Woodward Inc (WWD) 2014 Q1 法說會逐字稿

Thank you for standing by. Welcome to the Woodward, Inc. first-quarter fiscal 2014 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. (Operator Instructions).

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 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 2014 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 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. 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 February 4, 2014, 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 first quarter of fiscal 2014 were $429 million, including the acquired Duarte business, compared to $408 million in the first quarter of last year -- an increase of 5%. Earnings per share were down 13% to $0.34 for the first quarter of 2014 compared to $0.39 for the first quarter of last year.

EBIT for the first quarter of 2014 was $39 million compared to $45 million for the first quarter of the prior year, a decrease of 13%. Free cash flow for the first quarter of 2014 was $7 million compared to $10 million for the first quarter of 2013.

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

Thank you, Bob, and welcome to those joining us today.

This quarter we saw some strengthening in several of our markets and volatility in others. Energy markets appear to be firming, and commercial aerospace remained strong, while defense aerospace sales were weak.

More specifically in aerospace, Boeing 737 and 787 production rate increases are driving strong commercial OEM volumes. Commercial aftermarket is improving, more closely aligned with the consistent increases in revenue passenger miles. Commercial rotorcraft market is improving for both new and existing platforms, mainly driven by the oil and gas industry.

For Woodward, defense aftermarket was very strong in 2013; and in this quarter we saw a decline, as anticipated. This was due mainly to completion of specific upgrade programs and contract timing. Defense OEM was also soft this quarter.

We continued our investment on next-generation engine and airframe platforms in support of near-term milestones, including engine test and aircraft flight testing. We recently announced the signing of an agreement with Pratt & Whitney for its PurePower family of geared turbofan engines, significantly extending the term and expanding the scope of our current contract.

Turning to energy, natural gas applications continued to increase, particularly in Asia in compressed natural gas vehicles. Sales were strong in aeroderivative gas turbine, which are used in power generation and compression applications, although large gas turbine power generation markets remained soft.

We're beginning to see some firming in a number of energy-related markets. Shipbuilding contracts are up, demand for large gas engines used in power generation is increasing, and wind turbine projects are starting to move forward.

Energy segment margins were significantly higher as a result of our continued strategic focus on Lean initiatives and productivity. As energy markets rebound, we believe this will provide greater earnings leverage.

At the strategic level we continue to bring new technology to industry leaders in our markets. We have expanded market share with our existing customer base and added important new customers. Our growth strategies have delivered substantial new program wins as well as positioned us to capitalize on future opportunities.

Our focus is on delivering improved profitability even in challenging environments through Lean manufacturing, productivity improvements, and overhead reductions. The current economic climate, while still fragile, appears to be improving. We believe these efforts will enhance our financial performance both now and in the future.

Now let me turn it back to Bob to cover our financials.

Thank you, Tom. This quarter was fairly clear: commercial aerospace sales were strong; defense aerospace was weak; and energy was mixed.

From an earnings perspective, the decline in defense sales, particularly aftermarket, provided a headwind; and the earnings improvement in our energy segment was significant.

Aerospace earnings as a percent of segment sales were 9.8% this quarter compared to 14.9% in the same quarter a year ago. Earnings were impacted by reduced organic sales volumes and unfavorable product mix.

Organic sales were down 6% when compared to the first quarter of the prior year. Defense aftermarket sales in 2013 were very strong, and we anticipate a decline in 2014, which we did experience this quarter. But as Tom mentioned, we believe our defense aftermarket sales will improve throughout the year as new upgrade programs are implemented.

Defense OEM sales also declined, but not as significantly. In our energy segment, sales increased slightly in the quarter. Strong marine and solid aeroderivative sales were partially offset by continuing softness in heavy-frame turbine power-generating systems.

Energy earnings as a percent of segment sales were approximately 13.6% this quarter compared to 12.1% for the same quarter a year ago, reflecting our focus on improved manufacturing productivity initiatives. Examples include product design improvements; more efficient manufacturing flow; and the use of new technologies. Now I would like to focus on certain specific elements in our consolidated financial statements.

Gross margin percent for the first quarter of 2014 was 26.5% compared to 29.1% for the first quarter of 2013. Gross margin percent decreased primarily due to loss of leverage on lower defense sales and unfavorable product mix, partially offset by improved operational performance.

Research and development costs were $29 million for the first quarter of 2014 compared to $30 million for the first quarter of 2013. As a percentage of net sales, research and development was 6.9% in the first quarter of 2014 compared to 7.4% in the first quarter of 2013. We will continue to see quarterly variability, primarily due to the timing of achieving development milestones.

Selling, general, and administrative expenses were $37 million or 8.7% of net sales this quarter, largely consistent with prior-year quarter. Our effective tax rate for the first quarter of both 2014 and 2013 was 29%.

Looking at the balance sheet and cash flows, we generated $44 million of cash flow from operations for the first quarter of fiscal 2014 compared to $40 million for the same period of the prior year. Free cash flow for the first quarter of fiscal 2014 was $7 million compared to $10 million for the same period of the prior year.

Capital expenditures were $37 million for the first quarter of 2014 compared to $30 million for the same period of the prior year, reflecting growth in spending related to our capacity expansion projects. For fiscal 2014 we continue to anticipate capital expenditures to be approximately $220 million, subject to the inherent variability of large-scale construction projects.

Lastly, our outlook remains unchanged. We continue to expect our 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 per share.

This concludes our comments on the business and results for the first quarter of fiscal 2014. Operator, we are now ready to open the call to questions.

(Operator Instructions) Pete Skibitski.

I just wanted to -- delving in further on aerospace margin rate in the quarter, can you give us a sense of how much defense aftermarket was down? And then, are you still expecting defense to be kind of flattish, maybe modestly down for the full year?

Defense in total was down $25 million, which is about 28%. So you can see, that is a fairly significant overall decline. That is both OEM and aftermarket.

What happened this quarter is we saw the completion of a number of programs in the fourth quarter of the prior year. And then with the budget dialogue that was going on, some uncertainty early in the quarter related to the signing and executing on new contracts, which with the recent budget resolution should clear up as we go forward.

So for the full year as we go on, we anticipate some recovery from this first quarter. But we don't think we can recover the entire quarter. So overall, we are now looking at probably about a 10% overall decline in defense in total for the year.

Okay, got it. And then just one follow-up. Do you still think aerospace margin rate as a whole will be up year over year?

Up year over year? We said it would be fairly consistent with the prior year, and so I say at this point, still too early to say whether it would be up or down. But we do believe it will be consistent with the prior year.

Got it. Okay. Thank you very much.

Julie Yates.

Can you guys give some more specifics on where exactly you are seeing the improvement in energy?

Julie, are you referring to sales or earnings?

On the sale -- well, on both, I guess. But specifically just on the volume side.

Yes, on the volume side we're definitely seeing gas engines, reciprocating engines, increase. That has been a strong part of the market. We are seeing some very, very slight improvement in large diesels, which we think is a good sign going forward, which really attach to the marine market.

We're also seeing aeroderivative gas turbines. And that, we believe, is primarily being driven by the natural gas expansion. And a lot of that is used in pipelines and compression applications.

So those are some of the ones in energy that are increasing in the quarter. And for the year we're starting to see improving order book outlook. So we see that starting to materialize.

Also, on the wind side of our business, it was fairly flat. And so going back to the message we had earlier -- or last year, we definitely have seen the bottom of the trough, and we're in a better position on the renewable market.

Okay. And then any comments or read-throughs from Alston's more cautious comments?

I am sorry, say that again?

Any comments or read-throughs from Alston's more cautious comments?

No, not too much. I think if you look at a number of our customers, what we have seen is kind of the same as is reflected in our sales: that this quarter was a little soft on revenue, but the order books are filling in. I think you've probably seen that on some of our other big customers that are now talking about the order books increasing.

So that is kind of what we are seeing, is that we think we're moving into a better period; the orders are starting to come in. We discussed at our Investor Day in December that we were going to have a strong second half, and that's still what it's looking like as the orders fill in.

Okay, thank you very much.

Sheila Kahyaoglu.

Can you elaborate a little bit more on Pete's question in terms of the moving parts within aerospace margins? They contracted 500 bps year over year, and I think this was one of the worst performances in the segment's history. So how much of it was defense, and how could you prepare for the rest of the year? If you could walk us through that bridge a little bit.

Yes, ouch, Sheila. (laughter) So, clearly, we did see predominantly the defense decline; and we are getting to that point with that where we are not experiencing the nice leverage that you usually get on increased sales. So there is some negative leverage aspect going on.

We did mention predominantly defense aftermarket. And, obviously, they have similar construction in terms of the OEM versus the aftermarket. So that is the unfavorable product mix that we referred to.

In addition, the acquisition of Duarte in this year, not in last year, that at this point in time, as we have described, it is a bit of a headwind overall from an earnings perspective. It is remaining slightly accretive as we have said; it is improving, but it is still not at the same level of earnings as our legacy aerospace business.

So that is predominantly the three main areas. We referred to a number of the programs that will pick up again in the second half, and some of those upgrade programs and other aftermarket activity are nice contributors for us.

Thanks, Bob. What are those upgrade programs we should be looking out for?

We called out things like the T700, and then a number of other areas that aren't necessarily specific programs, but V22; some of the F-100 related to the F-15 and F-16. Some of those programs that were -- we called them kind of on a hiatus here a little bit in the first quarter that will pick up again as we go forward.

Okay, got it. And then, similarly, within energy the margins actually have been very good for the last three quarters in terms manufacturing productivity initiatives that you are putting into place. Is there a specific business or facilities that you could call out -- Lean initiatives that are working?

I think it is a series of lots of Lean initiatives. And in particular, and maybe just to name a couple of programs, we have talked about our small gas engine sales in China. The team has done some great work on improving those and getting some costs out from our standpoint. But there's a lot -- just a lot of work on a lot of programs that are causing those margins to improve as we go forward. So nothing individual that we would call out, but a lot of good work across the board.

Okay, sounds good. And then my final question: in terms of the new facilities, can you just provide us with an update on the progress there?

Sure. Right now we are progressing well on them. The three main large expansion facilities are all on schedule. A lot of the basic building construction is going on right now. The message we have is they are on schedule; they are on budget, and no red flags at the moment.

Sounds good. Thank you very much.

William Bremer.

Tom, you called out an improving order book on the energy side. Is that volume, or is that price, or little bit of both?

Primarily volume.

Volume. How is pricing there?

Stable. Yes, I would say pricing is stable. Margin expansion is really coming from productivity and Lean initiatives. And as we go forward, as we get the volume increases, we expect to leverage that. And I think, as you see, we're definitely going to be in our target range for energy segment earnings.

Okay. That is all I've got, guys. Thank you.

Steve Levenson.

Could you please give us a breakout on the changes on the commercial side in both OEM and aftermarket, and what your outlook is for aftermarket going forward in the current fiscal year?

So, Steve, the only one we have actually called out has been the commercial aftermarket. That was about 7% this quarter.

Okay.

We haven't broken out a lot of the other. But in our outlook for that, aftermarket is -- continued to stay firm with that. So the aftermarket on the commercial side has been looking pretty strong for us.

Then just a question on the fuel nozzle contract with Pratt & Whitney. Are you going to be making those using traditional technologies, or are you getting involved at all in 3D printing, as some of the LEAP nozzles are going to be 3D printed?

Actually, it is an evolution. We are doing a lot of work on additive manufacturing. It will be part of our longer-term activity. Initially they are going to be produced more traditionally. But there's quite a bit of work going into that in manufacturing today.

Good to hear.

J.B. Groh.

Just beating the dead horse on the aerospace margins, it looks like you kind of have to average at about a, what, 17% margin, something like that in the remaining three quarters to hit a flat year over year. What is it that is on the horizon there that gives you the confidence to be able to -- because I know you had pretty good margins last year, but what is in there this year that makes that achievable?

So from a -- there's a couple of things tying a couple of the comments together. One was the commercial aftermarket will remain strong. And as you know, there's a nice contributor for us.

The OEM side remains very strong, and Woodward's OEM business is not the loss leader that some are. So we do make money in that business.

On the defense side, really it is recovering from, obviously, this very significant decline. So if you go from a 28% overall during this quarter to a 10% for the year, that still implies a fair amount of recovery in the second half. So I think you put those three together, the increased sales volume is also giving us a little more leverage on the fixed-cost base, and continued improvement in Duarte, along with the continued cost control that we have begun -- put all that together, and all of those should contribute to exactly what you described in terms of incremental earnings.

Okay, good. And what do you have budgeted in for the interest expense for the year?

Not a significant overall change.

It was down a little bit sequentially, so --.

Roughly flat for the full year.

Okay.

Peter Lisnic.

First question: last quarter we talked about higher incentive comp this year. Can you give us a feel for what was booked in the first quarter? And if you can break it down by segment to give us a little bit more color on margins, that would be great.

Yes. We're flat with the first quarter of last year, largely. And then performance throughout the remainder of the year will determine where we're at. So for this quarter it was not a factor between the two.

Okay. So if I look at that aerospace segment, there must have been more than just aero mix there, correct? You talked a little bit about Duarte acquisition, but I'm guessing that there was adverse mix as well from commercial OE versus aftermarket, because it just looks like that decline in EBIT relative to the non-aerospace sales increase, if that makes sense. Just seems like there was adverse mix there. Is that right, and can you quantify that?

Yes, when we said product mix, it is kind of across the board. But not as significant on the commercial side as it was on the defense side.

Okay. And then as we look forward on the commercial mix, we're seeing increased production on the new platforms or programs. Should we continue to expect that to be a headwind as we progress through 2014, making that achievement of flattish margins a little bit more difficult than, say, actually meeting the margin target?

Yes, we have -- I think we called out last year -- as some of the new programs launched, we were seeing slightly less than we had anticipated with respect to initial provisioning on those. I think in the past we have described how even on new launches it's not as dramatic a margin impact as you might expect if you going all-OEM because of the initial provisioning.

We are seeing some improvements on the initial provisioning side this year, so that will also contribute as we go forward to the last three quarters.

And then, just switching quickly to energy, you know, giant customer out there talking about better orders. Can you remind us how significant the lead time might be between them seeing those orders and then you actually booking it?

It could be anywhere from a couple of months to six months. So as the orders are flowing through, we do see -- one thing, also, back to the previous question on aerospace, it also applies to energy: this was a low sales quarter. We tried to call that out earlier in previous calls.

Traditionally, with the number of working days and the end of the year type things, it is a low sales volume. So we do see the sales volumes picking up in the remaining quarters, and particularly in the second half of the year. The orders on turbines also pick up in the second half of the year, and we expect positive leverage on that sales growth.

Okay. And then some of the commentary on energy, on the heavy frame IGP side, there has been maybe some pricing -- more significant pricing pressure there as some of these orders are coming into the order book. What is you feel or outlook for the margin profile of that business as it comes into your revenue stream?

Yes, and just to remind everybody that on these business, particularly large turbomachinery side, we have long-term agreements. So our pricing has been established, and they are like set -- some of our contracts go from 5 to 10 years. So pricing is locked in.

So we don't see quarter-to-quarter or even year-to-year pricing volatility. So we know what prices we are working with, and then we work real hard on productivity.

Okay, that is very helpful.

Gary Farber.

A couple of small ones. Just the amortization expense and the interest expense in the quarter -- would you expect that to carry forward at a similar rate? And then, how many shares did you repurchase in the first quarter?

It is fairly linear with respect to the amortization. So you can multiply by 4, and you will be really close.

On the share buyback, it was approximately $46 million and what -- 2 million shares? 1 million shares, approximately.

Yes.

Okay. And the interest expense is expected to be similar, also?

Yes.

Pete Skibitski.

Just a couple of follow-ups, guys. Just want to understand on energy, the great margin this quarter -- is there any reason to think that this 13.6% wouldn't actually be the low for the year in energy margins, given we should have ramping volumes the rest of the year?

Yes, you should expect margins to improve through the year.

And then maybe just a couple of follow-ups for you, Tom, on particular end markets. I'm just wondering, one, in energy, mining: are you guys seeing any improvement in the mining outlook there? And then, also, anything you are seeing in business aviation?

No, mining -- we are not seeing any rebounds at this time, so that is still one of the down markets. One that we are pleased about is we have seen a little bit of an increase in the marine market. That is a positive for that market.

Biz aviation is still very flat on the mid-sized and small -- I mean, flat in what I would call a very depressed market. The large bizjets, the big Bombardiers, Gulfstreams, Dessos are still doing okay. But that mid-sized and down is still in the trough.

Got it.

Michael Ciarmoli.

I jumped on a bit late, so I apologize. But just to follow up, the buyback -- that was quite a substantial buy this quarter versus what you guys had been doing. How much have you guys baked into your outlook? Or what was a share count you guys were thinking of for the full year?

Full year we haven't really gone -- we don't have any change in our overall policies we have kind of talked about from time to time. We still have $200 million under an authorization, and we will be active in the marketplace based on where we see the stock price, and so on. So we haven't forecast over all end share count.

If you look at, say, the last quarter to this quarter, relatively insignificant overall impact. Really, by the time you get to the weighted average, it's not a significant impact to the overall earnings per share.

And then just on the business aviation market, how do you think -- Cessna is obviously a big customer. The Beechcraft acquisition: how do you view that transaction in the marketplace in the context of your revenues and your opportunities there?

Well, we view it as a positive in that Cessna under Textron will have more of the financial resources and capacity and capability to take those Beechcraft programs forward. We have good content on Beech, and really, what they acquired were the turboprop businesses, both the commercial and the military.

So from my standpoint, I am very happy that they acquired it. I think there's strength in that business, and we have good content on those turboprops. So I think with a better owner, it should be better for the business. So we view that as good for Woodward.

Fair enough. The last one I had -- it might be too early here. On the 777X with the GE9X engine, when would you guys expect to see your R&D tick up to support that engine, if it hasn't already?

One thing -- in the way we run our business, we start our R&D well in advance of new program launches. So we have been doing a fair amount of R&D in preparation for this program. So we already have a substantial staff working on it.

Now, that doesn't mean we have won anything. It's going to be put out for bid here shortly. So we have been working on the technologies and the activity on that for the last two years. So that is already in our R&D numbers.

We anticipate 777X activity, both on the engine and the airframe, that heavy RFP work will come our way really over the next 18 months. And it will take about that time period for the RFPs and the awards to occur. So that investment we have been carrying for really the last two years, and we will carry forward, ideally, with a sizable amount of new wins.

Perfect.

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

Okay. I'd like to thank everybody for joining us today. Thank you for your questions. And hopefully, we helped to provide some clarity on those questions. Look forward to talking to all of you next quarter. 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 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 1630063. 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.