Woodward Inc (WWD) 2015 Q2 法說會逐字稿

Thank you for standing by. Welcome to the Woodward, Inc., second-quarter fiscal 2015 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 second-quarter fiscal-year 2015 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 by phone or on our website through May 4, 2015. 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.

Before we begin, I would like to refer to and highlight our cautionary statement, as shown on slide three. 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. These elements can and do frequently change. Please consider our comments in light of the risks and uncertainties surrounding those elements.

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 our results, net sales for the second quarter of fiscal 2015 were $493 million, an increase of 2% compared to $482 million in the second quarter of last year. Earnings per share were $0.66 for the second quarter of 2015, comparable to the second quarter of last year.

EBIT for the quarter was $63 million, also compared to the same quarter of the prior year.

On a constant currency rate basis compared to the prior-year period, net sales for the quarter would have been $508 million and earnings per share would have been $0.69 per share. Free cash flow for the first half of 2015 was $13 million, compared to $56 million for the first half of 2014, including $41 million of increased capital expenditures over the prior year. For the first six months of this fiscal year, sales were up 8% and net earnings are up 28% compared to the same period of the prior year.

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 delivered a solid quarter despite anticipated economic challenges in our energy markets and we remain confident in our outlook for the fiscal year. Sales related to commercial and defense aerospace, as well as industrial gas turbine systems, remained strong. However, while the first-quarter CNG sales were strong in Asia, this quarter was weak, continuing the volatility we have seen in this market.

With respect to oil prices, we continue to believe that they will have a neutral to positive effect on our aerospace business and a slightly negative to neutral impact on our energy business for the full fiscal year.

Turning to aerospace, our markets remained strong, with commercial deliveries up and anticipated production rates increasing. Demand remained strong for both the 737 Max, as well as the Airbus A320 neo, which is nearing launch. We have expanded content on both aircraft and we expect significant revenue and earnings growth as they enter into service.

Large-cabin business jets continue to lead the business jet recovery. We're also seeing small-cabin jets recover as new aircraft are being introduced. We continue to expect growth in this market.

Defense sales were strong in the quarter, compared to an unusually low prior-year quarter. We have returned to a more normal flow of defense aftermarket activity with the resolution of contract timing issues late last year. We believe the increased amount of global defense activity supports a stable overall defense business.

Even though our commercial aftermarket sales in the quarter were relatively unchanged from the prior-year quarter, passenger miles continued to grow, supporting a strong aftermarket business. As expected, we continue to see softness in the commercial rotorcraft market, primarily as the result of the oil and gas industry lowering capital expenditures.

With regard to our three new facilities, Niles is finished and we have completed the move of nearly all production lines. Rockford is almost complete and we have started moving in. Our Fort Collins facility is on schedule for completion in early 2016. All three of these projects are on schedule and on budget.

Turning to energy, three main markets impacted our energy sales in the quarter -- our CNG business in Asia, heavy-frame gas turbines, and wind. The CNG market in Asia is heavily driven by the Chinese government setting prices for diesel and natural gas. We've seen volatility in this market for several quarters and we anticipate this to continue.

The heavy-frame turbine market remains strong, mainly driven by the demand for aftermarket services. Renewable power continues to grow as an important element of power generation capacity. The economics of wind-based power generation continues to improve and we anticipate further growth in this market.

The oil and gas industry continues to be the driver for the aero-derivative gas turbine and gas engine markets. While these markets remain strong, we are seeing slower growth.

In summary, the strong sales in aerospace, heavy-frame gas turbines, and wind were partially offset by anticipated headwinds in our energy segment for the quarter. As the fiscal year progresses, we see aerospace strength continuing and improvement in our energy segment from this quarter. The long-term growth drivers for Woodward remain solid. We have significant expanded content on new aerospace programs that are nearing launch and demand for our products related to natural gas usage continues to grow.

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

Thank you, Tom.

Our first half was strong, with earnings per share of $1.32 up significantly from $1.00 in the first half of 2014, even with the foreign currency and Asian sales headwinds.

In aerospace, second-quarter sales increases were driven by higher commercial OEM and defense sales in both OEM and aftermarket, compared to the same quarter of the prior year. Commercial aftermarket was comparable to the prior-year quarter, following an unusually strong first quarter of this fiscal year. As Tom mentioned, aftermarket drivers remained strong.

Aerospace segment earnings for the second quarter of 2015 were 16.2% of sales, up from 15.4% in the same quarter a year ago. The higher segment earnings for the quarter were primarily the result of the increased sales volume and lower research and development expense.

As we launch our new facilities, we will experience costs related to the move and ramp up of production for a period of time. We incurred some of these expenses for both our Niles and Rockford facilities in this quarter.

In our energy segment this quarter, higher sales of gas turbine and wind turbine systems were more than offset by lower sales of natural gas bus and truck systems in Asia and a $14 million unfavorable impact from foreign currency exchange rate fluctuations, as compared to the prior-year quarter. Earnings as a percent of sales were 12.9% this quarter, compared to 14.4% in the same quarter of the prior year. Lower segment earnings for the quarter were primarily due to a $4 million unfavorable impact from foreign currency exchange rate fluctuations.

At the Woodward level, gross margin percentage for the second quarter of 2015 was 27.9%, compared to 29.5% for the prior-year quarter. The decline was primarily due to quarterly variability, as well as plant startup costs related to our new facilities in Illinois. More importantly, for the first six months of the fiscal year the gross margin percentage was improved to 28.7%, compared to 28.1% for the same period in prior year.

Research and development costs were $30 million for the second quarter of 2015, compared to $36 million for the second quarter of 2014, reflecting timing of project expenses and related milestones. As a percentage of net sales, research and development was 6.1% in the second quarter of 2015, compared to 7.4% in the second quarter of 2014.

Selling, general, and administrative expenses were $38 million or 7.8% of net sales for the second quarter of 2015, compared to $35 million or 7.3% of net sales in the second quarter of 2014. The increase was primarily due to higher variable compensation expense.

The effective tax rate for the second quarter of 2015 was higher at 24% compared to 21% for the second quarter of 2014. Tax rates for both years were favorably impacted by international tax matters and adjustments related to prior years' tax issues. Our expected tax rate for the fiscal year remains at approximately 27%.

Looking at cash flows, we generated $123 million of cash flow from operations for the first half of fiscal 2015, compared to $125 million for the same period of the prior year. Free cash flow for the first half of fiscal 2015 was $13 million, compared to $56 million for the same period of the prior year. Capital expenditures were $109 million for the first half of fiscal 2015, compared to $69 million for the same period of the prior year, reflecting increased spending related to our capacity expansion projects.

Lastly, turning to our fiscal 2015 outlook, we continue to anticipate full-year sales to be between $2.05 billion and $2.15 billion and we are tightening our earnings outlook to be between $2.70 and $2.90 per share, reflecting our ongoing focus on operational performance and continuous improvement activities.

This concludes our comments on the business and results for the second quarter of fiscal-year 2015. Operator, we are now ready to open the call to questions.

(Operator Instructions). Sheila Kahyaoglu, Jefferies.

I guess can you just talk about what you're seeing in the aftermarket a little bit more, and if you could just see -- if you could just tell us what's driving the strength, by engine type, perhaps.

In commercial aftermarket, we are seeing flight hours up across the board and with the new programs going into service, such as the 787, we are seeing good initial provisioning sales, so the combination of hours, new programs ramping up is fueling the commercial airliner side.

We are seeing more hours on business jets going up and that over time power drives revenue in the aftermarket for us. So, collectively, those are the main things and so a strong market right now, and we are well positioned with our current portfolio and we are anticipating even stronger aftermarket as the new programs launch.

Okay, thanks for the detail, and then just in terms of guidance by segment in terms of operating margins, do you still expect 100 basis points within each segment or is it more weighted towards aerospace, given the FX hit?

No, we're still equally, I'll call it, bullish on the 100 basis points for both segments. So at this point in the year, that still looks like a good target for us.

Okay, thanks, I'll jump back in.

Pete Skibitski, Drexel Hamilton.

First half in aerospace, it's been excellent, almost 10% growth. And it looks like the comps in the second half aren't that difficult. So are you coming in pretty hot the rest of the year in aerospace and maybe just we stay at a more moderate level in energy? Because it seems like if you stay hot in aerospace, you could maybe even go through the top end of your revenue guidance, it would seem like.

Right now, we are pretty confident in our guidance. Aerospace is doing well. We have a lot of focus on margin expansion, which we have been working on for a number of years, so we are starting to see the results there. We do think this was a low quarter for energy and we do see some recovery off this low. So we are pretty confident in both markets going forward.

Okay. So, Tom, on the energy side, is it -- right now, it's more so economic weakness in Asia is impacting you more so than the price of oil declining. Is that a fair statement to make, would you say?

No. What really had the bigger impact in Asia, and particular in China, we saw volatility really due to the fact that fuel type between diesel and natural gas, the prices are set by the government versus the market, and for a while they were out of balance, and the delta in price between diesel and natural gas drives a lot of the natural gas business. So, for about a quarter, that was out of balance and it's now come back into balance, so we see that progressing for the rest of the year.

As I said, when you have prices set, I will call, somewhat artificially, it induces volatility. We always anticipate volatility in those markets and we did get it. But looking forward, we think it will be more positive for the remainder of the year.

Okay, got you, and if I could sneak in one more. On the A320neo, I think the entry into service of that is creeping closer and closer. I just wonder what kind of ramp are you guys expecting on that program because we are -- it's getting, like I said, fairly close and I'm just wondering, are you expecting a slow ramp over a couple of years or pretty dramatic and will we kind of see that show through in aerospace in the near future?

The ramp is kind of being set there, of course, by Airbus. We're not predicting anything different than they are showing publicly.

But because of the significant content gains, it is going to start impacting sales in 2016. The ramp will have a good size effect on our aerospace business. So it's a positive for us starting in 2016.

And, of course, in 2017 when the MAX kicks in, again it will have a ramp, too, as they transition from the next generation to the MAX. So between those two, you are going to see several years of ramping up. But because of the big content gains, it will be material for Woodward starting next year.

Thank you.

William Bremer, Maxim Group.

All right, in particular you called out that the second quarter was pretty much going to be the trough. What specific lines will lead you higher in the back half of this year?

You say specific lines. So I think obviously aerospace will remain strong. The defense side of the equation has been strong. We continue to believe that that will continue. Most of the areas within energy we also believe will be improved. So it's really kind of across the board.

Third and fourth quarter are always strong for us. Usually, it's the first quarter that's down and the second quarter that's back up. But this year, the two quarters have been more on the parallel.

I was specifically asking in energy, Bob. I'm sorry if I wasn't clear, but in energy, what specific product lines and services do you feel will rebound into the second half?

I think, as I said earlier, I think it's primarily we'll see improvements in Asia in total, in China, and I think we'll see improvement around our CNG business.

In terms of just pricing right now in general on the energy side, do you feel as though things are holding at this level or do you feel as though you have to be more accommodative to your clients?

We always work with our customers to get cost or try to help them drive cost. What I would say is that while we are doing that and working to help our customers be more competitive, we're going to continue to expand margins, as we've highlighted with the outlook for segment margin improvement this year.

So that's our balancing. That's kind of the value we bring to the market, so we are doing that, but at the same time we are increasing our earnings.

And lastly, very nice containment on the cost side on allocated expenses. Can you sort of give us a sense of what you're looking for for the year there?

We don't anticipate anything significant in terms of up or down. Yes, we have been enjoying both leverage and cost control. So we said that we've been employing lean across the entire organization, including administrative functions, and so we believe that's beginning to show some nice improvements from a continuous improvement perspective and we anticipate that that will continue to be a tailwind for us.

Great, gentlemen. Thank you.

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

What do you attribute the strength in military? Is it OE aftermarket? What's driving that and is that sort of unexpected, given -- considering your outlook maybe at the beginning of the year? Fiscal year?

So it is both aftermarket and OEM. And I think we called out kind of the increase in activity worldwide that I think is really driving most of that.

So, I think obviously from last year was kind of the trough, as Bill mentioned, for defense with all the sequestration and not a lot of foreign military sales having picked up yet. This year, and I think there's been a number of articles about how foreign military sales are really picking up.

And then, I hopped on late. Could you give me sort of the detail on the tax rate? I know -- I think you said 27% for the full year. Why was it low this quarter and do you have an EPS impact there? What would it have been?

I don't offhand have the EPS. It's fairly -- we're up about three points from the prior year. We've had quarterly variability from time to time. We have settlement of prior year tax audits that take place, and then every now and then there is a particular tax planning strategy that is employed at a particular point in time, but usually those are quarterly variability.

We have been fortunate the last several years to be down in that 27%, 28% range, and this year we anticipate we'll be in the same spot.

Okay, but you are -- okay, so -- but it was roughly 24% this quarter (multiple speakers)

24%, and 21% last year. Very similar types of items, just different magnitudes.

Got you, okay. Thank you.

Michael Ciarmoli, KeyBanc Capital.

Maybe, guys, just to elaborate on William's question in energy, what gives you the confidence in the Chinese market improving when their economy is clearly starting to slow? Is there anything specific that you could point to, or even more broadly in your energy customers, whether it's CAT or [Whychay] or anyone, just the pipeline, the order books, is there anything definitive we can sink our teeth into there?

Sure, the first thing is that they've adjusted the spread on natural gas between natural gas and diesel. And for a while, they were narrowed, and they have now adjusted so they are wider spread. So that spread supports the higher cost of a natural gas engine, and with that, it's back into the range on the spread that drives the demand.

Secondly, they are driving for implementing Euro 6 emissions standards and that's going to require natural gas trucks and buses will help. That will impact them. And so, we are going to see more, we believe, from those two, and then, overall the economy is a little slower than it has been in the past, but it's still growing, as you are well aware.

But the bigger drivers for us are the diesel gas spread and the emissions standards, and both those are going in a favorable direction for us.

Got it. And then, just on the guidance, I know you lifted the low end. It would still seem, though -- I guess, what gets you down to that low end as you look out the next six months? Which could -- you are going to be looking at maybe earnings being down year over year if you came out at that low end. What are some of the puts and takes in the low end versus the high end?

There would be unanticipated volatility. We always plan for volatility. So that's why we put out a range, just to ensure that we can get in those categories. But I think that would be it.

If you saw huge currency moves, if you saw significant changes in natural gas prices, things like that could drive us down. Other than that, the low end of the range is low end.

Got it, got it. And then just the last one, housekeeping. I think corporate expense down $2 million sequentially. What are we looking at for the remainder of the year there and maybe what drove that decrease?

Nothing unusually large or notable. I think I mentioned earlier that we do anticipate continuing to be a little more efficient in some of those categories. There can be from time to time projects that are embedded in there in terms of both legal and consulting and things like that. So there is some element of volatility, but other than that, no significant items of an unusual nature.

Got it. Thanks a lot, guys.

Steve Levenson, Stifel.

You talked about MRO on the large-frame IGTs. Do you have any comments on the outlook for new large-frame IGTs?

It's been a little slow on that. We think as you move into -- through this year and into the next year, we do see some demand picking up. You know, a slow pickup, but going in a positive direction on that, Steve.

The installed base and the higher utilization of the installed base is a big driver for us and a positive driver. So we were bullish on the large gas turbines. You know, OE is slowly growing over time.

Got it, thank you. Just watching the engine choices on the A320neo, it seems that the mix is shifting a little bit towards the LEAP and away from the geared turbo fan. Does that change the outlook at all? Do you favor one necessarily over the other? Or does the LEAP being on 737 exclusively sort of outweigh the mix shift?

Obviously, the LEAP being exclusive on the MAX, and traditionally they split pretty close the A320 market. So you know LEAP is very important, of course, with that type of volume, but we have very good content on the pure power engine as well, so -- as well as nice situations where we do well no matter which engine is chosen on that aircraft.

Okay, thanks, and last is an update on GE9X and what's going on there.

If you take the 777X in total, we are still finalizing -- it's still in the RFP proposal phase. But I'm confident we're going to do very well on that platform. But we won't be having any announcements for a little bit yet.

Okey-doke. Thanks very much.

(Operator Instructions). Pete Skibitski, Drexel Hamilton.

A couple of follow-ups for Bob, I guess. Bob, are you still expecting cash taxes to be heavily weighted to the second half of this year, like they were last year?

Yes. They will be. Yes.

And then, any change in the CapEx outlook? It sounds like progress is going really well. Do you guys still expect to take $270 million this year?

Yes, it is. Right now, it will remain to see how the summer goes in terms of these projects. We are on target and so I would imagine it will be up to $270 million or perhaps a little higher if the weather holds for us in the Midwest.

Okay, okay, got it. And then, just last one, Tom, with the rig counts coming down, I think that was a little bit of a fear in the market that it could impact you guys. You're just not really seeing much of an impact from that?

Well, we've seen a little bit of an impact there. But it's been offset by other parts of our energy segment that are up.

And I think that's one of the real nice things about our portfolio is we've got a lot of balance across it. So I wouldn't say -- we have been impacted there, but more than overcome by other parts of the energy value stream. We are seeing in what we usually see the utilization of oil and gas is strong. The lower prices are helping that part of the market, and so we are seeing increased demand there while we see a little bit lower at the rigs. Overall, it's a positive.

All right, thank you very much.

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

Okay. Well, I appreciate everybody joining us today. Thank you for the questions. And Bob, Don, and I all look forward to seeing you over the next quarter. So, thanks for joining.

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 Daylight Time by dialing 1-888-266-2081 for a US call or 1-703-925-2533 for a non-US call, and by entering the access code 165-4929. 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 call and ask that you please disconnect your line.