Woodward Inc (WWD) 2013 Q4 法說會逐字稿

Welcome to the Woodward Incorporated fourth-quarter fiscal 2013 earnings call.

(Operator Instructions)

Joining us today from the Company are Mr. Tom Gendron, Chairman and Chief Executive Officer; and 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 fourth-quarter fiscal year 2013 earnings call. In today's call, Tom will comment on our markets and related strategies and I will discuss our financial results as outlined in our earnings release. At the end of the presentation we'll take questions.

For those have not seen today's earnings release you can find that on our website at Woodward.com. We have again included some 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 26, 2013, and 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 refer to and highlight our cautionary statement as shown on slide 3. As always, elements of this presentation are forward looking or based on our outlook and assumptions for the global economy and our businesses more specifically. Those elements can and do frequently change. Please consider our comments in light of this uncertainty.

We also direct your attention to the reconciliations of certain non US GAAP measures included in today's slide presentation and our earnings release and related schedules. Management uses these non US GAAP measures in monitoring and evaluating the ongoing performance of Woodward and each business segment.

Turning to the quarter, net sales for the fourth quarter of fiscal 2013 were $558 million, including the Duarte business acquisition, compared to $529 million in the fourth quarter of last year, an increase of 6%. Earnings per share were up 15% to $0.76 for the fourth quarter of 2013, compared to $0.66 as reported for the fourth quarter of last year. Total EBIT for the fourth quarter of 2013 was $82 million, compared to $72 million for the fourth quarter of the prior year, an increase of 13%. Free cash flow year to date increased slightly to $81 million after absorbing an increase of almost $80 million in capital expenditures.

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

Thank you, Bob. Welcome to those joining us today.

We ended the year on a strong note, more in line with our original expectations, despite ongoing global, political and economic challenges. With volatile markets impacting top-line growth, we remain focused on execution and operational improvements.

In our Aerospace segment we continue to win market share on next generation engine and airframe platforms. We signed a new agreement with Pratt & Whitney for its PurePower family of engines, significantly extending our current contract. As announced earlier this month, we were awarded the fuel system on the Snecma Silvercrest Engine Program, which consists of a suite of components including the integrated fuel pump and metering unit, variable stator vane actuator and variable bleed valve actuator. This engine has been selected by Dassault for its Falcon 5X aircraft and Cessna for its Citation Longitude.

Commercial OEM sales remain solid reflecting the strong backlogs and increased demand for fuel efficiency. Boeing 787 production continues to ramp up. The 787-9 flew for the first time in the quarter and represents increased Woodward content on this key platform. Passenger miles continue to increase at a healthy rates. We saw a moderate increase in commercial aftermarket in the quarter, even when compared to strong fourth quarter of 2012. We expect this to continue in fiscal year 2014.

Aftermarket growth in our airframe business is a key element of our profitability improvement initiatives. Aftermarket sales in 2013 increased to approximately 25% of total sales from less than 20% several years ago and is moving toward the industry average of about 35% of sales.

While the defense in the aftermarket was strong this year, significant upgrade programs on the F100 and T700 engines are coming to an end. As we go forward we continue to expect softer defense spending. The Duarte business integration is proceeding as planned. We had a good year, both operationally and financially.

Turning to our Energy markets, most of our activity in the Energy markets is tied to significant investments in infrastructure that require long lead times. The current economic uncertainties in the US, China and Europe are increasing the risk associated with these investments and therefore negatively impacting sales volumes related to shipbuilding, mining, renewable power, and large electric power generation plants. The oil and gas value stream is an area where certain infrastructure development activities are experiencing strength. For example, compressed natural gas systems in Asia continue to be driven by the desire for cleaner emissions and the existence of the supporting infrastructure. Aero-derivative gas turbines used in applications related to oil and gas exploration and pipeline construction are also a growing market segment.

Our industrial turbine business, including the heavy frame segment, while relatively flat over the last several quarters, will benefit from the recently announced Algerian Power Project over the next two years. Joint research projects of several of our customers are focusing on dual-fuel locomotive engines, where the ability to use diesel fuel our natural gas provides costs savings and lower emissions. As we called out last quarter, our renewable power business sales finished the year down by approximately $95 million. While the fourth quarter decline moderated from previous quarters, we continue to anticipate ongoing volatility.

In summary, we continue to invest where we see growth opportunities such as selected segments of the commercial aerospace and natural gas markets. Additionally, our focus on operational performance, even where sales growth has been slow, enhances our competitive position and shareholder value. We believe these strategies are particularly appropriate during times of economic and political uncertainty.

Now, let me turn it back to Bob for the financials.

Thank you, Tom.

Our Aerospace segment sales for the fourth quarter of 2013 were once again favorably impacted by strong defense aftermarket sales. Organic sales were up slightly when compared to the fourth quarter of the prior year. Aerospace earnings as a percent of segment sales were 18% this quarter, roughly comparable to the same quarter a year ago. Earnings were positively impacted by margin improvement initiatives, favorable product pricing and mix, as well as lower investments in research and development. These were offset by higher variable compensation expense in the quarter.

In our Energy segment, sales decreased approximately $14 million in the quarter. Excluding renewable power systems sales, sales for the Energy segment were flat when compared to the prior year. Renewable power systems sales declined approximately $95 million for the full year compared to 2012. Strong sales of compressed natural gas systems and aero-derivative gas turbine systems were offset by softness in mining, power generation and marine applications.

Energy earnings as a percent of segment sales were approximately 15% this quarter compared to about 13% in the same quarter a year ago, reflecting our focus on improved financial performance initiatives. Segment earnings were primarily impacted by favorable product pricing and mix and lower research and development expense, partially offset by decreased wind turbine converter sales volume and higher variable compensation expense.

Now, I would like to focus on certain specific elements of our consolidated financial statements. Gross margin percent for the fourth quarter of 30.3% was comparable to the prior-year quarter. Research and development costs were $31 million for the fourth quarter of 2013 compared to $36 million for the fourth quarter of 2012. As a percentage of net sales, research and development was 5.5% in the fourth quarter of 2013, compared to 6.8% in the fourth quarter of 2012.

For the full 12 months of fiscal 2013, research and development was 6.7% of sales, compared to 7.7% for the same period of 2012. For fiscal 2014, we expect our spending on R&D expense to be approximately 7.5% of net sales on increases in hardware builds for prototypes in both segments. 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 $48 million or 8.5% of net sales this quarter, compared to $46 million or 8.6% of net sales in the same period of 2012. Our effective tax rate for the fourth quarter of 2013 was 30.2%, consistent with the same quarter last year. Our full-year effective tax rate was 26.9%, down from 28.4% in the prior year. The decrease in income tax rate for the full year was primarily due to the favorable impact of the reinstatement of the research and experimentation tax credit. For fiscal 2014, we expect the effective tax rate to be approximately 28%.

Looking at the balance sheet and cash flows, we generated a strong $223 million of cash flow from operations for fiscal 2013, compared to $144 million for the prior year, primarily the result of improved working capital management and the timing of sales during the year. Free cash flow for fiscal 2013 was $81 million, largely consistent with the prior year. Capital expenditures increased $77 million in 2013, compared to the prior year.

As previously mentioned, our capacity expansion projects related to awarded narrow-body programs and anticipated natural gas growth opportunities are underway. Capital expenditures for fiscal 2013 increased as expected to $142 million from $65 million for fiscal 2012. For fiscal 2014, we anticipate capital expenditures to be approximately $220 million, subject to the inherent variability of large-scale construction projects. Our original projection of $500 million in capacity expansion spread over a three to four year period is still on track.

Lastly, let me turn to our outlook. We anticipate fiscal 2014 sales to be between $1.95 billion and $2.05 billion and earnings per share to be between $2.10 and $2.30 for fiscal 2014. We expect slight growth in our fiscal 2014 sales for both our Aerospace and Energy segments. In Aerospace we anticipate growth in commercial aerospace offset by declines in defense. For Energy, the increases in sales of natural gas related products and systems are expected to be partially offset by decreases in products related to other large capital investment projects. We believe segment operating margins will be largely consistent with fiscal 2013, after adjusting for the impacts of the renewable power business specific charges.

Once again, our first-quarter sales will be sequentially lower as a result of normal historical trends, such as customer calendar year buying patterns and holiday plant shutdowns. I'd like to point out that on December 6 Woodward will host an investor and analyst day in New York City, as mentioned in a press release issued in October. Tom and I, as well as other members of the executive team, will review Woodward's markets, strategies and financial performance, as well as answering your questions. We look forward to seeing many of you there.

This concludes our comments on the Business and results for the fourth quarter and full year of fiscal 2013 and our fiscal 2014 outlook. Operator we are now ready to open the call to questions.

(Operator Instructions)

Pete Skibitski, Drexel Hamilton

I wanted to start with the Aerospace guidance for fiscal 2014. Maybe first, of your total guidance for revenue for Aerospace next year, how much of the total is commercial? Is that maybe two-thirds of the business now? Now that you have bought Duarte? Can you give us a sense of how much commercial should be growing next year? Because I would think it would be up pretty good and enough to offset defense unless defenses is down pretty meaningfully next year.

Maybe, just a comment on defense sales. We expect defense to be flat with a range of plus or minus 5% or so of sales. It will be like that for a number of years. When the OE is down, we see some aftermarket and upgrades compensating for that. We see that being flat. They account for about, defense is about 22% of sales. As we go forward, you are correct that commercial is getting to be a larger part. We see really good backlogs in the large commercial. We see line rates improving. We see 787 coming up to speed. We see that as a positive. We also anticipate slight growth in the aftermarket, so we think commercial will be more than offsetting the defense decline.

Can you give us what the backlog is for end of your backlog for Aerospace?

We don't publish that, and the reason is with a lot of our customers we are on what we refer to as a pull system. We don't necessarily have long orders, but what we have are exclusive positions on the program. So, we know we're going to get the backlog that's out there, but it's now booked in orders because of the production system we run with our customers.

Let me ask one last one before I get back in queue. Can you give us what your expectations for D&A next year? I'm just wondering what the offsets are, D&A, there's a lot of different things going on? Can you give us a expectation for that next year?

It will be largely flat with the current year. So, slight decrease As, slight increase in the D, overall being largely an offset.

Got you. Thanks guys.

William Bremer, Maxim Group.

Can you give us an idea, operating margins in Energy, up sequentially significantly in over year over year. What contributed to the high 15% plus operating margins this quarter?

We've been talking about operating margin improvement initiatives for quite some time, and we are starting to see those come into play. Obviously, in the third quarter you had the significant impact of the renewable power system that dragged it down. Even then, when we were showing the Energy without that impact, you saw significant increase. It's been a lot of hard work on the part of both our turbine business and our engine business in terms of bringing up those margins and we're seeing that come into play.

Do you expect those margins -- I heard your earlier comments, but how should we look at the operating margins in the Energy segment as we go through 2014? Very similar to your historical quarters? Or is it going to be more of a pull through?

It should be very similar when you exclude the results. Obviously, both the charges, the specific charges related to renewable and the lack of favorable leverage of the sales decline will hopefully start coming back a bit next year in terms of the impact of getting some leverage on wind sales. The rest of the business will continue to see sequential increases as we go forward. Overall, we've called them out as substantially similar to this year.

Okay, thank you.

Tyler Hojo, Sidoti & Company

First question, just wanted to touch on the $220 million CapEx expectation for FY14. I was hoping that you could maybe provide us with a little bit of detail in regards to what that goes to this year? Also, when you talk about your 3 year goal for $500 million, that is fiscal 2013 through fiscal 2015? Or is that fiscal 2014 through fiscal 2016? Thanks a lot.

We're kind of saying 2013 through 2016, a 3, 4 year period. It is timing. As we highlighted in previous discussions, with the large amount of business we've been awarded on the commercial aerospace market, we really were, in that segment, running out of capacity. At the same time, with the volumes that are coming with the narrow-body programs, we decided to put in a really advanced, lean value streams, lean flows to accommodate that and to look and really needed to construct new facilities. We have a very large, new modern facility being built to support the narrow-body programs and some of the wide-body programs. That is a big chunk of the $500 million.

The other part of that is really supporting the growth we see coming in the natural gas value stream. In there we see a lot of activity coming and will be coming on the turbomachinery side, as well as in the engine side. There, we started looking at the we were going to run out of test capacity. We needed some more investment in the R&D infrastructure to support the development programs that are underway. We see a lot of growth coming over those over the next 5 years. Basically, what we're doing is getting ready for the growth that we think will start kicking off in this 3 to 5 year horizon. Those are the main -- it's the facilities and the equipment to support the volumes that we're forecasting with commercial aerospace and natural gas.

Okay great. Then, just if we look at your free cash flow expectations in 2014, I don't believe you guys provided a guidance range for that. Would you mind updating us?

We continue to anticipate strong cash flow from operating activities in 2014. If you take that $220 million of CapEx expectation at the moment, we are going to be pretty close. We do anticipate we will fund the CapEx through cash flow from operations, but it won't be a significant delta over that expectation. It will be close, but we will be over on overall free cash flow.

Okay, thanks for that. I was also hoping to dig a little bit more into the 2014 revenue guidance. Did I hear you correctly, Tom, in regards to IGT? You expect that business to grow next year, vis-à-vis the Algeria order that GE got?

We expect to be, on the large train turbines, flat to maybe slightly up. Aero derivative, which we put in IGT category will be up year over year. The small industrial's will be flat, slightly up, but they're not real significant to us. What we see is aero derivative driving increased sales in our turbomachinery group.

What I don't understand, Tom, is when we look at GE's large gas turbine deliveries, they have fallen off quite a bit this year. What's made your business more stable? Why will it be more stable to growing next year when your customers won't?

One is, just remind everybody, that GE is our largest customer. We also do a significant amount of work with Siemens and Mitsubishi. So, you have to look at the whole industrial turbine market, including the heavy frames and the aero derivatives. We have really solid positions in both. When you take the whole market together, on the heavy frames we'll be slightly up, aero derivatives will be up much better.

Okay, great. Just last one for me. I think everybody understands why the wind inverter business was down this year. What is baked into the guidance in terms of expectations there for your fiscal 2014?

We really, in the third quarter we called out that without that was the bottom of the trough, and we do think that was the bottom. We're going to see a slight growth in 2014. We do anticipate we are going to be profitable in 2014. It may take us into 2015 and the like to get up to the expectation levels, but we really believe we got the business sized correctly, the markets have turned. We are on the upswing now. We think that we are positioned well moving in 2014 and 2015.

Thanks so much. That's all I had.

Julie Yates, Credit Suisse.

It looks like defense aftermarket was a source of strength again. What was the growth rate in the quarter? Then for the year? What are you embedding in your guidance for next year as these programs come to an end?

It was roughly 2.5% was the growth again this quarter. Right now, as you point out, we are expecting it to drop down a bit. We had some substantial upgrade activity that was taking place in 2013 that won't continue in 2014. Then, there is the likely come back in 2015 on some other upgrade programs. We have a lot of good content on a lot of equipment that's still getting a lot of use. Next year we do not expect the same strength in defense aftermarket, but we believe overall it will remain fairly stable.

Okay. I think last quarter it was up 38% year to date for the first nine months. What does that fourth-quarter number bring you to for the entire year?

Hold on one second, Julie. We're trying to quickly --

Okay, well I can follow up with you on afterwards.

To the total amount was 18% for the quarter. Not 2.5%.

The commercial aftermarket was 2.5%.

Oh, commercial. I'm sorry, I gave you the commercial, Julie. So it's a 18% up in the quarter for the military, 31% for the full year. What does that bring to us in total dollars?

Just the growth rate was all I need. So, 31% for the year in military aftermarket?

All right. Good.

Then what are you embedding for incentive comp in the FY14 guidance?

It is a significant headwind. We have a couple of significant headwinds, both in variable comp and R&D will return. We talked about having a fairly heavy prototype build coming in 2014. Between the two of those, we are in the neighborhood of $30 million of headwind between the two.

Okay.

Variable comp will be about two-thirds of that number.

Okay. Then just last question, the last 2 year's actual results have come in below your initial expectations. Can you talk about any changes you have made to your guidance setting process and how you feel about the $210 million to $230 million range in terms of the level of conservatism you that you are embedding?

Thanks for pointing that out, Julie. (laughter) We think we have had a decent process over the time. We had more issues on the top line. If you watch the way the things materialize our cost, control, our margins have been pretty accurate. We were suffering top line in some of our markets from whether you want to look at mining or renewables or shipbuilding, took bigger hits than our forecast. We've been looking conservatively at our forecast and trying to deter. We have a good handle on the potential volatility and if you want to say the range on what they can go. We are closely monitoring the global economy in each country, specifically where we have significant sales. I still think we're going to be, as Bob mentioned some of the numbers, we will be quite accurate on our costs and our margins. It's truly my mind is getting the top line right to ensure that we did not miss our guidance that we are giving you. I think we're on top of that right now.

Okay great. Thank you very much.

Sheila Kahyaoglu, Jefferies

A few questions if you don't mind. The first one, in terms of the Energy market, it seems excluding wind you sales were flatish in the second half of 2013. It appears that things will grow -- be at least it flat to growing low single digits next year. Is there any part of your business within Energy, aside from wind that you could see potentially down next year?

Right now we are still seeing softness in our sales that go to mining. We think that is not going to recover necessarily in 2014. Some of the ship building is still very soft. Those are probably two where we have a high degree of concern on. As we mentioned, we see a little bit on large gas turbines, but that's not huge growth. We see little bit there. Those are kind of the underlying fundamentals. We're going to be watching closely the economy and our customers. Where we have some growth, as we mentioned earlier, we have some of these things that are offsetting it and overall we see slight growth. It is going to be, we are anticipating as we move further into the year, we are going to see some of that pickup. So, really it's second half oriented in our forecast.

Okay, got it. Is it fair to say that shipbuilding and mining is about 10% 15% of Energy sales?

That's in the right range, yes.

Okay, got it. Then just one quick one on defense aftermarket. What percentage of your business is tied up into long-term contracts? What proportion do have visibility into next year?

On the aftermarket?

Yes.

We usually have contracts that go 1 to 2 years in the aftermarket, defense aftermarket. Depending on the upgrade program, sometimes they can go a little bit longer, depending on how they move through. You have some visibility, but then some of the aftermarket work is repair and overhaul and the like. That is a little bit more, we don't have as much visibility there.

Okay, I understand. Just lastly on margins, I understand the sales forecast and the EPS guide. In terms of margins, it seems like you're basically embedding flattish margin expansion and that is because of the $30 million headwind, two-thirds due to the variable comp and one-third due to R&D and organic growth that is flattish, so your incrementals are about 20%. Is there anything else we should think about in our forecast?

What that points to is we still do have a lot of margin improvement opportunities and productivity improvement that are kind of offsetting a lot of those headwinds. So, you are right. On flat sales, to be covering those headwinds and still to be seeing consistent segment margins is actually covering a lot of cost increases.

Okay, got it. Thank you very much.

Peter Lisnic, Robert W Baird.

I want to clarify one first. You talked about a $30 million headwind with variable comp being two-thirds of it, but if I do the math on R&D at 7.5% on $2 billion of revenue there is $20 million right there. So, did I hear incorrectly? Or is the headwind more like $40 million? Or am I just suffering from using midpoints for my math? Or what is the reconciliation there?

All of the above. (laughter) We struggle with the -- again, if you do the math at the midpoints and so on. The R&D number could be a little bit higher, so my two-thirds is a rough and tough to give you a directional, and you know how variable some of those can be. That's other thing we tried to call out is that both R&D and obviously variable comp is always variable based on how we do and the prototype builds and everything else. $30 million $40 million, I know that sounds like a big range, but the reality is that's what it can be.

Okay. But on a combined basis, those two are the reason why you have sales up when you look at 2014 versus 2013 and EPS down when you're looking at the midpoint at least. Correct?

That's right.

Okay, all right. Then, I was wondering if you could maybe give us just a little bit of color in terms of inventory positions at your customers? Are there any risks that you look to the various businesses in 2014 to customers maybe having to cut back inventory even more than they have in that leading to any sort of production hits or absorptions hits that you might have to absorb in 2014 that wouldn't be embedded in your forecast?

Pete, what I would say is we are looking at it at the opposite. I don't know if you have heard of the term bullwhip effect on inventory. If you look at a lot of our major customers, they have taken inventory down for the last couple of years and took it down in 2013. In particular, you can look at CAT and some of the activity at GE and some of our other large customers. So, I don't think we have a big risk on anything with further drops in inventory. That's not in our -- we're not anticipating that. We are trying to make sure that we're going to be agile if we do see the bullwhip effect that we can respond to it. That is something that we plan for, but we don't know if that will hit in 2014 or not. We think the inventories are actually more of an opportunity going forward than a headwind.

All right, that helps there. Then I just wanted to go back to R&D for the last question. The 7.5%, obviously big acceleration from what we saw 2013, more in line with 2012. Is that just a reflection of expenses being pulled forward a bit just given customer requirements? Or is there new business there that maybe is going to lead you to talk about or think about stronger growth rates as you look to 2015, 2016, 2017? Is it incremental or is it just timing, I guess would be the way of asking it?

What I would say is we have continued to secure more content, so we do have that. As we have promised, December 6 we're going to release some of those content numbers on the Aerospace side. What we do have, and it is an exciting time right now, if you look. A lot of the big programs we are on have made some huge milestones. I know you guys all follow this, but the CFM LEAP engine has run. They're going to start moving to further engine testing, flight testing. PurePower flew on the C-Series, and it worked well. The Passport 20 engine has fired up. On each of these big engine platforms, and then building the airframes as well, there is a lot of development, growth testing and then flight testing. What we're really seeing in 2014 is a very large amount of prototype and flight test hardware on the Aero side that is going. That is driving the R&D up. What you really had was getting to that point in 2013.

The real promising thing is all these programs are holding the schedule, so far. I'm quite encouraged that they're moving along well. On the Energy side we also have quite a bit of development activity going on. We have mentioned before that on the R&D number we're going to have quarter-to-quarter variability. That variability is not tied to our engineering our technician load. It is really tied to hardware and specific deliverables. That is what you are seeing here. There wasn't any push outs anything. It's just the timing of both the Energy programs and all of these Aero programs migrating to actually test and flight test. Expensive, but exciting times. We're looking forward that they hold to those schedules and we start going to production in 2015.

Understood. Okay. Thank you very much for your time and help. I appreciate it.

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

When do you start to see the benefit of your nice market share wins on LEAP and PurePower? Would that be something that kicked in early 2015?

Yes, the forecast right now is the A220neo is going to go third quarter 2015. That brings the LEAP and PurePower both, it's a dual-sourced aircraft. Boeing, right now is talking 2017 and it is a little flexible on the exact quarter, but that is coming. That is on its heels. Flight test on the Globe Bombardier Global Express with the Passport 20 is going to be in the 2016, 2017 timeframe. Then you've got the C-Series, which is in flight testing. Right now, I know they pushed it out a little, slightly. That is coming online, too. All these programs, we have significant content. The other one, not to forget, too, is the 787-9. We have more content on the -9 than we do the -8. That being in flight testing and then going into production here in the next year is going to be a positive for us.

So theoretically, R&D peaks n 2014?

Yes, I believe so probably in terms of dollars and hardware, roll into 2016. Then, you're going to see R&D expenses come down, both dollars and as a percent of sales, as we go forward from here. Because we have been operating at I'd say elevated levels due to these large wins that were all concentrated in the shortened amount of time. That is an expectation. If you look 1% to 2%, somewhat in this range. We've been running at this 7% to 8%, which is what we've been running for the last couple of years. That 3 to 5 year time period, it's going to drop 6% and below.

Okay. Then maybe one for Bob. Bob, can you give us an interest expense expectation? Any potential balance sheet changes?

No significant change at all on the interest side of the equation. You saw some of our announcements regarding the locking in some nice favorable long-term low rates. We'll be down a little bit as we go forward. Significant balance sheet, overall, largely will be driven by the CapEx. That will be coming online as we've been pointing out, and so over time you will see some increase in DE to that question regarding the depreciation and amortization as we go forward. Other than that, not a lot of significant change overall in the balance sheet.

Thank you, sir.

Michael Ciarmoli, KeyBanc Capital

Bob, just a follow up on that. Can you quantify how much interest will be down year over year?

It isn't significant in the first year here. So, I would model pretty much flat with this year.

Okay, perfect. Then just on the military aftermarket, you guys obviously had a tremendous year, you're up 31%. Looking at what a lot of other companies in this space have had to say, they've seen some pretty significant declines. Being down 5% next year, seems like it might be a little bit of an optimistic view in light of readiness spending coming down, flight hours coming down. Do you have pretty good visibility? I know you said you are on 1 to 2-year contracts there. Do you have pretty good visibility? Or could you see some surprises with ongoing sequestration? Just trying to get your comfort level in that down 5% versus what is likely a peak level for you guys here?

Well one clarity on that, that was total defense sales.

Okay. Not just defence aftermarket?

Not just defence aftermarket. So, there is a mix and there's still things that are increasing. Just to remind everybody, we do have excellent position on the F35 and the tanker and some of that activities moving forward. We see the mix on the aftermarket, and as we're calling out, that will be down. Overall, I'm saying is not going to be dramatic on total defense sales. Our view is that's going to continue to be in the, if you want to call it a 5% to 10% band, through the next few years. It's going to be this, what I call, just this underpinning of the business, it is not going to be a cliff. It is not going to be growth. It is going more in the steady category with about that type of range of variability.

Okay, that's helpful. Then, just shifting into Aerospace, you mentioned the 787-9. Even with the 787 coming online, you mentioned a bunch of the new engines. Are those going to be a margin headwind for you as those programs ramp up? Or, do you expect those programs to not be diluted to your Aerospace segment margins on these initial deliveries?

We expect our Aerospace margins to continue to increase towards our targeted level that we provide. We think, overall, when you look at the Aerospace, what we call the Aerospace, you don't see the value model. Even when you launch a new OEM program you're going to also sell initial provisioning spares. Those come with very good margins. Then, as they accumulate hours on it, then you start to get piece parts and repair and overhaul revenue to go with that. We think we will be able to manage that and continue to grow margins through that time period.

Okay perfect. Then, just the last one for me. The Silvercrest engine, does that roll through R&D? Is that something that is hitting this year? Just trying to get a sense of what else is driving up that R&D this year?

Silvercrest is in there. It has been for the last couple years. It is a big program, as you can tell by all of the content we had. The engine is performing well. The BizJet manufacturers take a little more time before they announce their planes, so you're going to see, like on the Falcon, it's going to start flight testing, not that far. You can see that it has been going for a while. That's a very nice engine for that market. We have been spending on it, and it has been going for the last 2 years.

Okay perfect. That's all I had. Thanks, guys.

Pete Skibitski, Drexel Hamilton

Just a couple follow ups. Tom, just to clarify, on the military sales up 31% in fiscal 2013, that was total military but that's not all organic, right?

No, for confusion, that was military aftermarket, not total military.

Okay, military aftermarket. But again, that is not all organic, right? Duarte has some military?

Correct.

You don't happen to have the organic number, do you?

We're trying to get all our numbers straight here on that piece. But that is the organic growth for aftermarket, for defense aftermarket. And do we have it with, Dorothy?

For aftermarket?

It is 46% including Duarte.

Okay, got it. Then I might have missed this earlier, but on the Aerospace revenue guidance, you have got the military down roughly 5% and then it sounds like maybe the balance of the commercial is maybe up 5% or so. If we parse that, are you assuming that commercial aftermarket is only modestly up? Kind of in line with traffic growth? And OE is maybe up mid to high-single digits?

Yes, that would be a correct assessment. We continue to see the underlying dynamics of the aftermarket that have not declined. So, we anticipate it should continue growing in next year. You've seen some of the production rate increases on the commercial OEM side. We envision those will be low single digits as well.

Okay. Last one. On the incentive comp, can you just remind us what that is based on? Maybe we can extrapolate out a couple of years. Because I think it's just obviously the top line was kind of weak this year and up only modestly in fiscal 2014. It's a little surprising to hear that it is going to be a meaningful headwind in fiscal 2014. It looks like it is going to even outpace earnings growth and certainly free cash generation. So, can you give us a sense of what the drivers are there?

Yes, a little bit. If you look at incentive comp and the reason there's a headwind, is that we did not meet, across the board, target incentive comp in all of our business segments. What we do each year is we set a target incentive comp based on performance that we seek to achieve in the year. There's many elements of our incentive comp, but in fiscal year 2013, when you take it all together, and our philosophy in our Company is that we have everybody has an incentive comp piece to their total compensation package, that we did not meet target performance for fiscal year 2013. When you roll into 2014, you reset everything, we are resetting it to achieve target performance, and that is the headwind.

Okay. But target performance, is there a main driver of what that is? Is it earnings or something?

The main driver is earnings.

Okay.

As we discussed earlier, we did not hit our earnings guidance that we initially set up for the year. As we discussed earlier. That is the main reason parts of the incentive comp, and there's various plans, as I said, all of our members worldwide have a portion of incentive pay. We did not -- and EPS was the main driver.

Okay. Thank you.

Steve McNeil, Jennison.

Just building on the last point. I'm just trying to triangulate. Has the performance bar is it as equally high this year as it was last year?

Steve, as look in, when we look at, you say the performance bar, is earnings percentages, whether at the segment level or the Company level and like there is improvement in all our metrics that we go. So, the bar is not being dropped from that standpoint. That's how we base and we seek to improve. Within those improvements is also the ability to pay for the bonus as well as pay for the additional wage benefits, R&D expenses. There's a lot of expenses that have to all be absorbed and an improvement in our margins to then trigger our incentive plans.

It can be fair. Should we be using the $210 million number that you reported including the charge this year?

What we used for incentive comp purposes was $203 million on earnings. The reason that is, is that's earnings less the 2012 retroactive R&E credit. That was a non-operating result from a prior year, so that didn't get included.

But the midpoint of the guidance is only 8% growth year over year?

On earnings, yes.

On earnings. And that triggers a $20 million comp? If you go from a relatively low level to back to target, I don't know if you recall, Steve, it was not that many years ago when we called out what the range was. Yes, it has a significant impact.

So you understand, again, I want to highlight. Every member in Woodward has an incentive comp piece to their salary. When you look at that number, that's across 7,000 people. We think the philosophy works, and it helps keep everybody aligned. So, yes, the numbers -- total incentive comp is when you run a high variable pay based on performance, it is a big number.

Yes. You said $203 million for 2013, what was the number for 2012? Do you remember?

$201 million was the actual number, Steve.

For 12?

Yes. So, you can see there's not a significant increase going from $201 million to $203 million. That's why, as Tom pointed out, we did not meet our expectations and therefore variable comp was not at target. I want to also point out, there's two other pieces to the puzzle. The question was asked, how is it based? As Tom mentioned, there is a very broad-based earnings-per-share target. There's also stock comp and long-term incentive plan. Stock comp is driven by share price, and as you have seen what the market's done, that piece is increasing as well. On l-tip is relative to our peer group and we're holding our own relative, as everybody's pointing out.

Yes, I would refer everybody that wants more detail on this, it's really spelled out well in the proxy. You can look at last year's proxy, the plan is the same. I would go look at the proxy. It is really well spelled out. We think it hits all the key metrics to drive. We have annual and long term. We're trying to make sure we perform in the short term, but that we have all of the incentives in the right place to bring long-term value to our shareholders. If you look, I think they're very good plans and they're really well spelled out in the proxy.

Okay, great. One other thing on R&D, Tom, you referenced dropping the 6%. Is that something that happens in 2015? Or is that something that is more 2016?

I think you're going to see -- it's is more like 2016 to 2017. We're going to have to watch as how the programs, if they stay on schedule and everything, it will be sooner. There is a lot of variation in R&D. This has been a very high load that we won a lot of programs all at once. That's why the R&D ramped up so high. As these come out of development, I anticipate we are still win more programs, but it is not going to be all these ones at this peak that we have had here for a few years. It will start coming back down, and that would be more towards historical levels, going forward. With the growth rate, and we talk about percentages, the growth rate in sales that will kick in, it will be a little lower number.

Great. Thanks.

(Operator Instructions)

William Bremer, Maxim Group.

Last one, what is a good fully diluted earnings per share figure for 2014? Shares outstanding, I meant. Sorry gentlemen. (laughter)

We thought we gave that one to you, Bill, already. (laughter)

Approximately 70 million shares.

Thank you (laughter)

Julie Yates, Credit Suisse.

Bob, I wanted to just get what the commercial aftermarket growth for FY13 was?

Okay. Hold on, we're going to pull this number and make sure we get the right number going here. Commercial aftermarket, organic, down 3.3%.

Okay. Just to be clear, you're expecting that to return to mid single-digit growth in FY14?

That's right.

On wind or renewables, where did you end the year in terms of on absolute dollar basis? Was it around the $100 million target that you had thought?

Slightly above, it was about $117 million.

$117 million?

Right.

Okay. That's why you think you can get to that $120 million number, which is where you needed to breakeven, next year?

That's right

Okay. Understood. All right, thank you.

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

Okay, I appreciate everybody joining us today. I appreciate your questions. I hope a lot of you will make it to our conference in New York on the 6th. We are going to provide some more details. I look forward to seeing a lot of you there. Thanks, again, for joining us.

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 PM 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 1626043. A rebroadcast will also be available at the Company's website, www.Woodward.com for 14 days. We thank you for your participation on today's conference and ask that you please disconnect your line.