Woodward - Earnings Call - Q2 2020
May 4, 2020
Transcript
Speaker 0
For standing by, and welcome to the water Woodward Inc. Second quarter fiscal year twenty twenty earnings call. At this time, I would like to inform you that this call is being recorded or rebroadcast rebroadcast and that all participants are in a listen only mode. Following the presentation, you will be invited to participate in a question and answer session. Joining us today from the company are Mr.
Tom Gendron, Chairman and Chief Executive Officer Mr. Bob Weber, Vice Chairman and Chief Financial Officer Don Guzzardo, Vice President of Investor Relations and Treasurer. I would now like to turn the call over to Mr. Guzzardo.
Speaker 1
Thank you, operator. We would like to welcome all of you to Woodward's second quarter fiscal year twenty twenty earnings call. In today's call, Tom will comment on our markets and related strategies, and Bob will then 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 05/18/2020. 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. I would like to refer to and highlight our cautionary statement as shown on Slide three. As always, elements of this presentation are forward looking or based on our current outlook and assumptions for the global economy and our businesses more specifically, including the ongoing COVID nineteen pandemic and related measures taken by individuals, governments, and private industry.
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 identify in our filings. In addition, Woodward is providing certain non U. S. GAAP financial measures.
We 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. We believe this additional financial information will help in understanding our results. Now turning to our results for the second quarter.
Net sales for the 2020 were $720,000,000 compared to $759,000,000 for the prior year quarter, a decrease of 5%. Net earnings were $91,000,000 or 1.41 per share compared to $78,000,000 or $1.2 per share for the prior year quarter. Adjusted net earnings were $104,000,000 or $1.61 per share compared to adjusted net earnings of $90,000,000 or $1.4 per share for the prior year quarter. Net cash generated from operating activities for the 2020 was $52,000,000 compared to $141,000,000 for the prior year. Free cash flow was $23,000,000 and adjusted free cash flow was $55,000,000 for the first half of twenty twenty.
Now I will turn the call over to Tom to comment further on our results, strategies and markets.
Speaker 2
Thank you, Don, and good afternoon, everyone. Before jumping into our business performance, I would first like to take a moment to thank our exceptional Woodward team for their hard work, flexibility, and dedication over the past three months as we collectively navigate through one of the most challenging times our company has seen over its one hundred and fifty year history. Our team acted swiftly in the face of a growing global pandemic. We implemented rigorous health and safety protocols within our global facilities to ensure the highest protection for our employees to enable us to continue delivering essential products and services to our customers. We also transitioned the majority of our office team members to a remote work environment.
On behalf of myself and the entire Woodward management team, thank you. As with previous downturns Woodward has weathered, we have taken quick decisive actions to mitigate negative impacts on our business. These actions include communicating daily both internally and externally with suppliers and customers, proactively revising demand and supply plans in accordance with changing market conditions, and taking numerous cost cutting and cash preservation steps such as implementing layoffs and furloughs, reducing cost company directors, retainers, and officers' salary through 2020, eliminating twenty twenty annual bonuses, decreasing our dividend, restricting capital expenditures, and reducing nonessential costs and working capital among other items. Additionally, on April 6, we announced the mutual termination of our merger with Hexcel Corporation. While disappointing, the mutual decision by Hexcel CEO Nick Stanisch, myself, and our respective boards was made in the spirit of doing what's best for our individual businesses as well as our employees, customers, and shareholders in order in order to focus on managing through this unprecedented crisis.
We also made the decision to shift Bob Weber back to the role of vice chairman and chief financial officer. As an industry veteran with deep knowledge of our business and end markets, I'm confident that Bob will help us manage through these challenging conditions. By taking these necessary steps, we're able to focus on what matters most in these uncertain times, which is protecting the health and safety of our team members and maintaining our financial strength. Now moving to Woodward's second quarter. Our performance was largely in line with expectations before beginning to experience impacts related to the global disruption caused by COVID-nineteen.
Over the past three months, however, we have seen increasing uncertainty as our markets react to frequent and significant disruptions, including global shelter in place orders, worldwide air travel at a near standstill, and historically weak oil prices, which are pressuring several of our end markets. In commercial aerospace, the largest impact in the second quarter continued to be the grounding of the seven thirty seven MAX, which affected both OEM sales and initial provisioning. Legacy commercial aftermarket in the quarter remained strong. As we closed the quarter, we began to see passenger and cargo traffic decrease significantly as a result of restrictions associated with the global spread of COVID-nineteen. In April, we saw build rates decline as a result of plant closures and the anticipated longer term impacts of the ongoing pandemic.
We expect commercial aerospace to be a challenging and uncertain environment in the coming quarters. In defense, OEM and aftermarket continued to be strong. Military demand remained healthy, particularly for fixed wing platforms and defense aftermarket activity. Historically, defense has remained strong during economic down cycles, we believe this will hold true through this crisis. Turning to our industrial markets.
Industrial markets were mixed during the quarter. In power generation, the industrial gas turbine market continued to recover as global power demand improved and end user upgrade initiatives increased. On April 30, we closed on the previously announced divestiture of our renewable power systems and related businesses. In transportation, COVID-nineteen related plant shutdowns in China at the beginning of the calendar year negatively affected the production and demand for natural gas trucks in the second quarter. Marine was negatively impacted in the quarter by decreased crews and container ship utilization and reduced global transportation of goods.
Oil and gas markets continue to soften with weak customer demand and excess supply resulting in a steep decline in oil prices and a corresponding reduction in capital expenditures. For industrial, we anticipate negative impacts in almost all of our markets due to the COVID-nineteen pandemic and the sharp decline in oil and gas prices. However, in China, the continued focus on emissions and related regulations remains favorable for natural gas trucks. As a result, we are seeing a recovery in demand as economic activity in China improves. We will continue to closely monitor developments in this market as well as all of our other markets.
In summary, although performance in the 2020 largely met our expectations, we anticipate significant weakness in the second half. As we continue to manage through this time of uncertainty, we are confident that we are taking the necessary steps to preserve Woodward's long term growth opportunities and our financial strength. We have a strong balance sheet, substantial available liquidity, disciplined cash management and a seasoned management team that has success had successfully navigated through previous downturns. We will continue to invest in world class technologies, operational excellence and strategic growth to deliver superior shareholder value and emerge even stronger than before. Now I'd like to welcome Bob back to the team and turn the call over to him to discuss the financials in detail.
Speaker 3
Thank you, Tom. I'm pleased to be back in the CFO role at Woodward. And while I wish it were in a better environment, I have the utmost confidence in our team's ability to successfully navigate through this time of uncertainty. To do that, we are highly focused on maintaining the financial strength of the company throughout this downturn and have already taken prudent actions to realign our cost structure and maximize cash flow. Now turning to our second quarter performance.
I'd like to first point out that earnings for the quarter benefited from our decision to eliminate annual bonus payments for 2020. This resulted in the reversal this quarter of the annual bonus expense recorded in the first quarter of twenty twenty. Speaking to our segments. Aerospace segment sales for the 2020 were $474,000,000 a 2% decrease from the prior year quarter. The lower segment sales were primarily the result of the prolonged '7 37 MAX production halt and related decline in initial provisioning.
Commercial aftermarket sales were down 4% in the 2020 as compared to the prior year quarter as a result of the decline in initial provisioning. Legacy commercial aftermarket growth remained strong in the quarter. Defense OEM sales growth in the quarter was driven by solid demand in guided weapons and fixed wing aircraft. Defense aftermarket activity was strong due to ongoing military spending, supporting The U. S.
Defense initiative to improve the combat readiness of U. S. Fleet and global upgrade programs. Aerospace segment earnings for the 2020 were $118,000,000 or 24.8% of segment sales compared to 102,000,000 or 21.1% of segment sales for the second quarter of twenty nineteen. Segment earnings benefited from the impact of eliminating the annual bonus for 2020, which was partially offset by the lower sales volume.
Turning to Industrial. Industrial segment sales for the 2020 were $246,000,000 compared to $276,000,000 in the prior year period, a decrease of 11%. Industrial segment sales declined primarily as a result of expected ongoing weakness in oil and gas and the effect early in the quarter of COVID-nineteen on natural gas truck sales in China. The sales decline was partially offset by improved sales in industrial gas turbines and renewables. Industrial segment earnings and adjusted industrial segment earnings for the 2020 were $26,000,000 or 10.6 percent of segment sales.
Industrial segment earnings were $27,000,000 or 9.8% of segment sales for the second quarter of twenty nineteen. Adjusted Industrial segment earnings for the 2019 were $36,000,000 or 13.1% of segment sales. The decrease in adjusted Industrial segment earnings was primarily due to the lower sales volume, partially offset by the impact of eliminating the annual bonus for 2020. Nonsegment expenses were $28,000,000 for the 2020 compared to twenty seven million dollars for the same period of the prior year. Adjusted nonsegment expenses for the 2020 were $11,000,000 compared to $18,000,000 for the same quarter last year.
Reported and adjusted nonsegment expenses benefited from the impact of eliminating the annual bonus for 2020. Adjusted nonsegment expenses for the 2020 excluded transaction costs related primarily to the now terminated merger agreement with Xcel Corporation. For the second quarter of twenty nineteen, adjusted non segment expenses excluded Duarte move related costs. At the Woodward level, R and D spending for the 2020 was 5% of sales compared to 6% for the prior year quarter. The decline in R and D expense was primarily related to the impact of eliminating the annual bonus for 2020 in the current quarter.
The effective tax rate for the 2020 was 14.8% compared to 14% in the second quarter of twenty nineteen. The adjusted effective tax rate was 16.2% for the 2020 compared to 16.7% for the second quarter of twenty nineteen. Looking at cash flows. Net cash generated by operating activities for the 2020 was $52,000,000 compared to $141,000,000 for the prior year period. Capital expenditures were $29,000,000 for the 2020 compared to $54,000,000 for the prior year period.
Free cash flow for the 2020 was $23,000,000 compared to free cash flow of $87,000,000 for the prior year period. For the first half of twenty twenty, adjusted free cash flow, which removes the M and A transaction expenses and includes the proceeds from the sale of the first parcel of the Duarte property was $55,000,000 The decrease in free cash flow was primarily the result of higher working capital. With regard to our financial position going forward, our focus is clearly on cash flow as we manage through this challenging environment. We currently anticipate positive free cash flow in the 2020 and throughout this downturn. We also have a strong balance sheet.
At the end of the second quarter, our leverage is 1.9x EBITDA, leaving significant headroom to our debt covenant of 3.5x EBITDA. With almost $1,000,000,000 of available liquidity, primarily through cash on hand and revolver capacity, we are confident that we will remain financially secure through the challenging environment ahead of us. Lastly, turning to our fiscal twenty twenty outlook. As we announced in our April 6 press release, we have withdrawn our full year 2020 guidance due to the unpredictable nature of the evolving COVID-nineteen pandemic and its unknown impact on our customers and suppliers. While current conditions have made accurate forecasting extremely difficult at this time, we will continue to evaluate our ability to generate an outlook for 2020 as the broader economic and industry specific impacts of this pandemic become clearer.
Operator, we are now open for
Speaker 0
questions. Thank before pressing any number. Should you have a question, please press star one on your push button phone. Should you wish to withdraw your question, press the pound key. Your question will be taken in the order it is received.
Your first question comes from the line of Robert Spingarn. Please state your
Speaker 4
I wanted to ask you about aftermarket. I think you said legacy aftermarket was pretty strong in the quarter, provisioning not so much, but the traditional aftermarket. How has that trend how did that trend through the quarter? And how has that trended so far through April? Commercial aftermarket.
Speaker 2
Right. Through through the quarter, you know, the legacy aftermarket was strong. The the the thing that was down was initial provisioning primarily tied to the max not coming back to service. As we moved into April, it's I think everybody's well aware of with the parking of aircraft and the lack of flying, aftermarket has started to drop significantly. We did have work in progress, for example, for controls for engines that were in shop and were being completed.
But we are seeing every week a further drop in demand for aftermarket activities, mainly just tied to the airlines aren't flying.
Speaker 4
Tom, is there a way algorithmically to tie what you expect your production cadence in in aftermarket to be relative to either ASK, or or RPK declines?
Speaker 2
You know, Rob, right now, I I I think it's those statistics normally we'd look at. And primarily, we we look at the fleet and the flying hours, you know, on the aircraft that we, you know, we have significant content on. Right now, some of the traditional looks, I think, just aren't relevant today. Not until we get, you know, we get through and start seeing the airlines going back into service at a yeah. With with a reasonable number of the aircraft.
So this is one of the reasons why we did suspend guidance. It's just incredibly difficult to make any correlations right now.
Speaker 4
Right. Well, Bob, welcome back.
Speaker 2
Thank you. If I could if I could
Speaker 4
just ask you a quick margin question. How should we think about decremental margins, at least once we get an idea what the what the revenue is going to do going to do both in aerospace, where I guess incremental margins have trended in the low twenties? Industrial harder to see just because it's moved around a lot. So as we're looking forward, how should we think about decremental margins in the two businesses? Sure.
Speaker 3
Mostly, I'll talk to the aerospace side first. And we've kind of used a guideline that we've talked to in the past about kind of a 30% up and down. And this will probably have more of an impact on the aftermarket. So the decrementals may be a little bit more on the downside as we go forward on the aero. On the industrial, they're very similar overall, as I think we've mentioned in the past.
And we probably don't see the same impact in terms of heaviness on the aftermarket side, and aftermarket isn't as pronounced in industrial. We have the impacts of on transportation for COVID-nineteen and the impacts of oil and gas on investment there and CapEx, and those will be similar to that 30.
Speaker 5
Our
Speaker 0
next question comes from the line of Pete Skibitski.
Speaker 6
Trust everyone's healthy. And Bob, I'm sorry your retirement was so short.
Speaker 3
That's actually
Speaker 6
Just on working capital, it was obviously a pretty pronounced use of cash in both the second quarter and the first half in general. I hear what you're saying about free cash flow. Is the gist basically that you guys are just going to cut production pretty severely in the second half and just kind of deliver from inventory. So we'll see a big spike in cash maybe by the fourth quarter. And I don't know if that gets you to 1x free cash conversion or not, but maybe you could speak to that.
Speaker 2
Yes. Maybe I'll start off and let Bob jump in as well. The first thing, you know, when you look at the working capital increase, you know, we were we were ramping up, you know, in our aircraft market, and we were also ramping up on the industrial side as we, you know, started the fiscal year. And then you got hit with the oil price collapse, and then you got hit with COVID nineteen on the aerospace side. We have what I wanted to highlight is what we've done is as soon as we saw this happening, we've gone through.
And we've where we had customer input, we used their input. Where we didn't have customer input, we used our own projections of what the market was doing. We reran all of our production schedules and significantly reduced the amount of inventory we'll be taking in going into the second half of the year and also as we move into 2021. So that's where we said, you know, we're gonna make, make up the working capital, that, we were over. And I think we are in the line with the scenarios that we believe are gonna happen in our markets.
So we do expect second half to have improved cash flow. But we do have fair amount of uncertainty as to when we'll start seeing some of our markets pick up and when we'll start seeing airlines fly. So there's still a lot of uncertainty. But we have, I think, effectively reduced the inventory that's coming in. And we've also been working hard on collecting receivables and managing payables, you know, with the reduced inventory.
So, Bob, I don't know if you wanna add
Speaker 7
to that.
Speaker 3
Yes. No. I think you covered it, Tom.
Speaker 6
I appreciate, guys. Just one last one for me. Just, Tom, on I know it's soon kind of post Hexcel. But as you think about things, and you're going to have your hands full, obviously, operationally in the next two or three quarters. But in the back of your mind, do you guys think about, at some point, looking at M and A again just in general?
Or is there even a thought to maybe a year from now, if things are healthier, maybe you could revisit the Hexcel, you know, topic again. I'm just wondering how you're thinking about that overall.
Speaker 2
Yeah. Well, right now, first and foremost is, you know, what I I would say is stabilize the business, ensure we we maintain adequate liquidity. The reason I say that is there's enormous uncertainty in the markets, and we've run all sorts of scenarios, and, you know, we're we're on top of it. So we wanna make sure that establish what the new normal is gonna be. And, you know, that's gonna take probably the second half of the year to see, you know, actually where the markets go and, you know, what fleet dynamics are gonna be in the aerospace side, the recovery in industrial.
I think as all of you know, we're we're significantly tied to global industrial production growth. So we'll be watching that. And since we see that, I would just highlight Woodward is a very strong cash generating company. Once we work through that, we have our costs in place. We're continuing to invest during this down cycle in technology, r and d, and then we're gonna turn our sites to growth again.
And that growth will be first and primarily organic, and then we'll visit with the excess cash flow that we're starting to generate inorganic opportunities that fit our strategies and, the long term plans of the company. So I think it's gonna be a little time before we could really put much attention to that, but we we will, once we get to the, what I'm gonna call, the new normal, which I think will take, you know, six months or more to really establish.
Speaker 6
Sure. I appreciate the color, guys.
Speaker 8
Thanks.
Speaker 0
Our next question comes from the line of Sheila Kahyaoglu. Please state your question.
Speaker 9
Hi. Good afternoon, and thank you, guys. Tom, this one's for you to start. You know, now that Boeing and Airbus have guided, and I understand visibility is limited, but they've put out production rates, how do we think about production rates and delivery rates for your platforms, particularly on the MAX if that entry into service is, you know, mid this year and they're assuming they deplete their inventory within a year. You know, kind of how does that plan, you know, go go into your planning process?
Speaker 2
Yeah. So we've you know, obviously, we take our our customers' input. And as I think everybody's aware, you know, Boeing talked about the rate they want to get to, and they talked about a gradual increase to get to that rate on the max. We're still waiting for the details of that gradual increase, you know, so we could put our plans in. What I would say is that we're well positioned.
We have long lead time parts in in in either an inventory or in the pipeline. We could flex quickly to respond to their ramp. So we'll be monitoring that closely. And, you know, obviously, they get up to, you know, the 31 aircraft a month that they talked about. That that's that's very positive for our company.
So, you know, we just have to watch at what is that gradual ramp up that they referred to and the details we have not received yet.
Speaker 9
Okay. Fine. I understand that. And then obviously, margins in Aero were really stellar this quarter. You know, appreciate the reduced, annual bonuses had a part to play in that.
I guess, what else were the driving factors? And to Rob's question, how do we think about the decrementals given aftermarket, a higher margin business is gonna decelerate faster? Or, you know, how do we think about that with your new facilities and the OE production?
Speaker 2
Yeah. So in the quarter, as we said, legacy aftermarket was still strong. You know, we started seeing in the March, you know, when we really started seeing some coming down. We have some tail going into the fiscal third quarter here Mhmm. You know, as we're still processing that.
One thing I'd like to highlight, and it was in, you know, the prepared remarks, is our mill our defense sales are doing very well. Year over year up, they're they're strong. You know, year to date, you know, on the defense side, you know, we're up in the 20% year to date on defense, both OE and aftermarket, and we have a huge backlog in defense. So defense sales are the backlog's strong. The growth is there.
The margins are good. So that's helping to offset. There's no doubt that our air commercial aero aftermarket margins are healthy, and that will put pressure on overall aerospace margins. We think we've taken proactive actions to get our costs down. Today, as we go in, we
Speaker 10
talk about
Speaker 2
the third quarter and fourth quarter being difficult. One of the reasons we have is a lot of you on the call know about our rock cut facility. I mean, it's furloughed. Basically, today, know, we've had to we just had to shut down production in line with what our customers are doing. We are still running our aftermarket shop.
We still have hardware going through there. We will feel that, but we're kinda committed on managing cost and cash flow to keep margins still healthy in the aerospace side. But they will they will come down some from these strong margins we had last year and in the first half of this year.
Speaker 9
Okay. And then, Bob, one more for you since you're you're a glutton for punishment. You keep coming back for more. Yeah. On the inventory, you guys maintained a pretty fair level.
You know, it didn't really blow up on you in the quarter. You expect the h two free cash flow positive, so we shouldn't expect a tick up in that inventory line item?
Speaker 3
I sure hope not. Normally, we'll see both receivables and inventories come down quite a bit, and that's what we anticipate in the next half as well. So we we see a lot of flow out of working capital into cash, and it'll probably come from both AR and inventory.
Speaker 9
I
Speaker 2
would just add too also CapEx coming down further.
Speaker 3
Our
Speaker 0
next question comes from the line of Chris Howe.
Speaker 10
Welcome back, Bob. Just to follow-up on actually that last comment about capital expenditures. As we look at that in addition to your cost structure, factoring in what a lot of us don't know as far as the shape of this recovery that will eventually happen, how should we look at the cost structure and capital spending, once we start on the recovery? Will you keep it at relatively conservative levels? Or how should we think about that flexing up and down?
Speaker 3
Yes. No, we definitely are going to take a much finer point to our pencil on capital spending and limit the investment. We will probably be below the first half spending in the second half, And then we'll be very cautious probably going into 2021 because we see this extending into the coming year. So we'll be very tight on overall spending.
Speaker 7
Yes. Just maybe to add, as you
Speaker 2
can recognize, we had put in our new facilities, and we put in the capital equipment to support the line rates that were planned for this calendar year, which have stopped. So as we go to what I we're all talking about will be the new normal, I think we will have very adequate capacity to where we we will not need to spend CapEx for that purpose. We will spend it on the need for r and d programs, any, you know, maintenance and required to keep things operating efficiently. But capacity wise, we won't need it, and we we can go quite a ways before we're gonna need to have any significant increases in CapEx.
Speaker 10
Okay. That's helpful. And a lot more questions here, but just parsing through some of these. You talked about the sense of the strong growth that you're seeing in OE and also aftermarkets. If we look at that from a positive perspective, is there a way to think about expectations in that side of the business given its relatively strong performance in this downturn environment as we look into the remainder of this calendar year and into next?
Speaker 2
Yeah. I think you're referring to defense.
Speaker 8
Is that correct?
Speaker 2
That's that's right. Defense. Yeah. Yeah. And and the defense side, you know, we have a pretty good time horizon where we see orders, and we have strong orders going through 2021.
So from from that standpoint, I think the outlook for defense, you know, over the next eighteen months is very healthy.
Speaker 5
Mhmm.
Speaker 2
And on the aftermarket side, we're looking at, you know, what can we pull in sooner. And that's with with military aftermarket, that is a possibility. So that is gonna be a tailwind for us, you know, offsetting some of the negatives on the commercial side.
Speaker 10
Okay. Thank you. That's all I have for now, and I'll hop back in the queue. Thanks.
Speaker 2
Okay. Thank you.
Speaker 0
Our next question comes from the line of Christopher Glenn. Please state your question.
Speaker 7
Yes. Thanks. Just curious, anything interesting to its receivables on the commercial aerospace side? Any you know, what what types of deferrals or allowances are under consideration there?
Speaker 2
Yeah. Well, right now, you know, our receivables and our collections are doing well. There there's no doubt there's pressure from airlines to push out. We're we're being, if you wanna say, very diligent on that and, trying to ensure we pull our collections in. We're also being very cautious on reestablishing our credit limits and ensuring that we we don't end up with bad debt.
So this is a practice we've been through in the past, and our team is doing, I think, an excellent job on this right now. On the OE side, our OEMs are the big global players. Everybody in the industry has pressure on cash, but they're still paying. And I anticipate that that will continue. So I think we'll be fine on receivables, but we are being cautious.
You know, I anticipate that there will be airline bankruptcies, as I'm sure everybody is. And so we're we're being very cautious. We got a disciplined process, and I think we're gonna do just fine on our receivables.
Speaker 7
Okay. And then thank you for that. And I I think you sort of explained the sort of baseline for thinking about decrementals is about 30% at both segments with maybe a mix kicker at Aerospace, if I heard you correctly. Could you quantify the sort of cost reductions that you're anticipating in the back half from the spectrum of your actions?
Speaker 3
No. We we haven't made an estimate of what those are. They will take place throughout the course of the half. There's so many different things going on across a very broad spectrum of types that, you know, kind of giving a number of the cost savings anticipated in the half would be getting a little bit too far out. So, no, we haven't.
As you can see, we've taken a lot of actions, and we believe that it will ultimately get our costs aligned. But in terms of where that top line is gonna end up, that's still uncertain as well. So we we have not attempted to disclose what we believe the cost savings are specifically related to those.
Speaker 7
Our
Speaker 0
next question comes from Please state your question.
Speaker 11
Thanks. Good afternoon.
Speaker 3
Hi. Good afternoon.
Speaker 11
The the aftermarket, without making you quantify what what you're thinking in terms of peak to trough decline, would you you know, I think for a while, you've been running you know, your aftermarket business has been running well above, ASM growth or capacity growth. Would you expect, you know, the aftermarket your aftermarket revenues to decline more than the decline that we're ultimately gonna see in capacity?
Speaker 3
Well,
Speaker 2
no. And and the reason first, you know, over the third quarter and and maybe rolling in the fourth quarter are gonna be very difficult with the the fleet that's parked and the like. You know, we, you know, we're we're not different than other other people in the industry. You know, we're gonna see dramatic reduction in commercial aftermarket because of that. As we recover, and I I call it our our fleet demographics are still very strong.
We were on some great programs. A lot of them, such as v 2,500, CFM 56, g 90, GNX, A lot of these haven't come in even for their first engine shop visit. Some of them haven't had their second visit. So as we come out of this, and you're gonna see, I think, a significant amount of retirements. We've analyzed that.
We will see some of our product on those retirements. But overall, the fleet that we believe will be flying after we come out of the pandemic and the airlines reduce total capacity will be favorable to Woodward products in the field and that we will see strong aftermarket coming again at that point. So we've we've talked about that over the years. And as you see, we've we've done better than the most players in the market in in our aftermarket growth. And that that's really tied to those demographics, the time, the engine shop visits.
We we think that'll carry forward after we get out of the crisis. And then we will start seeing a recovery in the max. We'll start shipping again. We'll see, initial provisioning coming back. So overall, I think it's a it's a a great business, great market position.
And once we get out of the, you know, the next six months and things start to normalize, that aftermarket will come back well.
Speaker 11
Okay. I guess a similar question thinking about aerospace versus industrial. I mean, aerospace is pretty, you know, a lot easier for us kind of visualize how much that might decline. But on industrial, given all the different end markets, obviously, I know oil and gas is a big headwind. Would you expect the peak to trough drop for industrial to be similar to what you think we're gonna see in aerospace, or will industrial, you think, overall do better?
Speaker 2
No. Know, in industrial, as you said, it's it's we have a lot more markets, a lot of different dynamics going on. So, you know, as an example, oil and gas has dried up. I I would say our reduction there is in the 70 to 80% reduction right now. Okay.
So huge. On the other hand, our China sales are growing. They're not declining. So second half of the year, we see that happening. Then we see power generation that's gonna decline.
So overall, you know, the the reduction, it's hard to pinpoint, but it it'll be, you know, 30%. You know? So it's we can't that's a little bit again, we that don't take that as, like, fixed number. What I'm highlighting is why we suspended guidance. At the moment, it's very difficult to forecast that with the the major disruptions we're seeing, and it's how quick global economy gets back, how quick manufacturing picks up, how quick industrial
Speaker 5
production picks
Speaker 2
up, we feel drive power generation and the like. So, we have a few bright spots in industrial, but we have some strong negatives. And, you know, overall, it's gonna be a a fairly sizable overall year over year reduction.
Speaker 11
Okay. That's helpful. I appreciate that. And then last one for me. Bob, the the, decline in accrued liabilities so far year to date, what what does that relate to?
Speaker 3
A lot of that's the elimination of the bonus.
Speaker 11
Okay. Because I think it all there also was a pretty big decline in q one.
Speaker 3
Yes. But, yeah, it's also related to bonus.
Speaker 11
Okay. Alright. Thanks.
Speaker 0
Next our next question comes from the line of Michael Ciarmoli.
Speaker 8
Maybe,
Speaker 10
Tom, just
Speaker 8
and put a finer point on you're not going to give guidance, I get that. Aftermarket, it seems like near term here, should we think about something in the neighborhood of capacity for aftermarket? I mean, if it seems like most of the peer companies out there are thinking potentially 50% declines in aftermarket, some even greater than that. I mean, is that sort of realistically in the realm of possibilities as you guys are looking at you know, sort of incoming orders, whether there's even shop visits planned or, you know, whether what's getting postponed and pushed out from a shop visit standpoint?
Speaker 5
Yeah. There there's no doubt. As as you've seen,
Speaker 2
a lot of our customers have, furloughed their shops. So they're they're taking us down, you know, to zero right now or near zero. So we're to see something in commercial aftermarket over the next six months in the fifty fifty plus range is realistic. Okay. We've we've modeled scenarios all the way to 80% reduction just so we could study what it means to cash and liquidity.
I'm not saying that's where it's going, but we've modeled all across the board. The longer the fleets parked and they're not flying, the the larger that decline is gonna be in the next half year. It'll start picking up, you know, as the fleet starts flying again. So that's why it's like you pointed out, you can't pinpoint that, but the decline is significant.
Speaker 8
Got it. And then on on on the commercial OEM side, you know, we we've seen the rate cuts. You know, we we can certainly, think about the revenue exposure. But is there going to be is that revenue decline on OE going to maybe be a bit more pronounced if there's buffer stock in the supply chain, the entire supply chain needs to get realigned? I mean how are you guys thinking about maybe some of those added headwinds on top of the rate reductions that we're seeing out of Boeing and Airbus?
Speaker 2
Yeah. So I mean, that's a good question in terms of understanding the supply chain. There's no doubt there was a a fair amount of inventory in the supply chain. We have analyzed and we have a good understanding of the inventory of our product all through the entire supply chain. And we we have, in our modeling, factored that in to how quickly you get to these new rates, how do they deplete.
You know, we don't know for sure how our customers will deplete inventory, but, you know, we've taken several scenarios at that. We think we have a good understanding. We've modeled it. It's been played into, you know, our liquidity analysis. And through all that, we feel we're in good shape and have a good understanding.
But we'll have to see how that plays out. But there is a lot of inventory in the system today.
Speaker 8
Okay. Last one. Just, GE, obviously, still a big customer for you guys. I think they're announcing, you know, permanent, workforce reductions 25%. Any any implications on on the JV for you guys with, you know, either what's happening at GE, you know, the magnitude of of rate reductions or even, you know, programs still in the hopper like the 9x engine?
Speaker 10
Well, the 9x engine
Speaker 2
is moving along well. You know, second second, light vehicle, went up and, you know, very successful with the engine. We I will see on the JV side the impact of reduced production volumes. We will continue to support and get the nine x or the nine x into service. But, you know, it won't be immune either.
It'll have to adapt to the new rates as well as aftermarket revenue to the JV that is tied to, you know, the large engine programs.
Speaker 8
Okay. Got it. Alright. Thanks, guys. Stay safe.
Speaker 3
Thanks. Thanks. You too.
Speaker 0
A reminder, should you wish to to ask a question, press star one on your push button phone. Your next question comes from the line of Gautam Common. Please state your question.
Speaker 5
Hi. Thanks. Good afternoon.
Speaker 2
Good color. So
Speaker 5
just to follow-up on Mike's question, his last question on destocking. Tom, could you talk about maybe the number I don't know how to frame it, but the number of customers you sell to within the supply chain as opposed to just GE and Boeing and Airbus. I mean, is it, you know, hundreds of of intermediary subcontract manufacturers to the OEMs? Is it 10?
Speaker 2
No. What what I'm saying? Scope. Yeah. It's it's it's definitely in the 10.
So what you have to look at is we obviously, we sell to all the engine manufacturers and all the OEMs, whether commercial, regional, or bizjet as well as rotorcraft. But we also sell through the tier ones. So all the major tier ones also buy from Woodward. You know, those are mainly in our what we call our components and sensors business. So so there's, yeah, there's quite a few channels.
I don't know that I have on top of my head the exact count, but, you know, it's, yeah, it's tens of Mhmm. Tier ones as well as the engine and the OEMs. So there's so we've we've analyzed the entire supply when I said that, we've analyzed that entire supply chain and where all the inventory is in those channels of Woodward hardware.
Speaker 5
And and do you think that you'll go a quarter or two or three with, you know, substantially lower purchases? I mean, I e, to zero for some period of time just as folks work down their inventory to your customers? Or I'm just trying to get a sense for the magnitude of the sequential, you know, how bad
Speaker 2
it can get and then Yeah.
Speaker 5
What we snap back to.
Speaker 2
Well, we we we've done scenarios, Gautam, of Mhmm. Throughout there and what what what would the inventory strategies be or inventory plans or our customers. I can't tell you we've seen customers that are determined to keep the supply chain wet and producing. So, you know, having a proactive look at that. And we have had some customers that have brought it to zero for a period of time.
So it's kind of across the board. But I would say going to zero is very is so far has been the rarity. But we have seen a few of those, you know, that have taken out orders or pushed out orders for several months. Most of them are trying to keep, you know, the supply chain wet and are are very concerned if you shut off the supply chain, how do you bring it back up as you start ramping production again. So I think it has been very helpful that, you know, Boeing coming out with their line rates, Airbus has come out with theirs.
We're also being sensitive to the fact that those may not be final line rates, but, you know, we're watching that closely. But Mhmm. You know, with that information, everybody's re yeah. If you wanna say replanning, you know, all their their their internal line rates, their inventory strategies, their planning, material planning. So just like we are.
So we have factored that in. So on the only side, it won't won't be able very many of them bringing us down to zero. I guess that's a long winded answer to that question.
Speaker 5
I appreciate it. And then one other one, we've heard anecdotal remarks from some suppliers further downstream that they're seeking price reductions among their suppliers. And I'm wondering if you've actually had any serious pressure yet from some of your key customers on rethinking the price agreements you already have in place. Has there been that pressure? Do you expect that to grow?
Is that factored into any
Speaker 2
of your thinking? You know, that we we've we've seen a few requests for that, but I'll just remind everybody on the call that, you know, we're almost all of our business is done under long term agreements with fixed you know, with the pricing fixed. So I I don't see that that's gonna impact us.
Speaker 5
Okay. And last one, just to revisit L'Orange. It's been a while since we talked about it. I was just curious where are we in terms of moving that technology into The US? Has that happened?
Is you know, what sort of your if you can just give us a state of the state on L'Orange.
Speaker 2
Yes. Yeah. We're still, you know, we're still very pleased with the the launch acquisition and the business. We we have been working, you know, with with all all of our global engine OEMs with bringing the combination of L'Orange technology and Woodward technology together for solutions. We've won quite a few programs in Asia with L'Orange now.
We have US customers that are working with us and looking at it. Mhmm. You know? So some of those programs may slow down a little bit, but we are being successful getting new applications. And, you know, we're gonna continue to be aggressive with that.
But the the combination of their technology with Woodward controls and actuation and valving technology, it's it's quite a quite a comprehensive offering, and customers are responding well to that.
Speaker 3
Thanks, and welcome back, Bob. Thank you very much.
Speaker 0
Mister Gendron, there are no further questions at this time. I will now turn the conference back to you.
Speaker 2
Well, thank you for everybody for joining
Speaker 3
us
Speaker 2
today. We appreciate the questions and discussion. We are in very unique times. I would just highlight that, we're addressing this crisis, I think, very proactively. We talked about a little bit in prepared remarks.
I just wanna highlight that we're still investing for the future. WinRAR is gonna come out of this stronger than before. And as we stabilize, we will be turning our focus back to growth. So thanks for joining us. Look forward to talking to you during the next quarter.
Thank you.
Speaker 0
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 07:30PM Eastern Daylight Time by dialing +1 (855) 859-2056 for a US call or +1 (404) 537-3406 for a non US call and by entering the access code 3655204. A rebroadcast will also be available at the company's website, www.woodward.com for fourteen days. We thank you for your participation on today's conference call and ask that you please disconnect your line.