Woodward Reports First Quarter Fiscal Year 2022 Results - Transcript Summary

Operator: Joining us today from the company are Mr. Tom Gendron, Chairman and Chief Executive Officer; Mr. Mark Hartman, Chief Financial Officer; and Mr. Dan Provaznik, Director of Investor Relations.

 

I would now like to turn the call over to Mr. Provaznik.

 

Dan Provaznik: Thank you, operator. We'd like to welcome all of you to Woodward's First Quarter Fiscal Year 2022 Earnings Call.

 

In today's call, Tom will comment on our markets and related strategies; and Mark will 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, on our website through February 14^th, 2022. 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 expected and potential effects of the ongoing COVID-19 pandemic. Those elements can and frequently change, 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-US GAAP financial measures. We direct your attention to the reconciliations of the non-US financial GAAP 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.

 

Turning to our results for the first quarter. Net sales for the first quarter of fiscal 2022 were $542 million, compared to $538 million for the prior year quarter, an increase of 1%. Net earnings were $30 million or $0.47 per share compared to $42 million or $0.64 per share.

 

Adjusted net earnings for the first quarter of fiscal 2022 were $36 million or $0.56 per share. Adjustments to earnings for the quarter included costs related to business development activities and a charge related to a non-recurring matter unrelated to the ongoing operations of the business. There were no adjustments to earnings in the prior fiscal year first quarter.

 

Net cash provided by operating activities for the first quarter of fiscal 2022 was $39 million compared to $147 million for the prior year. Free cash flow for the first quarter of fiscal 2022 was $26 million, compared to $139 million for the prior year. Adjusted free cash flow was $27 million.

 

Now, I'll turn the call over to Tom to comment further on our results, strategies and markets.

 

Tom Gendron: Thank you, Dan. Good afternoon, everyone. We continue to see positive signs of recovery across the business despite market volatility. Ongoing COVID-19-related disruptions, including global supply chain challenges, labor shortages and customer-initiated shipment delays permeated the industry and impacted our revenue in the quarter.

 

Although we expect an uneven market recovery throughout 2022, Woodward’s proven resiliency underscores our confidence and our continuing recovery and ability to deliver a solid year.

 

Moving to our markets. The commercial aerospace market continues to improve. We are pleased to see the Boeing 737 MAX recertification in China and expect overall build rates continue to ramp slowly throughout the year.

 

Commercial aftermarket recovery is being fueled by rising passenger traffic and utilization of commercial aircraft fleets that include significantly higher Woodward content. US domestic passenger traffic is nearly at pre-COVID levels, while international travel continues to improve, primarily as a result of the easing of travel restrictions between the US and Europe in November. Overall, defense markets remained stable. But as expected, demand for guided weapons is down and is anticipated to remain at lower levels for the foreseeable future.

 

Turning to our industrial market. In power generation, demand for gas turbines remained strong, driven primarily by growth in Asia, and the replacement of coal-powered plants. Aftermarket activity has been increasing and we continue to see strong demand for backup power for data centers.

 

In transportation, the global marine market continues to see increasing orders for new ships and higher utilization, driven primarily by a robust freight market, which will drive future aftermarket activity.

 

Demand for China natural gas trucks remains challenging, even though global natural gas prices have trended downward after peaking late last calendar year. The oil and gas market has improved with pricing above pre-2020 levels, driving increased levels of capital spending.

 

In summary, while we see a significant amount of uncertainty in our markets, we anticipate improvements as we progress through the fiscal year and we remain confident in our ability to deliver on our previously stated 2022 outlook.

 

As a reminder, for the full fiscal year 2022, we expect further recovery and improved profitability in our Aerospace business as OEM build rates increase and passenger traffic recovers despite the headwinds from softened guided weapon sales.

 

In our Industrial business, we anticipate increased demand for industrial gas turbines and related services, continued improvement in marine markets and stabilization of oil and gas prices, all of which should drive customer investment in this segment.

 

We will continue to navigate the challenges of this market recovery with a focus on operational excellence, delivering value to our shareholders and customers and positioning Woodward to capitalize on future market opportunities.

 

Now, I'll turn the call over to Mark to discuss the financials in detail.

 

Mark Hartman: Thanks, Tom. Net sales for the first quarter of fiscal 2022 were $542 million, an increase of 1% as compared to the prior year period. Sales for the quarter were negatively impacted by $70 million due to ongoing industry-wide COVID-19 related disruptions, including supply chain constraints, labor shortages and some customer initiated shipment delays.

 

Aerospace segment sales for the first quarter of fiscal 2022 were $336 million, an increase of 5% from the prior year quarter. Segment sales were negatively impacted by approximately $42 million of industry-wide COVID-19 related disruptions, which resulted in shipment delays for some orders.

 

Commercial OEM and aftermarket sales were up 38% and 31%, respectively, driven by continued recovery in both, domestic and international passenger traffic and increasing aircraft utilization.

 

Defense OEM sales were down 20% in the quarter, primarily due to lower sales of guided weapons. Defense aftermarket sales were down 18% compared to the prior year quarter, primarily due to supply chain disruptions.

 

Aerospace segment earnings for the first quarter of 2022 were $51 million or 15.2% of segment sales, compared to $46 million or 14.4% of segment sales for the first quarter of 2021. The increase in segment earnings was primarily a result of significantly higher commercial OEM and aftermarket sales volume.

 

Turning to Industrial. Industrial segment sales for the first quarter of fiscal 2020 were $205 million compared to $216 million in the prior year period, a decrease of 5%. Segment sales were negatively impacted by approximately $28 million of industry wide COVID-19 related disruptions as well as weakness in China national gas engines, partially offset by higher marine sales.

 

Industrial segment earnings for the first quarter of 2022 were $24 million or 11.5% of segment sales, compared to $33 million or 15.2% of segment sales in the prior year. Industrial segment earnings decreased primarily as a result of lower sales volume as well as product mix and net inflationary impacts.

 

Nonsegment expenses were $29 million for the first quarter of 2022, compared to nonsegment expenses of $23 million for the same period last year. Adjusted nonsegment expenses for the first quarter of 2022 were $21 million. There were no adjustments to nonsegment expenses for the first quarter of 2021.

 

Adjusted nonsegment expenses for the first quarter of 2022 excludes costs related to business development activities and charge associated with non-recurring matter unrelated to the ongoing operations of the business.

 

At the Woodward level, R&D for the first quarter of 2022 was $25 million or 4.7% of sales, compared to $32 million or 6.0% of sales for the prior year quarter.

 

SG&A for the first quarter of 2022 was $62 million, compared to $56 million for the prior year quarter. The effective tax rate was 19.7% for the first quarter of 2022 compared to 12.6% for the prior year quarter. The adjusted effective tax rate for the first quarter of 2022 was 20.6%.

 

Looking at cash flows. Net cash provided by operating activities for the first three months of fiscal year 2022 was $39 million, compared to $147 million for the prior year period. Capital expenditures were $13 million for the first quarter of 2022, compared to $7 million for the prior year quarter.

 

Free cash flow was $26 million for the first three months of fiscal 2022, compared to free cash flow of $139 million for the prior year period. Adjusted free cash flow was $27 million for the first three months of fiscal 2022. Adjustments to free cash flow for the quarter included payments related to business development activities and restructuring activities. There were no adjustments to free cash flow in the prior year first quarter. The decrease in free cash flow and adjusted free cash flow was primarily related to working capital increases to support this year's anticipated growth.

 

Leverage was 1.7 times EBITDA at the end of the first quarter. During the first quarter of fiscal 2022, $37 million was returned to stockholders in the form of $10 million of dividends and $27 million of repurchased shares under our board authorized share repurchase program. In addition, today, we announced a dividend of $0.19 per share, up from the prior quarter's dividend of $0.1625 per share, an increase of approximately 17%.

 

Further, today, we announced that our board of directors authorized a two-year stock repurchase program under which up to $800 million in stock may be purchased in the open market and private transactions. This authorization replaces the previously authorized stock repurchase program.

 

Our stock repurchase program is an important part of our balanced capital deployment strategy. Given our strong financial position and positive financial outlook, including our ability to generate robust cash flow, we remain committed to returning capital to stockholders via stock repurchases and cash dividends while concurrently investing in our business to support future growth.

 

Lastly, turning to our fiscal 2022 outlook. COVID-19 related disruptions persisted in the quarter, although improvement is anticipated in the remainder of fiscal year 2022. Net sales for the fiscal 2022 are expected to be between $2.45 billion and $2.65 billion.

 

Aerospace and Industrial sales growth percentages are each expected to be in the low-double digits to mid-teens. Aerospace segment earnings as a percent of segment net sales are expected to increase over last fiscal year by approximately 200 basis points to 300 basis points, primarily due to increased sales volume in both, commercial OEM and aftermarket, partially offset by lower guided weapon sales and the anticipated return of annual variable incentive compensation costs.

 

Industrial segment earnings as a percent of segment net sales are expected to be approximately flat to up 150 basis points over last fiscal year, primarily due to the increased sales volume, partially offset by the anticipated return of annual variable incentive compensation costs.

 

Growth and profitability in both segments could be negatively affected if COVID-19 and supply chain disruptions do not improve, or if the pace of inflation puts additional pressure on labor and material costs.

 

The adjusted effective tax rate is expected to be approximately 21%. Adjusted free cash flow is expected to be approximately $315 million, generating an adjusted free cash flow conversion rate of greater than 100%.

 

As the anticipated sales growth returns, we expect higher working capital requirements, primarily driven by accounts receivable. Also, capital expenditures are expected to increase over last fiscal year by approximately $30 million.

 

Adjusted earnings per share is expected to be between $3.55 and $3.95 based on approximately $66 million of fully diluted weighted average shares outstanding. The favorable impact of sales growth and productivity improvements in both segments are being partially offset by the expected return of annual variable compensation costs, inflationary pressures and a higher tax rate.

 

This concludes our comments on the business and the results for the first quarter of 2022. Operator, we are now ready to open the call to questions.

 

Q&A

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