Woodward Inc (WWD) 2015 Q3 法說會逐字稿

Thank you for standing by. Welcome to the Woodward, Inc., third-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; Mr. Bob Weber, Vice Chairman, Chief Financial Officer, and Treasurer; and Mr. Don Guzzardo, Director of Investor Relations and Treasury.

I would now like to turn the call over to Mr. Guzzardo.

Thank you, Operator. We would like to welcome all of you to Woodward's third-quarter fiscal-year 2015 earnings call.

In today's call, Tom will comment on our markets and related strategies and Bob will discuss our financial results as outlined in our earnings release. At the end of our presentation, we will take questions.

For those of you 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 August 3, 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 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 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 third quarter of fiscal 2015 were $495 million, a decrease of 6% compared to $524 million in the third quarter of last year. Earnings per share were $0.66 for the third quarter of 2015, compared to $0.69 in the third quarter of last year.

EBIT for the quarter was $63 million, compared to $68 million in the same quarter of the prior year.

On a constant currency basis compared to the prior-year period, net sales for the quarter would have been $514 million and earnings per share would have been approximately $0.71.

Free cash flow for the first nine months of 2015 was an outflow of $24 million, compared to an inflow of $79 million for the first nine months of 2014, including $86 million of increased capital expenditures over the prior year.

For the first nine months of this fiscal year, sales were up 3% and earnings per share were up 18%, 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, Don, and welcome to those joining us today.

For the third quarter, aerospace markets remained healthy overall and our aerospace segment results were strong. This strength was offset by softer sales in Asia, mainly driven by the natural gas truck market in China and continuing weakness in the euro, which were reflected in our energy segment results. We did, however, continue to see strong sales of wind turbine systems and industrial gas turbine aftermarket systems and components.

Turning to aerospace, personal aerospace remains strong with backlogs at record levels as a result of the demand for more fuel-efficient aircraft and passenger miles continue to grow at very healthy levels. The next-generation narrowbody aircraft are nearing their much-anticipated launch and we have significant content gains on these aircraft compared to their current generation.

As you know, our strategy is to increase share on each new aircraft platform. In the quarter, we announced the award of the fuel system for the GE9X engine in connection with a joint venture to be formed between Woodward and GE Aviation. The joint venture will be the exclusive supplier of fuel systems for GE's engines with thrust ratings greater than 50,000 pounds.

As the preferred supplier to the JV, Woodward will supply a majority of the components for the GE9X fuel system. This represents a significant content increase for Woodward compared to our content on the GE90.

The heightened level of global defense activity is supporting increased defense sales, which is recovering from a low prior year, led by aftermarket volume.

The business jet market continues its slow but steady recovery, led by large cabin jets. We're also seeing small cabin jets recover as new aircraft are being introduced.

All three of our facilities' projects are on schedule and on budget. Our Niles facility is finished and we have completed the move of our production lines. Our Rock Cut campus building is complete and we are now outfitting the facility. And Fort Collins is on schedule for completion in early 2016.

Turning to energy, four factors impacted our energy results for the quarter. The first is the natural gas truck market in China. The China government sets the prices for diesel and natural gas. The movement in the regulated spreads impacts the economic benefits of natural gas trucks and has resulted in significant volatility in this market for several quarters. We expect this to continue in the near term.

The other items affecting our energy results are the overall slowing Asian market growth, the depressed euro, and the lower oil and gas prices, all of which provided headwinds within the energy markets.

The heavy frame turbine aftermarket remains strong as the increased usage of these turbines is driving demand for additional services.

In the month of April, electricity generated in the US by natural gas exceeded coal for the first time on record, according to the U.S. Energy Information Administration. We see this as a clear indicator that natural gas is becoming a much bigger factor in power generation overall.

With respect to aero derivative turbines, OEM sales are down as a result of the oil and gas industry, but we are seeing increased demand for aftermarket services and upgrades.

As we have seen over the last several quarters, the wind turbine market continues to improve.

In summary, aerospace remains strong and we anticipate this to continue through the year. Energy is being impacted mainly by weakness in our Asian markets, foreign currency exchange rates, and oil and gas prices.

As we move forward, we believe we will continue to see economic uncertainty outside the US impacting both sales growth and foreign currency exchange rates.

Our focus remains to improve earnings in spite of these challenges. We are seeing results from our strategic initiatives around market share gains, operational improvements, and lean implementation. Increased counts at our new aircraft platforms, along with the globalization and expanded use of natural gas, will drive long-term growth for Woodward.

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

Thank you, Tom. Our third-quarter results reflected headwinds for our energy segment. As Tom mentioned, energy sales were negatively impacted by significantly lower sales of natural gas truck systems in China, an unfavorable foreign currency exchange rate impact of almost $20 million, lower oil prices, and the overall changing -- challenging economic environment in Asia.

Sales of gas turbine systems for the aftermarket remained strong in the quarter. Energy earnings as a percent of sales were 14.8% this quarter, compared to 16.1% in the same quarter of the prior year. Lower segment earnings for the quarter were primarily due to the lower sales volume and the negative effects of foreign currency exchange rates, partially offset by lower operating costs in the quarter.

In aerospace, higher sales in the quarter were primarily the result of higher commercial OEM and defense aftermarket sales, partially offset by lower commercial aftermarket sales. While commercial aftermarket sales year to date are up 4%, sales for the quarter were slightly lower than the prior-year quarter, due to normal quarterly variability.

Aerospace segment earnings for the third quarter of 2015 were 16.1% of sales, up from 14.3% in the same quarter a year ago. The higher segment earnings for the quarter were primarily the result of the increased sales volume. Year to date, aerospace segment earnings were 25% higher than the same period of the prior year, including planned startup costs in the current year associated with the launch of our new facilities in Niles and Rockford.

At the Woodward level, gross margin percentage for the third quarter of 2015 and 2014 was consistent at approximately 29%. Research and development costs for the third quarter of 2015 were approximately $34 million or 6.8% of sales, in line with the prior-year period. Selling, general, and administrative expenses for the third quarter of 2015 were approximately $39 million or 8% of sales, also consistent with the prior-year period.

The effective tax rate for the third quarter of 2015 was 24%, compared to 26.4% for the third quarter of 2014. Tax rates for the quarter were favorably impacted by adjustments related to international tax matters and prior years' tax issues. We now anticipate our full fiscal-year tax rate to be approximately 26%.

Looking at cash flows, we generated $167 million of cash flow from operations for the first nine months of fiscal 2015, compared to $184 million for the same period of the prior year. The decrease reflects the timing of income tax and other payments. Free cash flow for the first nine months of fiscal 2015 was an outflow of $24 million, compared to an inflow of $79 million for the same period of the prior year.

Capital expenditures were $191 million for the first nine months of fiscal 2015, compared to $105 million for the same period of the prior year, reflecting increased capital spending related to our capacity expansion projects.

We are approaching the end of our substantial incremental capital investment in additional production capacity required as a result of the significant program awards on the new narrowbody aircraft that are nearing launch and market-share gain related to the globalization and expanded usage of natural gas.

On April 28 of this year -- of this quarter, Woodward increased the borrowing capacity of its revolving credit facility to $1 billion from $600 million. On June 2, 2015, we entered into an accelerated stock repurchase agreement to repurchase shares of our common stock for an aggregate purchase price of $125 million.

In summary, while weaker sales in Asia, the impacts of foreign currency exchange rates, and lower oil and gas prices contributed to a challenging quarter, reported year-to-date earnings per share were up 18% compared to the prior year and constant currency rate earnings per share were up 23%, demonstrating our commitment to improved profitability.

Turning to our outlook, given the considerable market uncertainty discussed above, we now anticipate full-year sales to be approximately $2 billion and earnings to be in the mid to lower end of our previously stated range of between $2.70 to $2.90 per share.

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

(Operator Instructions). Sheila Kahyaoglu, Jefferies.

Thank you for taking my question. In aerospace, it has been two months since the JV announcement. I was wondering if you could provide some more color on maybe the moving pieces and how we should be accounting for that in our model.

So, things are progressing as anticipated. We have had a lot of teams working as we move up closer to closing.

In terms of the modeling, nothing has changed from the previous guidance that we had given. It will be probably a separate line on the financial statements. We will continue to have sales to the joint venture, so there won't be a dramatic sales decline from period to period, and we do anticipate that we will still remain approximately $0.20 accretive to the coming year.

Okay, and then in terms of R&D for the total Company, should we expect this to be the high point, 6.8% as a percentage of sales, or do we expect R&D to remain at this 6.5% to 7% level for 2016?

We anticipate that R&D at the 6.8% level will probably moderate down a little bit, in particular with the effects of the joint venture as we go into 2016.

And then, just one last one, do you mind providing some additional color on what you are seeing in the commercial aftermarket?

Sheila, commercial aftermarket, we think, is still strong -- overall in the market, and we do experience quarter-to-quarter fluctuations really based on initial provisioning sales, spare sales, and timing of repair and overhaul activity. But overall, we see that the overall market drivers are indicating a 5% overall market increase and we should be tracking along those lines as we go forward.

Okay, thank you very much.

Pete Skibitski, Drexel Hamilton.

On the ASR, can you tell us -- did you retire all the shares from the ASR in the quarter and how many were there that you retired?

It's not all. At the inception of the ASR, you do approximately 85% of the shares, which was about 2.1 million, and then you settle up at the remainder of the period.

Okay, okay. Is this basically half the proceeds from the JV and you will do the other half -- I don't know when the deal closes. Is that how you are thinking?

Yes, the timing is still open. We indicated at the time of the JV that it would be within 12 months of that period, so we still anticipate that that is our plan.

Okay, and Bob, on CapEx it sounds like things are moving along pretty quickly. Are you still expecting to spend around $275 million, I think, for this year and what are you thinking for next year at this point?

Yes, so we are anticipating $275 million, maybe slightly up. I think last time we moderated it up a little bit to about $300 million. Somewhere in that range, again depending upon weather, et cetera, and then we will start to bring that down next year, and so it will be significantly lower than that.

And that will largely be in the first half of the year, and then we should start returning to positive free cash flow in the remainder of the year.

Okay, great. I will get back in queue. Thanks.

William Bremer, Maxim Group.

Can we go into energy a little bit here? Let's specifically talk about the compressed natural gas market, first and foremost, and your commentary still seeing that we still have some softness there. More importantly, maybe talk a little bit about the content on pipelines. You did quite well on the contents to the industrial gas turbine market. So, maybe just get a little more granular on the other components that are affecting energy right now.

Well, sure. Bill, when you were asking about natural gas truck/bus market in China, definitely in the prepared remarks we talked about the spread between diesel and natural gas. Through a good portion of the quarter, that spread was very small. It has now expanded to where economically natural gas trucks are -- provide the operators the savings.

However, because it has been so volatile, we still see a time lag before the market really, if you want to say, thinks the pricing is secure and start ordering.

So it's been volatile and we think as the prices move, we should see some recovery, but we still see volatility as we go forward for six to 12 months. So there still is a volatility out there.

You were asking a little bit about turbine market and pipelines. What we are seeing on some of the applications is maybe a little lower on the OE side, but we see the order books filling in at our customers. Maybe a lot of you have seen some of the orders because some of our customers have already announced, but the order books are filling in. The current sales on the OE side of the industrial turbines are light, but the utilization is very high, so we have been seeing aftermarket activity, as well as upgrades, occurring in the marketplace and that is really why we had higher sales in the industrial turbines side.

Those are positive indicators. The higher uses of natural gas is positive because the more they use the turbines, the better it is in the aftermarket, so we are seeing that factor into our results. And then, as we go forward we are seeing the order books fill in, so that's a positive looking out into next year.

And I think those were the ones you highlighted. I don't know if you have other parts of the market you want to ask questions on, Bill?

I was just asking about the overall pipeline market and on the compressed pipelines and the content there.

Well, what we are seeing there is the newbuilds are down a little bit. Those are primarily aero derivative turbines and some of the more small industrial gas turbines, but we are seeing the aftermarket on that side pick up, so aftermarket overall in that size class of turbines has increased for us.

And maybe just touch a little bit upon the wind inverter market here.

Yes, wind was strong in the quarter. Right now, it continues to look good, the order book is solid and we see continuing growth over the next year.

Okay, great. Thank you.

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

Thanks for taking my call. Just delving a little bit more into that commercial aftermarket down 4% for the quarter, were you comping up against anything particularly difficult from last year or do you think that's just a seasonal impact? I am just curious if you had some maybe initial provisioning of something last year.

So we had a strong comp last year, so I think that's part of it, and if you look sequential quarters, we were up 2%, so, and 4% year to date. So overall, the aftermarket is doing fine. It was just a strong comp last year and we continue to see commercial aftermarket doing well.

So, seasonality bounces this around a little bit and that is why you can't compare these to everybody else? Okay.

Yes.

Okay. And then -- I guess that's all I've got. Thanks.

Michael Ciarmoli, KeyBanc Capital.

Thanks for taking my questions. I guess just, Tom, maybe on the FX and the low oil prices, we have seen the FX headwinds persist. We have obviously seen low oil. What really changed from when you guys last updated the guidance in mid to late April to now? Because I'm looking at it. Maybe the euro FX improved a little bit, so you guys have been dealing with this low oil price environment as well. Did anything notably change for you to create that FX wind -- FX headwind this quarter?

I think what might have occurred a little bit is higher euro sales for us, so in terms of dollars, it would be higher. The oil price, one, what we are really highlighting is there were four -- the four impacts to our energy business, and if you want to say in order of impact, the first was the China natural gas trucks, second was FX, and then we had slowing Asian growth, and then we had the oil prices.

So, oil prices were not a surprise. They were one of the four things that knocked us down, so it wasn't overall, but if you compare it and go year to year, that has had an impact.

Okay, okay.

For FX and CNG/LNG trucks.

Okay. And then, could you just comment on -- I know you talked a little bit in the prepared comments about the business jet market. Are you seeing any specific headwinds there from Bombardier or some of the midsized Gulfstream programs at all or are you still confident in the overall portfolio there?

We are quite confident in the overall portfolio. As you probably recall from some of our previous presentations, we have got a lot of content in all the new, large business jets. There has been some movement of schedules in that area, but we have got really good content there. We got -- midsized jets are good. And then, we have quite a range on the small.

So, the dynamic that we are actually seeing is improved operating hours, improved orders, and we just see it slowly, slowly picking up, but it is becoming a positive versus if you go back the last few years, really dating back to 2009, it was a drag, so we are starting to see it turn. So we -- slow turn, not exponential, but nice that it is going in the right direction.

Okay, okay, fair enough. And then, just the last one, housekeeping. Bob, with the buyback and lower taxes, back of the envelope, is that basically adding -- you probably get $0.03 or so from the buyback this year and then you got the lower tax this quarter and next quarter, so maybe another $0.04 to $0.06, $0.07? Fair to say there is about $0.10 to earnings from those two items this year?

No, no, you are a little -- I thought you were going to say $0.03 for both together. I think it is closer to $0.03 for both together.

$0.03 for both together, okay, perfect. That's all I had. Thanks, guys.

Steve Levenson, Stifel.

Just in terms of the commercial MRO, you talked about timing a little bit, and I guess a number of the planes will be coming out of service or out of some capacity reductions for service later in the year. Do you have any idea how that might work out for you and what the ordering patterns are from your airline customers?

You know, Steve, the bigger item on timing is generally around initial provisioning sales.

Okay.

And that moves more. We get orders as airlines are taking on either new aircraft or adding new routes, and in terms of -- so that's where I think we get the bigger timing fluctuation on the commercial side.

The repair and overhaul, there is some seasonality. During the summer, they don't take planes out of service like they do later in the year. So, that seasonality we can track, but the bigger variability comes from what we classify as these initial provision in sales, and that just is timing of those sales from quarter to quarter.

Okay, thanks. I know at the air show at GE Aviation's presentation, they said 66% of the engines on narrowbody planes haven't come in for their first shop visit yet, and I know you don't have quite as much content on the current ones as you will on the LEAP, but how do you see that affecting things going forward?

Well, we look at that as positive. A couple of the aircraft that we see good looking forward are definitely the A320ceos, so the current, and we are on both engines on the A320. And what you just described is correct. We see those shop visits increasing, and we also see the 777 shop visits increasing, so those are two, I think, are going to be good drivers of future growth.

And on the current generation of the 737 or 737NG, we have content, but not as much as we will on the MAX. So, we will get a little benefit from that, a lot more from the A320 and 777. Those will be the bigger drivers the next few years.

Okay, thanks, and just last one on the LEAP. Do you see things staying on schedule right now or do you see any interruptions?

Well, what I can say is we are on schedule and I know from what we understand flight testing is going well, and to the best of our knowledge, the program is going to stay on schedule.

Great, thank you very much.

(Operator Instructions). Pete Skibitski, Drexel Hamilton.

A couple more energy questions, guys. Can you quantify how big the decline in CNG was for the quarter and maybe your expectations for the full year? I think it was around $100 million in revenue last year for you.

Yes, in the quarter --

It's down significantly (multiple speakers). I don't know that we would like to call out the specific, but you are right in prior year.

Yes, overall it's going to be 20%, 30% down.

Yes.

Okay, okay. And then when you talk about the slowing Asian economy, I'm assuming that's mostly China. What other parts of your energy business are being negatively impacted by Asia?

Well, we have seen some slowdown in our steam turbine controls market. You see some slowdown in, do you want to say, heavy construction equipment has slowed down, a little mix on power generation, and then definitely around the CNG/LNG vehicles.

Okay, okay. So (multiple speakers) there is one more quarter left in the year. At this point, what portion of your expected revenue for the fourth quarter in energy is in backlog?

Our industrial turbine business usually has a fair amount of -- for us, backlog in general isn't a very good indicator because of the real-time releases and so on. But at least in the turbine side of the business, it is pretty strong, and not as much on engine. So, we have pretty good visibility, but it's not perfect by any means.

Okay, last one. Just top level, Tom, in general in energy. We have had a couple quarters here of weakness. Fourth quarter last year was a little weak. What is your sense over there? Are things going into a cyclical downturn that might be lasting or are we in a midcycle pullback? What is the sense that you get?

Actually, if I go across and look at the order book, our customers' order books, and buses in backlog, the interesting thing, traditional backlog, as we said, we have long-term agreements with our customers, but we're on pull system, so we don't have the orders as much on that side of the business.

But when we see our customers' orders, we know we are going to get the orders. And if you look on the turbine side, overall newbuild orders are up, and so we see that as a good indicator going out into 2016. And some of those orders have been moving into our system and we see that as a positive.

The other area, a good-sized market, that we have seen some slowdown is in steam, but we're anticipating with some newbuilds and also a wide range of new product offerings that we came out with, we see that picking up as we go into 2016. If you want to say, the most uncertainty we have is really wrapped around the CNG/LNG vehicle market, along with if you want to say the construction side (multiple speakers) been tied to economic growth, primarily in China.

So that one is really much more difficult to forecast and predict. We have highlight -- or we did highlight that the spreads in fuel costs, which drive the economic incentive really for going into the natural gas vehicles, has improved, so we see that as a positive indicator, but there is a lag between that spread and when you start producing.

So, that one, we don't have as much visibility on the order book. The other ones, though, we're feeling pretty good about the direction, and when you see the utilization of natural gas, particularly in the power gen -- obviously with power gen, the pipelines are running a lot harder, those are all positive indicators as we were anticipating of growth going into 2016 and beyond.

So we do have this little bit of a tough period here on a couple of the global market issues that we highlighted, but the order book indicates that -- from our customers indicate that things are going to start picking up as we move into 2016.

Okay. That's helpful. Thank you.

Gary Farber, CL King.

Yes, can you just update us on your thoughts on the acquisition market and what things look like?

I guess from that side, there's a lot of activity going on. We're seeing prices are high. Multiples are high. From a Woodward standpoint, I will just remind everybody we are pretty disciplined around when we do acquisitions, it is really for strategic reasons only. We don't just acquire through acquisitions to grow. But we acquire if it meets our markets, technology, or channels. But in our markets, the prices are pretty high right now.

Is there anything -- is there any market in particular that looks interesting to you, though, putting aside the price?

Right now, we are really more concentrated on delivering this organic growth in the next, really, year or 18 months. So, we are watching in case something very special comes up, but we are really concentrating on finishing this CapEx, as Bob highlighted. We are -- second half of 2016, we will be out of the big CapEx bubble and back to free cash flow, so we want to get through that period, start generating cash, and then we will probably be looking at the market a little more closely.

Okay, thanks.

Michael Ciarmoli, KeyBanc Capital.

Thanks for taking the follow-up. I guess just trying to get an accurate read on these nat gas engines. I have tracked what YJ Power is doing out there, but I am trying to get a better understanding of the spreads. It sounded like you guys had some confidence on the last quarter call, and then I know it sounded like China was lowering the price of their diesel to stimulate demand.

So is this just a day-by-day, week-by-week market out there? Do you guys truly not have the visibility into what is going to happen with those spreads? I'm just trying to get a sense of how we can try and forecast this market a little bit better.

Right now, the prices, as we said, are set by the government and there is a lot of pressure on diesel. And the interesting thing is the pressure in China on diesel was really coming from the Chinese citizens because they could see the prices in the global market and they weren't getting the diesel price. So they were concerned about rioting and other things like that. So they lowered diesel.

When they did that, they didn't lower natural gas. They have since corrected that. But there has been movement in diesel again, so that spread moves around.

There is some activity in China. We don't know if it will come through, but they are talking about fixing that spread at a fixed rate, and if they do that, then we will have a lot more visibility because they're going to hold the spread. So that's something that is being contemplated that has not been initiated yet.

So in the meantime, the spread moves, and really what you have is when it moves, it creates this uncertainty so people are nervous about buying a natural gas vehicle. And the reason is the natural gas vehicle is more expensive on the acquisition cost, but it is cheaper to operate, as long as there is that spread.

In the rest of the world, there is always that spread, but in China, it can move. And so, we are anticipating and our colleagues that are in China believe that this fixed spread initiative may occur, and then if we see that, then we're going to have a lot more visibility on being able to forecast.

Okay, perfect. That's helpful. And then, I think you touched on it, you talked about other areas that were slowing in Asia, heavy construction. I'm assuming some of that would fall under your Caterpillar related sales. Can you give us the general sense or trend you have seen with Caterpillar quarter over quarter or year over year? Have those sales troughed out for you or is there still some room to the downside?

We have definitely -- as Caterpillar has been down, we have been down with them on the sales. In addition, commodity prices and commodity activity is still down.

Whether we have actually hit the bottom of the trough or not, a little hard to predict, but it is feeling a little bit like we're towards the bottom of the trough and we will have to see as we move forward.

But that's been a pressured market for this whole fiscal year. There's no doubt about that, in addition to our other customers that supply into that construction market.

Got it. All right, fair enough. Thanks, guys.

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

Okay, well, we appreciate everybody joining us today, and hopefully we will see some of you as we are out in New York and other financial capitals of the country. And we look forward to talking to 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 p.m. 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 165-9422. 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.