Woodward Inc (WWD) 2012 Q1 法說會逐字稿

Thank you for standing by. Welcome to the Woodward Inc. first-quarter fiscal 2012 earnings call. At this time, I would like to inform you that this call is being recorded for rebroadcast and that all participants are in a listen-only mode. Following the presentation, you will be invited to participate in a question-and-answer session.

Joining us today from the Company are Dr. Tom Gendron, Chairman and Chief Executive Officer; and Mr. Bob Weber, Vice Chairman, 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 year 2012 conference call. In a minute, I'll cover the financial highlights of our first quarter, and Tom will comment on our results, strategies and 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 January 28, 2012. 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 summarize 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 energy 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 2011 and 10-Q for the quarter ended December 31, 2011, which we expect to file shortly.

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 let me turn to our financial highlights. Woodward delivered a solid first quarter with performance in line with full-year expectations. We do believe economic uncertainty, particularly in Europe, impacted our first-quarter sales somewhat more than anticipated. Our order booking activity supports our full-year guidance. Sales were up 12% to $408 million compared to $365 million in the first quarter of last year, and earnings per diluted share were up 25% to $0.40 for the first quarter compared to $0.32 for the first quarter of last year.

Now we will turn the call over to Tom to comment on our results, strategies, and markets.

Thank you, Bob, and welcome to those joining us today. Our financial performance this quarter continued to improve, while increasing our investment in product development by 30%. Consistent with our expectations, we saw gains in market share coupled with moderate market growth this quarter. Our recent announcements with respect to new program wins demonstrate close alignment with our customers, which should provide greater aerospace and energy business opportunities in the future.

Now turning to our markets, with respect to aerospace, production rates in the commercial aerospace market continued to increase. Boeing is increasing production rates on a variety of key platforms over the next three years, many of which contain significant Woodward content. Airbus plans to increase A320 build rates in 2012. Together, these increased build rates are supported by a very strong order backlog from airlines around the globe.

Previously announced production delays in the Boeing 787 and 747-8 represent opportunity in future quarters. Commercial air craft utilization continues to improve, as evident in our 17% year-over-year commercial aftermarket sales growth. Evidence of business in regional jet recovery continues. We are also continuing to pursue additional content on both the 737 MAX and A320 neo-platforms.

With respect to defense, Woodward's military revenues increased slightly, although government budget issues continue to raise potential concerns with respect to future defense spending. We have seen a number of large foreign military sales authorizations that are positive for both the market and Woodward. The diversity of our defense programs and our participation on newer platforms such as the F-35, UAVs, and smart weapons, should allow our military sales to remain relatively stable.

Turning to our energy market, we see long-term energy demand growth driving new energy and power generation infrastructure projects, particularly in developing markets. This trend will continue to drive long-term growth for Woodward. Uncertainty regarding expiring government subsidies for renewable energy is providing a current boost to demand for wind turbines in the US, and is likely to contribute to increased volatility in the future. Through continued share gains and expanded wind product offerings, we anticipate increased strength in this area.

We are expanding our market position in product offerings associated with the increase in natural gas production, transportation, liquification, and distribution through our portfolio of industrial turbine, engine, and compressor capabilities. We're also supporting customer programs for duel-fuel and multi-fuel engines, engines that can burn either natural gas or diesel fuel or combinations including waste gases. This allows for considerable flexibility in optimizing fuel usage based on availability and pricing.

In summary, the aerospace and energy markets continue to reflect rising OEM production rates and equipment usage. We are well-positioned within these markets to take advantage of opportunities to deliver control systems, and make a meaningful difference in efficiency, emissions, reliability, and performance of our customers' products. Our focus on customer needs and our willingness to invest in technologies and capabilities over the years has allowed us to secure exciting new programs and expand our market share.

Now let me turn it over to Bob for the financials.

Thank you, Tom. This quarter reflects improved profitability despite revenues that were impacted by economic uncertainty and customer order hesitation beyond our normal first-quarter expectations. Woodward net sales this quarter were $408 million compared to $365 million for the 2011 first-quarter, an increase of 12%. Foreign currency rates -- exchange rates had an insignificant impact on sales.

Net earnings for the first quarter were $28 million, or $0.40 per share, compared to $22 million, or $0.32 per share, in last year's first quarter. Earnings per share in the first quarter of 2011 included a charge of $0.03 per share related to Workmans Compensation. Foreign currency exchange rates also had an insignificant impact on earnings.

EBIT, or earnings before interest and taxes, was $46 million for this quarter compared to $38 million in the prior year's quarter. The prior year included the Workmans Compensation charge I mentioned of approximately $3.5 million.

Research and development costs increased $7 million, and variable compensation expense increased $3 million from the first quarter of 2011. As a percent of total sales, EBIT was 11.4% this quarter compared to 10.4% in the same quarter a year ago. Free cash flow for the first quarter of 2012 was negative $15 million, reflecting increased variable compensation payments and capital expenditures in the quarter.

Moving to aerospace, our aerospace segment sales for the first quarter of 2012 were $193 million compared to $181 million for the first quarter a year ago -- an increase of 7%. Aerospace sales this quarter reflected strength in both commercial and military markets, as well as some price increases. Aerospace earnings for the first quarter of 2012 increase to $27 million from $20 million for the same quarter a year ago.

As a percent of segment sales, segment earnings were 14% this quarter compared to 11% in the same quarter a year ago. Segment earnings benefited from increased volume and price increases, partially offset by increased research and development costs. The prior year also reflected a $3 million Workmans Compensation charge. We continue to expect full year aerospace segment margins of approximately 17%.

Moving to our energy results, our Energy segment sales for the first quarter of fiscal 2012 were $215 million compared to $184 million for the first quarter a year ago, an increase of 17%. The energy sales increase was driven by broad strength in our controls for industrial turbines, wind turbines, and reciprocating engines. Energy segment earnings for the first quarter of 2012 increased to $27 million from $25 million for the same quarter last year.

As a percent of segment sales, segment earnings were 12.4% this quarter compared to 13.3% in the same quarter a year ago. Segment earnings benefited from increased sales volumes offset by OEM and aftermarket mix variability. We continue to expect Energy's segment margins to approximate 14.5% for the full fiscal year. Non-segment expenses for this quarter of $7 million, or 1.8% of total sales, was largely consistent with the prior-year first quarter.

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, was 30.3% of sales in the first quarter of 2012 compared to 28.5% for the first quarter of 2011. The results for the first quarter of 2012 reflect operating leverage on increased sales volume and pricing increases. The first quarter of 2011 included the Workmans Compensation charge mentioned earlier.

Research and development costs were $31 million for the first quarter of fiscal 2012 compared to $24 million for the first quarter of 2011. As a percentage of net sales, research and development was 7.5% in the first quarter of 2012 compared to 6.5% in the first quarter of 2011. The increase relates primarily to our efforts on previously-awarded programs. We anticipate that full-year R&D costs will be approximately 7% of sales.

Selling, general and administrative expenses were $39 million or 9.5% of net sales this quarter compared to $33 million or 8.9% of net sales in the same period of 2011. Our effective tax rate for the first quarter of 2012 was 29.3% compared to 28.8% for the same quarter last year. For 2012, we still anticipate that our tax rate will be approximately 33%, reflecting the expiration of the US research credit, which occurred on December 31, 2011. If the credit were to be reinstated for fiscal 2012, we anticipate our full-year effective tax rate would be approximately 31%. Our earnings guidance does not assume an extension of the research credit.

Capital expenditures were $17 million for the first quarter of 2012 compared to $10 million for the first quarter of 2011. For 2012, we anticipate capital expenditures of approximately $80 million.

Looking at the balance sheet, working capital, defined as current assets less current liabilities, was $564 million at December 31, 2011 and $537 million at September 30, 2011. Woodward generated $2 million of cash flow from operations and a negative $15 million of free cash flow for the first quarter of 2012. We continue to anticipate free cash flow of approximately $120 million for the full year. The ratio of debt to debt plus equity was 31.1% at December 31, 2011 compared to 31.6% at September 30, 2011.

Lastly, let me turn to our outlook. We continue to anticipate moderate growth in our markets for 2012, and our results will be further supported by a number of market share gains across our businesses. We are managing the business to carefully pursue the opportunities we see within our aerospace and energy markets, while monitoring the uncertain global economic situation.

For fiscal 2012, we continue to expect sales to be between $1.80 -- excuse me -- $1.85 billion and $1.95 billion, with earnings per share to be between $2.20 and $2.35. We still anticipate 2012 sales growth in our Aerospace segment to be approximately 8% and approximately 16% in our Energy segment.

That concludes comments on our business, and results for the first quarter of fiscal 2012, and our 2012 outlook.

Operator, we are now ready to open the call to questions.

(Operator Instructions). Fred Buonocore.

Thanks for taking my question. My first question, just wanted to get a little bit more color on the weakening that you saw in Europe during the quarter. I mean, obviously, it's something everybody anticipated to be a headwind during the period. And I guess it was a little bit stronger of a headwind than you'd anticipated maybe a couple of months ago.

Can you talk a little bit more about what product areas or what end market subsegments you saw this weakening? And how you expect those markets to proceed going forward? Maybe what you've seen since we've entered the new calendar year and so on. Thank you.

Yes, Fred, I think what we really saw was the uncertainty with the European financial situation. And the fact that all of our business projects are financed, that we saw hesitation in the market. That's the way I would describe it. So it's not particular just in Europe. It was a general hesitation where we saw a little bit of slowing down in orders and a little hesitation, is the way we're looking at it, across the board, that, as we hit the end of the calendar year, we started seeing the orders picking up. And as we're here in January, we're seeing the orders pick up.

So I think it was one of these confidence things in the market and a little reluctance to get ahead on orders. And we felt that in the first quarter. But we're seeing a change with the order books filling in now. So our read on it, it wasn't specific to Europe; it was across the board on concerns with the ability to keep financing projects.

Okay. And any particular markets there? I mean, any particular kind of product areas? Or largely across the board?

I think mainly it was largely across the board.

Got it. And as you look at that, I know it's a tough question to answer, but as you look at the first-quarter results, and then as you look at the rebound in order volumes, do you look at your guidance range and see your likelihood at a certain point within that guidance range has changed? Or you view your full year similarly to the way you did at your Analyst Day in December?

Yes, actually, we're still sitting with the same expectation that we had. So we haven't seen any change there. I kind of remind everybody that on previous calls, we always highlighted that the first quarter is always a tough quarter for us, due to the number of working days in the quarter, the end of the year; some of our customers aren't running their lines or are careful of what inventory they're bringing in.

So it's kind of a -- first quarters are always difficult. And then compounded on some of that, we saw this hesitation due to the European debt crisis. We see that changing and the order books are starting to reflect that. And as we did our updated forecasts are exactly in line with what we were thinking in December when we had the analyst meeting.

Great. Well, thanks. I'll jump back in line.

Tyler Hojo.

Yes, first question, I'm just kind of wondering how the airframe businesses performed in the quarter? I know they're included in the Energy segment now, but I know the segment reporting has changed. So, if you could maybe just speak specifically to how those businesses did.

Sure. Tyler, one thing, we're on plan in terms of our improvements that we were looking at, margin improvement and margin enhancements. We also had made a lot of headway on the aftermarket. So, part of that 17% increase in aftermarket was driven by our motion control business. So we're making good progress. And some of the plans that we laid out when we first acquired the businesses in that segment are materializing.

Okay. Now the 17% increase in aftermarket, was that -- I mean, maybe you could just call that out, just in regards to those businesses. Was that mostly biz jet? Or was it military as well?

It was across the board.

Okay. All right, great.

Yes. Yes.

And I also wanted to ask you, just in regards to your large industrial gas turbine exposure. I mean, GE reported on Friday, it looked like the deliveries came in a little bit better than they were anticipating in the quarter. And it looked like they also increased kind of their unit shipment expectations for 2012. Does that do anything for you guys, in terms of either just visibility or expectations over the next 12 months or so?

Yes. You know, what I would say is, it's further confirmation, if you want to look at it that way, of our expectations to meet our plan for the year. Tyler, if you looked at those numbers, they showed a nice increase in gas turbine year-over-year in the 2012 forecast year-over-year, increase in unit shipments. Same thing for -- they also have the aero derivatives, and they had a nice increase there. And then if you go over to oil and gas, there was a substantial increase occurring there. We participate in all those markets with GE, so I would just say that's confirmation of our outlook. And then -- yes.

Okay. All right, great. And just lastly for me, maybe you could just talk about the wind inverter product line. Is that tracking as anticipated? Or are we still on track to see that 20% to 25% growth this year?

Yes, actually, in our prepared remarks we highlighted, with the expiring production tax credit, a lot of units are being pulled into this year. We're really anticipating greater than 40% increase in inverter deliveries in 2012. And if you look at some of the other announcements that were out earlier this week -- or last week, you're seeing that large volume increase coming.

So we're real pleased about that. We're well-prepared to deliver on that. Our only concern is that it will induce future volatility. But for fiscal year '12, we're going to see a substantial increase in wind turbine inverters.

Okay. And how about the quarter? Because it sounded like some stuff seemed to be pushed out just in terms of the OEMs. Were you impacted by that as well, just in terms of specifically to the December quarter?

And are you referring to wind turbines?

Yes.

No, actually, our wind turbine in the first quarter were up -- greater than 30%.

Oh, wow. Okay. (multiple speakers)

On a quarter-over-quarter basis.

Okay, great. Well, that's all I've got. Thanks a lot.

Peter Lisnic.

I guess, first question -- if we can go back to the deferral -- the push out of orders, can you maybe give us a sense of the order of magnitude in the order rate change from the early part of the quarter to the end part of the quarter then, into January?

What I'd say on that, Pete, is -- I mean, we didn't quantify that. What we did see was sales in the quarter not as high as we anticipated. And the -- our upcoming three quarters, the orders fell in, in that timeframe. So, it's a little bit of a movement there. Like I said, I would prefer some hesitation in the market, but the demand is increasing and we're starting to see the orders flow. So it's kind of just that end of the year, a little bit of hesitation and they're moving forward, so.

But you've effectively recaptured it, is basically what you're saying?

Well, we're looking in terms of the order book and our outlook is, we've recaptured it. Nothing was lost; just some movement and I think some hesitation as the end of the calendar year occurred. But it's here in our outlook and we feel very positive about that.

Okay. All right. Fair enough. And then if I look at the Energy segment, the incremental margins there, according to my math, are sub-double digits. And the implication for the full year is that you get to 20% incremental kind of margin for the year. I'm just wondering, in the quarter, at least relative to aerospace, those incremental margins are lower.

So, first question is, can you give us the components as to why? And then the second question would be, just what changes in the second through fourth quarter to get that incremental back up to, call it, a mid-20's run rate?

Yes, I think looking at -- I think you mentioned energy first. On the energy side, we referred to a mix between our OEM and aftermarket a little bit on that side of the equation. So we do anticipate that that will normalize a bit as we go forward on energy.

On the aerospace side, we mentioned the R&D as being a big factor in the quarter. We don't believe that that rate will hold for the whole year. So we had a kind of a big pop in the quarter that will moderate little bit as we go through the remainder of the year. So that will help those margins as we go forward.

Okay. All right. And then if you could, the shift away from, call it, other sources to natural gas, does that have any margin implication for you in the energy business?

Well, it's actually a positive in terms of the higher use of natural gas turbines. We've got good content, good margins. The content and margins on natural gas reciprocating engines for Woodward are very positive and slightly higher than for our diesel business. So overall, as we look at the natural gas play, driving even compressor sales, all these are good margin businesses. So I would say it's a positive long-term for energy margins.

Okay. All right. And then the last question, again on energy -- the wind business you said plus 40 maybe on the shipment number. I'm just wondering what the pricing dynamics look like in that business? Obviously, there's been commentary that there's been some pricing pressure for the supply chain there. Just wondering if you're seeing that and to what degree?

We have seen it, historically, and I would say the majority of the pricing pressure that we've seen is a little bit behind us. We do have some pricing pressure that will continue, but I think we called that out a lot at the end of last year as one of the reasons for some of the margin pressure we saw in that business. So we'll continue to -- pricing pressure is always there, but I think it will be moderated from what we've seen in the past year.

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

William Bremer.

Could we talk a little bit about bookings in the current pricing environment, specifically on the energy side? You guys called out that you're still looking for the 14.5 in terms of margins at the end of this year. How do we look at that as we gravitate through 2012 here?

Yes. One thing -- well, Bill, when you're asking about pricing, one thing I'll clarify for everyone is most of our business is under long-term agreements. So there isn't near-term -- you know, the pricing in these long-term agreements are from three to 10 years. So we have that built-in. From that standpoint, I feel very comfortable on the pricing of our products in the market. We have, obviously, the effects and we have the higher volume. We expect to leverage that well. And we have a lot of margin improvement and margin enhancement programs that we're working on.

Can you give us some type of color in terms of your shorter cycle business? And maybe, with the hesitation you called out, how much of that impact this quarter?

The impact, I think, as Tom mentioned, very, very hard to quantify. A lot of our business is kind of talk about it as a dark cloud, that we know it's out there. You've heard many of our -- the releases prior to us refer to it, so we know that there is a trickle-down impact related to it. It would be very difficult to quantify. You guys had us a little bit higher in terms of the overall consensus on where things were going to end up. And we were below that. And so we believe it's occurring, but very difficult to quantify.

All right. And then if the first quarter here is historically your weakest, how do we look at it through the rest of the year? Is it just that it's very similar to historical, very steady as we go towards the fourth quarter here?

Yes. We don't believe there will be a tremendous amount of quarterly variability, but we do believe we will see sequential profitability improvement as we go through, and as we've been calling out over a long-term period. But there will not, to the best of our vision today, not be significant variability in the remaining quarters.

And my last question, just a geographic, can you give us the geographic breakdown? How much was, in terms of percent of sales, was Europe? And can you break down the rest of the world?

Yes, it's very difficult for us, Bill, as you know, many of our -- we have, I'll call it about 60% roughly, sometimes it's a US sale. We know it's not really a US sale that our customers are actually shipping to Europe and Asia and so on; Asia, obviously, being a big driver. So for us, that's a very misleading number, quite honestly.

Okay. All right, gentlemen, I'll hop back in queue. Thank you.

Greg McKinley.

I know someone already asked a question around the implied margin expansion for both aerospace and energy for the remainder of the year, to get to your targeted margin rates, which I think were 17% and maybe 14.5%, respectively. Could you just maybe give us a little more detail on the moving parts there causing that expansion again?

As I look back at my model, it didn't look like product mix was a huge pressure on gross margins. It looked like more came in on operating expenses, even outside of R&D. It just seemed general operating expenses were a little higher at the segment level than I had anticipated. Can you maybe just comment a little bit on what happened in the first quarter along those lines? And more detail on how that expansion is likely to occur in the next three quarters?

Sure, Greg. I think the predominant factor in improving our margins as we go will be the volume increases. So we're luckily back into that phrase where we do get leverage, and we are seeing the volume. And as you noticed, even in this quarter, that helped a lot on the 12%. And that's what we're looking out for the full year as well, in terms of overall sales increase.

We did see a little bit -- I mentioned the pop in the R&D relative to future quarters. So we don't anticipate that that will stay quite as high. So that will be another contributor, if you will, on a percent basis for each of our businesses.

The mix, I think, will continue to always be a quarterly fluctuating factor that is difficult to anticipate. But if you take it over longer periods, in terms of all four quarters vis-a-vis one quarter, we do believe it will be more in line with our overall expectations.

You did see -- I think we were, on the non-segment side, roughly in line with the prior year on that. Our SG&A was up somewhat. We have made some increase in costs there that showed up in the quarter, and they mollify a little bit over the remainder of the year, related to some of the growth.

And in particular, as Tom mentioned, there's a number of these areas that we've been focusing on compressors, capturing the natural gas growth, the diversity of engines and turbines in those areas in terms of multi-fuel and so on. So there has been an increase there. That also will moderate as we go through the full year. So, a couple of things that popped a little bit this quarter will take less -- have less of a factor as we go forward.

Thank you. And then I know last year, we talked about variable compensation trading, higher operating expense comparisons year-over-year. It sounded to me like there is maybe $3 million higher again year-over-year in Q1. How would you expect those comparisons to play out as the year progresses?

I'm sorry, I didn't catch the first --?

The variable compensation expense?

Oh, the variable comp. Right.

How should we expect those comparisons to play out as the year progresses? Because it sounded to me like that was up maybe about $3 million versus the prior year period?

Yes, it might end up being a little bit higher. So where we're at right now, at targeted rates, we would anticipate that we will continue to see some headcount increases. And that will be our primary driver.

So we've talked about investing in growth at operations levels and so on. That growth will obviously cause an increase at targeted rates in our overall variable comp. So it will be somewhere in that $3 million to $5 million range, maybe a little bit higher, but somewhere in that neighborhood.

Thank you.

(Operator Instructions). Okay. I'm showing just one more question coming from Fred Buonocore. Please state your question.

Oh, yes. My follow-up just relates to something I'd read in your fiscal 2011 10-K about some inventory-related challenges or inefficiencies. I guess, particularly in Asia, where maybe you were shipping product from production in Europe to try and meet demand in Asian markets, so you had some inventory issues there in fiscal '11. Just wondering if you've resolved those? Or if those -- if that is something that's lingering that may have been an impact on the first quarter? Thanks.

I would love to say we've solved them, Fred. No, we have not. We are making some progress. I will say it's not going to be immediate, and particularly, the area you mentioned. We've called out managing the growth in the electrical power business and what that's done to inventories as sales in Asia have increased.

We've moved some production to Asia. We've been consolidating some of our production, trying to keep tabs with respect to what's going on, on a regional basis. So last year, everything was, I'll call it, calmed down in some of the regions. We were continuing to see increases related to share gains, but there were some regions that were not participating fully.

So that -- we're making progress. We have progress yet to be put in place. We are consolidating some of our manufacturing with respect to that particular area, but we have opportunities in all of our businesses. We do have, we've talked from time to time about lean programs and initiatives in place, and we are continuing to drive those as well.

Okay. So obviously, this would be baked in to some degree, hopefully conservatively, into your view for the full year?

Yes.

Yes, that makes sense. Okay, great. Thanks very much. That's all I had.

Thank you.

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

Okay. Well, I appreciate everybody joining the call today and for your questions. And we look forward to talking to you through the next quarter and in our next conference call. 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 7.30 p.m. Eastern Standard 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 1563970. A rebroadcast will also be available at the Company's website at Www.Woodward.com for 14 days.

We thank you for your participation on today's conference call and ask that you please disconnect your line.