WWD - NASDAQ

Thank you for standing by. Welcome to the Woodward, Inc. Second Quarter Fiscal Year 2025 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 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.

Thank you, operator. We'd like to welcome all of you to Woodward's second quarter fiscal year 2025 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 our 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've included some presentation materials to go along with today's call that are also accessible on our website and a webcast of this call will be available on our website for one year. All references to years in this call are references to the company's fiscal year unless otherwise stated. I would like to highlight our cautionary statement as shown on Slide 2 of the presentation materials. As always, elements of this presentation are forward-looking, including our guidance and are 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 risks related to potential changes in the macroeconomic environment and risks related to tariffs, retaliatory trade actions in addition to 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, we're providing certain non-US GAAP financial measures. We direct your attention to reconciliations of non-US GAAP financial measures, which are included in today's slide presentation and our earnings release. We believe this additional financial information will help in understanding our results. Now, I'll turn the call over to Chip.

Thank you, Dan. Good evening, everyone, and thank you for joining us. We are pleased to report strong performance in the second quarter with results in line with our expectations. Woodward's net sales were up 6% year-over-year and adjusted earnings per share were up 4%, reflecting steady growth, despite headwinds from China on-highway volume and mix. Excluding China on-highway, our company posted revenue up 12% and operating earnings up 22%. These results are a testament to the outstanding efforts of our Woodward team members worldwide, even as we operate in a challenging and uncertain environment. As we enter the second half of the year, we remain on a steady growth trajectory, with our lean transformation continuing to pay dividends. Our aerospace plants continue to gain ground. During the quarter, we achieved new highs with significant month-over-month sales growth at some of our facilities. For example, the combination of our two plants in Rockford, Loves Park and Rock Cut achieved record sales to OE and services customers combined, facilitated by accelerated onboarding of new frontline members and model line transformations reaching new levels of performance. Additionally, our

Thank you, Chip and good evening to everyone. As a reminder, all references to years are references to the company's fiscal year unless otherwise stated, and all comparisons are year-over-year unless otherwise stated. As Chip highlighted earlier, we had a strong second quarter in line with our expectations. Net sales for the second quarter of 2025 were $884 million, an increase of 6%. Earnings per share for the second quarter of 2025 were $1.78 compared to $1.56. Adjusted earnings per share were $1.69 compared to $1.62. Net cash provided by operating activities for the first half of 2025 was $112 million compared to $144 million. Capital expenditures were $52 million for the first half compared to $56 million. Free cash flow was $60 million for the first half of 2025 in-line with our expectations compared to $88 million. The decrease in free cash flow was primarily due to an increase in working capital caused by a slow start to the quarter. As Chip mentioned, we exited the second quarter with strong sales, which will be collected in the third quarter. As of March 31st 2025, debt leverage was 1.5 times EBITDA. Regarding capital allocation, our strategy is unchanged. We continue to prioritize investing in organic growth, returning cash to stockholders and pursuing strategic M&A. During the second quarter, we returned over $61 million to stockholders, including $44 million in share repurchases and $17 million in dividends. Through the first half of 2025, we've returned $111 million to stockholders, including $79 million in share repurchases and $31 million in dividends. We are on track to achieve our goal of returning approximately $215 million to stockholders in 2025, $150 million of share repurchases and $65 million in dividends. We will continue to manage this with flexibility as conditions evolve. We have $130 million remaining on our $600 million stock repurchase authorization. Returning capital to stockholders is a key component of our capital allocation strategy, reflecting our confidence in the business and our ability to generate strong cash flow. Turning to Aerospace. Aerospace segment sales for the second quarter of 2025 were $562 million compared to $498 million, an increase of 13%. Defense OEM sales were strong in the quarter, up 52%, primarily due to increased demand for our smart defense programs. Commercial aftermarket sales were up 23% in the quarter due to both price and higher volume. As Chip mentioned, we anticipate that commercial aftermarket sales growth will moderate in the second half of the year. Commercial OEM sales were down 9%, primarily due to a measured production ramp to customers' demand following the Boeing work stoppage. We anticipate that commercial OEM sales will return to growth in the second half. Defense aftermarket sales were down 8%. Earnings in the second quarter for the Aerospace segment were the highest on record at $125 million. Margins expanded 240 basis points over the previous year to 22.2% of segment sales. The increase in segment earnings was primarily a result of price realization and higher volume, partially offset by inflation and unfavorable mix. Turning to Industrial. Industrial segment sales for the second quarter of 2025 were $322 million compared to $338 million, a decrease of 5%. Transportation was down 18% due to the expected declining of China on-highway sales. China on-highway sales were $21 million in the second quarter, a $45 million decrease from the prior year. Our core industrial sales, which exclude China on-highway were up a healthy 11% with Oil & Gas up 21%, Marine Transportation up 13% and Power-Gen up 4%. Industrial segment earnings for the second quarter of 2025 were $46 million or 14.3% of segment sales compared to $65 million or 19.3% of segment sales. Industrial segment earnings decreased primarily due to lower China on-highway volumes and unfavorable mix, partially offset by price realization. Margins for our core industrial business were 14.8% in the second quarter, in line with our expectations. We continue to expect core industrial margins of 14% to 15% of sales for the year. Non-segment expenses were $27 million for the second quarter of 2025 compared to $33 million. Adjusted non-segment expenses were $34 million for the second quarter of 2025 compared to $29 million. Turning to our 2025 guidance. We are raising the low end of our sales and adjusted EPS guidance while reaffirming the other elements of our full year outlook. This updated guidance reflects our strong year-to-date performance and the expected impact of announced tariffs. Our revised guidance does not incorporate potential effects from further escalation of announced tariff levels, significant changes in customer demand or a recession in the US or globally. For fiscal year 2025, we now expect consolidated sales of $3.375 billion to $3.5 billion, which includes aerospace sales growth between 8% and 13% and a decrease in industrial sales from 7% to 9%. We now expect adjusted EPS between $5.95 and $6.25. All other aspects of our guidance remain unchanged. This concludes our comments on the business and results for the second quarter of fiscal year 2025. Operator, we are now ready to open the call to questions.

Thank you. The question-and-answer session will begin at this time. [Operator Instructions] Our first question comes from Scott Deuschle with Deutsche Bank. Please state your question.

Hey, good evening. Nice results.

Hey, Scott. Thanks.

Chip, can you further decompose the commercial aftermarket growth in the quarter a bit further in terms of the platforms or customer geographies that drove that strength?

It was -- Scott, really it was across the board growth there. If the jump that we saw late in the quarter were some drop in spare parts orders from MRO facilities. So we had some quick ship opportunities for spare parts to search the MRO network. The rest of the ways we serve customers, whether it's spare end items or our own repair and overhaul was fairly strong, but I think that -- something that contributed to that 23% was the spare parts at the end.

Okay. Was that mostly shipments to China?

No, in fact, China is looking a little bit slower there. I think moderating with their -- the quantities that they're purchasing, at least that's what we see in their activity with us.

Okay. And Chip, how far does the backlog run in marine transportation at this point. Just trying to get a sense for what your visibility looks like in that market if we see a reduction in global shipping and trade activity?

The OE is quite extended as you might imagine. It's out into the 2029 type ship build slot from an order standpoint right now. But as far as utilization of the fleet, it still has looked strong up to this point. But I would point out that extended trade tension between the US and China would see some of that drop-off and that's probably the biggest risk in marine aftermarket that we face right now. There have been some calls that you've seen in the news about the West Coast port activity may be getting to be softer. So these are the type of signals we're looking at.

Okay. Thank you.

You bet.

The next question comes from the line of Scott Mikus with Melius Research. Please state your question.

Good afternoon.

Good afternoon.

Chip, Bill, the past couple of years a larger portion of the earnings call and the Woodward story is kind of focused on the outlook for China on-highway natural gas truck market. It also created a lot of volatility in the financial results. Just given that Woodward is an aerospace company and the broader trade tensions between the US and China. Does it make sense to maybe find a different owner for that product line?

We're always examining our portfolio, Scott, and trying to decide exactly what makes sense for us and our shareholders and our customers going forward. So I don't have any comments at this time about any actions that we might consider. I can assure you we continue to look at the portfolio as we go forward. Like I've said in prior earnings calls, what we're focused on operationally is trying to make sure that we're in the best position to serve our customers there with the best technology. When that market is good, we generate a lot of cash and a lot of earnings and we want to be in a position to do that on an uptick. And right now, we're focused on managing through this downturn as efficiently as we can with them.

Okay. And then on the commercial OE side, when Hexcel reported, they noted some changes in planned shipset deliveries on the 787. In contrast, RTX said heat exchangers on that program are now where they need to be. But can you just give us color on what rate you were shipping on the 787 in this most recent quarter? And are you receiving orders from Boeing to support the production rate hike to seven per month later this year?

So we're in close contact with Boeing because we provide a number of chipset materials directly to them on certain programs. On the 787, largely we're supplying through GE on the GEnx powered 787. So we have a lot less direct visibility to our order book correlates to their build rate. But I can tell you that we are satisfying the GE order rate on the GEnx and the outlook looks good. I'm bullish on that program, getting to those kind of seven rates that you're talking about and where we have the capacity and the ability to deliver that.

All right. Thanks for taking the questions.

You bet. Thank you.

Your next question comes from the line of David Strauss with Barclays. Please state your question.

Thanks, good afternoon.

Good afternoon, David.

Chip, could you maybe touch on the aftermarket in terms of what's come through? I mean, I think going back to your initial guidance call for this year, you kind of downplayed the aftermarket growth you might see this year and it's obviously come through really strongly, particularly in Q2 when you had a really tough comp. Can you maybe just talk at a high level what's come through better than what you were anticipating?

Yes. David, I think you're right in that, our call was -- we thought it would get a little bit softer in 2Q with that tough compare. What came through a little bit ahead of our -- in addition to our forecast with these spare parts orders to satisfy MRO facilities that looks like potentially they're getting a better throughput and higher volume through their shops and thus had sort of a little bit of a short cycle demand on spare parts from us. And so that helped us have quite a good second quarter. Those kind of things don't often repeat. So I think, I'm going to like just move one quarter to the right on our prediction that it's going to be a little bit softer going forward with tough compares as well as probably some spare end items softness as you look at two factors for that. One, the China part of the equation, we're now thinking that there's going to be less LRU orders to support provisioning of those fleets as well as we'll probably see the US customers pull back a little bit on their order of LRU spare end items, because that's the easiest thing to defer and push to the right really when you think about it. If there's an engine in the shop and the LRUs are rather for repair, they're probably going to finish that activity. So if the spare end items and the China piece that I think we could see some softness in the second half plus the tough compare.

Got it. Thanks. And Bill, on currency, the weakening in the dollar that we've seen here, how could that impact you guys going forward given I think a decent footprint in Europe?

Yes. We have seen slightly higher fluctuation as we think about the translation piece, we obviously will get hit on the top line, but that gets offset down in the cost area. So we typically see that get balanced out and not hit us too much at the operating earnings level. And then there are some cash over in non -- outside the US that we have to watch the translation -- sorry, the transactional aspect of it. But again, it will not be a major factor on our results.

All right. Thanks very much.

You're welcome.

Our next question comes from Noah Poponak with Goldman Sachs. Please state your question.

Hey, everyone.

Good evening, Noah.

Bill, I'm surprised you left the Aerospace segment margin guidance unchanged. It looks like that would require closer to a 25% incremental in the back-half versus the over 40% you did in each of the first and second quarter. Can you talk about what drives the Aerospace segment margin in the second half?

Sure. Yes, we're really great and happy that we got over 40% incremental in the second quarter, Noah. As we look to the back half, we do expect defense OE to be a much greater share of the volume. So that will moderate the incremental that we saw in the second quarter. We've always stated that we like to see our incrementals around 30% to 35% and so we would expect that to moderate in the second half. Additionally, we talked about tariffs and it's not a major issue, but we are cautious in that it may impact us some. So we felt it was prudent, Noah, to keep that margin guide where it is currently.

Okay. What have you seen for LEAP aftermarket through the first half? And what are you expecting in the back half and into 2026?

So as I said in the remarks, we've been a few quarters in a row of seeing that volume double year-over-year. So, as we look at what our model was for the performance of the LEAP fleet, we're very pleased with the progress on that. So new so far and we feel like that trend will continue for a bit this year, the rest of this fiscal year for us. Of course, that curve may turn over a little bit as the compares get bigger because it's doubling off a fairly small base. But we feel like we're on track for the outlook that we gave at the Investor Day where in the 2027 to 2028 timeframe, we keep seeing the similar volumes of aftermarket activity from the LEAP GTF compared to the legacy narrowbody fleets.

Okay. And what was the unit -- just unit growth in the Aerospace segment in the quarter?

Yes. Noah, we saw good growth from both the price. Overall price was about 7% at the -- sorry, yes, 7% at the Woodward level. Aero's price was a little bit stronger than industrial price, but both contributed. And so, we did see good volume as aero delivered at 13%.

Okay, great. Thank you so much.

You’re welcome.

Our next question comes from Matthew Akers with Wells Fargo. Please state your question.

Yes. Hi, good afternoon guys. Thanks for the question. Chip, I think you had talked last quarter within aerospace, I think commercial OE versus aftermarket kind of similar growth for the year. Could you kind of update on where those stack-up or has one of those changed relative to the other for the year?

Yes. Thanks for that question because second quarter was a little bit out of the ordinary in terms of us seeing higher commercial aftermarket growth than we forecast and then OE being a bit down due to the way we responded to the Boeing return to work a challenge. So those two things made the second quarter look a little bit unusual. But I think for the fiscal year 2025, we're still going to be in about the same zone for OE and aftermarket growth in the commercial space. However, defense OE is -- we think that's going to continue to be a very strong growth for the second half.

Yes. Okay, thanks. And I may have missed this, but what's the latest full year China on-highway expectation? Has that changed at all?

Yes. We came out with around $40 million and with the Q2 performance being roughly $2 million more than we expected, we're moving it up to around $50 million.

Okay, great. Thank you.

You're welcome.

Your next question comes from Christopher Glynn with Oppenheimer. Please state your question.

Thank you. Good afternoon.

Good afternoon, Glynn.

Good afternoon. I had a question on Industrial. Oil & Gas was very strong, wondering if there are any onetime volume benefits or otherwise pull forward given -- across the Industrial segment, given even at the high end of the full year guide, you're running about $20 million a quarter lower than the second quarter. I realize China is about a $10 million diminution of the run rate.

I'll kick it off and maybe hand it over to Bill on the last part of your question. But as far as Oil & Gas goes, I think we've said this before, it's a bit lumpy for us because quite a bit of what we do in Oil & Gas is project related. And so it was a strong quarter. A lot of the delivery material that we provide to Oil & Gas is also power-gen related, whether it's powering pumping stations or it's part of power generation for a platform or for a LNG site. So the 21% is a big increase, but I think it moderates through the year and the fact is, like I said, quite lumpy.

Okay, that makes sense. And...

Christopher, I'm sorry. The second part of your question?

I think that covers it, Bill. I think China would be the other piece for the industrial segment bridging the two quarter -- second quarter absolute revenue versus the implied back half. If I could switch to the commercial aftermarket, I think that was really a nice spike in the quarter. So I think in the guidance, if I'm hearing everything correctly, probably looking at second half run rate is a little lower sequentially for the commercial aftermarket, but still up moderately year-over-year. Do I have that correct?

Yes, we still think it's -- yes, that's correct. We still think it's going to grow, but it's in the single-digit regime -- high single-digit regime versus the 20% that you saw in the second quarter.

Okay. And just a little bookkeeping, the corporate expense a little higher. We're still talking 3.3%, I think you cited last year -- last quarter for the full year?

Yes, Chris, we are still calling that level. We'll have slightly higher sales in the back half. And so, we do expect for us to hit that in the full year that we guided on earlier in the year.

Thanks. And if I could sneak one more in, I think pricing outperformed in the second quarter probably what you implied previously for the year. Is that just learning curve on value pricing toolkit across the organization?

Yes, we've had two solid quarters of pricing this year. And I think it is us continue to get a better understanding of our value pricing and we had some volumes come through in the right place that also helped to push up the price that we achieved.

Understood. Thanks, guys.

You're welcome.

Our next question comes from Michael Ciarmoli with Truist Securities. Please state your questions.

Hey, good evening, guys. Thanks for taking the questions. Chip, could we just dig into that? I just want to make sure I understand that Aero, the commercial OE and aftermarket. So aftermarket track into maybe high single-digits for that second half, that implies something like 14% to 15% growth. Did I hear you earlier say that OE and aftermarket should grow at the same rate? I mean those would be pretty heroic growth rates to get commercial OE up on par with the same growth as aftermarket?

No, I don't think they'll -- what I meant was that over the year, it will come back to this, what we said at the beginning of the year that we kind of -- we kind of gave an order of battle, if you will, in terms of how things would stack up with defense OE being the biggest growth.

Okay.

Followed by commercial aftermarket, followed by commercial OE. But I don't expect commercial OE to be down, which it was this quarter. Sorry about the confusion, but that's just sort of the work.

That's helpful. And then maybe just back to the incrementals. I mean, you did that 40% plus like Noah was talking about. I mean, you did that in the face of really strong OE. You're going to get the commercial OE ramping, which has never really been truly dilutive to your margins. Is it really just a function of aftermarket kind of normalizing in the second half that's giving you some pause on those high incrementals?

Again, on our commercial OE, we do make money, but to the 40% incremental in them is 240%. As we talked about, we look to have 30% to 35% in Aero. And so what happens in the second half is again, in Q2, we didn't have as much commercial OE, which help incrementals. We will have more commercial OE in the second half and we'll have greater defense OE. And that will translate into still really good incrementals in our 30% to 35%, but it will not sustain at 40% level.

Got it. That's fair. Perfect. Thanks, guys. I'll jump back in the queue.

Thank you. You're welcome.

Our next question comes from Sheila Kahyaoglu with Jefferies. Please state your questions. Sheila your line is open.

Sorry, good afternoon, guys. How are you?

Afternoon, Sheila. Good. Thank you.

Maybe just first half versus second half, $3 at essentially both midpoints when you look at the first half and the second half. How are you thinking about the tariff impact? I know you mentioned in the prepared remarks, localized production largely. How is that embedded into your guidance?

Yes. I'll start it off, Sheila and kick it over to Chip. But as we look at our tariff situation as Chip mentioned, our manufacturing strategy really does help to mitigate the overall tariff impact on Woodward. Having said that, we have taken an extensive view of the business and have a good handle of the flows that will cause us some challenges. And as we look at those flows for 2025 -- fiscal year 2025, we feel like we have $10 million to $15 million of pressure. Now that's before we put into action our strategies to mitigate those items. So based on that, we have baked it into our guidance that we updated here until as long as there is no escalation of those announced tariffs that we will deliver on the guide.

Got it. Okay. And if I could ask one on aerospace specifically, outside of aftermarket, defense OE growth was pretty phenomenal. What drove that 52% increase? And why is aftermarket and defense down?

So the increase is largely smart defense, but also good health and good growth in the rest of the programs too. So not taking anything away from them, but the large number shows up really due to smart defense and it's across the entire smart defense portfolio as well. So that's the defense OE story. On defense aftermarket, largely it can be a little bit lumpy in defense aftermarket, working with our customers, they tend to batch some of their inputs for overall based on how they run the fleet. So we don't see any difference in op tempo or anything fundamental that would drive defense aftermarket down. This quarter just looks like we are experiencing some delayed inputs. We don't really think that it will be that different the rest of this year with some of the logistics and friction in the system, if you will. So we're thinking that defense aftermarket might stay in that type of volume region for the rest of fiscal 2025.

Got it. Thank you.

Welcome.

Our next question comes from Spencer Breitzke with TD Cowen. Please state your question.

Hey, thank you. I was wondering if you could provide an update on JDAM and where we are with the higher pricing from the new contract rolling through as well as volumes? Thank you.

We are -- as we talked about, JDAM demand has been strong. Secondly, the supply chain has been pretty healthy. So we've been chipping on a pretty good clip here. If those things continue, we would expect to get through the older lots of JDAM and get to the higher price lots sometimes in Q4. Guess I answered that question.

Operator, can you move on to the next question?

Our next question comes from Louis Raffetto with Wolfe Research. Please state your question.

Hey, good evening, Chip, Bill.

Hi, Louis.

Hi, Louis.

Maybe just to go back to the corporate for a quick second. It was high, was there anything in there? I know we're adding back the -- I think what is like the industrial benefits. And so, I'm just curious, are the industrial -- is there a benefit running through the industrial segment and you're backing it out in corporate? And is there any sales impact from those sort of sales that you're doing?

No, Louis, we're not. Is the simple answer.

Okay, I know I think last quarter, you guys had -- last quarter you said you were backing out the product line sales benefits and I don't know if that's exactly what it was again this quarter?

Yes. So we did back out those benefits, in adjustment out last quarter and that doesn't repeat.

It's a onetime gain.

Is there a sales benefit running through somewhere as well?

No.

No, okay. No sales benefits and then you're just backing out the income.

So question is just on the non-segment?

Yes.

Yes. So again, on the Greenville, we adjusted that gain out -- sorry, we adjusted the sale of Greenville out this quarter, out of non-segment.

Okay. But I guess, is there a benefit in industrial from the gain and you're just adjusting it out of [indiscernible]?

No. We moved it out to non-segment and then we adjusted it out of non-segments. So Aero is clean, Industrial is clean.

And so what caused the step-up in non-segment? It's just a big number that we haven't really seen before.

Non-segment, some of it is the timing of us doing with our equity, our long-term incentive program, that gets done in the second quarter. Historically, the switch happened last year and from first quarter to second quarter, but other than that, that's it.

All right. No, that's helpful. Thank you, Bill. And then I guess, one more, I just want to make sure I heard you right. Was China Industrial $20 million in the second quarter or $29 million in the second quarter?

Yes. $21 million be exactly, to be exact $21 million.

All right, great. Thank you very much.

You're welcome.

Mr. Blankenship, there are no further questions at this time. I will turn the conference back to you.

We'd like to thank everyone for joining today's call.