Woodward Inc (WWD) 2012 Q4 法說會逐字稿

Welcome to the Woodward, Inc., fourth-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 Mr. Tom Gendron, Chairman and Chief Executive Officer, and Mr. Bob Weber, Vice Chairman, Chief Financial Officer, and Treasurer. I'd now like to turn the program over to Mr. Weber.

Thank you, Operator. We would like to welcome all of you to Woodward's fourth-quarter fiscal-year 2012 earnings call.

In a minute, I'll cover the financial highlights of our fourth quarter and Tom will comment on our results, strategies, and markets. I'll then comment on today's earnings release. And at the end of our presentation, we will take questions.

For those who have not seen today's earnings release, you can find it on our website at Woodward.com. As noted in today's earnings release, we have included some visual presentation materials to go along with today's call that are also accessible on our website.

An audio replay of this call will be available through November 18, 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 three. 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 earnings release and our public filings with the Securities and Exchange Commission, including our 10-K for fiscal 2012, 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 earnings 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.

Turning to our financial highlights, sales for the quarter were up 8% to $529 million, compared to $489 million in the fourth quarter of last year. Earnings per diluted share were up 10% to $0.66 for the fourth quarter, compared to $0.60 for the fourth quarter of last year.

Now I 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.

2012 was challenging, but we finished the year strong with record sales and earnings. We continued strategically investing in both product development and manufacturing technology and capacity to support platform wins that will drive future growth and profitability. The unusual operational issues we experienced and discussed in the third quarter have been resolved and can be seen in our fourth-quarter results.

Economic instability continues to affect near-term global growth prospects in certain of our markets. We continue to win market share and expand content per application.

Turning to our markets, with respect to aerospace, the continuing strength in commercial OEM deliveries provided a strong base for aerospace sales in the quarter. The Boeing 787 continues to ramp up with a projected doubling of monthly deliveries by the end of 2013. Business jets remain fairly stable, while regional showed some softness this quarter.

Commercial aftermarket for Woodward was strong, with 14% sequential growth quarter on quarter. Favorable fleet dynamics continues to support our aftermarket sales.

In spite of significantly -- in spite of significant uncertainty with respect to defense spending, we saw strength in both OEM and aftermarket military sales. We saw a combination of solid demand and improved operating performance. We continue to believe our defense sales will be only modestly impacted by potential cuts, although uncertainty exists.

In support of our Aerospace wins, we broke ground last month on a new campus in northern Illinois. Our increased systems content requires this expansion to provide the much-needed capacity and manufacturing technology required to meet our increased role on these new commercial programs.

Turning to our energy market, we continue to see evidence pointed to what's been called the golden age of gas. The widespread application of natural gas will require tremendous infrastructure investments.

Additionally, the desire for fuel flexibility is also driving considerable research investment. Our investments in R&D and our current product portfolio position us well to take advantage of these near- and long-term developments.

Compressors are a critical element of the natural gas infrastructure as well. We made significant progress this year gaining share in the compressor controls market with large program wins.

Reciprocating engines and industrial gas turbines are also used extensively in exploration, extraction, and distribution of oil and natural gas. Woodward control solutions are found throughout these applications.

The shift of baseload power generation from coal to natural gas has begun. Future coal plant retirements have been announced, totaling approximately 30 gigawatts in North America.

In September, we announced the reorganization of our electrical power systems business to align more closely with our customers and to reduce overhead costs. This reorganization will also consolidate the leadership of our wind and solar businesses to provide consistent focus on similar issues in the renewable markets. The global renewables market remained volatile, in part due to the expiration of the production tax credit in the US and uncertainty in the European and Chinese markets.

We remain confident in the long-term future of renewable energy, despite the short-term instability.

In summary, we believe our strategies are positioning us well for long-term growth and profitability. Now let me turn it back to Bob for the financials.

Thank you, Tom.

Woodward's net sales this quarter were $529 million, compared to $489 million for the 2011 fourth quarter, an increase of 8%.

EBIT, or earnings before interest and taxes, was $72 million for this quarter, an increase of 12%, compared to $65 million in the prior year's quarter. EBIT for the quarter was primarily impacted by the increased sales volume and favorable price changes. As a percent of total sales, EBIT was 13.7% this quarter, compared to 13.2% in the same quarter a year ago.

Net earnings for the fourth quarter were $46 million, or $0.66 per diluted share, compared to $42 million, or $0.60 per diluted share, in last year's fourth quarter. Free cash flow for the fourth quarter of 2012 was $60 million, compared to $52 million in the fourth quarter of the prior year.

Our Aerospace segment sales for the fourth quarter of fiscal 2012 were $264 million, compared to $242 million for the fourth quarter a year ago, a 9% increase. Aerospace sales in the quarter were strong across all end markets we serve.

Commercial aftermarket sales were up 3% compared to a strong fourth quarter a year ago and up 14% sequentially versus a weaker third quarter of 2012. For the full year, commercial aftermarket was up 9% compared to the prior year.

Military aftermarket sales increased 28% compared to the fourth quarter a year ago, due to increased activity on programs in aircraft propulsion and aircraft motion control. While we do not expect this to be a recurring trend, we believe the specific programs on which we have content and the diversity of those programs should soften the impact of probable military budget constraints.

Aerospace earnings were $48 million in the fourth quarter of 2012, compared to $41 million in the fourth quarter of 2011. As a percent of segment sales, segment earnings were 18.1% this quarter, compared to 16.9% in the same quarter a year ago. Segment earnings were mainly impacted by higher volume and price increases, partially offset by significant investments in research and development and in manufacturing technology and capacity.

Moving to our energy results, our energy segment sales for the fourth quarter of fiscal 2012 were $265 million compared to $248 million for the fourth quarter a year ago, an increase of 7%. Strong sales related to compressed natural gas engines and wind turbines for the US market drove the sales increase. The scheduled expiration of the wind turbine production tax credit in the US resulted in unusual strength in our US wind converter sales for 2012.

Energy segment earnings for the fourth quarter of 2012 increased to $34 million from $33 million for the same quarter last year. As a percent of segment sales, segment earnings were 12.9% this quarter, compared to 13.4% in the same quarter a year ago. Segment earnings were favorably impacted by increased sales volume and lower research and development costs, primarily offset by expenses associated with product warranty, increased accounts receivable reserves, and overhead cost-reduction initiatives.

Now I'd like to focus on certain specific elements of our consolidated financial statements. Gross margin, defined as net sales less cost of goods sold, was 30.6% of sales in the fourth quarter of 2012, compared to 30.5% for the fourth quarter of 2011. Research and development costs were $36 million in both the fourth quarter of fiscal 2012 and the fourth quarter of 2011. As a percentage of net sales, research and development was 6.8% in the fourth quarter of 2012, compared to 7.3% in the fourth quarter of 2011.

For the full year of fiscal 2012, research and development was 7.7% of sales, compared to 6.8% for the same period of 2011. For fiscal 2013, we expect our spending on R&D expense will remain at a level similar to fiscal 2012. As we have discussed in the past, we will continue to see quarterly variability due to the timing of achieving development milestones, prototype hardware builds, and other project costs.

Selling, general, and administrative expenses were $46 million, or 8.6% of net sales, this quarter, compared to $39 million, or 8% of net sales, in the same period of 2011. The increase was primarily related to expenses associated with an increase in accounts receivable reserves and overhead cost-reduction initiatives.

Our effective tax rate for the fourth quarter of 2012 was 30.0%, compared to 29% for the same quarter last year. Our full-year effective tax rate was 28.4%, down from 29.5% in the prior year. We anticipate that our full fiscal-year 2013 tax rate will approximate 31% to 33%.

Looking at the balance sheet, working capital, defined as current assets less current liabilities, was $624 million at September 30, 2012, and $537 million at September 30, 2011. We generated $144 million of cash flow from operations and $79 million of free cash flow for fiscal-year 2012.

Capital expenditures of $21 million for the fourth quarter of 2012 were below our previous expectations. Capital expenditures in the fourth quarter of 2011 were $16 million. Capital expenditures for all of fiscal 2012 were $65 million.

For 2013, we anticipate significantly higher capital expenditures, which could approximate $150 million. This includes our recently announced expansions for both our Aerospace and energy businesses.

Share repurchases were $44 million for fiscal 2012. Total debt decreased to $392 million at September 30, 2012, from $425 million at September 30, 2011. The ratio of debt to debt plus equity was 28.0% at September 30, 2012, compared to 31.6% at September 30, 2011.

Lastly, let me turn to our outlook. In our Aerospace segment, we anticipate continued commercial market share growth offsetting softness in defense sales. Our energy segment growth in natural gas offerings is being somewhat offset by the significant decline in the wind turbine market from 2012. Therefore, we expect our sales to be between $1.85 billion and $2.0 billion and earnings per share to be between $2.15 and $2.35 per share for fiscal 2013.

I would also like to note that we anticipate our usual quarterly pattern of lower first-quarter sales as a result of historically normal customer calendar year-end buying patterns and holiday plant shutdowns. We anticipate 2013 sales growth in our Aerospace segment to be approximately 8% and approximately 1% for our energy segment, which reflects the 2013 decline in wind. Excluding the impacts of wind, energy segment sales growth would be approximately 6%.

We anticipate that segment operating margins for the full year for Aerospace will be approximately 16% and for energy will be approximately 14%.

I would like to point out that on November 30, Woodward will host an investor and analyst day in New York City, as mentioned in a press release issued earlier. Tom and I, as well as other members of the management team, will spend the morning reviewing Woodward's growth prospects and strategic positioning, as well as answering questions. We look forward to seeing many of you there.

This concludes our comments on the business and results for the fourth quarter of fiscal 2012 and our 2013 outlook. Operator, we are now ready to open the call to questions.

(Operator Instructions). Sheila Kahyaoglu, Jefferies.

Hi. Thanks, Tom, Bob. Just a quick one for you guys. In terms of your guidance, your revenue guidance growth of 3% and EPS guidance implies margins are around 13% or 13.2%. Can you talk about the moving parts within Aerospace and energy, and what we should expect in terms of the margin bridge?

Sure. From the Aerospace side, first, we've commented on our motion control business improving profitability there. We anticipate that will continue.

We anticipate continued strength in our propulsion business, although we have had significant investments in R&D that have kept that at perhaps slightly lower levels than historically had been the case.

So overall, continued improvement in Aerospace, largely an improvement in the airframe side of the equation.

And then on the energy side, we anticipate not much change as a result of the significant wind decline. I think there were some comments made at one point in time that we should experience a significant tailwind as a result of that. I think we clarified that our wind turbine margins are not significantly different from the business as a whole. So that will not be the case.

So we'll continue to see improvement in operating performance across the spectrum. We expect a pretty good mix in our industrial turbine business going into next year, and that should help the overall profitability in the energy side as well.

Okay. Thanks. And then, in terms of just the -- can you provide a little bit more color, and I appreciate what you guys gave on the call in terms of aftermarket trends, both on the Aerospace and energy side of the business? And more specifically within energy, what sort of replacement demand are you seeing and how is that playing into just the natural gas markets? Thank you.

Okay, on the natural gas. I figured you were going with the aftermarket, I figured, predominantly on the Aerospace side. But both have been doing well.

So on the Aerospace we have maintained pretty strong aftermarket compared to, as we understand, some of our peer groups and so on. And we think that's largely due to the very favorable fleet dynamics that we've been enjoying, and you saw some strength in the military aftermarket as well on the back of some significant program shipments that we had this quarter.

On the energy side, the aftermarket has been strong. I wouldn't say we've seen any major trend changes in overall aftermarket on the energy side. On the natural gas aspects, I think we will see continued improvement there as infrastructure is built out going forward.

Thank you very much.

Sure.

Tyler Hojo, Sidoti & Company.

Hi. Good evening. Just on the wind side of the business, first, I was wondering if you guys did indeed achieve the 70% growth that you were looking for in FY12?

Yes, it was pretty close, Tyler.

Okay, good. And I think you kind of alluded to it -- I haven't done the math yet, but what is your expectation for wind in the fiscal 2013 guidance that you've provided?

Yes, it's basically going to be down approximately $50 million in revenue.

Okay. Great. And what about the military side? I think you alluded to the fact that you thought you were better positioned than the overall market, but I've got to think that your guidance assumes some sort of headwind. Could you maybe comment on that?

Yes. We definitely expect defense cuts. Our comment there, where the world may be a little different than some companies with military sales, is we have a wide range of products on all sorts of applications. So we're not dependent on any one program.

And so, I always use this example. If the F-35 goes down in sales, the F-18 will go up in terms of product support and aftermarket. They'll buy new helicopters. You're going to maintain the current fleet. We happen to be on every one of these applications with some content. So that portfolio means no one program really hits us extremely hard. And the balance between cuts and maintenance -- you know, cuts on new builds and maintenance kind of keeps it steady.

So we expected it to be slightly down, but not dramatically down, and that's still our outlook today.

Okay, great. And what about free cash flow? I mean, obviously CapEx is going up pretty significantly next year, and I get that. But maybe you can talk about operating cash.

Yes. Operating cash, we will continue. So yes, you're right. In summary, the CapEx will be a significant impact on free cash flow. Operating cash flow should continue to increase in 2013 fairly significantly, and that's related to -- you know, you saw some working capital improvement as we approached the end of the year here and we expect that continue next year as well.

Okay. Do you care, maybe, Bob, to provide a free cash flow guidance range?

Not at this time, Tyler. I think that $150 million -- so you can kind of back into it, right? I'll tell you that we expect somewhere north of $200 million for operating cash flow.

Okay.

And so you can kind of back into a rough number there.

But the one thing I want to point out, and in particular in the fourth quarter, these are very large expenditures with respect to these two campuses and the timing is very much open. And so in terms of getting specific at this time, I think as we see the year go on and as we see those programs develop, we'll have a lot better color as we go.

All right. Great. And just lastly for me, I think on the last earnings call we kind of discussed some share-gain opportunities out there in some of those next-generation engine platforms. Just wondering, has anything changed in regards to perhaps winning something? Or if you would just comment on that, that would be great.

Sure. We're still working on the narrowbody platforms. More opportunities on what we call our motion control side on the airframe. We are getting near the end on the propulsion side.

On the propulsion side, though, as engine programs go -- you know, these are brand-new engines -- as they go through development, there tends to be equipment that gets added on, sometimes taken away, but generally more often controls equipment gets added on to help get the engine through development and certification. So we anticipate some more gains there.

I will bring out to everyone that yesterday -- last night, GE and Parker announced a joint venture on aircraft fuel nozzles. It was something we were pursuing in terms of trying to secure the program for the narrowbodies. GE chose to go with their current supplier, an incumbent, and they formed a joint venture. And you can probably find that out on GE or Parker's website.

So that's one area that we've known about that decision for quite a long time. It's something we had been pursuing prior year, so that's off the table now, but there's still other opportunities, and we still expect to add to our current amount of content, which, as we've highlighted before, is significantly higher than we've ever had on these narrowbody programs.

Got it. Thanks so much for the color. I'll hop back in the queue.

Julie Yates, Credit Suisse.

Hey, guys. This is Russ, stepping in for Julie. Thanks for taking my question. (Multiple speakers). Could you fill us in a little bit on the SAP implementation in Skokie and what level of contingency you have built into your guidance for challenges?

No contingency. From our standpoint, I think we've described that we do believe that the specific issues that could impact the Skokie implementation we have behind us, and we don't anticipate those again. So there is no formal contingency embedded in our results. And we do believe it should be a fairly smooth launch.

Now, however, we do have operational, IT contingencies, and we're set up, as Bob highlighted, to have a smooth introduction at the end of the year.

That's great, guys. And then just quickly on aftermarket, I know Sheila alluded to it earlier, what aftermarket growth rates are you assuming in your guidance for fiscal-year 2013 in both commercial and in defense?

We don't really identify those specifically, Russ. We've said that we believe we will remain fairly strong in those areas. How long the defense aftermarket will remain strong for us as we go through the next few years of the defense uncertainty remains to be seen. But they would probably not be significantly different from what we've experienced so far this year.

Great, guys. And then, just lastly, what is your non-segment -- what non-segment expense is embedded in your guidance for next year?

It's roughly the same, a slight increase. We don't anticipate much beyond the standard cost-of-living sort of increase in that line.

Okay. Great, guys. Thanks a lot.

Peter Skibitski, Drexel Hamilton.

Yes. Hi, guys. Just was wondering, I guess, for Bob, if you're factoring in any further share repurchases in your fiscal 2013 guidance, or maybe cash will be a little tougher next year to do that?

No. If you kind of work that math on that free cash flow, we'll still be fine. We do not anticipate anything significant in terms of a change in philosophy at this point in time.

So we do have factored in kind of, I'll call it, the similar level to this year, maybe a little bit lower. I think I called out about a $40 million, $44 million for the full year. A little bit lower than that next year, but that one is one that kind of see how the market reacts and where it goes, and then we'll go from there.

Got it. Okay, okay. And then, just variable comp overall for fiscal 2013, do you guys anticipate any kind of incremental headwind there?

We do, at least we hope. We -- that's one of those things where, at target, it will be up a bit next year. We don't have a significant amount of headcount increases embedded in next year, but variable comp will be a slight headwind next year.

Got it. Okay. And then, if I missed this, I'm sorry, but how did defense, overall, finish in the quarter in terms of revenue year over year and for the full year, fiscal 2012, as well, for defense?

Yes, we don't break out defense as a separate category. I would say that, given the strong fourth quarter from an aftermarket standpoint, the growth rate was not abnormal compared to the growth rate as a whole. But the commercial deliveries were clearly stronger during the year.

Okay, okay. And then, just Aerospace margin in the quarter was great. It looked like one of your best quarters ever in Aerospace, margin-wise. Was that just the defense aftermarket, because it looked like commercial aftermarket wasn't that great in the quarter year over year, so was that primarily defense aftermarket driven?

No, I think it was a combination of commercial deliveries, defense, we had good sales, and some of our margin-improvement activities were coming through on the airframe side. So I think it was a combination of that, but definitely leverage on sales was part of it.

Okay. So nothing unusual that would prevent that from happening again at a similar volume level?

Well, as you can see from the full-year guidance, we're calling up the Aerospace segment margins for the full year, fiscal-year 2013, so we expect to continue improvements, yes.

Okay. Last question, I guess, for Tom. What are you guys hearing from your big energy customers going forward? It seems like a lot of them are kind of getting more cautious. Are you guys feeling the same thing? I know, obviously, what's going on in wind, but I guess more so on the reciprocating and turbine side?

Yes, it's an interesting time because we actually have a mix of input from various customers, various to the big OEMs. Everybody is bullish on the long term. They're just expecting and cautious about the next six months and are expecting some things to pick up. So that's factored into our outlook.

So yes, we are hearing and feeling some caution in the near term, but extremely bullish on the longer term, particularly with the investments in the gas infrastructure, the new technology for oil exploration and the like. So there is a little short-term concern, but that is reflected in our outlook.

And the outlook from top to bottom, I guess, the sensitivity is mainly, I guess, defense and then maybe non-wind energy. Is that the way to think about it?

Well, the biggest one is wind, I would say, and then I would say defense is next. And then, when you see the non-wind energy is up, as we highlighted, about 6% year over year, so we are seeing things come through with some caution.

We really do anticipate that over the next few years, you're going to see a boom in some of the natural gas infrastructure development -- or investments. And that will translate to higher sales for us.

So it's more of a -- everybody's -- the exact timing, getting the projects approved, they're all long lead-time type projects, so we feel bullish on the long term. Short term, there's a little bit of volatility, but still up.

Got it. Thanks, guys.

Peter Lisnic, Robert W. Baird.

I guess the first question on the aerospace margins, when you look at the forecast for 2013, it looks pretty healthy, at least from an incremental standpoint. So is that a function of mix, or are we seeing productivity improvements fall through to the bottom line, or are we looking at a year where maybe the productivity costs are coming down?

Well, what I would first say is it's the outcome of our efforts across our motion control business, and managing the very high R&D expenses we have, and continuing to work the aftermarket very aggressively. So it's a combination of that.

But it's definitely we are making improvements in the motion control business, and those margins are improving, and so that's a big part of it.

Okay. So that would -- I guess, volume leverage in the propulsion business, correct?

Correct.

All right. All right. Fair enough there. Then, on the GE-Parker, saw that. I'm just wondering, or at least heard your answer, I'm just wondering if it changes or alters the competitive landscape. Realizing that was business you were trying to get, but does the way that they structured their JV or the closeness of the relationship change the landscape for you?

Well, what's kind of interesting is, though we have a really great relationship and partnering relationship with GE on fuel systems, we've always only sold them a very small amount of fuel nozzles.

Our largest fuel nozzle customer is Pratt & Whitney. And we did secure the Pratt & Whitney pure power for the narrowbody market with the fuel nozzles and we do sell some to Rolls-Royce. So in a lot of ways, it kind of solidified the current market positions of the fuel nozzle manufacturers, like Woodward, with the OEMs. So it kind of locks everybody in to kind of the current status quo is what I would say is we're kind of -- so it doesn't change dramatically.

We were trying to pick up share by securing that, and Parker and GE worked out that arrangement and preferred that arrangement. So I don't think -- there's nothing that's going to hurt us long term, it just will limit the ability to go and capture some GE business going forward.

Okay. All right. That is very helpful on that. And then, on the industrial gas turbine side, I'm just wondering if you can give us a little feel for maybe what the backlog there might look like or if you've seen any sort of order cancellations on the new piece of the business there?

No, we're not seeing any order cancellations.

One of the things -- I think a question earlier on the energy aftermarket, one thing we are seeing is higher utilizations of the natural gas-fired turbines. So we're seeing the aftermarket increase come through. We actually will see a year-over-year increase in IGT sales, so it's not going down, and we anticipate that will start growing over the next few years.

Okay. All right. And then last question (multiple speakers)

Keep growing at a higher rate, I should say. Yes.

Okay, okay. And then, last question, the compressor share that you identified or talked about in the presentation or formal comments, when does that flow through the income statement? When do you realize that business? Are we seeing it now or is it more of a longer-term time horizon kind of realization?

Yes, what you're seeing is we spent a fair amount of R&D in 2012. We won quite a few programs. We're just starting to ship some of these controls, so we're going to have 2013 revenue. And kind of a pitch for all you guys to show up to our investor day, we're going to talk more about compressors at our investor day.

What, I can't ask for, what, 2014 or 2015 might look like on the compressor business?

You know, the compressor market, if you look at -- the compressor market, we think, is very attractive. When you look at the natural gas outlook, the amount of investment that's going to be made in the infrastructure, compressors are throughout that infrastructure. They are also used in the LNG activity and you're finding compressors all through petrochemical plants.

So when you look at the boom in natural gas, the amount of investments being made, the compressor market is going to go up substantially. We feel we have a very good competitive technology. All compressors are driven either by electric motors, steam turbines, or gas turbines. So when you look at an integrated compressor drive package, we feel very well positioned to secure that business, and it's a lot of the same large OEMs around the world that we know very well. And there's also a very nice aftermarket that goes with it.

So we think it plays exactly to our strengths, and we are now positioned with products, and we staffed up to get some more talent and capability in this area. And our intent is to go aggressively grab share.

All right. That is very helpful. Thanks for the time and the details.

William Bremer, Maxim Group.

Nice quarter, gentlemen.

Thanks, Bill.

Thank you.

Let's stay with the compressors. Give me an idea, what is your capacity there and where are they manufactured?

Yes, when we refer to compressor controls, it's primarily electronics, and we are producing them in the US, here in Fort Collins, but we're also producing them in Europe, a combination in our Krakow, Poland, operation. So that's the prime product on the compressors.

But with the compressors, like I said, it's always the drive. And that's more of our traditional control products that go with the compressor package.

Tom, what's the key to achieve the higher end of this range that you provided? Is it the PTC coming back here, maybe midway through or even earlier than that? Or what do we really need to get to the higher end of this range?

You know, I don't think the PTC is going to have any impact on 2013. It impacted 2012, as we highlighted.

The real activity here, I think, is going to be delivering and securing on our engine and turbine controls. Really, a huge amount is tied to the natural gas activity. So if you're asking on the energy side, that's what will drive it there. We feel well positioned.

One of the other things that is going on -- so I don't want to just dwell on natural gas -- we also, if you guys recall from last year and particularly at the investor meeting, we talked a lot about advanced diesel engine control systems. And there, we've come out with complete high-pressure common rail systems and we've been securing a lot of business there. That's all moving through development, and we're going to start seeing some -- more of that go into production in 2013. So that's going to be a positive.

And those systems are designed to help meet the newest emissions standards in the industry. So we see some of these investments all starting to materialize in 2013 and as we go forward.

So it's seeing those come through, and we're going to be watching the markets closely. Obviously, there's uncertainty out there. I think everybody knows that. So we'll be watching closely, but we think we've factored that in to our outlook, and it will be a matter of these orders coming through and Woodward delivering on time and getting those products out the door this year.

Okay. All right, gentlemen. Thank you for your time.

Michael Ciarmoli, KeyBanc Capital Markets.

Just on the -- there's been a lot of talk on the Aerospace margins, and maybe if you can help us out with some of the benefits that you got from pricing there and maybe some of the expectations for 2013 on pricing, as maybe you hone in on that business a little bit more.

Yes. We have had some benefits on pricing. Tends to be more on the aftermarket than the OEM side.

We would anticipate probably close to the same amount moving forward into 2013.

The bigger part of the margin improvements is leveraging volume and implementing some of the things we talked about in the past on our motion control business, and that was moving more from -- more to commercial from military, securing that business. We've been working hard and that's been occurring. It's been increasing the amount of aftermarket out of our motion control business. When we acquired that business, it was low relative to peers and to our expectations, and that's gradually moving up.

A lot of that is coming from operational performance where we're doing better on turnaround time and logistics and the like.

And the third is an overall productivity improvement and implementation of lean manufacturing into those operations, and that's starting to yield productivity results. So it's a combination of all those, along with the leverage on the higher sales on the rest of the aerospace business.

That's helpful. On the SAP, is that sort of -- you've obviously just went through an implementation. You've got another one planned for later this year. Have you incorporated the benefits of SAP into the margin outlook for 2013 or is that sort of, let's wait and see how it plays out and maybe those benefits can add some upside? Or how should we be thinking about the benefits derived from those systems?

Yes. I appreciate the positive thought on the move forward. That is actually what we do think we'll get from SAP.

Okay.

But not -- this year, it will be -- we'll be happy with doing a very smooth implementation, getting everybody trained, getting up to speed. So we didn't factor anything in for that. But longer term, yes, the SAP system will help with productivity improvements, I do believe that.

Okay. On the productivity, you mentioned earlier working capital improvement. As we think about maybe some of the rate increases, the inventory requirements there, where exactly are you getting the working capital improvement? I mean, is this just ongoing, lean, best execution? I mean, is that how we should be thinking about the improvements there?

Yes, I think, when you really look at it, I'd say the number one area has been around our lean implementations, and we are seeing improvement in those areas and driving improvements in inventory. We generally do very well on receivables, and then you throw in payables in there, and we think the combination of working terms with customers and suppliers and implementing lean is how we're going to get that.

Okay. Perfect. Last question. There's been some talk on -- and you guys, that was helpful with the detail around the energy and natural gas. I mean, it seemed like there were higher expectations this year for the bookings environment there, whether it was, let's just call it, broadly on the natural gas infrastructure. I mean, is there anything that you're looking at in terms of planning when we might see a real uptick in the bookings or some of that, I guess, those expectations really come to fruition?

We kind of expect orders to ramp in the second half of 2013.

Okay.

And as you move forward from there. That's our projection. Obviously, things can move some. Again, it's a long lead time on these programs that kind of throws everybody off a little bit. But that's in our forecast right now is more towards the second half of 2013 ramping up.

Great. All right. Perfect. Thank you very much, guys.

Thank you.

J.B. Groh, D.A. Davidson.

Thanks, guys. I think pretty much everything I was thinking of has been covered, but you haven't talked about acquisitions. Could you give us your current thoughts on what you're looking at, valuations, that sort of thing?

Yes, you know, on the acquisition front, what I would always say is we're always watching and monitoring and seeing if there is attractive assets at a good price that would make sense strategically for the Company. So what I would say is it's a constant looking.

We're not overly aggressive looking, but when things come that are attractive, we take a look, and I would say there have been some very high prices paid here recently. So probably higher than what we'd be comfortable with, but at the right place, right asset, strategic fit, we're a player. But it has to be all of those.

So that appetite hasn't changed at all with the higher CapEx in 2013?

No. I mean, particularly you still have to look and see -- sometimes timing isn't your own choice (multiple speakers)

Right.

So we're a constant -- constantly monitoring and looking, but before we would ever do anything, it would have to meet those other criteria.

Okay. Thanks. That's all I had.

(Operator Instructions). Jim Foung, Gabelli & Co.

Could you just talk about your pension expense in 2013? What was it in 2012, and then what do you expect in 2013?

Yes, we do not expect any significant change, flat to maybe slightly down a little bit, but a lot of the impacts have been, the last couple years, have kind of gotten that reflected in pension expense. So it is not changing significantly, and I think, as you know, Jim, we don't really have a significant part of the Company that is actually subject to defined benefit plans.

Right. Okay. And so, your cash contribution for 2013 is going to be pretty modest, right?

Yes.

Okay. And then, just shifting gears a bit to CapEx, you mentioned it was $150 million for 2013. How much of that is for the construction of the new plants that you're building?

I'd call it about a third.

About a third? Okay.

And then, there's also a significant equipment component as well, on top of that. So you have the physical structures, the land and physical structures, and then you have the equipment. And the equipment is probably another third on top of that piece.

Okay. So your maintenance CapEx would be just pretty much around, would you say, like $50 million?

Yes, $50 million to $60 million is kind of what we've been running in the past years. There have been some smaller -- for example, the Krakow expansion and things like that from time to time. And we will probably continue to have those smaller expansions and particular sites that won't make the radar screen and are probably more on the maintenance mode.

Okay. And then, R&D, just talking about that a bit. It looks like it's just going to be modestly up in 2013, so I think you mentioned last time it's kind of been leveling off here. Do you still anticipate that, as you go into 2014, that your R&D expense is going to kind of level at this rate? And when do you expect that to start declining?

So we do anticipate that in 2013, it will be very similar in the amount of spend. So obviously, that means the percentage should go down somewhat. In 2014, we would probably continue to expect somewhere in a similar leveling. Probably as you get closer to projected launches, whether those are 2015, 2016, or 2017, would be when we would start to expect to see some of the declines, pending other things that come on between now and then.

Okay. Great. That's all I have. Thank you.

Steve McNeil, Jennison.

Hi. Just to close the loop on R&D, are you talking similar dollars or percentages?

Similar dollars and a slightly lower percent on the increase of sales.

Okay. Great. And then, on a CapEx, I'm just wondering if you could -- I mean, did you think about possibly doing operating leases here instead of building new structures? I'd imagine there's a sufficient amount of real estate out there that -- where you could get an operating lease. So maybe just talk about that a little bit.

Yes, Steve, when we look at that, the first thing we did was to look for existing facility structures.

A couple of things you have to look at is, in particular, the facility -- well, both facilities, but let me start with the Aerospace one. The facility is going to be very unique to handle the volumes and to implement new production techniques and new production equipment over what we have today. We could not find something that exactly fit that requirement that we had.

And secondly, these are 30-year programs. So when we started looking at it, it's not a short-term investment. The programs are going to go for the long term, and as we ramp up and support these programs and production, 20 years of production, plus follow on, the economics actually work okay in today's environment to own these, to get the facility we need to deliver the right equipment.

What we look at our energy side, we have some really specialized facilities and facility requirements for test, the manufacturing of some of the product, but in particular, the flow testing and things. To get the capacity we needed, the new technology, it was very difficult to find anything that would fit. They are unique buildings, and again, we do believe the programs that we've won that will go into these new facilities have got 20-, 30-year lives, so we think it's actually pretty good investments.

Okay. What's the duration of the elevated CapEx?

Well, I think it would take us through 2014 and maybe a little roll into 2015.

So another $150 million in 2014, call it.

Probably. Somewhere close to that, and then it will ramp down from there.

Yes. Okay. All right. And then, just building on that a little bit, I mean, it's a little tricky because you're putting in new capacity and the revenue is going to come, but how should we think about the margin impact of the new capacity as you're building it?

Yes, well, what we're looking at both from -- we're using the lean production, but we're also using some real advanced manufacturing technology in these new facilities. We expect that to drive a fair amount of productivity, if that's your question. So we're going to get that from there.

We do not expect the capacity and the depreciation and other things to decrease margins as we go forward, and that might also have been your question, so I don't know, Steve, if one of those answers it correctly or not.

Yes. I guess I've just thinking about startup costs and the mismatch of having costs in the system and no revenue, how that plays through.

Yes. We will have a little of that, but really the thing is is we expect, with this new equipment and the new facilities, that it will also drive improvements in margins on our existing programs. So that's one of the things we're driving hard is to have margin improvement on the existing, through the use of this new equipment and the new facilities. So that will help offset it, we believe.

All right. So you don't expect margins to compress for a period of time as this new capacity gets filled?

We do not.

Okay. Great. Thanks, guys.

Thanks, Steve.

Thanks, Steve.

Thank you. This does conclude the question-and-answer session of today's program. I'd like to hand the program back to Mr. Gendron for any further remarks.

Okay. Well, I appreciate everybody joining us today and for all your questions. I look forward -- I hope to see most of you next -- well, in a couple of weeks, I guess, out in New York and look forward to having a real good open dialogue at our annual investor day. So thanks again for joining us. See you in a couple of weeks. Bye.

Ladies and gentlemen, that concludes our conference call for today. If you would like to listen to a rebroadcast of this conference call, it will be available today at 730 PM, Eastern Daylight Time, by dialing 1-888-266-2081, or 1-703-925-2533 for all non-US callers, and by entering the access code 159-2537. A rebroadcast will also be available at the Company's website, www.Woodward.com, for 14 days.

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