Woodward - Earnings Call - Q3 2020

Transcript

Speaker 0

Thank you for standing by. Welcome to the Woodward Inc. Third Quarter Fiscal Year twenty twenty Earnings Call. At this time, I would like to inform you that this call is being recorded for rebroadcast and that all participants are in a listen only mode. Following the presentation, you will be invited to participate in a question and answer session.

Joining us today from the company are Mr. Tom Gedron, Chairman and Chief Executive Officer Mr. Bob Weber, Vice Chairman and Chief Financial Officer and Mr. Don Cazardo, Vice President of Investor Relations and Treasurer. I would now like to turn the call over to Mr.

Cazardo.

Speaker 1

Thank you, operator. We'd like to welcome you

Speaker 2

to Woodward's third quarter fiscal year twenty twenty earnings call.

Speaker 3

In today's call, Tom will comment on our markets and related strategies and

Speaker 2

the outlook for the results outcome in our earnings release.

Speaker 3

At the end of our presentation, we will take questions. Those who have not seen today's earnings, find it on our website at uber.com. We have again included the presentation to go along with today's call also accessible on our website. Audio replay of this call will be available by phone or on our website through 08/20/2020. 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 information will help in understanding our results. Now turning to our results for the third quarter. Net sales for the 2020 were $524,000,000 compared to $752,000,000 for the prior year quarter, a decrease of 30%. Net earnings were $38,000,000 or $0.61 per share compared to $66,000,000 or $1.02 per share for the prior year quarter. Adjusted net earnings were $31,000,000 or $0.48 per share compared to adjusted net earnings of $84,000,000 or $1.3 per share for the prior year quarter.

Net cash generated from operating activities for the first nine months of fiscal twenty twenty was $212,000,000 compared to $219,000,000 for the prior year period. Free cash flow was $173,000,000 and adjusted free cash flow was $169,000,000 for the 2020 compared to free cash flow of $141,000,000 for the prior year period. I will now turn the call over to Tom to comment further on our results, strategies and markets.

Speaker 2

Thank you, Don, and good afternoon, everyone. Our performance in this quarter was severely impacted by the global pandemic. However, as we discussed last quarter, when the pandemic was first taking hold on the world, we took immediate actions to mitigate adverse effects on our business. These actions include heightened communications with suppliers and customers, proactively revising demand and supply plans, numerous cost cutting and cash preservation steps. I'm proud of the strength and resiliency

Speaker 3

of our

Speaker 2

Woodward team as we continue to navigate through this challenging period. As we progress through rapidly evolving economic environment, we have been focused on the safety of our members and communities while maintaining our financial strength. So far, what we are seeing in our markets is within the range of the scenarios and assumptions we developed early in our third fiscal quarter. We continue to closely monitor the situation, strategically adjust our business to align with customer expectations while rightsizing our cost structure for today and continuing to invest for the future. Moving to our markets in more detail.

Our Aerospace segment took the brunt of the impact from the pandemic. Global flight hours declined as much as 80% on some platforms and OEM build rates plummeted due to the global manufacturing constraints, plant closings and furloughs. Flight traffic has begun a slow increase off the bottom and is starting to show some improvement and OEM production rates are slowly stabilizing. However, we anticipate a slow recovery in commercial aerospace over the next couple of years with commercial aftermarket recovering first. When it does recover, the fleet that will be in service will have greater Woodward content than the permanently retired aircraft, resulting in a positive fleet dynamic for Woodward, favorably impacting both our earnings and cash flow.

In Defense, our aftermarket business delivered solid growth driven by global upgrade programs and improving U. S. Combat readiness. Overall defense OEM activity remains strong. However, Woodward sales levels were pressured due to COVID related supply chain challenges.

With respect to our Industrial segment, on April 30, we closed on the divestiture of our renewable power systems and related businesses, one of a number of strategic initiatives to focus our Industrial segment and enhance our margins. We are confident that these actions will contribute to delivering on our profitability targets as we move forward. Turning to our industrial markets. In power generation, scheduled deliveries for industrial gas turbines are largely unchanged for calendar year 2020 due to long lead times. However, as in past downturns, the impact on gas turbines lags the general market, and so we expect to see a reduction activity in 2021.

In transportation, China natural gas truck production volumes rebounded from shutdowns earlier in the year, but have shown volatility as the global pandemic continues to drive economic uncertainty. Marine markets have been depressed in almost all areas as a result of the pandemic. Oil and gas markets continue to be very challenged with weak customer demand, low oil prices and a decline in drilling activity. While oil prices have improved from their recent lows, the current levels are still an impediment to capital investment. In summary, the actions we took early in the quarter to address the downturn in our markets softened the pandemic related impacts on our financial results.

As a result of these actions, we delivered significant cash flow in the quarter, improved our liquidity and further strengthened our balance sheet. We continue to closely monitor this dynamic environment and are constantly exploring other actions to be taken. While we anticipate continued pressure on our business through our fiscal twenty twenty one, we remain confident in the long term strength, market position and growth opportunities for our company. We will continue to invest in new technology and operational excellence, pillars of our business that have enabled Woodward to successfully navigate numerous past economic cycles. As we manage through this unprecedented period, we are focused on delivering exceptional shareholder value and emerging as an even stronger company.

I'll turn it over to Bob to discuss the financials.

Speaker 1

Thank you, Tom. Aerospace segment sales for the 2020 were $3.00 $6,000,000 a 39% decrease from the prior year quarter. The decline in segment sales was predominantly driven by lower commercial sales due to the secular decline in passenger traffic and lower OEM production rates, plant closings and furloughs, all as a result of the global pandemic. Commercial aftermarket sales were down 47% in the 2020 as compared to the prior year quarter as a result of the severe decline in global flight hours. Defense OEM sales were down in the quarter, driven by lower sales of guided weapons and fixed wing aircraft tied to supply chain issues from COVID-nineteen, as well as a very strong quarter in the prior year.

Defense aftermarket activity benefited from continued military spending in support of The U. S. Defense initiative to improve the combat readiness of The U. S. Fleet and global upgrade programs.

Overall defense sales for the first nine months of twenty twenty were up 8% compared to the same period last year and our backlog remains strong. Aerospace segment earnings for the 2020 were $41,000,000 or 13.4% of segment sales compared to $103,000,000 or 20.7% of segment sales for the third quarter of twenty nineteen. Segment earnings were negatively impacted by the severe commercial aftermarket decline and lower OEM sales, partially offset by the cost reductions we took early in the quarter. Turning to Industrial, Industrial segment sales for the 2020 were $217,000,000 compared to $253,000,000 in the prior year period, a decrease of 14%. Excluding the renewable power systems and related businesses, which I will refer to as RPS, Industrial segment sales for the third quarter would have been $210,000,000 compared to $230,000,000 for the third quarter of the prior year, a 9% decrease.

Industrial segment sales declined in the quarter as a result of the macroeconomic headwinds impacting our markets today, continued weakness in oil and gas and the divestiture of RPS. Industrial segment earnings and adjusted industrial segment earnings for the 2020 were 27,000,000 or 12.6% of segment sales. Industrial segment earnings for the 2019 were $26,000,000 or 10.4% of segment sales. Adjusted Industrial segment earnings for the 2019 were $29,000,000 or 11.4% of segment sales. Excluding RPS, Industrial segment earnings and adjusted Industrial segment earnings for the 2020 would have been unchanged at 27,000,000 or 13% of segment net sales compared to Industrial segment earnings excluding RPS of $27,000,000 or 11.9% of segment net sales for the same period last year.

Adjusted industrial segment earnings, excluding RPS, for the 2019 would have been $30,000,000 or 13% of segment net sales. Adjusted Industrial segment earnings decreased primarily due to the lower sales volume, which was partially offset by cost reduction initiatives. However, as Tom mentioned, overall segment profitability as a percent of sales was improved by the divestiture of RPS. Non segment expenses were $15,000,000 for the 2020 compared to $27,000,000 for the same period of the prior year. Adjusted non segment expenses for the 2020 were $19,000,000 compared to $20,000,000 for the same quarter last year.

Adjusted non segment expenses for the 2020 excludes primarily the gain resulting from the resetting of certain cross currency interest rate swaps and the impacts of restructuring charges related to COVID-nineteen. Adjusted non segment expenses for the 2019 excluded Duarte Move related costs. Reported and adjusted non segment expenses in 2020 benefited from cost reduction initiatives. At the Woodward level, R and D for the 2020 was $35,000,000 or 6.6% of sales compared to $41,000,000 or 5.4% of sales for the prior quarter prior year quarter, excuse me. The decrease in R and D was primarily due to cost reduction initiatives and the divestiture of RPS.

SG and A for the 2020 was $57,000,000 compared to $53,000,000 for the prior year quarter. Adjusted SG and A was $50,000,000 for the 2020 compared to $52,000,000 for the prior year quarter. The decrease in adjusted SG and A was primarily the result of cost reduction initiatives, partially offset by higher amortization expense related to the Woodward L'Orange acquisition. The effective tax rate for the 2020 was 14.6% compared to 28.4% in the third quarter of twenty nineteen. The adjusted effective tax rate was 29.1% for the 2020 compared to 25.5% for the third quarter of twenty nineteen.

Looking at cash flows, net cash provided by operating activities for the first nine months of fiscal year 2020 was $212,000,000 compared to $219,000,000 for the prior year period. Capital expenditures were $39,000,000 for the 2020 compared to $78,000,000 for the prior year period. Free cash flow for the first nine months of 2020 was $173,000,000 compared to free cash flow of $141,000,000 for the prior year period. Adjusted free cash flow was $169,000,000 for the first nine months of twenty twenty. The increase in adjusted free cash flow was primarily the result of lower capital expenditures, aggressive cost control and effective working capital management.

Adjusted free cash flow removes the impacts of certain one time non recurring items and we believe it provides better comparability of ongoing operations between the current and prior period. As Don mentioned, please refer to the tables in the slide deck for this call for a detailed reconciliation. We remain confident in the strength of our financial position today and continue to focus on prudently managing cash flow as we progress through this challenging environment. We continue to believe we will generate positive free cash flow throughout the downturn. As a result of closely managing cash and reducing debt, leverage declined to 1.8 times EBITDA at the end of the third quarter.

We also have significant liquidity available through approximately $1,000,000,000 of combined cash on hand and revolver capacity. In summary, these are challenging times, but the actions we've taken have reduced the impact of sales declines on earnings and cash flow, strengthened our balance sheet and improved our liquidity while still driving critical investments in our future. Lastly, turning to our fiscal twenty twenty outlook, global economic effects associated with the COVID-nineteen pandemic have been unprecedented in their scope and depth. We continue to see severe volatility in our markets making even short term forecasts challenging. Because of that uncertainty, we will not be providing specific financial guidance for fiscal twenty twenty.

However, we anticipate our fourth quarter financial results to be similar to our third quarter. This concludes our comments on the business and results for the third quarter of fiscal twenty twenty. Operator, we are now ready to open the call to questions.

Speaker 0

Thank you, sir. The question and answer session will begin at this time. 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, please press the pound key.

Your questions will be taken in the order it is received. Please stand by for your first question. And sir, our first question comes from Sheila from Jefferies. Your line is open.

Speaker 4

Hi. Good afternoon, guys, and thanks for the time.

Speaker 0

Hi, Sheila.

Speaker 4

My first question, I guess, would be on the aerospace side. If you could obviously, OE is seeing a massive decline. If you could maybe comment on where you are on production on the MAX and other platforms and what you're seeing in terms of your own inventory?

Speaker 2

Yeah. Sheila, I I think the first thing would, you know, comment on the MAX is, I think all production rates, for us right now are a little bit uncertain. You know, I think what really will play out is when it's certified. Things have been moving and so I guess, we don't have a today a stabilized production rate to quote. So I think I would not state anything on that one.

The rest of the production rates are tracking with what Boeing and Airbus on the commercial side have communicated to the market and those have been reflected in updated POs that have come through either directly or through our tier one customers. So we're tracking really with what they're saying.

Speaker 4

Sorry, Tom. Just on the MACs, are you producing any right now?

Speaker 2

We have some hardware that we're producing. You know? So it varies by the, end product that we have. So, yes, we are producing, but it depends on how much inventory was already in the system, what they're pulling, and it's not consistent across all our max products.

Speaker 4

Okay. And then I wanted to ask about industrial. I think the decrementals were pretty good actually. And I don't know how much of that was the RPS divestiture that was dilutive to the business. But maybe can you talk about what helped margins?

Is this a sustainable level?

Speaker 1

Yes, we are encouraged by the industrial segment earnings this quarter. And I think it does represent some of the work that we've been doing. And there is an impact to RPS for the quarter and the year to date. It's obviously favorable. I'd say it's one of probably three major things, the cost reduction actions and RPS.

And then having some mix going on a little bit, we were seeing turbine business improving in the kind of first six months and stayed fairly flat in the last quarter, offset by a decline in the lorange aftermarket.

Speaker 4

Great. Thank you.

Speaker 0

Thank you. Our next question comes from Robert Spingarn of Credit Suisse. Please state your question.

Speaker 1

Good afternoon.

Speaker 2

Good Tom,

Speaker 5

your Aero margins held in pretty well this quarter despite the sharp drop in sales. So I'm wondering if you'd be comfortable calling the June the floor for margins unless the pandemic gets much worse? Or maybe said differently, should we expect further cost out in Q4 to have favorable drop through the margins, assuming that sales don't get worse?

Speaker 2

This is Ali. And there's a definite strong tie to the volume. The third quarter was a very tough quarter. I think everybody on the call knows. Our customers had facilities closed, people were furloughed, weren't taking products, the airlines were parked, very challenging time.

You could say subject to further pandemic issues that our fiscal third and fourth quarter should represent the bottom. Okay? Now we can't say that for certain, but that's that's what it would look like. And as, you know, Bob highlighted, and I I mentioned as well, the first thing that's gonna come back is aftermarket. You know, the production rates have, you know, been changed as everybody knows.

You know, you know, the really the most uncertain one is Sheila asked was the max, and that that's still uncertain going forward exactly what the ramp rate on the the max will be. The other ones are understood, obviously, down significantly from where they were, you know, even six months ago. So what we see is those OEM, the the first thing they'll start growing is Aftermarket. The reason I'm highlighting that is obviously that's a high margin business. So it should bode well for increasing margins as we move into 2021 on lower sales, which are anticipated year over year.

Speaker 5

And then just on the Industrial side, more from, I guess, a top line perspective, but how are things trending as we move past June into the summer here? I guess, both from a top line perspective and then how you think about margins.

Speaker 2

Yes. Well, top line, there's going to be continued pressure. We have seen our customers reduce some production rates. I'm sure we've seen some of those announcements come out over the last week, week and a half. We do believe though that our margins will continue to hold and improve both from cost out actions, but also what we would call portfolio adjustments that we've done with pruning some businesses.

And in fact, removing low margin businesses and our core businesses are half good margin. So this is one step towards a goal we've had that we're we're not changing, which is industrial should be a 16% plus margin business. And as the volume picks up with the cost structure initiatives we've taken, we'll lever the sales growth into higher margins as we move forward. But we we are gonna still have

Speaker 3

it is still a

Speaker 2

tough outlook for some months to come until we really see how things stabilize.

Speaker 5

Okay. Thank you, Tom.

Speaker 0

Thank you. Our next question comes from Christopher Glynn of Oppenheimer. Please state your question.

Speaker 6

Thanks. Good afternoon. The Good afternoon. Yeah. I just wanna kinda build on the discussion of the, you know, margin pathway for industrial there.

You brought up pruning. Just wanna get a sense of, you know, what degree of pruning's taking place other than RPS. Should we think about that as kinda like a couple point impact on the top line?

Speaker 2

Yeah, I think what we say that, as Bob highlighted, we refer to as the RPS businesses. So there is a number of product lines with the wind turbine converters being the largest of those. Those product lines net had lower actually, significantly lower margins than the core industrial margins. And so we we talked previously when we announced the divestiture of the businesses that we would be like two, two and a half points margin improvement based, you know, on steady sales based on that divestiture. And in addition, those businesses were not core or strategic to our future.

Speaker 6

Okay. Yeah. I just wanted to clarify. There there are not other pruning actions contemplated at the moment?

Speaker 2

Nothing material. You know, we we constantly look at our portfolio, but we do not see anything on the order of of an RPS in the near you know, in the future.

Speaker 6

Okay. I wanted to jump over to Marine for a minute. Yeah. How should we think about that tracking in terms of drivers? Is it really global trade?

Any weight to, you know, oil and gas production levels? And also wondering if the environment, you know, creates a window, maybe if there's any pent up aftermarket demand that built up in the system.

Speaker 2

Yeah. I I think it's really tied to global economic activity, global GDP, which leads to trade as you're highlighting. Where we see your point is correct. We do see that there will be some pent up aftermarket demand coming as the ships are brought back online and utilization increases. So we are looking at that and would anticipate in our forecast that as the economy picks up, global economy picks up that we will see that.

Second thing that we're seeing some favorability on is orders for LNG carriers. So LNG is a trend out there. We have substantial content on LNG carriers. And so we see that coming in the next couple of years as those ships are built and put into service. And those also will have a nice aftermarket tied to them.

Speaker 6

Okay, thanks. Sounds good.

Speaker 2

Thank you.

Speaker 0

Thank you. And next we have Pete from Alembic Global. Please state your question.

Speaker 7

Yes, good afternoon guys. Hey Tom, the comments in the slide on the commercial aftermarket and just your comments about the better mix on the newer aircraft, are you implying or should we think that maybe the recovery in commercial aftermarket sales for you guys is kind of more of a V shaped recovery versus, obviously, kind of a slower or a more modest slope on the OEM sales?

Speaker 2

No. I would not claim a V shaped recovery. I I think what we're really trying to say there, Pete, is, you know, so we we really monitor all the aircraft in the fleet. We actually track every airline, what they're flying, what their route structures are, you know, and what aircraft they're utilizing. So as we look at the retirements that have been announced or planned and ones we see coming, they're taking out aircraft that has little to no Woodward content for the most part.

There will be some that have you know, that that's a spectrum, but for the most, it's smaller. The fleet that we see coming out of the recovery of the pandemic will have higher content per aircraft than the fleet that was flown before. So what that means is as we move forward and the market recovers, we will recover probably better than the market because we have more content per plane, which will lead to higher sales with good margins. So it's more about really very detailed analysis of what we call the demographics of the fleet. And we think the Woodward portfolio, a year from now, two years from now, as things settle out, start flying again, will be an excellent portfolio and we'll have better position in the market.

Speaker 7

Okay. That's great. Just one more follow-up on the industrial side. I feel like you got I feel like oil and gas has been soft for you guys for a few quarters now. I lose track exactly, but and I think you guys have been talking about 70% to 80% down, something like that.

At what point do we get to easy comps in oil and gas? Are are we getting closer to, you know, kind of the trough in that area?

Speaker 2

Yeah. I think as you roll past the first quarter twenty one or, you know, the start of calendar twenty one, there's no doubt. At one point, you know, we saw just it was on the order 80% drop in our oil and gas sales, you know, applications in oil and gas. And just a reminder for everybody on the call too, you know, a lot of the product that Woodward product that goes into that oil and gas market is on drilling or compression, pumping, And those are applications that have a lot of hours. So when they're running, they generate good aftermarket.

A lot of that's been shut down. And so with no operation, there's no additional aftermarket in addition to no OEM sales. So, yeah, it's kind of for industrial, you know, we we're we're pretty pleased with how we've made it through all this. But if you think about it, we had an oil and gas crisis compounded by a pandemic, and we're still holding together. So when that recovers, which it will, we'll be in good shape.

And somebody asked a question earlier, you know, maybe it was related to marine, but you could apply that to oil and gas. When they bring these rigs back up online and start operating, there will be an aftermarket demand to get all that back in place. And we saw that before during previous oil cycles or oil market cycles.

Speaker 7

Much appreciated. Thank you.

Speaker 0

Thank you. And next we have David Strauss of Barclays. If you would please state your question.

Speaker 8

Hey, thanks. So I don't know if I might have missed it. Did you actually say how much your Commercial Aero OE sales were down in the quarter? And could you comment on the potential for destocking to see a pickup in the revenue decline that you're seeing on the commercial aero side from here?

Speaker 2

Yeah. So commercial aero was down approximately six aero OEM was down 62% in the quarter. So quite significant. We we have studied and and this is why it's a little hard to say production rates, you know, and there was a question regarding the MAX, but even on some of them, is we've been monitoring and calculating all the inventory in the system. And so there will be some rightsizing of inventory through the whole supply chain.

We've got that planned into our numbers. I would say we've seen some of that. So I think you call it destocking. I'm just saying that the inventory supply chain needs to come to new balance given the production rates, and that's occurring. But all the lines that, you know, Boeing, Airbus, Embraer, we are producing product.

It's just at which rate are we producing, and it will then turn over the next months to stabilize to their stated rates.

Speaker 8

Okay. And, on the aftermarket, Tom, what's you what do you think about the potential going forward that we could actually see a decoupling, in the aftermarket, relative to, you know, underlying kind of flight activity? I mean, right now, we're seeing for you guys and pretty much everyone else, the aftermarket down in line with kind of what calendar Q2 flight activity was down. But do you have any concern that we might actually see the aftermarket come in below flight activity going forward as the airlines kinda get their arms around this and start using you know, start cannibalizing parts and use material and all of that? Thanks.

Speaker 2

Yeah. I think the you know, I would state the airlines are doing a proper job. If I was in their shoes, I'd be doing the same trying to minimize expenditures, as much as they can today. The interesting thing is we're still seeing activity of engines going into shops, obviously at much, much reduced rates. We will see and we're that in our outlook that the airlines will do their best to delay, by swapping out equipment, you know, delay expenditures that they can.

We, in some ways, you know, in the quarter, our aftermarket sales were not down as far as flight hours even in this bad quarter. So it it's it's there's a lot of uncertainty wrapped around that. You know, there's a certain amount of maintenance that has to occur. And I don't know that we're you know, right today, I would not believe we will fall below flight hours as a drop. The the one challenging part also to watch is the impact of all the fleet being retired or parked, you know, what happens with some of that equipment.

Again, we're tracking that. But all that, we shouldn't be too far off of flight hours. And then as as they start putting more aircraft back into service, which means they have to make sure they're flight worthy and safe and so forth, we will start seeing that aftermarket pick up. And so it may pick up more rapidly than flight hours. You know, there will be a inflection point on that.

So challenging to forecast given that, you know, I've been in the industry a long time, so is my team. You know, we've got a really good experienced team, you know, you

Speaker 3

know, from

Speaker 2

thirty five to forty plus years in the industry. Nobody's seen anything like this. So, you know, we're doing our best to estimate, talk to customers, talk to airlines, work with everybody. But I do see once we hit that inflection point, that was the fleet dynamic discussion we had earlier. We will see Woodward accelerate out of this downturn due to the fleet demographics.

Speaker 8

All right. Appreciate all the color. Thanks.

Speaker 2

Yep.

Speaker 0

Thank you. And up next, we have Michael from TUIS Securities. Could you please state your question?

Speaker 9

Hey, good evening, guys. Thanks for taking the question here. Tom, maybe just a little bit more on the aftermarket. I mean, the down 47% in the quarter, I know you kind of gave the expectations for the second half kind of being a bottom here. But do think the aftermarket growth could get worse?

I guess, enter this quarter with a backlog? I mean, clearly, were engines in the shops. And I think if we look at with some of your big customers, GE saw, I think, 60% declines in some of their CSA billings and the engine shop visits down. So you think the aftermarket actually gets worse here in short term before it picks up? Or do you think you've bottomed here?

Speaker 2

I I do believe we're near bottom, you know, with the plus or minus. You know, I'm not sure what percent to put on it. It's pretty close to bottom.

Speaker 7

What Okay.

Speaker 2

You know, what we're seeing, you know, just, you know, share with everybody. We we did have a number of airline customers where we had hardware back for repair and overhaul who said stop working, ship it back as is, don't do any more work, you know, stop. So we we we did see a fair amount of that. But at the same time, we had a number of customers which we were unsure of at the time saying, please complete it, get it back to us. And then we've seen some outlook for shop visits, you know, to come off of this bottom as we move, you know, over the next few months.

So we we've seen the whole the whole gamut here, and, we've also been, you know, frankly, we've been very careful careful. And if you look at, how well we did on our our receivables, we've been very careful to ensure airlines and operators are able to pay. And so we had to have a lot of dialogue, and we did really well with that. So so I I can't say it won't get worse, but I I I'm more in line that we're pretty well bottomed or near the bottom and, you know, over the next and I'm gonna say over the next year based on the uncertainty, but we're starting to see, an inflection point in that time period and then it'll start picking up again.

Speaker 9

Got it. Okay. And then just what about the your opportunities and content on the 777X, the nine x engine that being pushed out, does does that have you know, I mean, obviously, there's a whole host of other things going on, but does that have any any major near term impact on you guys?

Speaker 2

Well, yeah, of course. You know, this now all of our previous, five year forecasts are now changed. So

Speaker 4

Right.

Speaker 2

But if you had gone back six six months ago, those sales were in our forecast. Obviously, going forward, as we're recasting everything, we've adjusted and, you know, so we were the triple seven x would've had sales, you know, it was planned to come online. And once it came online, there would've been initial provisioning sales. So, yeah, you know, there's an impact to that. It's it's not huge.

And it but at the same time, it's not lost. You know? I truly believe that'll be a very successful aircraft. People will fly again. People do wanna fly internationally.

We all sit around here and talk about in my, you know, entire working career, I've never been home this much in a row in my life. So, you know, we're all we're all, like, going a little stir crazy, not traveling. So we're all ready to get going as soon as we can, and I think the whole world's that way. So you're gonna see these the demand for the aircraft come back. It's just, you know, it's a one year, two years, three years.

But, you know, I'm I'm very confident we'll see people flying again and and that international flight will go. And triple seven x, seven eight seven, A350 are going to be great planes.

Speaker 9

Got you. Right. And last one, just the margins in the quarter. I know last quarter, I think there was the reversal of the variable comp and bonus. Was there anything else?

Did that flow through at all in this quarter or was that all done last quarter?

Speaker 1

That was all done last quarter in terms of reversal. There was nothing recorded in the quarter because we forego the bonus for the year, but no big credit like it was last quarter.

Speaker 10

Okay.

Speaker 9

Got it. Thanks guys.

Speaker 2

Yep.

Speaker 0

Thank you. Our next question comes from Gautam Khanna of Cowen. Please state your question.

Speaker 10

Yes. Thanks. Good afternoon, guys.

Speaker 1

Hi, Gautam.

Speaker 10

I wanted to pick up on one of the earlier questions on who that and Tom's response to it, which was that you might see part outs and, I guess, some cannibalization. But I I was curious, like, have you guys what is your exposure to used serviceable material? Maybe, you know, how did that how did that affect the last downturn? And and, you know, how is the aftermarket mix different or or similar to what was experienced you know, what the mix was back in back in the o eight, o '9 downturn or maybe even before that, 09/11, what have you.

Speaker 2

Yeah. If if you go back to those time period I mean, it's it's a good question. To date, we haven't, you know, we haven't seen that used service material market and that, you know, we would anticipate that with retirement, permanent retirements to where you would see some of that equipment coming online. What we did we did see in the last time we had a real downturn, there was a small impact from that. But the interesting thing was some of that, though they say used serviceable material, we would see a number of those type controls come back to us to be, if you wanna say, brought up to standard, you know, latest service bulletins to be repaired so they have a little more value.

So we actually would see some aftermarket tied to that. I'm not saying universally we saw it, but we did see on some of the more complex units that they would actually come back through us. We're actually looking at that and saying, okay. That that's coming available. Let's work to make sure, we we participate in, in that market.

And so we're looking at, ways to do that. But I don't expect it to be a material negative on our aftermarket sales.

Speaker 10

Okay. And just a follow-up from earlier. You know, do you feel like you have good customer visibility right now on what you're supposed to deliver over the next two or three quarters? Or yeah. Just getting to the point on destocking.

You know, how much visibility you have, or do you keep getting change orders or what have you, you

Speaker 2

know, schedule changes and the like? Yeah. What what what I'll share with you, we talked about this last quarter, but and I'm gonna say this across all our customers and all our markets. Okay? So no.

Not gonna highlight one over another. So this is industrial and aerospace. It customers can be slow to change their orders. And what we did is, you know, understanding this and having lived through downturns, we proactively changed our production plans based on what we saw and anticipated was gonna happen. And in our prepared remarks, we made reference to that.

And we were pretty darn accurate with what happened. We are talking to our customers every week, all customers, to align what what they're looking for in deliveries, what the inventory levels are, and the like. So a little long to answer your question, we're very confident and on top of what inventories in the system, what our customers are doing and how we will produce to the current requirements. Now, will there be volatility in those requirements? And I'd have to say yes, because we could see changes in production rates, we could see changes in the market, but customers are working really well with us, and we're like I said, it's a weekly discussion.

And I would say we we gotta really inventory system with our so I feel like we're on top of it.

Speaker 10

Great. And and just one last one on, you know, your appetite in this downturn to entertain acquisitions or mergers or what have you, just cash deployment. Is it one of those situations where we just kind of preserve liquidity? Or are you looking at things in the m and a pipeline?

Speaker 2

Yeah. What I what I would say first is, liquidity, was priority number one, you know, and then with that liquidity, not knowing initially where this could go, we wanted to ensure we had ample liquidity, no issues with debt covenants and the like. And you can see by the results that we're in quite good shape there. As we go over the next year, we will start accumulating cash. And as we watch the market conditions to ensure we don't need to preserve liquidity, we are actively working on our growth initiatives.

And we did this in past downturns. We did it after 09/11. We did it after the financial crisis. And a lot of guys might might remember in the financial crisis, Bob and I, months before the crisis hit, we we told the world, you know, prices were too high. We went into that financial crisis net net debt free and told everybody in advance we were gonna buy, and we did.

We we made two significant acquisitions that have really positioned us in the aerospace market. So we're we're we're be looking at opportunities, but we're be we're gonna be conservative and very prudent about deployment of cash and the like. At the same time, though, I know we like to talk a lot on m and a. I just wanna highlight this is we're still investing very well into r and d, organic development. I see opportunities, with customers where weak suppliers may not make it or they're not able to properly support customer of the market.

There's opportunities in that. We're positioning our technology so that we can have more share on the next application, so we're not backing down on that. And I absolutely believe we're gonna come out stronger with very good growth rate as market recovers. So we're gonna be doing both.

Speaker 10

Thank you very much, guys.

Speaker 2

You. Thank

Speaker 0

you. And we now have a follow-up from Robert from Credit Suisse. Please state your question. Hi.

Speaker 5

I just I wanted to just follow on that last question and then some earlier comments on destocking and asking your customers or trying to frame what your customers really need. I wanted to ask you, Tom, if you ever get into a situation where you have mixed signals between on the OE side between what the airframe guys are saying and the engine guys?

Speaker 2

Not not really, Rob. There's always a difference to lead times and, you know, do I say material management strategies, but but they they are in sync, and and we're confident. And matter of fact, we constantly look at both to ensure we're confident in the data that we get from both of them. So I would say today, you know, again, we're tracking this and monitoring weekly discussions. They they are in sync.

Speaker 5

The reason I ask that is because you'll remember back with Precision Cast Parts who sold a lot of components through the engine guys, they were in this, you know, lengthy period of destocking, and we couldn't quite track it. And it turns out that at least one particular engine OEM was overstocking or at least had been. And I just wonder if there's any risk of that, not necessarily going forward, but maybe it's already happened and just wanted to be aware of it.

Speaker 2

Yeah. What what I would say occurs in the industry, and we would at Woodward, we would do the same thing. If you have, long lead time parts with a supplier that's not consistently delivering on time, you're gonna build up a buffer of inventory. And then if things change, you gotta burn that off. What I would say with our customers is we're we're kinda delivering to them in a more just in time fashion.

And then what we're when we talk about inventory and the supply chain, what we're talking about is, you know, some of our hardware will go to, you know, a nacelle manufacturer that then gets potted with an inch and then gets onto the airplane. So you gotta track that inventory in the system. But when we're selling to a customer, they do not have big buildups of Woodward inventory at their site. So, you know, it's mainly just what's flowing through the system. So that that's why I have a little more confidence, you know, in in an understanding of what's in the supply chain that there's not gonna be a big destocking effect on Woodward.

I can't say on every supplier because we have I can tell you, we buffer some of our suppliers just due to poor performance and ensuring that we we can deliver. So I understand how that occurs, but that's not what we're experiencing.

Speaker 5

Okay. And then just while I have you, and I don't think this came up before, but CapEx is down by something like half from last year, and that was discussed in the context of free cash flow. But I'm just wondering, when we come out of the pandemic, whenever this is, a year, two years, three years from now, will we have a big catch up spend? No. No.

Speaker 2

Yes. You know, now this is you know, and this is good for, you know, our investors or, you know, future investors. Look, you know, we we we facilitate and and we're prepared for all the growth that was happening, and we were ahead of it. So just think of that and the line rates that we're going, we we we have years of not needing additional capacity. You know, there'd be maintenance capital, capital for productivity and things.

So it's not like going to be zero, but it's going to be significantly below past CapEx levels because we have.

Speaker 5

Okay. Excellent. Thank you.

Speaker 0

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

Speaker 2

Well, thanks everybody for joining us today. And, I think we're going through challenging times, but I can only imagine for all our investors how challenging it is to understand what's going on in the market and what's going on with our company. Hopefully, we're providing you with some information and color. Please reach out to us if you have questions and we look forward to talking to you through this quarter and at our next quarterly report. So 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 starting at 07:30PM Eastern Daylight Time by dialing 505056 for a US call or you may dial 030406 for a non US call. You may also enter the access code for either call. The access code is 388800854. The rebroadcast will also be available at the company's website which is www.woodward.com for fourteen days.

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