Woodward Inc (WWD) 2016 Q2 法說會逐字稿

Welcome to the Woodward Inc second-quarter FY16 earnings call.

(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 second-quarter FY16 earnings call.

In today's call, Tom will comment on our markets and related strategies, and then Bob 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 3, 2016. 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-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 2016 were $479 million, a decrease of 3% compared to $493 million in the second quarter of 2015. Earnings per share were $0.65 for the second quarter of 2016 compared to $0.66 in the second quarter of 2015. EBIT for the second quarter of 2016 was $60 million, compared to $63 million in the prior-year second quarter.

Strong performance in our aerospace segment was offset by continued weakness in our industrial segment. Free cash flow for the first half of 2016, including the $250 million of proceeds from the formation of the joint venture with GE, was $262 million, compared to $14 million in the prior-year period. Capital expenditures for the first half of 2016 were $99 million, compared to $109 million in the prior-year period.

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. The fiscal year is progressing largely in line with our overall expectations, despite ongoing market challenges.

For the second quarter, our aerospace markets continued to be very healthy, with particular strength in commercial aftermarket and defense. In our industrial segment, while we have seen some additional sales deterioration as a result of economic headwinds and slower growth in China, we believe many of our markets are at or near the bottom of the cycle.

Our second half is historically stronger for us, and we expect this year to follow the same pattern. Significant challenges remain, but we are still on track to deliver our full-year guidance.

Moving to our market segments in more detail, starting with aerospace. Commercial sales continued to benefit from strong capacity utilization, increased passenger travel and solid order book backlogs for next-generation aircraft. As you know, several major new programs are nearing launch, including the A320neo and 737 MAX, which both have significantly expanded content for Woodward. And looking forward, we continue to pursue and secure additional content on the Boeing 777X and the A330neo.

Commercial aftermarket continues to be strong, driven by repair and overhaul needs in general, as well as a favorable shop visit cycle for the platforms we are on. As expected, the commercial rotorcraft and business jet markets remain soft, particularly in emerging markets, as this segment is highly correlated to the oil and gas industry.

On the defense side, given the heightened level of global instability and favorable budget conditions, our defense sales have accelerated. We are on nearly all existing major defense platforms for fixed wing and rotorcraft, as well as new programs such as the Joint Strike Fighter and KC-46 tanker. We are also seeing increased demand for smart weapons that use our actuation systems. With no anticipated change in the geopolitical environment, we expect defense to remain solid for the foreseeable future.

Turning now to industrial, expanded use of natural gas and increasing emission regulations will continue to drive our long-term growth. However in the near-term, our industrial business continues to be adversely impacted by the economic slowdown in Asia, the depressed natural gas truck market in China, reduced demand as a result of global economic weakness, and lower oil and gas prices.

For the second half, we are seeing orders pick up in several of our markets, such as gas and wind turbines, and we are also seeing an impact from increased content on heavy frame gas turbines, as a result of new product launches. We also benefit from the signing of a new long-term agreement with a large turbine OEM.

In addition, our aftermarket initiatives to drive upgrades that improve machine efficiency, lower emissions, and extend the operational usefulness should serve as a key driver going forward. Power generation-related markets have shown some pockets of strength, driven by aftermarket activity, as the existing equipment continues to be used and kept in service for longer periods. However, investment in new equipment remains soft.

Electricity generated from natural gas is increasing, and gas turbines, historically used as peakers, are now being used as base power generation, and are driving demand for a upgrade and retrofit activity. The wind turbine market remains stable, as a result of demand for clean energy and favorable government incentives. In the sea turbine market, we're having success in aftermarket upgrades and services, and new product launches are beginning to gain traction, which together is helping to offset depressed new equipment sales.

Within transportation, despite the favorable change in the regulated price spread in China between diesel and natural gas that we mentioned last quarter, the natural gas truck market, in fact the truck market in general, in China, remains weak due to overall economic conditions. Lastly, in oil and gas, conditions continue to be depressed.

In summary, as we look ahead to the balance of FY16, we expect the positive momentum in aerospace to continue, and the industrial segment to show improvement in the second half. The strategic actions we took last quarter will favorably impact our second-half performance, and enhance long-term profitability, while improving the operational excellence our customers expect.

As new aerospace programs launch, and industrial markets stabilize, we are transitioning into a cash generation cycle, following years of heavy investment in new platforms and capacity. As we indicated during our investor day last December, we expect to generate approximately $1.5 billion of free cash flow over the next five years.

Let me turn it over to Bob to discuss the financials.

Thank you, Tom. As we have said, this quarter reflected strength in our aerospace segment, and weakness in industrial. In aerospace, sales increased 3% this quarter, driven by strong commercial aftermarket and defense sales, which was partially offset by lower business jet and commercial rotorcraft OEM sales.

Aerospace segment earnings for the quarter were 17.4% of sales, compared to 16.2% in the same period last year. The improvement was driven largely by the increased sales and aftermarket volume.

Our industrial segment sales were down $23 million in the quarter, or 11%, compared to the same quarter of FY15. Sales were negatively impacted by slower growth in China, and continuing economic weakness, partially offset by strength in the gas turbine aftermarket. Industrial sales for the quarter were negatively impacted by approximately $4 million, due to foreign currency exchange rate movements.

Second-quarter industrial segment earnings were $19 million, or 10.3% of sales, compared to $27 million, or 12.9% of sales in the prior-year period. Segment earnings were primarily impacted by lower sales volume, which was somewhat offset by the effects of cost reduction measures. At the Woodward level, gross margin percentage for the second quarter of 2016 was 27.8%, comparable to the prior-year period.

Research and development for the second quarter of 2016 increased to 6.6% of sales, from 6.1% of sales in the prior-year quarter. Selling, general, and administrative expenses were largely consistent, at approximately 7.8% of sales for the second quarter of both years. The effective tax rate for the second quarter of 2016 was 24.9%, compared to 23.9% for the second quarter of 2015.

Looking at cash flows, we generated $362 million of cash flow from operations for the first half of FY16. Excluding the $250 million in proceeds from the formation of the joint venture with GE, cash flow from operations would have been $112 million, compared to $123 million in the same period of the prior year. Free cash flow, excluding the joint venture proceeds, was $12 million for the first half of 2016 compared to $14 million for the same period last year.

Capital expenditures are beginning to decline with $99 million spent in the first half of 2016, compared to $109 million for the same period of the prior year. Excluding the effects of the joint venture, we still anticipate free cash flow to be approximately $100 million for the full year. In the second quarter of FY16, we repurchased 1.9 million shares of our common stock, for an aggregate purchase price of $88 million.

Lastly, turning to our FY16 outlook. Before I address our full-year outlook, let me again highlight some of the anticipated factors impacting the strength of our second half, as compared to the first half, which were incorporated in our original guidance.

First, the strategic actions we took in the first quarter will produce cost savings predominantly benefiting the second half. On a segment basis, in aerospace, we expect continued strength in the commercial market overall. Additionally, smart weapons and defense aftermarket sales are projected to be considerably stronger in the second half.

In industrial, increased sales related to the signing of the long-term supply agreement that Tom mentioned, continued aftermarket strength, and strong orders from our wind turbine customers, are producing considerable second-half improvement.

Turning to the full year, we now expect aerospace segment sales to be up 4% to 6% and industrial segment sales to be down 2% to 4% from the prior year. Additionally, we now anticipate aerospace segment earnings as a percent of sales to be up 100 basis points to 150 basis points, and industrial segment earnings as a percent of sales to be flat to down 100 basis points. Considering this, we are maintaining our FY16 guidance of 1% to 2% growth in sales, and earnings per share to be between $2.75 and $2.95.

This concludes our comments on the business and results for the second quarter of FY16. Operator, we're now ready to open the call for questions.

(Operator Instructions)

Our first question is from Sheila Kahyaoglu of Jefferies. Your line is open.

I guess I have a few questions on Industrial. First off, can you talk a little bit about the new OEM agreement, and I'm guessing that is with a gas turbine OEM, and how that compares to the rest of your Business, in terms of sizing it a little bit?

And I guess, do you think the Industrial guidance is conservative enough, because I can't run through the math that quickly, Bob, but I am still coming out to high single-digit organic growth exiting the second half of the year, and margins up about 500 basis points. Just wondering how the cost savings is factoring into the Industrial guidance.

I will let Tom speak to the LTSA first.

The LTA is with a gas turbine OEM we're not able to disclose at this time, but it's a very positive agreement carrying forward, long-term relationship, as well as new product sales.

And then, Sheila, I can't do your math that you've just done that quickly in my head. I can assure you that as we did, and when you take the ranges and mid-point and so on, we believe it's right in the heart of the guidance that we have given.

From the Industrial perspective, I think what we've really highlighted, we hope, is that there are a number of factors, most notably in our industrial turbine side of the equation, which also includes our wind business, that are probably out of the norm from what you are expecting on the dire impacts of oil and gas, and economic conditions. We have not assumed much in the way of recovery in those areas at all, and so it is really focused on some of the things that are different for the second half than they were for the first.

The other thing, when you look historically at Woodward, this pattern is no different than we almost always experience. Our first half, most notably our first quarter, is always considerably weaker than our second half, most notably our fourth quarter, and we don't anticipate this pattern will be any different.

Just in terms of the aftermarket on the IGT side, how much of the business does that consist of?

I think this is an area we have called out that we do not have specifics on the aftermarket, because it's a little different than it is on the aerospace side, but it is significant and it has been strong for us for almost 18 months to two years now.

Utilization has been high in the aftermarket. Our order book is strong, and we have real solid order book for upgrades, repairs and overhauls in the second half of the year. So, that has been a positive, lower natural gas prices have driven utilization, and we are seeing a strong aftermarket on gas turbines, but we are also seeing it on steam turbines. So, the aftermarket is going well, offsetting a lot of the softness on the OEM side.

Understood, so it's more project-based business, where you have decent visibility.

And just last question -- did you mention the full-year tax rate guidance? Is that still 28%?

No, we did not mention it. We anticipate it will be very close to that. It might be slightly lower, but pretty much on the 28%.

Okay. Thank you.

Thank you. Our next question is from Gautam Khanna, of Cowen and Company. Your line is open.

Yes, first, I was hoping you could elaborate on the margins at Industrial, given the restructuring last quarter. It came in a bit light, and I just wondered if there is any specifics that you can provide around mix or pricing or deleverage, given sales were up sequentially? How should we think about that?

Overall, what we would say is we still had lower sales relative to the prior year and also [of late]. Some of the margin impact is the negative leverage on sales being down.

The second part of that, as Bob highlighted during the prepared comments, the majority of the cost savings that we planned, we had to get through that in the first half of the year, and that is going to start showing up here in the third quarter and fourth quarter. So, it is a combination of volume and the cost savings from the restructuring activities that will be taking place in the latter half of the year.

Okay. In terms of -- when you guys have described your position on LEAP and some of the programs that are ramping over the next couple of years, do you have firm pricing over that period? Is there any rheostat pricing or step downs in pricing that occur as these programs ramp, that we should be mindful of, on the LEAP and elsewhere?

Really across on these new programs going into service, which is pretty traditional, with our contracts, it's firm pricing. So, there is nothing you should be thinking about in terms of steps.

Okay. I wanted to ask about the profile of CapEx for the year -- how it is going to phase in?

Sure. One comment I would have is, the major capacity projects that we had in terms of the new buildings and the new facilities have been completed in the first half of the year. We still have some equipment to come in the second, so we are going to start to see year-over-year decline in the CapEx in the second half of the year, and moving forward to more normalized CapEx going into 2017.

(Multiple speakers) The last one --

It came in on time, on budget, so we're feeling good about that.

Okay. On the Aerospace aftermarket, I was wondering if you could update us on what you're expecting this year? Is it still a plus 5% for the year?

And if you could parse out, in the quarter, if you saw -- if you could attribute any of the strength, the double-digit growth, to any pockets within the aftermarket, be it engines, be it provisioning, be it actuation, what have you. Where did you see the strength, if you could parse it for us.

Sure. We had a good across-the-board aftermarket quarter. We had good initial provisioning sales; we had good shop visits.

If you really look, we are on good programs, we have very favorable dynamics if you look at engine programs such as CFM, V2500. If you look at the installed base and the planned shop visits, they are very much going up, and it's a very positive dynamic for our aftermarket business. And then the other part I would also say is, we had good defense aftermarket as well.

So, overall, the aftermarket was strong in all elements. And going forward, we see that continuing, and continuing -- as the new programs launch, it will drive initial provisioning sales, and those shop visits of all the installed base are a positive trend for multiple years. We think we are on a good track with the Aerospace aftermarket.

And what is your guidance for the year on Aerospace aftermarket? Is it plus 5%?

No change, approximately 5%.

Okay. Thanks a lot. I will turn it over.

Thank you. Our next question is from Robert Spingarn of Credit Suisse. Your line is open.

Sticking with the aftermarket, I thought I might ask you if you are sensing any trends vis-a-vis destocking of the surplus material, meaning are you starting to see a little demand strength because there are fewer parts in the desert, maybe some of those older aircraft will be coming back into service?

Definitely some of the older aircraft are still -- I would say still flying, and their retirements have been pushed out. So, I think that helps in the aftermarket.

But I also think, where we are actually hitting the bigger drivers, I think we are hitting favorable dynamics on the number of years, the number of these engine programs in particular have been in service and they're hitting the shop visit cycle that is very favorable. And so, you've got to take all of the installed base and look at that.

And I'm sure you've seen -- that data is published, and it's very favorable. And I think that's what we're -- more than anything, is driving some of the favorability in the aftermarket.

But also, then you go on to the new programs that have been ramping up, in particular like the 787, driving initial provisioning. And then as we look forward, the new narrow bodies, the MAX and the Neo are going to continue that IP. We feel pretty bullish about our commercial aftermarket.

It's interesting, Tom, that you're seeing some 87 provisioning when most people were done with that a while back. Is there any kind of particular reason for that?

I don't know against other companies. It is part of the program and timing of when they buy certain -- or use -- when they do the provisioning, and it just happened to be favorable to Woodward and our content here.

Okay. And then on the shop visit cycle, the strength you're talking about, we're talking about CFM56, you said earlier, so we're talking about the dash 7s for the most part?

For Woodward, it is dash 5, V2500, GE90 would be the three big programs that are really improving for the aftermarket for Woodward. Dash 7 is not as big a program for Woodward; we have some, but it is more the dash 5, which is on the A320, as well as the V2500 on the A320.

Is it just too late for any kind of resurgence in dash 3 or CF6 or any of that?

I would say, back to a question earlier, they fly those planes longer versus retiring them, that's a positive because they will drive part sales and the like. We're not looking for a big increase there. The dynamics are around the programs I highlighted.

Okay, and then when we look at your -- just switching to Industrial, you have talked about scraping along the bottom here. You've got a sequential increase in revenue, I think, from fiscal quarter one to two. And that seems to be different than the pattern a year ago. So, is the bottom behind us now?

When I look at it, I really believe we are at -- if you look at the bottom of a cycle or bottom of the trough, if we're not at the bottom, we are pretty darn near it. And we're anticipating seeing that improve as we go forward.

Now, some of the markets may be slower. We are not anticipating a huge increase in natural gas truck sales in China, so there is one that we're not, for the rest of the fiscal year. But we are seeing some of the other ones starting to turn. As we move into 2017, it is our belief that we are going to start seeing some recovery.

Okay. Thanks, Tom.

Thank you. Our next question is from Pete Skibitski of Drexel Hamilton. Your line is open.

Just curious on Aerospace, if you can maybe give us a rough order of magnitude of how much headwind you've seen in the first half of the year from rotorcraft and biz jets?

It was significant. It has been down for quite a while, and it is one of those areas where we thought we were in the bottom, but it was a significant decline again.

Okay. Okay. Double digits is safe to assume?

Yes.

Okay. And then, on Industrial, similar question on the first half of the year. I want to get a sense of -- it sounds like transportation was down the most in the first half. I am not sure if it was, or if oil and gas maybe was, and it sounds like maybe power gen was down as well. Can you give us a sense of a rank order of the headwinds you've seen in the first half of the year in your three Industrial areas?

If you look, first quarter of 2015 we still had good sales of natural gas, truck and bus, and then it collapsed after that. We are still at, if you want to call it, the collapsed level.

So, when you compare our first half to first half, you have to remember that we had that. That's down relative to that. But sequentially, and after it was down, it's just been down and it's kind of stayed down.

We have seen some drop-off in sales of some power generation equipment, and a lot of that goes into oil and gas, and that has been down. We have seen construction equipment down. There has been a lot of stuff that we would tie back to -- if you really want to look at global GDP, you probably saw some of these numbers out, that global GDP was down. A lot of that was concentrated in industrial markets. We are seeing that across the board.

But then we are also seeing some new activity coming in. Industrial turbomachinery, and as we highlighted with some of the content gains in the second half, we'll be stronger in those areas. But we are not really calling up the natural gas, or some of these other equipment markets -- we are not calling those up.

Has there been any clear slowing -- construction of power utility plants? Have you seen that at all globally?

Overall, I would say, overall, they are down. But for Woodward, you have to look at the applications we are on, and the new plants that are being installed, and we have actually a favorable mix there. As we go into the second half, we've got a good order book for newbuilds, as well as a good order book for aftermarket upgrades and retrofits.

So, sometimes it is actually in the mix of who has won which plant and how it goes, and it just happens to be a favorable one for us. If you do look at the overall market, all players counted, it is slightly down, and distributed power is down a little more than the base load, larger turbines.

Okay. Very helpful.

Last question -- maybe more for Bob. Bob, you got the $250 million in this quarter from GE, and then it sounds like you will pay out roughly $95 million in cash taxes in the second half? So, that's, let's call it, a net $150 million, plus the $100 million underlying free cash flow, so we should think about $250 million overall free cash flow for the full year? Does that sound right?

Yes, your math is pretty close. We will obviously try to minimize the tax payment as much as we can, but your timing is correct, and you're directionally correct on the amount.

Okay. Thanks so much.

Our next question is from Michael Ciarmoli of KeyBanc. Your line is open.

If we could go back to Gautam's question on the Industrial margins, was there anything in this current quarter -- any associated spending with restructuring? I am just trying to figure out, as he was pointing out, the margins are down from the first quarter on higher volumes. So, was there anything -- was it mix, was there any additional spending this quarter?

There's always -- and we have had some as we moved into the new industrial building in Fort Collins and so on. There is always some spending. I can't say there's anything significant that is new.

I think Tom mentioned the major factor that actually we were happy to overcome a bit was the negative flow-through related to the fixed cost coverage associated with sales decline of that magnitude. So, at this point, nothing unusual, and no significant cost savings on that side of the house either; that will all be in the second half.

But didn't you have the same negative flow-through in the first quarter?

We did. But overall, it continued to deteriorate.

I think one comment I'd make -- could be at the root of some of your questions is -- our margins -- our product margins are holding, pricing is holding, we're getting some mix between OE and aftermarket that can affect overall margins, but there's nothing fundamental changing, the biggest issue was volume. And then there is some, when you go through some cost reductions and cost savings measures, there is a timing on the cost versus savings, and you've seen some of that in the quarter. That will clear out as we go into the third quarter here, but you will see the positive effects of that versus negative overhang.

But in terms of the Business, the key factors around margin are holding. We are confident of that going forward.

Okay. It sounded like the orders were -- the order velocity was pretty good. Did you see a book to bill in the quarter in that segment above 1, or can you give us some sense of where the bookings were?

We definitely have that, and the order book for OE sales is much better in the second half. We have that, and we have line of sight to that. On a lot of the aftermarket upgrades, we already have the orders in-house that we have line of sight to, so we feel good about the strength of the order book in the second half on the Industrial business. So, that's part of the pick up, as well as, we will see the effects of the cost savings coming through in the second half.

Okay. To get to that guidance for margins of down 100 to 150, we are going to have to see a pretty good pick up second-half profitability over first half, but it sounds like, between the line of sight you have with orders, and maybe the type of work, you seem pretty comfortable there.

Yes, we do.

Okay. And then just quickly back on Aerospace, I think you said commercial OE was down. Can you give us an order of magnitude of how much it was down, and maybe what platforms, outside of biz jet and helicopter?

That is the main factor.

Was commercial transport down, as well?

Mainly flattish. There's a little movement on a couple of the line rates that you're familiar with, like 747-8, and 777. It was really, when we give a number like that, it's commercial helo, the biz jets, as well as commercial and regional jets in there. It was primarily the helo's and the biz jets.

Okay, and then last one for me, and I will jump back in the queue -- given the lead times you have on some of the new programs, when should we expect to start to see that commercial transport, Boeing Airbus revenue growth accelerate here, given the content gain? Is that more going to be a 2017 event? I'm just trying to think, do we see a gradual increase or more of a step function?

We're going to start seeing it in the fourth quarter, and you start seeing ramps into 2017 and 2018. The ramp is a multi-year ramp. And actually, in Aerospace history, it's a fast ramp, but you are going to start seeing it occurring -- some of the growth we are going to have in the fourth quarter in Aerospace and then really accelerating in 2017 and 2018.

Perfect. Thanks, I'll jump back in the queue.

Thank you. Our next question is from William Bremer of Maxim Group. Your line is open.

It seems like the year is playing out as you envisioned. Any trends that you are seeing, either during the quarter or subsequent to the quarter, that have surprised you in any way?

What we would say is, from the launch of the year, we probably have seen a little bit more softness wrapped around some of our reciprocating engine markets. And so, that would pick up the natural gas trucks, and also picks up some of the construction equipment, and some of the small power generation. That came out a little softer than our initial plan, but it was countered by stronger Aerospace than we planned. Not by much, but those two are offsetting each other.

There was a little bit there, Bill, that we saw down. We were anticipating the new program launches, the order books, in particular around turbomachinery, that's occurring, the new product content is occurring, and the order book in the second half is filling in as anticipated.

So, we did see a little softness on what we generally call our faster cycle, even though it is not real fast, but of our Business it is a faster cycle, and it was a little softer than the initial projections. But we had a little strength in other areas.

Okay. In terms of the overall restructuring, is it completed for 2016 at this time?

No, not all the activities associated with it. Almost all are initiated or in process, but we really won't see a lot of the impact of that, as we said, until the second half. But no, not all are completed.

Okay. And my final is on unallocated -- the expenses there. Is that the new run rate we should be utilizing going forward there?

Yes. It will vary as we go from year to year and quarter to quarter, but that is not substantially different than we would anticipate otherwise. You are talking about the 2%-ish in that segment?

Yes.

Remember that, in the first half, that included the special charges. So, you want to back that out.

Okay, great. Thank you.

Thank you. Our next question is from Jim Foung of Gabelli & Company. Your line is open.

Just getting back to the commercial sales, particularly in transport, I was just wondering, are you seeing any push out in commercial aircraft deliveries as the airframe manufacturers transition from the traditional airplanes to the new re-engined airplanes?

We're not seeing anything that hasn't been announced in the line rate changes, Jim. There's [nothing addition] and the order books are reflecting pretty accurately their stated line rates. We're tracking pretty closely.

It's just that one [of the Meadows] guy who reported earnings lowered their commercial growth rate expectations because of that deliberate planning on the airframe manufacturers to build the -- re-engine the aircraft carefully, and so they saw some delay as they make that transition from the old line to the new line. But you are not seeing any impact on that, right?

And then I guess the other thing you mentioned in your call, you said you potentially more opportunities to win business in the 777 and the A330neo. Can you talk a little bit more about your progress on that, and has the amount of potential business, what you can get, change?

We are doing well on both platforms. We haven't announced the content for aircraft. I think we are probably, on those two applications, do it at our investor day this upcoming November.

We are, on both of them, at the moment, at higher content than we had on their earlier generation. There are still RFPs out that we're responding to, so we anticipate to win a little bit more, and there [will] be good platforms for us, with increased content over the previous platform. So, we're pretty pleased with that.

Okay. But potentially it could be some more business to come later on, if you win some of the RFPs then, right?

Correct.

Okay. All right. Great, thanks so much.

Our next question is from Gautam Khanna of Cowen and Company.

I just wanted to follow up on your comments on the IGT upgrades that you are working on. Is this the advanced gas path upgrades, or what specifically are you referencing, and can you describe a little bit about your content on those sales, and how the margin profile is compared to the OE side?

We have a wide range of upgrades. At some of them, as you're highlighting and calling out are gas path updates. We have fuel system upgrades that are out there. We have controls upgrades that are out there, depending on which machine it is -- so, both from aero derivatives up to frame style machines.

In the aftermarket, the way we go to the aftermarket on the IGT side is we collaborate with the OE, the original equipment manufacturers, and margins are relatively similar. At times we get a little better, but relatively similar. So, positive activity going on, and I would say neutral to positive to margins.

And has pricing continued to hold up in that product category? Or have you seen any incremental pressure there?

Well, there is always -- what I would say with all of our OEMs in every market segment we are in, there is always pressure on prices. We always take a collaborative approach with them, trying to find ways to value-engineer the products, get costs out, system optimization, so we're always working on that.

So, yes, there's always cost pressure, but I think in the way we do business and creativity, we work to hold or enhance our margins, while we try to drive costs out for our customers. So, I'm just saying it that way because that's universal on all our platforms.

Okay. And just one last one: As we ramp on the OE side in Aero on the 320neo and a number of the other platforms that are ramping next year, starting in Q4, are they going to contribute at the OE margin, or are they going to be better or worse given the Rock Cut facility and the like? I'm just wondering how we should phase these in, as some of these new products start to hit?

What I would say, with all the initiatives we put in place, improving our operations, our cost of the product, our cost structure, and then you take the balance, as these new programs ramp up, we do expect to continue to improve our Aerospace margins. And we talked about our target of getting to 20% plus segment margins; I think we did that again at the investor day.

That has not changed, and so you can see we're making progress last year to this year. And our expectation is to continue that improvement, as these get into full production, that we will also be hitting our margin target.

Okay. I said that was the last one; I did have one more, which is just again on the commercial aftermarket. It sounds like your commentary seems better than plus 5% for the year -- 5% to 6% for the year. Can you make any comment about how the trends have been since the quarter, or if you built backlog in the quarter, and what your visibility is for the third and fourth quarter, in terms of year over year?

We feel confident in that aftermarket increase for the year. We do believe there is some opportunity out there; there would be some timing as we get in the fourth quarter, primarily more around initial provisioning than around repair and overhaul. There is a possibility, but there is definitely going to be a timing issue as we hit the fourth quarter, whether it will be fourth quarter or roll into the first quarter. But the outlook is good, and we're confident in the outlook.

All right. Thank you very much.

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

Thank you all for joining us, and also for the Q&A session. We appreciate your questions. We look forward to seeing you over the next quarter, and again, thank you for joining us today.

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 1670790. 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.