Woodward - Earnings Call - Q2 2025

Executive Summary

• Q2 FY2025 delivered solid execution: revenue $884M (+6% YoY), GAAP EPS $1.78 (+14%), adjusted EPS $1.69 (+4%), and Aerospace segment margin expanded to 22.2% (+240 bps), while Industrial margin compressed to 14.3% (-500 bps).
• Woodward raised the low end of FY2025 guidance: sales to $3.375–$3.5B and adjusted EPS to $5.95–$6.25; Aerospace sales growth guided up to 8–13%, Industrial down 7–9% (margins unchanged), citing tariff headwinds but manageable footprint.
• The quarter featured strength in Defense OEM (+52% YoY), robust commercial aftermarket (+23%), and pricing tailwinds (~7% price at company level), offset by Commercial OEM (-9%) and China on-highway weakness (Industrial Transportation -18%).
• Versus S&P Global consensus, Q2 beat on revenue and EPS: revenue $883.6M vs $835.0M*, EPS (adjusted) $1.69 vs $1.464*; management highlighted late-quarter MRO spare parts orders and Smart Defense as drivers*.
• Stock-relevant narrative: management pulled up the bottom end of revenue/EPS ranges, reaffirmed top end, and flagged $10–$15M tariff pressure embedded in FY guide, plus expected moderation in commercial aftermarket growth in 2H.

Note: *Values retrieved from S&P Global.

What Went Well and What Went Wrong

What Went Well

• Record Aerospace profitability: segment earnings $125M, margin 22.2% (+240 bps) on price realization and higher volume.
• Defense OEM strength: sales up 52% YoY on Smart Defense; JDAM demand strong with higher-price lots expected to roll through in Q4.
• Commercial aftermarket robust: +23% YoY; management: “late in the quarter…drop-ins, spare parts orders from MRO facilities” boosted growth.
• Pricing discipline: overall company price ~7%, with Aerospace stronger than Industrial; two solid quarters of pricing execution.

What Went Wrong

• Commercial OEM down 9% YoY due to measured ramp post Boeing work stoppage; growth expected to return in 2H.
• Industrial margin compression: Industrial margin fell to 14.3% (-500 bps) on lower China on-highway volume and unfavorable mix, despite price realization.
• China on-highway drag: Transportation -18%; China on-highway sales $21M in Q2, -$45M YoY; management raised FY China on-highway outlook to ~$50M but still volatile.
• Nonsegment expenses timing: adjusted nonsegment expenses rose to $34M, reflecting equity/LTI timing and portfolio actions (adjusted out), adding corporate headwind.

Transcript

Speaker 5

Thank you for standing by. Welcome to the Woodward Second Quarter Fiscal Year 2025 earnings call. At this time, I would like to inform you that this call is being recorded for rebroadcast and that all participants are in listen-only mode. Following the presentation, you're invited to participate in a question-and-answer session. Joining us today from the company are Chip Blankenship, Chairman and Chief Executive Officer; Bill Lacey, Chief Financial Officer; and Dan Provaznik, Director of Investor Relations. I would now like to turn the call over to Dan Provaznik.

Speaker 2

Thank you, Operator. We'd like to welcome all of you to Woodward's Second Quarter Fiscal Year 2025 earnings call. In today's call, Chip will comment on our strategies and related markets. Bill 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've included some presentation materials to go along with today's call that are also accessible on our website, and a webcast of this call will be available on our website for one year. All references to years in this call are references to the company's fiscal year unless otherwise stated. I would like to highlight our cautionary statement as shown on slide two of the presentation materials.

As always, elements of this presentation are forward-looking, including our guidance, and are based on our current outlook and assumptions for the global economy and our businesses more specifically. Those elements can and do frequently change. Our forward-looking statements are subject to a number of risks and uncertainties surrounding those elements, including risks related to potential changes in the macroeconomic environment and risks related to tariffs and retaliatory trade actions, in addition to the risks we identify in our filings with the SEC. These statements are made as of today, and we do not intend to update them except as required by law. In addition, we're providing certain non-U.S. GAAP financial measures. We direct your attention to reconciliations of non-U.S. GAAP financial measures, which are included in today's slide presentation and our earnings release. We believe this additional financial information will help in understanding our results.

Now, I'll turn the call over to Chip.

Speaker 1

Thank you, Dan. Good evening, everyone, and thank you for joining us. We are pleased to report strong performance in the second quarter, with results in line with our expectations. Woodward's net sales were up 6% year over year, and adjusted earnings per share were up 4%, reflecting steady growth despite headwinds from China on-highway volume and MIPS. Excluding China on-highway, our company posted revenue up 12% and operating earnings up 22%. These results are a testament to the outstanding efforts of our Woodward team members worldwide, even as we operate in a challenging and uncertain environment. As we enter the second half of the year, we remain on a steady growth trajectory, with our lean transformation continuing to pay dividends. Our aerospace plants continue to gain ground. During the quarter, we achieved new highs with significant month-over-month sales growth at some of our facilities.

For example, the combination of our two plants in Rockford, Loves Park, and Rock Cut achieved record sales to OE and services customers combined, facilitated by accelerated onboarding of new frontline members and model line transformations reaching new levels of performance. Additionally, our Zeeland plant also reached new levels of output in the quarter on total fuel nozzle shipments, thanks to continued growth in GTF OE and service volumes. The leap in GTF maintenance cycle continues to develop, and LRU inputs and return shipments to customers doubled again year over year in the second quarter. In smart defense, we made significant progress on our challenges with supplier quality, which enabled us to align production rates to customer demand. Our lean transformation has created the capacity and the forward momentum to deliver on aerospace volume commitments in the second half of the year.

Our outlook for the aerospace market remains bullish, even in the face of uncertainty. Despite concerns around soft forward bookings in the U.S. and some international routes, passenger traffic continues to grow, and OEM build rates continue to increase. We are keeping an eye on inputs to MRO shops and fleet capacity reductions. Like others, we see a slower commercial services growth rate in the second half. We expect to see substantial growth continue in defense OE, driven mainly by smart defense. In industrial, we also achieved operations improvements that translated into financial performance. We increased output by 20-50% in various gas turbine systems value streams to support our customers' power generation growth plans through lean transformation efforts on our model lines and with select equipment additions for capacity and efficiency improvements.

Moving from operational excellence to innovation, we are proud to announce a key milestone reached in the quarter with our Micronet platform, an advanced turbine control system for critical industrial and marine applications. Woodward delivered the first production Micronet XT advanced gas turbine control system for U.S. Navy DDG-51 class destroyer shipboard gas turbine generators. These warships provide a wide range of defense capabilities, and the Navy production contract covers 30 system deliveries through 2027, scaling to 135 systems over 10 to 15 years. This collaboration with the Naval Service Warfare Center resulted in a significant upgrade in controller technology and capabilities. The next phase of the DDG-51 gas turbine control upgrade consists of the same Micronet XT platform, using additional features and capability, such as a fully redundant architecture to serve as the propulsion system control for GE LM2500 gas turbines.

Low-rate production is preliminarily scheduled for 2026 through 2029, with 70 systems planned. Woodward has also been selected as the preferred propulsion control system supplier from the Korean Navy KDDX program. While the industrial end market outlook is mixed, the Woodward opportunity remains strong. Increasing demand for global power generation capacity continues, including data center power requirements, which represents opportunity for Woodward content in both base load and standby applications. The global marine market remains healthy, with strong shipbuild rates creating OEM engine demand and laying the groundwork for future aftermarket activity. While the fleet utilization remains strong, there is risk that utilization could decrease if trade tensions persist. Demand for heavy-duty trucks in China remains subdued. The recent government stimulus could have a positive impact on demand, although we have not received customer signals to support this connection yet.

Looking ahead, a word about tariffs and how they may affect our second half operations and results. Woodward's production footprint is largely in region for region. Moreover, our supply base that serves each production site is largely in region as well. This production footprint and supply-based strategy results in less exposure to tariffs for Woodward compared to some other aerospace and industrial companies. However, increased cost pressure on any portion of our operations is worthy of attention. We are proactively working to mitigate the pressure on cost and any supply chain disruptions. Woodward is closely tracking early indicators from our end markets and customer forecasts. We are putting actions in place to mitigate tariff impacts as well as manage impacts from a slight economic downturn. We are also monitoring whether trade tensions could increase sales risks.

We have already experienced sales order quantity reductions for spare parts from Chinese airlines this month, and we are watching China on-highway, marine transportation, and oil and gas market dynamics closely. Based on our strong first half performance and a better understanding of downside risk for the remainder of the year, we are reaffirming the top end of our guidance and pulling up the bottom end of the revenue and adjusted EPS ranges. The low end of the aerospace sales range assumes current-level headwinds from supplier performance, Boeing rate break delays or moderate Woodward inventory destocking in the supply chain, and slightly lower commercial aerospace services revenue, most likely from lower sales of spare end items. The low end of the industrial segment sales ranges assumes a sequentially flat forward industrial performance.

Our guidance ranges for segment margins remain unchanged due to conservative estimates of potential tariff impacts and potential lower commercial aerospace services mix. Our outlook does not assume a further escalation of announced tariff levels or a global recession, both of which could significantly impact demand. If extreme scenarios like these develop, we will re-examine our guidance and communicate any revisions. We remain confident in our long-term prospects as well as our ability to meet the medium-term commitments we shared with you at Investor Day in December of 2023. Now I'll turn it over to Bill for more detail on our second quarter financial performance and the specifics of our refined guidance. Positive news cutting through the noise and uncertainty. Over to you, Bill.

Speaker 3

Thank you, Chip. Good evening, everyone. As a reminder, all references to years are references to the company's fiscal year unless otherwise stated, and all comparisons are year over year unless otherwise stated. As Chip highlighted earlier, we had a strong second quarter in line with our expectations. Net sales for the second quarter of 2025 were $884 million and an increase of 6%. Earnings per share for the second quarter of 2025 were $1.78 compared to $1.56. Adjusted earnings per share were $1.69 compared to $1.62. Net cash provided by operating activities for the first half of 2025 was $112 million compared to $144 million. Capital expenditures were $52 million for the first half compared to $56 million. Free cash flow was $60 million for the first half of 2025 in line with our expectations compared to $88 million.

The decrease in free cash flow was primarily due to an increase in working capital caused by a slow start to the quarter. As Chip mentioned, we exited the second quarter with strong sales, which will be collected in the third quarter. As of March 31, 2025, debt leverage was 1.5 times EBITDA. Regarding capital allocation, our strategy is unchanged. We continue to prioritize investing in organic growth, returning cash to stockholders, and pursuing strategic M&A. During the second quarter, we returned over $61 million to stockholders, including $44 million in share repurchases and $17 million in dividends. Through the first half of 2025, we've returned $111 million to stockholders, including $79 million in share repurchases and $31 million in dividends. We are on track to achieve our goal of returning approximately $215 million to stockholders in 2025, $150 million in share repurchases, and $65 million in dividends.

We will continue to manage this with flexibility as conditions evolve. We have $130 million remaining on our $600 million stock repurchase authorization. Returning capital to stockholders is a key component of our capital allocation strategy, reflecting our confidence in the business and our ability to generate strong cash flow. Turning to aerospace, aerospace segment sales for the second quarter of 2025 were $562 million compared to $498 million, an increase of 13%. Defense OEM sales were strong in the quarter, up 53%, primarily due to increased demand for our smart defense programs. Commercial aftermarket sales were up 23% in the quarter due to both price and higher volume. As Chip mentioned, we anticipate that commercial aftermarket sales growth will moderate in the second half of the year. Commercial OEM sales were down 9%, primarily due to a measured production ramp to customers' demand following the Boeing work stoppage.

We anticipate that commercial OEM sales will return to growth in the second half. Defense aftermarket sales were down 8%. Earnings in the second quarter for the aerospace segment were the highest on record at $125 million. Margins expanded 240 basis points over the previous year to 22.2% of segment sales. The increase in segment earnings was primarily a result of price realization and higher volume, partially offset by inflation and unfavorable mix. Turning to industrial, industrial segment sales for the second quarter of 2025 were $322 million compared to $338 million, a decrease of 5%. Transportation was down 18% due to the expected decline of China on-highway sales. China on-highway sales were $21 million in the second quarter, a $45 million decrease from the prior year.

Our core industrial sales, which exclude China on-highway, were up a healthy 11%, with oil and gas up 21%, marine transportation up 13%, and power gen up 4%. Industrial segment earnings for the second quarter of 2025 were $46 million, or 14.3% of segment sales, compared to $65 million, or 19.3% of segment sales. Industrial segment earnings decreased primarily due to lower China on-highway volume and unfavorable mix, partially offset by price realization. Margins for our core industrial business were 14.8% in the second quarter, in line with our expectations. We continue to expect core industrial margins of 14-15% of sales for the year. Non-segment expenses were $27 million for the second quarter of 2025, compared to $33 million. Adjusted non-segment expenses were $34 million for the second quarter of 2025, compared to $29 million.

Turning to our 2025 guidance, we are raising the low end of our sales and adjusted EPS guidance while reaffirming the other elements of our full-year outlook. This updated guidance reflects our strong year-to-date performance and the expected impact of announced tariffs. Our revised guidance does not incorporate potential effects from further escalation of announced tariff levels, significant changes in customer demand, or a recession in the U.S. or globally. For fiscal year 2025, we now expect consolidated sales of $3.375 billion-$3.5 billion, which includes aerospace sales growth between 8% and 13% and a decrease in industrial sales from 7% to 9%. We now expect adjusted EPS between $5.95 and $6.25. All other aspects of our guidance remain unchanged. This concludes our comments on the business and results for the second quarter of fiscal year 2025. Operator, we are now ready to open the call to questions.

Speaker 5

Thank you. The question and answer session will begin at this time. If you're using a speakerphone, please pick up the handset before pressing any numbers. 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 order it is received. Please stand by for the first question. Our first question comes from Scott Dorsley with Deutsche Bank. Please state your question.

Hey, good evening. Nice results.

Speaker 1

Hey, Scott. Thanks.

Chip, can you further decompose the commercial aftermarket growth in the quarter a bit further in terms of the platforms or customer geographies that drove that strength?

It was, you know, Scott, really, it was across the board growth there. If this, the jump that we saw late in the quarter, were some drop-ins, spare parts orders from MRO facilities. We had some quick ship opportunities for spare parts to search, you know, our MRO network. The rest of the ways we serve customers, whether it's spare end items or our own repair and overhaul, was fairly strong. I think the something that contributed to that 23% was the spare parts at the end.

Okay. Was that mostly shipments to China?

No. In fact, China is looking a little bit slower. They're, you know, I think, moderating what they're the quantities that they're purchasing. At least that's what we see in their activity with us.

Okay. Chip, how far does the backlog run in marine transportation at this point? Just trying to get a sense for what your visibility looks like in that market if we see a reduction in global shipping and trade activity.

The OE is quite extended, as you might imagine. You know, it's out into the 2029-type shipbuild slot from an order standpoint right now. As far as utilization of the fleet, it still has looked strong up to this point. I would point out that, you know, extended trade tensions between the U.S. and China would see some of that drop off. That's probably the biggest risk in marine aftermarket that we face right now. There have been some calls, you know, that you've seen in the news about, you know, the West Coast port activity maybe getting to be softer. These are the type of signals we're looking at.

Okay. Thank you.

You bet.

Speaker 5

Your next question comes from the line of Scott Mikkens with Milus Research. Please state your question.

Good afternoon.

Speaker 1

Good afternoon.

Chip, Bill. Chip, Bill, the past couple of years, a larger portion of the earnings call and the Woodward story has kind of focused on the outlook for China on-highway natural gas truck market. It's also created a lot of volatility in the financial results. Just given that Woodward is an aerospace company and the broader trade tensions between the U.S. and China, does it make sense to maybe find a different owner for that product line?

We're always examining our portfolio, Scott, and trying to decide exactly, you know, what makes sense for us and our shareholders and our customers going forward. I don't have any comments at this time about any actions that we might consider. I can assure you we continue to look at the portfolio as we go forward. Like I've said in prior earnings calls, what we're focused on operationally is trying to make sure that we're in the best position to serve our customers there with the best technology. When that market is good, we generate a lot of cash and a lot of earnings. We want to be in a position to do that on an uptick. Right now, we're focused on managing through this downturn as efficiently as we can with them.

Okay. And then on the commercial OE side, when Hexcel reported, they noted some changes in planned ship set deliveries on the 787. In contrast, RTX said heat exchangers on that program are now where they need to be. Can you just give us color on what rate you were shipping on the 787 in this most recent quarter? Are you receiving orders from Boeing to support the production rate hike to seven per month later this year?

We're in, you know, close contact with Boeing because we provide a number of ship set materials directly to them on certain programs. On the 787, largely, we're supplying through GE on the GE NX powered 787. We have a lot less direct visibility to how our order book correlates to their build rate. I can tell you that we are satisfying the GE order rate on the GE NX. It, you know, looks, the outlook looks good. I'm bullish on that program, getting to those kind of, you know, seven rates that you're talking about where we have the capacity and the ability to deliver at that.

All right. Thanks for taking the questions.

You bet. Thank you.

Speaker 5

Your next question comes from the line of David Strauss with Barclays. Please state your question.

Thanks. Good afternoon.

Speaker 1

Good afternoon, David.

Chip, could you, you know, maybe touch on the aftermarket in terms of what's come through? I mean, I think going back to your initial guidance call for this year, you kind of downplayed the aftermarket growth you might see this year. It's obviously come through really, you know, really strongly, particularly in Q2 when you had a really tough comps. Can you maybe just talk at a high level what's come through better than what you were anticipating?

Yeah. David, I think, you know, you're right in that our call was we thought it would get a little bit softer in Q2 with that tough compare. What came through a little bit ahead of our, you know, in addition to our forecast were these spare parts orders to satisfy MRO facilities that looked like potentially they're getting a better throughput and higher volume through their shops and thus had, you know, sort of a little bit of a short cycle demand on spare parts from us. That helped us have quite a good second quarter. Those kind of things do not often repeat.

I think I'm going to just move one quarter to the right on our prediction that it's going to be a little bit softer going forward with tough compares, as well as probably some spare end items softness as you look at two factors for that. One, you know, the China part of the equation. We're now thinking that there's going to be less, you know, LRU orders to support provisioning of those fleets, as well as we'll probably see the U.S. customers pull back a little bit on their order of the LRU spare end items. Because that's the easiest thing to defer and push to the right, really, when you think about it. If there's an engine in the shop and the LRUs are routed for repair, they're probably going to finish that activity.

It is the spare end items and the China piece that I think, you know, we could see some softness in the second half, plus the tough compare.

Got it. Thanks. Bill, on currency, you know, the weakening in the dollar that we've seen here, how could that impact you guys going forward given, you know, I think, a decent footprint in Europe?

Yeah. We have seen slightly higher fluctuation. As we think about the translation piece, we obviously will get hit on the top line, but that gets offset down in the cost area. We typically see that get balanced out and not hit us too much at the operating earnings level. There are some cash over in outside the U.S. that we have to watch the translation, sorry, the transactional aspect of it. Again, it will not be a major factor on our results.

All right. Thanks very much.

You're welcome.

Speaker 5

Our next question comes from Noah Poponak with Goldman Sachs. Please state your question.

Speaker 0

Hey, everyone.

Speaker 1

Hey, everyone.

Speaker 0

Bill, I'm surprised you left the aerospace segment margin guidance unchanged. It looks like that would require closer to a 25% incremental in the back half versus the over 40% you did in each of the first and second quarter. Can you talk about what drives the aerospace segment margin in the second half?

Speaker 1

Sure. Yeah. We're really great and happy that we got over 40% incrementals in the second quarter at NOAA. As we look to the back half, we do expect defense OE to be a much greater share of the volume. That will moderate the incrementals that we saw in the second quarter. We've always stated that we like to see our incrementals around 30-35%. We would expect that to moderate in the second half. Additionally, you know, we talked about tariffs, and it's not a major issue. We are cautious in that it may impact us some. We felt it was prudent at NOAA to keep that margin guide where it is currently.

Speaker 0

Okay. What have you seen for LEAP aftermarket through the first half and what are you expecting in the back half and into 2026?

Speaker 1

As I said in the remarks, you know, we've been a few quarters in a row of seeing that volume double year over year. You know, as we look at what our model was for performance of the LEAP fleet, we're very pleased with the progress on that. Good news so far. We feel like that trend will continue for a bit this year, the rest of this fiscal year for us. Of course, that curve may turn over a little bit as the compares get bigger because it's doubling off a fairly small base. We feel like we're on track for the outlook that we gave at the investor day where, you know, in the 2027 to 2028 timeframe, we could be seeing the similar volumes of aftermarket activity from the LEAP GTF compared to the legacy narrow body fleets.

Speaker 0

Okay. What was the unit, just unit growth in the aerospace segment in the quarter?

Speaker 1

Yeah. No, we saw good growth from both the price. Overall price was about 7% at the, sorry, yeah, 7% at the Woodward level. Aero's price was a little bit stronger than industrial price, but both contributed. We did see good volume as Aero delivered that 13%.

Speaker 0

Okay. Great. Thank you so much.

Speaker 1

You're welcome.

Speaker 5

Our next question comes from Matthew Akers with Wells Fargo. Please state your question.

Yeah. Hi. Good afternoon, guys. Thanks for the question. Chip, I think you had talked last quarter within aerospace, I think commercial OE versus aftermarket, kind of similar growth for the year. Can you kind of update on, you know, where those stack up or, you know, has one of those changed relative to the other for the year?

Speaker 1

Yeah. Thanks for that question because, you know, the second quarter was a little bit out of the ordinary in terms of us seeing higher commercial aftermarket growth than we forecast. Then OE being a bit down due to the way we responded to the Boeing return to work challenge. Those two things made the second quarter look a little bit unusual. I think for the fiscal year 2025, we're still going to be in about the same zone for OE and aftermarket growth in the commercial space. However, defense OE, we think that's going to continue to be very strong growth for the second half.

Yeah. Okay. Thanks. I may have missed this, but what's the latest full-year China on-highway expectation? Has that changed at all?

Yeah. We came out with around 40. And with the Q2 performance being roughly $10 million more than we expected, we're moving it up to around $50 million.

Okay. Great. Thank you.

You're welcome.

Speaker 5

Your next question comes from Christopher Glynn with Oppenheimer. Please state your question.

Thank you. Good afternoon. Good afternoon. I had a question on industrial. You know, oil and gas was very strong. Wondering if there were any one-time volume benefits or otherwise pull forward across the industrial segment, given, you know, even at the high end of the full-year guide, you're running about $20 million a quarter lower than the second quarter. I realize China is about a $10 million diminution of the run rate.

Speaker 1

I'll kick it off and maybe hand it over to Bill on the last part of your question. As far as oil and gas goes, I think we've said this before. It's a bit lumpy for us because quite a bit of what we do in oil and gas is project-related. It was a strong quarter. A lot of the delivery material that we provide to oil and gas is also power-gen related, whether it's, you know, powering pumping stations or it's part of power generation for a platform or for an LNG site. The 21% is a big increase, but I think it moderates through the year. It, in fact, is, like I said, quite lumpy.

Okay. That makes sense.

I'm sorry. The second question.

I think that covers it, Bill. You know, I think, you know, China would be the other piece for the industrial segment bridge in the second quarter absolute revenue versus the implied back half. If I could switch to the commercial aftermarket, I think, you know, that was really a nice spike in the quarter. I think in the guidance, if I'm hearing everything correctly, you're probably looking at second half run rates a little lower sequentially for the commercial aftermarket, but still up moderately year over year. Do I have that correct?

Yeah. We still think it's, yes, that's correct. We still think it's going to grow, but it's in the single-digit regime, you know, high single-digit regime versus the 20% that you saw in the second quarter.

Okay. Just a little bookkeeping, the corporate expense a little higher. We're still talking 3.3%, I think you cited last year, last quarter for the full year?

Yeah, Chris, we are still calling that level. We'll have slightly higher sales in the back half. We do expect for us to hit that in the full year that we guided on earlier this year.

Thanks. If I could sneak one more in, I think pricing, you know, outperformed in the second quarter probably what you implied previously for the year. Is that just, you know, learning curve on value pricing toolkit across the organization?

Yeah. We've had two solid quarters of pricing this year. I think it is us continuing to get a better understanding of our value pricing. We had some volumes come through the right place that also helped to push up the price that we achieved.

Understood. Thanks, guys.

You're welcome.

Speaker 5

Our next question comes from Michael Grimolli with Truist Securities. Please state your questions.

Hey, good evening, guys. Thanks for taking the questions. Chip, could we just dig into that? I just want to make sure I understand the Arrow, the commercial OE and aftermarket. Aftermarket tracking to maybe high single digits for that second half, that implies something like 14-15% growth. Did I hear you earlier say that OE and aftermarket should grow at the same rate? I mean, those would be pretty heroic growth rates to get commercial OE up on par with the same growth as aftermarket.

Speaker 1

No, I don't think they'll, what I meant was that they'll, over the year, they'll come back to what we said at the beginning of the year, that we kind of gave an order of battle, if you will, in terms of how things would stack up with defense OE being the biggest growth, followed by commercial aftermarket, followed by commercial OE. We don't expect commercial OE to be down, which it was this quarter. Sorry about the confusion, but that's just sort of the order of it.

That's helpful. Maybe just back to the incrementals. I mean, you did that 40% plus like Noah was talking about. I mean, you did that in the face of really strong OE. You're going to get the commercial OE ramping, which, you know, has never really been truly dilutive to your margins. Is it really just a function of aftermarket kind of normalizing in the second half that's giving you some pause on those high incrementals?

You know, again, on our commercial OE, we do make money. But to the 40% incremental, it is dilutive to the 40%. As we talked about, we look to have 30-35% in Aero. And so what happens in the second half is, again, in Q2, we did not have as much commercial OE, which helped incrementals. We will have more commercial OE in the second half, and we will have greater defense OE. That will translate into still really good incrementals in our 30-35%, but it will not sustain at the 40% level.

Got it. That's fair. Perfect. Thanks, guys. I'll jump back in the queue.

Thank you. You're welcome.

Speaker 5

Our next question comes from Sheila Kahyaoglu with Jefferies. Please state your question. Sheila, your line is open.

Speaker 4

Oh, sorry. Good afternoon, guys. How are you?

Speaker 1

Good afternoon, Sheila.

Speaker 5

Thank you.

Speaker 4

Maybe just first half versus second half, $3 at essentially both midpoints when you look at the first half and the second half. How are you thinking that the tariff impact? I know you've mentioned in the prepared remarks localized production largely. How is that embedded into your guidance?

Speaker 1

Yeah. I'll start it off, Sheila, and kick it over to Chip. As we look at our tariff situation, as Chip mentioned, our manufacturing strategy really does help to mitigate the overall tariff impact on Woodward. Having said that, we have taken an extensive view of the business and have a good handle of the flows that will cause us some challenges. As we look at those flows for 2025, fiscal year 2025, we feel like we have $10 million-$15 million of pressure. Now, that's before we put into action our strategies to mitigate those items. Based on that, we have baked it into our guidance that we updated here. Still, as long as there's no escalation of those announced tariffs, we will deliver on the guide.

Speaker 4

Got it. Okay. If I could ask one on aerospace specifically, outside of aftermarket, defense OE growth was pretty phenomenal. What drove that 52% increase, and why is aftermarket and defense down?

Speaker 1

The increase is largely smart defense, but also good health and good growth in the rest of the programs too. Not taking anything away from them, but the large number shows up really due to smart defense. It is across the entire smart defense portfolio as well. That is the defense OE story. On defense aftermarket, you know, largely it can be a little bit lumpy in defense aftermarket. Working with our customers, they tend to batch some of their inputs overall based on how they run the fleet. We do not see any difference in OPTEMPO or anything fundamental that would drive defense aftermarket down. This quarter just looks like we are experiencing some delayed inputs. We do not really think that it will be that different the rest of this year with some of the logistics and friction in the system, if you will.

We're thinking that defense aftermarket might stay in that type of volume region for the rest of fiscal 2025.

Speaker 5

Got it. Thank you.

Speaker 1

You're welcome.

Speaker 5

Our next question comes from Spencer Brusky with TD Cowen. Please state your question.

Speaker 2

Hey, thank you. I was wondering if you could provide an update on JDAM and where we are with the higher pricing from the new contract rolling through, as well as volumes. Thank you.

Speaker 1

Yeah. As we talked about, JDAM demand has been strong. Secondly, the supply chain has been pretty healthy. So we've been shipping at a pretty good clip here. If those things continue, we would expect to get through the older lots of JDAM and get to the higher price lots sometimes in Q4. I guess I answered my question. Operations, can you move on to the next question?

Speaker 5

Our next question comes from Luis Rufedo with Wolfe Research. Please state your question.

Hey, good evening, Chip, Phil.

Speaker 1

Hey, Luis.

Maybe just to go back to the corporate for a quick second. It was high. Was there anything in there? I know we're adding back the, I think what is like the industrial benefits. And so I'm just curious, are the industrial, is there a benefit running through the industrial segment and you're backing it out in corporate? And is there any sales impact from those sort of sales that you're doing?

No. No, Luis. We're not. It's a simple answer.

Okay. I know I think last quarter you guys, last quarter you said you were backing out the product line sales benefits in the, and I don't know if that's exactly what it was again this quarter.

Yeah. Yeah. Yeah. We did back out those benefits in adjustment out last quarter. That does not repeat. It is a one-time gain.

Is there a sales benefit running through somewhere as well?

No.

No. Okay. No sales benefit. And then you're just backing out the income. What role?

Just on the non-segment?

Yes.

Yeah. Again, on the Greenville, we adjusted that gain out. Sorry. We adjusted to sell the Greenville out this quarter out of non-segment.

Okay. I guess is there a benefit in industrial from the gain? And you're just adjusting it out and not allocating?

No. We moved it out to non-segment, and then we adjusted out of non-segment. Arrow is clean. Industrial is clean.

What caused the step-up in non-segment? It's just a big number that we haven't really seen before.

The non-segment, some of it is the timing of us dealing with our equity, our long-term incentive program. That gets done in the second quarter. Historically, this switch happened last year from first quarter to second quarter. Other than that, that's it.

All right. No, that's helpful. Thank you. Bill, and I guess one more. I just want to make sure I heard you right. Was China Industrial $20 million in the second quarter or $29 million in the second quarter?

Yeah. $21 million to be exact. Twenty-one.

All right. Great. Thank you very much.

You're welcome.

Speaker 5

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

Speaker 1

We'd like to thank everyone for joining today's call.

Speaker 5

Ladies and gentlemen, that concludes our conference call today. A rebroadcast will be available at the company's website, www.woodward.com, for one year. We thank you for your participation in today's conference call and ask that you please disconnect your line.