Yahoo Finance Woodward, Inc. (NASDAQ:WWD) Q2 2024 Earnings Call Transcript
Woodward, Inc. (NASDAQ:WWD) Q2 2024 Earnings Call Transcript April 29, 2024
Woodward, Inc. beats earnings expectations. Reported EPS is $1.62, expectations were $1.28. WWD isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Ladies and gentlemen, thank you for standing by. Welcome to the Woodward Incorporated Second Quarter Fiscal Year 2024 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 are 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.
Dan Provaznik: Thank you, operator. I would like to welcome all of you to Woodward's second quarter fiscal year 2024 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 the presentation, we will take questions. For those who have not seen today's earnings release, you can find it on our website at woodward.com. We have again included some presentation materials to go along with today's call that are also accessible on our website. An audio replay of this call will be available by phone or our website through May 13th, 2024. 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 2. 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. Those elements can and do frequently change. Our forward-looking statements are subject to a number of risks and uncertainties surrounding those elements, including 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, Woodward is providing certain non-U.S. GAAP financial measures. We direct your attention to the reconciliations of non-U.S. GAAP financial measures, which are included in today's slide presentation and our earnings release and related schedules.
We believe this additional financial information will help in understanding our results. Now, I will turn the call over to Chip.
Chip Blankenship: Thanks Dan. Today, prior to my commentary on our company's financial performance, I want to start with safety, which is how we normally begin our operating meetings. In our industry, we must wake up every day thinking about safety and how to sharpen our safety culture. While Woodward has a strong, even world-class safety record, there's always room to improve. As I've shared previously, we prioritize our work in the order of safety, quality, delivery, and cost. Delivery and costs are incredibly important, but we stop our work if there's an unsafe condition. And it is not acceptable to pass along a defect to meet a product delivery goal. This disciplined order of battle is ingrained in our operational culture.
At the same time, as we aspire to zero safety incidents due to the existence of layers of protection and zero quality escapes due to a thorough understanding of built-in quality of the source, we know there are opportunities to improve. One way we are enhancing the safety culture Woodward is through the rollout human and organizational performance, also known as HOP, an approach that builds an engaged, proactive workforce focused on preventing errors and providing for fail safe outcome. Key tenets of HOP are that the absence of a significant event and low injury rates do not mean a company has a robust safety program. In my prior meetings, leading HOP implementations and seeing them in action, I know it's a game-changing system. As a simple example of HOP in action, a few years ago, I visited an aluminum-rolling mill facility with the mature HOP system in place, and was told that my visit was the high-risk task of the day for the site.
Not because I'm inherently dangerous, I hope, but because my presence was a distraction and represented a significant interruption to the normal work patterns. It's partly this keen awareness of human interaction with the environment that makes this system so effective and why we've chosen to implement it at Woodward. Last week, during a management and Board visit to our Glatten facility in Germany, I asked the value stream leader in the pump fuel assembly area what the high-risk task of the day was. Without leading the witness, he said this tour. I was pleased with our progress. Following a successful launch of HOP at our Rock Cut plant last year, we're making progress across our other sites and have accelerated certain aspects system to all plants this year, including fatality and serious injury prevention assessments and gap closure projects.
The fatality and serious injury approach, FSI for short, focuses on key risks inherent to manufacturing, assembly and test operations. In pursuit of excellence, Woodward has aggressive targets to reduce quality escapes to customers. Our commitment to quality is essential to support OEMs and their customers' own goals for safe and reliable operation. As an error reduction methodology, HOP provides tools to help members errors that could impact delivered quality. This is not just a quality function responsibility, it's everyone's job. We have conducted quality stand downs to support members and to emphasize our dedication to getting it right. Additionally, we have embarked on enhanced rigorous training in areas such as quality management systems, metrology, problem solving and HOP.
I'm pleased to see how members embrace these methodologies in their daily work. And we want to continue building a culture where they feel empowered to raise issues and help resolve them. Next, I'd like to provide a brief update on strategic planning. We recently performed a deep dive into the R&D and CapEx investments necessary to meet near-term financial commitments, prepare for the next single-aisle aircraft program and prepare for our critical role in the energy transition. My leadership team and I spent time study innovation roadmaps with our aerospace and industrial businesses and technology teams, and with our nine Woodward innovation network teams who work on breakthrough technologies, in some cases, leveraging innovation breakthroughs across our two business segments.
I'm pleased with our progress on optimizing both the focus and the breadth of our R&D portfolio to ensure Woodward's competitiveness and unique value proposition to our customers' future projects. On the CapEx front, we continue to explore additional automation investment opportunities with strong calculated returns inside the planning horizon. Moving forward I these calls, I'll continue to touch on topics like these related to our interconnected value drivers of growth, operational excellence, and innovation, and I hope you'll find them interesting. Turning to our results. We delivered significant sales growth and margin expansion year-over-year across both our aerospace and industrial businesses. The compounding impacts from our focused efforts on operational excellence are enabling us to capitalize on continued strong end market demand.
While there is still more work to do, I am proud of our team's efforts and dedication. Moving to our markets. Aerospace, we continue to see strong commercial airline, domestic and international passenger traffic, resulting in high aircraft utilization. Transatlantic traffic remains strong, further increases in aircraft utilization are expected as international passenger traffic in Asia Pacific continues to recover. While the overall macro environment remains strong, we are monitoring OEM build rate dynamics and modeling potential impacts on our business so we can actively manage these risks. In defense, recent escalation in geopolitical tensions is driving increased demand as US and foreign militaries look to replenish inventories. The amount of government R&D proposal procurement dollars available rising and suppliers are ramping to meet this demand.
In industrial, rising global power demand is driving increased investment in gas-fired power generation for both prime and backup power which is attributed to global development primarily in Asia. Data center demand for backup power, which is primarily diesel-fueled reciprocating engines appears to be growing sharply. And the outlook for capacity firming applications supporting renewable energy and grid stability remains optimistic. In transportation, the global marine market remains healthy with elevated shipbuild rates, driving OEM engine demand and high utilization rates fueling current and future aftermarket activity. Demand for alternative fuels across the marine industry continues to increase. Demand for natural gas heavy-duty trucks in China has been strong.
While the mix of heavy-duty truck production in China has been trending towards natural gas engines, recent discussions with our customers indicate there may be a softening in demand this summer. And potentially a return to the stronger demand towards the fourth quarter of calendar 2024. We continue to monitor the economic environment and the durability of this demand and remain in close contact with our customers in China. Regarding oil and gas markets, uncertainty in the United States for LNG export continues as application reviews remain on pause, although global demand outside of the United States remains strong. Positive sentiment in this space is driven by strong performance and outlook in domestic shale oil as well as refining and petrochemical activities in China and India.
In summary, ongoing market trends indicate strong and sustained demand. Our second quarter performance reflects the hard work and dedication of members and the progress we've made to strengthen our value proposition and fulfill our purpose. We believe we are well positioned to capitalize on current and future opportunities, and we remain focused on driving profitable growth, operational excellence, and innovation to enhance shareholder value. I'll now turn it over to Bill to share our financial results.
Bill Lacey: Thank you, Chip, and good afternoon to everyone. As a reminder, all comparisons are year-over-year unless otherwise stated. Net sales for the second quarter of fiscal 2024 were a record $835 million, an increase of 16%. Earnings per share and adjusted earnings per share for the second quarter of fiscal 2024 were $1.56 and $1.52, respectively, compared to earnings per share and adjusted earnings per share of $0.58 and $1.01, respectively. Aerospace segment sales for the second quarter of fiscal 2024 were $498 million compared to $437 million, an increase of 14%. Commercial OEM and aftermarket sales were up 15% and 18%, respectively, driven by increased aircraft utilization as a result of continued growth in passenger traffic and price realization.
Defense OEM sales were up 4% and defense aftermarket sales grew up 17%. Aerospace segment earnings for the second quarter of 2024 were $98 million or 19.8% of segment sales compared to $73 million or 16.8% of segment sales. The increase in segment earnings was primarily a result of higher volume and net price realization. Turning to Industrial. Industrial segment sales for the second quarter of fiscal 2024 were a record $338 million compared to $281 million, an increase of 20%. We saw growth in transportation, up 46%. Empowered generation increased 14%. These increases were partially offset by a 16% decrease in oil and gas. Sequentially, oil and gas sales were up 7%. The increase in transportation sales was primarily led by on-highway natural gas trucks in China, which totaled approximately $65 million in the second quarter, driven by significantly higher demand compared to the prior year quarter.
Although, we saw a significant increase year-over-year, China on-highway sales were lower sequentially as expected. Given the market dynamics Chip mentioned, in Q3, we don't expect the same run rate that we've seen over the past several quarters. For the third quarter, we are expecting a range of $35 million to $40 million of China on-highway sales. As we move into the second half of our fiscal year, we expect industrial sales growth rates to moderate, given the high comps in the back half of fiscal 2023. Industrial segment earnings for the second quarter of 2024 were $65 million or 19.3% of segment sales compared to $38 million or 13.4% of segment sales. The increase in Industrial earnings was a result of higher volume, largely due to the heightened demand for our China on-highway business, net price realization and operational improvements, including increased output and efficiency gains.
Excluding the impact of the China on-highway natural gas truck business, Industrial segment margins were in line with the first quarter at approximately 14%. Non-segment expenses were $33 million for the second quarter of 2024 compared to $58 million. Adjusted non-segment expenses for the second quarter of 2024 were $29 million compared to $23 million. At the Woodward level, R&D for the second quarter of 2024 was $36 million or 4.4% of sales compared to $38 million or 5.3% of sales. SG&A for the second quarter of 2024 was $81 million or 9.8% of sales compared to $76 million or 10.5% of sales. The effective tax rate was 19.1% for the second quarter of 2024 compared to 11.8%. The adjusted effective tax rate was 19.3% for the second quarter of 2024 compared to 17.8%.
Looking at cash flows. Net cash provided by operating activities for the first half of fiscal 2024 was $144 million compared to $40 million. Capital expenditures were $56 million for the first half of fiscal 2024 compared to $44 million. Free cash flow was $88 million for the first half of fiscal 2024 compared to negative $4 million. Adjusted free cash flow for the first half of fiscal 2024 was $90 million compared to negative $1 million. The increase in free cash flow and adjusted free cash flow was primarily due to increased earnings, partially offset by higher capital expenditures. Leverage was 1.2 times EBITDA at the end of the second quarter compared to 2 times EBITDA. $28 million was returned to stockholders in the form of dividends in the first half of fiscal 2024.
Lastly, turning to our fiscal 2024 guidance. Based on visibility into the third quarter demand for the China on-highway natural gas truck business and anticipated improved operational performance in the second half of fiscal 2024, we are raising certain aspects of our full year guidance. Total net sales for fiscal 2024 are now expected to be between $3.25 billion and $3.35 billion. For fiscal 2024, Aerospace sales growth is now expected to be 12% to 14% and segment earnings are still expected to be 18% to 19% of sales. For fiscal 2024, we now expect industrial sales growth to be 13% to 15% and segment earnings to be 17% to 18% of segment sales. At the Woodward level, the adjusted effective tax rate is now expected to be approximately 20%. We expect adjusted free cash flow to now be between $325 million and $375 million.
Capital expenditures are still expected to be approximately $100 million. Adjusted earnings per share is now expected to be between $5.70 and $6 based on approximately 62 million fully diluted weighted average shares outstanding. This concludes our comments on the business and results for the second quarter 2024. Operator, we are now ready to open the call to questions.
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