right now I don't know the exact number, because we have, between the 787 and 747-8, common hardware.

Okay.

So we are shipping between them and I am not exactly positive on the number, but we are seeing pickup. We'll see more at end of the year, but like I said, it is common hardware, so it is a little tough to call.

So you can't really tell which particular aircraft it is going on?

No.

And then there's been a lot of talk on reengining narrow bodies and that sort of thing. What kind of opportunity does that represent for you all?

Yes, we are very -- it is a big opportunity. We've been -- just to give you a little background on the way Woodward works. We have actually been working on the thoughts and the investment for that for the last six years. We have been investing heavily, anticipating what was going to be needed.

We think we are in excellent position. We are working right now in the early stages, as they have not done any RFPs or awards on the reengining program. But we are today on the CFM engines, we also have content on the geared turbo fan, the PurePower for the C series engine. So we are working with both Pratt, GE, Snecma on their activities.

We are going to work really hard and aggressively and anticipate that we can get something there. But it is going to be a competition that will occur later this year to early next year for our type equipment. So we are in the middle of, if you want to say, all that advance work, preproposal work, and it is a very big activity for Woodward right now.

Great. Thank you.

Sure.

Thank you. (Operator Instructions). Our next question is from Tyler Hojo. Your line is open.

Hi, just a follow-up. What is your expectation for FX as we move through the back half of your fiscal year?

That's a great question. I would love if you could give me an answer on that, Tyler.

That's not going to happen.

We do not really take positions in terms of what we think is going to happen, because every time we do it goes the other way. So we don't really have any formal -- I think you guys see the same things we see with respect to Greek debt and everything else. There is just a lot of variability and a lot of question marks out there. I would say it is just too much to call.

Okay. I guess that's fair. And then just one other thing here. I mean, clearly it seems like the orders on the wind side have been delayed by a bit. If I think back, I believe you guys were expecting kind of a back half recovery on the wind side.

So I'm just trying to mesh all this together into your unchanged guidance range. Is it perhaps that you have done a little bit more on the deleveraging side, and perhaps that some of the earlier cycle businesses are coming back to offset the wind opportunity in back half?

Well, I think some of that is true. We believe we are seeing the fourth quarter. So it is always a function of making sure the whole supply chain in the wind turbines are delivering. So we have orders, more in the fourth quarter, and we expect to see increases.

So some of the other businesses have picked up. That is maybe a quarter delayed from what we had thought at the beginning of the year. So there is some of that. But just on that, we are seeing the orders. It is just more weighted to the fourth quarter.

Okay. And is there a typical type of lead time on those wind orders? Is it comparable to the IGT side? Or how do you think about that?

Well they are shorter in total. And what I was highlighting there, is as they ramp back up they've got to ensure that they have all the equipment. So the orders, the way they come with us sometimes can move in and out a little bit as they get the rest of the supply chain up and ramping up.

But I guess an example is we are seeing the orders coming in for delivery in the fourth quarter, so that gives you an idea of the lead times.

Terrific. Thanks.

Yes.

Sure.

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

Okay, thank you. Appreciate everybody joining us today, and appreciate your questions, and look forward to talking to you over the next quarter and on our next conference call. So thank you.

Thanks, everybody.

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 daylight time 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 1436759. A rebroadcast will also be available at the Company's website, www.woodward.com, for 14 days.

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