Woodward Earnings Call INSIGHTS: Narrow Body Content, Increasing Pressure

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

Narrow Body Content

Tyler Hojo – Sidoti & Company: Just first wanted to ask you, just in regards to the new content wins that you announced today and some of the other ones that I think you alluded to in the prepared comments. Where do we now stand, can you give us an update just in regards to narrow body content and what some of the future opportunities are out there?

Thomas A. Gendron – Chairman and CEO: Tyler we’re making I think making good progress on the program wins. On the engine side, we’re getting closed to, on the narrow body those two programs, getting close to locking-in in their designs, so there is not going to be too much more content released on those programs, so we’re feeling pretty good with our position we’ve secured there. On the airframe side, this is probably another 12 to 14 months before all the potential opportunities are locked-in, and that means the designs are frozen and all the awards are made. So, we still see more opportunities out there on the airframe side, engine is quickly coming to a close.

Tyler Hojo – Sidoti & Company: Now one of the things that you guys had been alluding to in the past was kind of next-gen content was 3X what current generation content is. Where is that now, is that 4X? Can you give us an idea of what you want incrementally speaking?

Thomas A. Gendron – Chairman and CEO: Right now we’re really on track if you look at – say the average on the narrow bodies, on the current generation to the new generation. We’re on track for the three times. Some of the – I think as we previously discussed on other calls, we have been working on these the PurePower complements for over a year. It was just nailing down the contract. So, as we were talking to you in the past we knew we were going to secure those. It just was – we don’t announce anything until we have a solid contract in hand and we just achieved that last – on Friday afternoon.

Tyler Hojo – Sidoti & Company: So, what’s been announced kind of gets you to where you thought you would be?

Thomas A. Gendron – Chairman and CEO: That’s correct and we still see some more opportunities out there, but we’re competitively bidding those. So, we don’t think we’re done, but we do feel good that we’ve achieved everything we told you we were going to do up to this point.

Tyler Hojo – Sidoti & Company: That sounds good. The other question I wanted to ask you, just in light of what you’re seeing in both the Aerospace and the Energy business today, just kind of wondering, where you think you stand in regards to both the five-year sales CAGR for both segments that you provided and the margin targets. I’m most interested in the margin target for Aerospace, just given some of the hiccups that we see in this quarter?

Thomas A. Gendron – Chairman and CEO: Yeah, we’re still confident in those margin targets, and we did have a disruption in our progress this quarter. I believe we’ll be back on those in the fourth quarter moving into next year. So, we still believe we’re on track for those, and the disruption this quarter, we anticipate it’s more of a blip than a trend.

Increasing Pressure

Julie Yates Stewart – Credit Suisse: So, thinking about what was originally expected before last Monday, you guys essentially missed the quarter by about $0.20, and then when we take the tax rate into effect for the year, you guided down more than $0.35 at the midpoint. So, there seems to be some lingering pressure as the year progresses, can you guys quantify that and (less so) how we think about that in the fourth quarter?

Robert F. Weber, Jr. – VC, CFO and Treasurer: Yeah, quantification is difficult, but at least we can give you kind of general direction. I mean first was the impact of the sales volumes that we missed. That was predominantly due to the ERP system related issues that I mentioned. So those are behind us. We have kind of talked about some delays in programs that we believe will be back in, in the fourth quarter, but there is a lot of uncertainty on some of these things. So, first and foremost was the sales volume issues. And then we get into the issues related with the increased investment, and the two parts of that are really related to investment in the programs themselves. So, we’ve talked about the fact that there has been additional complexity as the programs are further defined and refined, combinations of functionality and different components and systems and so on. And then lastly the production process improvements we’ve been making as we get prepared to ramp up for the narrowbody programs. So there is a lot that has to go one. A number of years in advance are getting ready for those programs, and we’ve talked a lot about lean initiatives and so on that are going on in the factory, and when you upset a factory in those fashions of moving lines around, redefining sales, et cetera, it creates a certain amount of slowness with respect to meeting some of the orders as you go through that. So, quantifying is difficult, but those are the largest items in there.

Julie Yates Stewart – Credit Suisse: So, if there are further delays on programs in Q4, is there incremental risk to the new guidance?

Robert F. Weber, Jr. – VC, CFO and Treasurer: There would be. We believe we have covered all of that risk in our guidance. We are pretty confident, I would say, at this point that the delays that we had will materialize in the fourth quarter. Having said that, just always like to kind of cover myself from the standpoint, things can happen and frequently do, but we do believe that we have pretty good visibility in the fourth quarter.

Julie Yates Stewart – Credit Suisse: And that’s both on the Aerospace and the Energy side?

Robert F. Weber, Jr. – VC, CFO and Treasurer: Yes, I believe so. The Energy side we’ve talked a little bit about. Industrial gas is kind of – the growth has not materialized to the extent that we anticipated. We are seeing growth, but I think you’ve seen a lot of announcements that the long-term growth is still there, the timing is still open.