Woodward, Inc. Earnings Call Nuggets: Next Generation Narrow Bodies, Wind Converters

On Monday, Woodward, Inc. (NASDAQ:WWD) reported its second quarter earnings and discussed the following topics in its earnings conference call. Take a look.

Next Generation Narrow Bodies

Tyler Hojo – Sidoti & Company: Just the first question I guess, you mentioned some opportunities to take up your kind of existing content on the next generation narrow bodies. I was wondering maybe if you could expand upon that a little bit?

Thomas A. Gendron – Chairman and CEO: Sure. We still have opportunities on both the CFM LEAP engine as well as the Pratt & Whitney PurePower. We expect some of those awards to occur or we expect the awards to occur in the third quarter – fiscal third quarter. So, we still anticipate that there is some more content on both engine platforms. As well as we’re working both Boeing and Airbus and their supply chains for additional content. The engines were ahead of the airframe in some of the opportunities, so we see those once maybe materializing over the rest of the fiscal year into early first quarter. So, by the end of calendar year ’12, we expect all the opportunities to be solidified.

Investing Insights: What are the Key Themes in Gold?>>

Tyler Hojo – Sidoti & Company: I see, and are these opportunities that you’re speaking of, are they incremental to kind of the conversations that we’ve had about kind of 3X content on next generation versus current generation, or is this inclusive of those comments?

Thomas A. Gendron – Chairman and CEO: Not be incremental.

Tyler Hojo – Sidoti & Company: Okay, and I mean, where do you think it could go?

Thomas A. Gendron – Chairman and CEO: How about if I tell you after we win?

Tyler Hojo – Sidoti & Company: That’d certainly be the easy way to do it.

Thomas A. Gendron – Chairman and CEO: All right. We got to wait-and-see, but there is a fair amount still out there, and we win some, we won’t win at all, so – but we should know shortly, Tyler. But it should add to – it will add to the portfolio and add to the numbers we shared with you in the past.

Tyler Hojo – Sidoti & Company: So, what I’m trying to ultimately get at is, when we look at the R&D spend kind of creeping up here a little bit, I mean is it possible that we could be talking about R&D going from 7.5% to 8.5%, say, over the next 12 months? Just trying to…?

Thomas A. Gendron – Chairman and CEO: Yeah. What I would highlight, Tyler, is we’re spending money on those opportunities today, and anticipation of securing the business, and also securing – we’re also spending money to pursue the business. So, I don’t see much change in that rate, though being at around 7.5%, probably likely for the rest of the year and maybe moving into next year. It will be a little bit lumpy at times, and we wanted to get that across because as you go through these major programs, different milestones, you spend a certain amount of money or you have hardware deliverables that are quite expensive. So, you are going to see movement in that rate, but if you average out over the year we’re still thinking around 7.5% carrying into next year about that rate.

Tyler Hojo – Sidoti & Company: And just a one last final questioning from me. On the wind inverter piece of the business, you mentioned strength. I was wondering if you could quantify what exactly we saw in terms of the growth rate this quarter.

Thomas A. Gendron – Chairman and CEO: Sure. If you take the first half of year, we’re up over 60% from last year.

Tyler Hojo – Sidoti & Company: Okay. Well, okay.

Thomas A. Gendron – Chairman and CEO: Yeah, so it’s strong.

Tyler Hojo – Sidoti & Company: And are you still looking for that to be up about 40% or has this tax credit…?

Thomas A. Gendron – Chairman and CEO: We’re going to probably be higher than 40%, and what you have is it’ll run strong to the fiscal year and into the first quarter of next year. And then with the production tax credit running out at the end of this year, we do expect a slight drop-off going into calendar year ’13; obviously, our first quarter will still be in calendar year ’12. We don’t have as high exposure to the U.S. market as a lot of the companies in the wind industry. But we do – we are seeing increase this year. Going into next year, we still feel good about it, but there is going to be heightened uncertainty and volatility so, it’s a little hard to predict when you get into our second quarter of ’13.

Tyler Hojo – Sidoti & Company: But you would expect your inverter sales to be down next fiscal year. I mean that’s a fair statement right?

Thomas A. Gendron – Chairman and CEO: We’re right now expecting slightly down but not – slightly and that could change to eight direction but just a little bit down.

Tyler Hojo – Sidoti & Company: The slightly down kind of forecast, does that anticipate additional share gains or is that just how you view the market?

Thomas A. Gendron – Chairman and CEO: Well what I would say right now Tyler’s is we’ve been picking up share and we’re starting to deliver. We’ve won share in India, further share in Europe and in China, and some of that’s ramping up right now. So that’ll help offset some of the U.S., which we do expect a big decline in the U.S. market, but the rest of the world we don’t see that same type of decline occurring. So some of those gains should offset some of the U.S. business, but that’s where there is some uncertainty.

Wind Converters

Fred Buonocore – Rodman & Renshaw: My first question just follows along with the discussion that Tyler was talking about with the wind converters. So clearly this is just going gangbusters this year and stronger than you had anticipated going into the year and stronger still after the second quarter. And with the guidance unchanged I guess that would imply maybe (you have) little bit more softness in another area than you would’ve expected going into the year, I guess the puts and takes. Is there one particular area on the Energy or Aerospace side that’s falling behind what you had expected as the kind of converse to what’s happening with wind?

Thomas A. Gendron – Chairman and CEO: Yeah, I think in total it’s not too much variation off of the plan. Wind is up. We have seen a little slower ramp as of the first half of the year in some of our engine sales, but the outlook is strong, and that also (was) associated, what we call, the associated package control that go around those engines. So a little bit, but it’s minor. So yeah, the wind is pushing on the higher end of the Aerospace side, so it’s very strong for the year. So, sales are within the range and winds picked up, but maybe a little softer on some (of the sales), but I would call it in the couple percent kind of thing in the noise level.

Fred Buonocore – Rodman & Renshaw: Then on the Aerospace side, another quarter of strong growth on the aftermarket side, can you give us a little bit of color on the involvement of the Airframe business in that growth in Aerospace aftermarket?

Thomas A. Gendron – Chairman and CEO: Yeah, well, the Airframe aftermarket continues to increase, so some of our strategies on developing the channel and packaging together with the turbine side is working. The sales were strong, but I would also highlight we were seeing some push outs – just to give you highlight, the airframe aftermarket was up about 12% year-over-year. So I think that’s good progress on that. We did see some spare initial provisioning sales that were in our quarter plan move to later in the year tied to delays in the 87 and 47 entry into service. That was the first time we’ve seen some of that move. So, even though we had a very strong quarter, there was some movement of initial provisioning out which should bode well for the later quarters because it will move into the third and fourth quarter.

Fred Buonocore – Rodman & Renshaw: That’s helpful. Then, you also talked in Aerospace just about somewhat of a margin headwind due to higher than anticipated manufacturing costs related to this growth and investments in improved productivity. Can you talk about that a little bit for us please?

Thomas A. Gendron – Chairman and CEO: Sure. We’re putting a big push on lean manufacturing and optimizing our value streams. Part of that is we’ve added to our manufacturing personnel that will help implement some of these new strategies. So what you really have happening is we’re investing in improving productivity, improving our margins. Right now, we’re having some higher overhead expense tied to that, and as the sales ramp up in the second half and moving into 2013 and ’14, we’d be absorbing that overhead as planned, but ideally also for our plan is higher margins associated with being able to optimize our production processes for these higher volumes associated with the narrow-body program.