Woodward Inc (WWD) 2018 Q3 法說會逐字稿

Thank you for standing by. Welcome to the Woodward, Inc. Third Quarter Fiscal Year 2018 Earnings Call. At this time, I would like to inform you that this call is being recorded for rebroadcast. (Operator Instructions) Joining us for 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, Corporate 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 2018 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 August 13, 2018. The phone number for the audio replay is on the press release announcing this call as well as on our website 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 including the risks we identified in our filings.

As previously announced, Woodward will be providing financial information as reported under U.S. GAAP and on an unadjusted and an organic basis. Please refer to our press release and related tables as well as the appendix of today's presentation for the definition of adjusted and organic. We believe this will help in understanding both historical results and future outlooks.

We also direct your attention to the reconciliations of non-U. S. GAAP financial measures which are included in today's slide presentation and our earnings release and related schedules. Management uses these non-U. S. GAAP and adjusted financial measures when monitoring and evaluating the ongoing performance of Woodward and each business segment.

Now turning to our results. Net sales for the third quarter of fiscal 2018 were $588 million, an increase of 7% from the prior year quarter. Organic net sales for the third quarter, which excludes L’Orange sales of $25 million, were $563 million, an increase of 3% from the prior year quarter. Net earnings were $49 million or $0.77 per share in the third quarter of 2018. Adjusted net earnings were $71 million or $1.12 per share for the current quarter compared to $54 million or $0.85 per share for the third quarter of 2017.

Net cash generated from operating activities for the first 9 months of 2018 was $162 million compared to $184 million for the first 9 months of the prior year. Free cash flow was $72 million for the first 9 months of 2018 compared to $119 million for the same period of the prior year. Free cash flow for the first 9 months of 2018 was negatively impacted by approximately $13 million of special charges.

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

Thank you, Don. Welcome to those joining us today. Our Aerospace segment performed and continues to be strong while our organic Industrial segment remains challenged. However, with the completion of the L’Orange acquisition, we are already seeing the anticipated favorable impact in our Industrial results on an adjusted basis.

Before I get into more detail on the quarter, I'd like to address the issue of tariffs and the potential impact on Woodward. Clearly, the imposition of tariffs can have a negative implication for the global economy as parties attempt to balance trade. For Woodward, the most notable impact will be in Aerospace and certain commodities used in both of our segments. As an aerospace supplier, the downstream impacts of tariffs directed in this space could be impactful, but at this stage, are not specific and are impossible to assess.

With respect to commodities, Woodward generally designs both its customer and supplier contracts to insulate against the potential for rising costs. The imposition of tariffs is just one avenue of -- for those increases.

With respect to steel and aluminum specifically, most of our requirements are sourced domestically. While commodity prices have increased in certain areas, contract terms, both customer and supplier, have protected us to date from significant impacts. Over the longer term, if tariffs were to remain in place, there could be significant impacts and costs in our ability to pass them along. We continue to monitor the situation and we'll provide more information as available.

Turning back to the quarter. Let me provide some more detail on our market segments. Fundamentals within the overall aerospace industry remain exceptionally strong as evidenced by new order flow recorded at the Farnborough Air Show, continued improvement in business jet and rotorcraft markets and mounting global defense spending. Additionally, rise in oil prices have historically accelerated this transition into more efficient aircraft.

Building upon what are already historically strong backlog levels, Boeing and Airbus announced more than $100 billion in new aircraft orders during the Farnborough Air Show this past month. We have content on nearly 100% of the aircraft order during the show, which represents significant future Woodward sales.

More specifically, our Commercial Aerospace business continues to be very strong, driven by the ramp-up of the new narrowbody programs. During this period of heavy OEM growth, we have maintained solid profitability to leverage on increasing sales, improving productivity at our new facilities and strong aftermarket activity. Our defense business also generated solid results reflecting increased global defense budgets, driving overall increased activity and more specifically, ongoing strength in guided weapons.

Turning to Industrial and focusing on the 3 main Industrial market segments. In power generation, industrial gas turbine market continued to decline but inventories are decreasing. We are optimistic that we're nearing the bottom. On a positive note, market demand is shifting toward gas turbines with higher Woodward content, and we have aggressively reduced cost to address market conditions. However, it's so unlikely that we will see improvement in gas turbine sales before 2020.

Overall, economic activity is positively impacting certain areas within power generation including distributed power applications, utilizing large natural gas and diesel engines where we would anticipate improvement going forward. In renewables, the global market is growing. Our success in regaining market share and new customer platforms, including with Vestas, will begin to impact sales in fiscal year '19.

In transportation, the volatility in the Chinese natural gas vehicle business has led to slower sales than anticipated. The announcement of the adoption of the China VI emission standard, coupled with the recent rise in oil prices, should be a positive incentive for natural gas-fueled vehicles going forward.

Oil and gas markets remained healthy as rise in oil price is driving further investment. This is fueling activity within our large gas engine, steam and compressor products.

The Woodward L’Orange business, which we acquired on June 1, is performing very well, benefiting from the ongoing improvements in the marine and oil and gas markets including a strong aftermarket. While it's only been 1 month since closing, we're optimistic on the opportunities ahead of us and integration's proceeding as planned.

In summary, the aerospace industry remains very healthy and Woodward's Aerospace business is thriving. Activity levels at Farnborough as well as recently announced defense spending commitments out of NATO highlight future opportunities. We have greatly expanded our market share through investments in industry-leading technology, which we will continue to create numerous opportunities in the future.

We're encouraged that several of our industrial end markets are showing signs of improvement, and we believe we are well positioned as we go forward. We continue to drive innovation to enhance our leadership position while remaining diligent in our efforts to align our cost with current demand levels. Finally, we are extremely excited about the addition of Woodward L’Orange and expect the business to provide a significant boost to our Industrial segment performance. Now let me turn it over to Bob to discuss financials.

Thank you, Tom. Aerospace sales grew 14% this quarter compared to the prior year, driven by strength in commercial and defense OEM and very robust commercial aftermarket activity. Commercial aftermarket sales for the quarter were up 19% due to both initial positioning and MRO tied to record traffic growth and the resulting heavy utilization of the existing fleet. While we did not anticipate that this rate would continue through the year, we now expect the commercial aftermarket growth rate for the full year to be in the mid to upper teens.

Aerospace segment earnings for the quarter were 20.3% of sales compared to 18.9% in the same period last year. Segment earnings were favorably impacted by the higher sales volume in the quarter, particularly the aftermarket strength and was only partially offset by higher manufacturing costs related to the increased production levels.

Turning to Industrial. Third quarter Industrial segment sales were down 5% compared to the prior year. Organic Industrial segment sales were down 18% primarily due to weakness in industrial gas turbines, renewables and China natural gas truck sales this quarter compared to the third quarter of fiscal 2017. Third quarter Industrial segment earnings were 5.7% of sales. Adjusted Industrial segment earnings were 10.2% of segment sales compared to 10.8% in the prior year period. The decrease in adjusted segment earnings was primarily due to lower organic sales volume partially offset by L’Orange operating earnings excluding the impact of purchase accounting adjustments.

At the Woodward level, R&D spending was approximately $5 million higher in the third quarter of 2018 compared to the prior year quarter. This increased spending relates primarily to new Aerospace programs and we expect the full year to finish at approximately 7% of total sales. Selling, general and administrative expenses were $55 million this quarter compared to $45 million for the third quarter of last year. The year-over-year increase in SG&A expenses was primarily due to $11 million in special charges associated with the acquisition of L’Orange.

The effective tax rate for the third quarter of 2018 was 9.7% compared to 21.9% for the third quarter of 2017. The adjusted effective tax rate, which excludes the transition impacts of the change in U.S. tax legislation, was 11.9% for the quarter compared to 21.9% for the third quarter of 2017, primarily due to favorable resolutions of the prior period tax matters in the third quarter of 2018. The effective tax rate for fiscal 2018 is anticipated to be approximately 23% and the adjusted effective tax rate is anticipated to be approximately 18%.

Looking at cash flows. Net cash generated by operating activities for the first 9 months of fiscal 2018 was $162 million compared to $184 million for the first 9 months of the prior year. Free cash flow for the first 9 months of 2018 was $72 million compared to $119 million in the same period of the prior year. Free cash flow for the first 9 months of 2018 was negatively impacted by approximately $13 million of special charges. Capital expenditures were $90 million for the first 9 months of 2018 compared to $65 million for the first 9 months of 2017. We expect capital expenditures for the year to be approximately $130 million. For the full year, we now anticipate free cash flow to be approximately $165 million, reflecting increased capital expenditures and working capital requirements.

Lastly, turning to our fiscal 2018 outlook. Our outlook now reflects the acquisition of L’Orange. Total net sales are expected to be approximately $2.3 billion for fiscal 2018 with Aerospace sales up approximately 14% and Industrial sales flat to slightly up, both as compared to the prior year. Organic Industrial sales are expected to be down approximately 12%. Aerospace segment earnings as a percent of net sales are expected to be flat to slightly up and adjusted Industrial segment earnings as a percent of net sales are expected to be up approximately 100 basis points, both as compared to the prior year. Earnings per share are now expected to be approximately $2.75 based on approximately 64 million of fully diluted weighted average shares outstanding. Woodward's overall outlook on an adjusted basis has improved. Adjusted earnings per share are expected to be approximately $3.80.

This concludes our comments on the business and results for the third quarter of fiscal year 2018. Operator, we are now ready to open the call to questions.

(Operator Instructions) Our first question comes from Sheila Kahyaoglu with Jefferies.

On Industrial, organic volume seemed like it decelerated in the quarter. Can you talk about some of the moving pieces and expectations as we move into 2019?

You said organic, right?

Yes.

Yes. I think, Sheila, that we kind of highlighted during the prepared remarks but the Industrial gas turbine sales continued to decline in the quarter. We see that decline decelerated, if you want to say, and as we move into '19, and we really think we're hitting the bottom in 2019. And as we've approached 2020, we should see the turn in gas turbines. Our renewable business, as we've highlighted in the past conference calls, we had lost out on a couple of the most current programs. We have, however, won back, the next generation which will start to materialize in sales in 2019. So we see the wind business picking up in '19. And finally, the volatility in the China natural gas market, all indicators are pointing up. We expect that to start turning in the fourth quarter and as long as the fuel prices and emission standards and all that continue as we anticipate, it should be more positive in 2019. So those are the ones that have dragged us down this quarter but we do see an inflection point starting to happen on those.

And then just on commercial aftermarket, I think you said midteens guidance for the full year but it would imply some sort of deceleration into Q4. I guess, how -- what are you seeing in the aftermarket, if you could give us some idea there? How much of it is initial provisioning versus legacy aircraft and then how we should think about commercial aftermarket as a whole?

Sure. The first is we're going to have a strong comparable to last year. So that's one of the things that you'll see on the growth rate. But what we've highlighted is the commercial aftermarket for Woodward is very healthy. On the MRO side, the key programs, the shop visits are up. Engine shop visits on our key programs are up. Initial provisioning sales on the new programs are doing well. So that's what's been driving the very sizable growth we had this year. As we move into next year, I expect the market to still be very strong. We're just going to have really tough comparables as we move into 2019 but it's not -- the market's decreasing. We're going to have a strong market both on the OE and the after mark-to-market side for commercial, but I guess you guys should be ready for some tougher comps as we move into next year.

And our next question comes from Robert Spingarn with Credit Suisse.

Wanted to ask you a little bit about L’Orange and what -- how you think about it contributing on an annual basis. Did you say it was $25 million in sales for the 1 month that you had it in the quarter?

That's right.

Right. So how do we think about that, Tom, on an annualized basis both from a sales, margin and cash flow perspective? And then I'm wondering if you can -- Bob, maybe you can clarify or explain why such a heavy allocation asset-wise to goodwill rather than -- PP&E seems kind of light for this heavy industrial business?

Okay. Well, we'll take that in 2 parts. Yes, first part, we see L’Orange performing to the pro forma when we announced it. So both from the sales and EBITDA margin are tracking and then we feel very positive that we will deliver those results. So owning it for a little over a month here, we're getting to know the business better. We're confident in our outlook that we gave, and I see it delivering those results as we move forward here in the rest of '18 and into '19.

And what kind of cash conversion?

It's going to be strong -- yes, it's good margins, good cash conversion. It'll be additive to the company. That's for sure. And then the second part of the question.

So from our perspective, we don't really see it as that heavy on the goodwill side. I think it's fairly in line -- when you look at other comps and when we did the valuation study, it's pretty much in line with most of the categories. They have a good strong backlog and that always garners some intangibles associated with it, but we didn't really see it out of line. So I don't know if you had some specifics, we'd be happy to...

Well, I just thought the intangibles looked a little light at $500 million -- a little high at $500 million-plus and then figured, given that, maybe the amortization allows for earlier accretion, then had it been balanced for PP&E and a flatter depreciation curve.

We would agree with you on the intangibles, and that's why I mentioned kind of, one, a very strong backlog, obviously very strong customer relationships. So a lot of those intangibles did garner a lot of the value. You saw the LTSA term on that. So there were some things that were really driving the intangible portion, not as much we thought the goodwill portion.

Okay. And then just on the free cash flow guide for the year. You mentioned higher CapEx, if we could talk about that a little bit, also the working capital. I guess, some of this was transaction related in the quarter but not all of it, not all of the guide down from last time.

No. As you know -- I'll take the last part first. As you know, we're fourth quarter-driven and, more importantly, perhaps the latter part of the fourth quarter-driven, and so that drives a lot of working capital both on the inventory and the receivables side into the latter part of the year. So that is -- that pattern is not any different. It's a little bit stronger this year in terms of working capital requirements. We still -- as Tom said, there's a number of varies particularly in the Industrial side that we see potential for improvement but it would be late in the quarter and that's what's going to drive that working capital in particular.

Is that inventories, receivables?

It's predominantly -- this quarter, it's inventory. Next quarter, hopefully, those inventories will be turned into receivables. On the CapEx question, 2 main features. One is, obviously, the addition of L’Orange now and their CapEx that comes with that. And then the second part is our continuing Duarte to Drake transition and the work we're doing renovating the Drake facility.

And our next question comes from David Strauss with Barclays.

Following up on Rob's question. So I think, previously, for L’Orange, you talked about $0.35 in fiscal '19 accretion. I think you did better from a financing perspective than you would've thought or had originally baked into that guidance. And unclear how you were handling all the intangible amortization in that number, whether it was just back -- if you were excluding the backlog amortization or not. Could you just clarify how you're thinking about the accretion number and what actually is included in that from an amortization standpoint?

Yes. So the $0.35 originally -- so a, that was very early on in the valuation process, which I think we called out at that time. We have not gotten the final numbers. And the intangible portion, as we just alluded to, did go up, and so that $0.35 does include that element of it as well. So that's really -- other than that, we're pretty close to in line. Operating performance is in line. The intangible amortization is slightly up and that's probably where we'll end up.

Okay. So within that amortization number, the backlog amortization, that was excluded from that number?

Yes, it was.

Okay. And then on the adjusted EPS, so the -- moving up to $3.80, could you just help us walk to what changed there? It sounds like, obviously, Aerospace, better; Industrial pre-L’Orange, worse; and then L’Orange, I guess, being accretive from an adjusted standpoint. Is that how you get to that number?

You do. You're pretty much have the 3 major pieces, slight tax impact, and I could see you got them all.

And I would just add improvement in the organic Industrial operating business as well.

Going into the fourth quarter.

Going into the fourth quarter, we anticipate better margins in organic Industrial as well.

Okay. And then last one, deleveraging, how you're thinking about that? Is it still the plan to take out a couple of hundred million. I know you have a couple of maturities next year, but is the plan still to take out a couple of hundred million in debt next year?

It is. Yes.

Our next question comes from Drew Lipke with Stephens.

So we saw -- in Aerospace, we saw a nice step-up in incremental margins this quarter, which is encouraging. What was the impact of increased manufacturing expenses? I think you noted that just associated with the narrowbody ramp in the quarter. And then how are you tracking in terms of your ramp down the learning curve for the narrowbody production ramp just relative to your internal expectations?

Yes. What I would say is we're tracking pretty well to our plan. When we talk about the increased manufacturing expense, obviously, we got the full factory loan as we're -- costs were moving into the ramp-up. We're quickly moving down the learning curve. So we're positive about the performance of our operations to those plants. And as we look forward, and to what we've said 2019 was going to be our year to hit 20% for the Aerospace segment. We are definitely on track to get there.

Is it the commercial OE mix that could limit you to 20%, just given the progress on the OE ramp and then the strength in aftermarket?

Well definitely, it's -- the mix will be a factor, and next year, we're going to be up substantially on the OEM side. So that's kind of the balancing effect we have between the higher OE with a strong aftermarket and better operational performance. So it's all those factors together but that's a part -- a big part of it.

Okay. I think you talked about in your prepared remarks R&D as a percent of sales at 7%. I think that's even as we're layering L’Orange here. I mean, I think that's higher than the previous guide of 6.5%. Can you just elaborate on what that's tied to and maybe going forward how should we think about R&D as a percent of sales just longer term?

Go ahead, Bob.

Yes, you're right. It was 7%. Yes, there's a L’Orange element to that. There's also, as we mentioned the Aerospace wins that we announced earlier in the year, didn't necessarily announce all of them, but it's really driven by new program spend. I would say we're not going to see significant -- every time I say that, we'll learn something new, I hope, and the R&D will go up again. But at this point, not looking at any nominal increases and watching it come down a bit with the sales growth.

Our next question comes from Christopher Glynn with Oppenheimer.

So going back to some of the comments on the Aero aftermarket outlook for next year. You raised the point certainly about the tough comparisons. Would the idea be to what percent in that kind of tracks flight hours for your next year as the reasonable proxy?

Yes. We haven't put together the outlook for investor disclosure as of yet for fiscal year '19. But what I would highlight to you is that the MRO side is very strong. We see that continuing. We expect -- and that, we're tracking above the flight hours or utilization rates just due to the demographics of the fleet and the products we're on. The initial provisioning sales, I think, will still be strong next year but it won't be that big of an incremental change as we had this year. So it's a combination of -- be a little above maybe the average market fleet utilization. We will have to wait and see when we give a little firmer outlook.

Okay. That's really helpful. And then on L’Orange, if we look at some of the updated Industrial segment guidance, it looks like the fourth quarter impact might be around half of that $0.35 outlook that was given for all of fiscal '19, putting together some imperfect numbers and trying to back it up. But could you comment on how lumpiness or seasonality works with that platform in general relative to the annualized run rates?

Yes. Well, first, we haven't had it long enough to really analyze seasonality. I'm not sure there's a huge amount of seasonality at our initial look. What I would say though, too, is don't forget in the fourth quarter, I highlighted earlier our organic Industrial business will be up in the fourth quarter. We're having improved margins. So it's a combo of that and L’Orange, in the fourth quarter.

Okay. And then on free cash flow bridge into next year. Certainly, the CapEx is higher this year. How might that inform how we think about next year? And working capital's a pull this year, does that turn relatively favorable next year?

We hope so, yes. From a capital expenditure standpoint, a major project that we've been working on will be substantially complete, and so we should see that taper off a bit. Hopefully, the working capital requirement is kind of just in terms of this timing element of being shoved in the back of the quarter. We'll also kind of modify a little bit as we get into '19, and so we should see increased capital growth in '19.

Our next question comes from George Godfrey with CL King.

I just wanted to go back to the L’Orange EPS accretion. Given that you have had it now for a full month and -- actually, 2 months, I guess, of ownership, do you have greater confidence in the ability on the synergy target that you gave? And I'm specifically thinking about the sales, the aspect to expand the customer base. And I have a follow-up.

Okay. We feel very good about the synergies that we outlined both on the cost as well as on sales. Customer reaction has been very positive. Now it takes little time to convert that positive reaction into new programs and sales, but we're confident that we're going to be able to drive the top line and achieve the $20 million of synergy savings that we highlighted. So we're on track. We feel good about it. The integration's going well. We're really positive about the team that came with L’Orange and the business is really solid.

Got it. And then on the free cash flow. As we look to next year -- or I should say this year, the free cash flow conversion looks to be around 70%. Next year, do you think that it hits more like Woodward's historical of 100%?

Yes. As I say, I seem to always come back and talk about the timing of these things, but that's the difficult part to really address but we should be more on a regular track next year, yes.

And our next question comes from Michael Ciarmoli with SunTrust.

Maybe, Bob, just to go back to the previous line of questioning on cash conversion. Did you say you expected more capital growth in '19 so we should expect an uptick in FX for '19?

No. I should have said more cash flow growth in '19, not capital expenditure growth. Capital expenditures should come back down to the level that we've been kind of outlining for quite a while now in this year, in particular, because of the 2 main increases of L’Orange and the Duarte project. That's really why we're above that normal -- well we want to be a normal level.

Got it. And then maybe just to go back on -- I think it was David's line of questioning on the Industrial margins, sort of the core organic business. So even despite the pretty sharp downward sales provision, I think, you had that at down to 7%, now looking at down 12%. It sounds like the profitability of that organic would have kind of held in your prior range in that 10.5% to 11.5% range. Is that the right assumption there?

It would've, yes. I mean, this is a tough quarter. Fourth quarter, we get some increased sales leverage and that helps a lot. So we should see improvement back to our more normal level in the last few quarters in the fourth quarter of this year.

Okay. Got it. And then realizing it's probably pretty fluid with the tariffs, the raw materials, but do you have a fairly good understanding knowing that you've only owned L’Orange here for a few months, just even layering in Brexit, what those implications could have on the overall business there?

Well, Brexit, I don't see having any impacts. The sales are very, very, very small in the U.K. So I don't see that as being an issue. The material side, specialty steels and alloys, we have to watch to see if these tariffs stay or if we get them resolved. At this point, we're analyzing all the supply contracts and we're trying to figure out the impact at L’Orange. So it's a little challenging because you have to go through -- so I think we've said in previous conference calls, a lot of our contracts, we have material escalation clauses but there's always what we call deadband in there. And so there's a period where these price changes won't affect us. But after a period of time, they can. So we have to analyze individual contracts, see where the tariffs and the pricing changes go. And we're in the middle of that. We'll report out at the end of the next quarter if the tariffs are still in place and we have a better handle on the overall impact. But at the moment, we think it's going to be small. I'm anticipating that this will get resolved, but we'll have to wait and see.

(Operator Instructions) Our next question comes from Gautam Khanna with Cowen.

I wanted to ask, in some quarters, you guys have called out mix within the aero OE business as being more or less profitable than some platforms or less profitable than others and the like. And getting back to the earlier question on kind of the LEAP engine, GTF, single-aisle ramp, I was wondering maybe if you could characterize, does the OE mix actually improve as we move next year as you come down the cost curve? Is it a dramatic shift within OE as we get down on the learning curve? Or I'm just curious how steep it actually is considering you're going to be getting to much higher volumes next year. Is that something that could provide a bit of a tailwind?

There's definitely a positive tied to the learning curve as we're going forward. So the answer to your question is yes. It is a positive compared to fiscal year '18 as we go into '19. But on the other hand, we will have higher overall OEM sales versus aftermarket in fiscal year '19. So better margin on OEM, different mix but that's also coupled with improvements in the defense sales, which generally carry good margins. So overall, that's how we're balancing this all out and saying we are going to achieve our target in fiscal year '19.

And then on the flip side, Tom, to look at it another way, some of the legacy single-aisle stuff will fade down over time. Is that pretty profitable relative to where you might be on the new single-aisles next year in terms of profit per unit or what have you? So is that another headwind? Or should we view it OE mix improves. Period.

I would say OE mix improves overall, and it's not going to be a tailwind and the aftermarket associated with those legacy is very good.

Last quarter, just on the gas turbine side, if you've seen any cancelation of orders or is this just kind of no new orders for a long time now and any sort of price down. Have you seen any sort of renegotiation of existing contracts or canceling that which is on order that's amplifying the decline this year?

What I would say is that the canceling of orders is not really the issue in terms of the way our contracts and our systems are set up with our customers in the gas turbine side. But what I would say is the -- definitely, the volume in the gas turbine aftermarket and retrofits has plummeted. The OE is soft and we see that, and at this point, we're not calling the bottom yet but we're pretty darn close to it. It has gone down that much. So in terms of the supply chain and contract negotiations, it's a tough time in the gas turbine market both for our customers and for Woodward. Obviously, with our customers, they have issues with the supply base staying in business and so that's a lot of pressure. And for Woodward, we have the same thing as working through the suppliers that have dramatically reduced sales and I think we're managing that really well. We're able to handle all the disruptions that have occurred because of that going forward. We're working with the OEMs how to create a positive going forward and be prepared for the recovery. So challenging times in the industry. I think we're handling it pretty well, and we're pretty -- we're getting confident that we're pretty much at the bottom. Yes, we'll probably be able to have a clear picture in the next 2 quarters but we think we're pretty close.

Okay. I just want to be clear though. It's not like -- I'm wondering if this year, you're seeing the impact of both the lower volumes in the aftermarket and OE as well as maybe lower pricing but I'm not exactly sure how...

Yes. So I didn't answer your pricing. Pricing isn't the issue, okay? Sorry, it's not the issue. It's all tied to dramatically lower volumes.

Okay. Fair enough. Last one for me, if you don't mind. Last quarter, you guys had kind of stuck to the low double-digit commercial aftermarket sales growth for the year. If I recall, I think Q3 last year was like a plus 30 comp or something, and you still put up a point -- plus 19. Was there something about the phasing of the aftermarket in the quarter? Was it very much like June weighted or what have you? Or is that are you still seeing kind of very robust activity? And I'm just wondering how predictable it is. Or is it exceptionally lumpy even within the quarters? Is it tied to 1 or 2 customers? It sounded like it was pretty broad-based. So I was just wondering if there's -- what if the visibility is actually very good?

Yes. There's mixed visibility. What we look at first is we can track and work with our customers on scheduled shop visits, and that's -- we could see that. And then we -- knowing we've got a lot of data on our products, which is really a great thing, and so we kind of calculate the hours, what will be the extended repairs based on the hours on the hardware, so that, we predict pretty well. We're also getting better at the initial provisioning. So we do really a lot of analysis working with our customers, again, on who's taking new aircraft, what routes are they going to fly and starting to look at what initial provisioning they're going to need, working with both our OE or our OEMs and the airlines, on what initial provision they need. The thing with additional provisioning is it's a little -- that's I would call a little more lumpy because you get orders that are pretty big dollar amounts, and they could vary from month-to-month. Overall, if you average them over a rolling 12-month period, they smooth out. But month-to-month, quarter-to-quarter, you can see some variation in that, and that's pretty normal. We're seeing the third-party repair shops, with piece part orders pretty consistent. So we can kind of predict that. We're really confident in the robustness of the aftermarket and that robustness continuing into next year. I would say that we will have some quarter-to-quarter variability but the aftermarket is strong. And we've had some great growth rates here from '17 to '18, and that's the only reason we've cautioned that those growth rates are extremely high, and we're just kind of giving you the heads-up that you might not project those same growth rates going forward. But the aftermarket's strong and we will do really well with the aftermarket in fiscal year '19. Hopefully that's helpful.

I appreciate it. Maybe offline -- I don't know if you guys have given it, but have you given the mix of what percentage of commercial aftermarket is scheduled shop visits versus initial provisioning versus day-to-day compare? I don't know if that's ever been disclosed.

No. We've never done that. I mean, we try to give color to it but we haven't done down to that granularity.

And our next question is a follow-up from Robert Spingarn with Credit Suisse.

I just wanted to ask you a couple of things on the military side. Just get an idea where you are in JDAM production, same on F-35, where you are relative -- maybe what your lead time is to Lockheed on the latter?

Well, JDAM production, if you've seen some of the press releases there, the information on that, it has ramped up. We're right on schedule on our deliveries and are in great shape. I mean, we're fully ramped up to the requirements. That program's strong going forward, at least we see for the next 3 to 5 years.

So your current numbers would reflect sort of a standing rate at this point?

Yes. The numbers today reflect the current rate. There's, Rob, as you probably are well aware of, there are discussions of further rate increases. We have the capacity to do that. We've been working our supply base to ensure that they're ready. If and when that moves further, production ramps occur, we'll be able to deliver on those and capitalize on that. On the F-35, yes, we're both on the engine as well as the airframe programs starting to proceed. I try to remember your detailed question on that. I mean, we're in good shape.

Well, just really what your rate is. I mean, they're going to top out at, like, I don't know, [160] or some number like that at some point where you are relative to that.

In terms of capacity in place?

And what you're running at, I mean...

At what run rate that we're at?

Yes, in terms of ship sets.

Yes, they're not at those rates today. I know that's the future rates.

Some long lead stuff is going at those rates or coming close to that.

Yes. Robert, we're not there yet. I don't think our lead times are quite as long maybe as some of the other suppliers, but we will be approaching that as we move into next year. So it's part of the defense strength that we see going into fiscal year '19.

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

Okay. I appreciate everybody participating in today's conference call. Thank you for your questions. We look forward to seeing you over this next quarter and I guess talking to you -- next release will be in November. So thank you again for joining us today.

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