WWD - NASDAQ

Ladies and gentlemen, thank you for standing by. Welcome to the Woodward, Inc. Fourth Quarter and 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 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 Charles P. Blankenship, Chairman and Chief Executive Officer, William F. Lacey, Chief Financial Officer, and Daniel Provaznik, Director of Investor Relations. I would now like to turn the call over to Daniel Provaznik.

We would like to welcome all of you to Woodward's Fourth Quarter Fiscal Year 2025 Earnings Call. In today's call, Charles P. Blankenship will comment on our strategies and related markets, William F. Lacey 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 have included some presentation materials to go along with today's call that are also accessible on our website. Please note that based on changes in market dynamics, the company has refined its industrial end market presentation to better align certain sales within power generation, transportation, and oil and gas. Accordingly, sales for the quarters and years ended September 30, 2025, and 2024 have been reclassified for comparability. The reclassification had no impact on total industrial or the consolidated financial results. 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 the slide 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 the risks we identify in our filings with the SEC. These statements are made as of today, and we do not intend to update except as required by law. In addition, we are 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. We believe this additional financial information will help in understanding our results. And now I'll turn the call over to Charles P. Blankenship.

Thank you, Daniel. 2025 was another remarkable year for Woodward. Our team continues to make significant progress motivated by our purpose to design and deliver energy control systems that our partners count on to power a clean future. Our members' dedication to serving our customers and meeting our commitments to all stakeholders drove record performance in a number of areas. Our annual revenue exceeded $3.5 billion for the first time, which was the result of strong performance in both business segments. Aerospace sales increased 14% to record levels with margin expansion of 290 basis points. Industrial delivered healthy sales growth of approximately 10% excluding China, and core industrial margin expansion of 110 basis points. As a result, we delivered all-time high adjusted earnings per share up nearly 13% compared to the prior year. We achieved these results through a keen focus on our strategy, guided by our values, including integrity, respect, and accountability, and showing up as humble yet driven industry leaders as we continue to improve how Woodward serves customers. Next, I'd like to highlight some notable achievements that created value from last year driven by our pillars of growth, operational excellence, and innovation. Starting with growth, our aerospace team delivered strong growth in defense OEM as predicted, and rose to the occasion to deliver on higher than expected commercial services demand. Commercial aircraft delivery rates were lower than originally planned, including impacts of destocking of some Woodward components and systems. In commercial services, our team successfully captured volume growth and pricing opportunities. We experienced more legacy engine MRO volume than planned, coupled with the expected increase in LEAP and GTF demand, which is rising to levels of significant contribution to overall commercial services revenue and earnings. We expect LEAP and GTF repair revenue to surpass legacy repair revenue in late calendar 2026 or early 2027. For this comparison, I'm speaking specifically to the repair activity and excluding spare LRU sales associated with fleet spares provisioning. As these sales can be lumpy over short periods of time, but generally correlate with total aircraft delivered over the long term. For example, this past quarter, we received more orders for spare end items than we anticipated, with trade and tariff uncertainty contributing to the order surge. Our Industrial segment delivered double-digit growth in oil and gas and power generation, and high single-digit growth in marine transportation. Notably, our industrial services portfolio ranging from component MRO to power plant controls upgrade projects achieved substantial growth contributing to top-line sales and improved mix. Overall, our strong performance in the fourth quarter and full year 2025 reflects the strength of our strategy and our team's ability to execute. We have increased content on growing platforms and growing markets. We believe we are well-positioned for future success. Over the past year, we achieved several key milestones supporting our long-term growth strategy. We completed a strategic transaction to add capability and pedigree to our electromechanical actuation business unit. The acquisition included state-of-the-art horizontal stabilizer trim actuator products on Business Jet, regional, and wide-body commercial aircraft including the Airbus A350. This represents our first direct supply contract to Airbus. Integration of the acquired people and products is progressing on plan to capture the full value of the transaction. We won a competitive selection to design and deliver A350 wing spoiler actuators further increasing our Airbus business portfolio and A350 shipset content. This organic growth project proves our position on a very successful widebody program. As well as prepares us for the next single-aisle opportunity by demonstrating our technology, design, and industrialization capabilities. This win, coupled with our recent acquisition of electromechanical actuation capability, including the A350 HSTA, will raise our total A350 shipset value to approximately $550,000 once we start shipping the wing spoiler actuators. Currently scheduled for late calendar 2028. To that end, we broke ground on our Spartanburg, South Carolina facility construction project in November. This facility is intended to be another showcase advanced manufacturing building on our experience with our Rock Cut campus, highly automated and vertically integrated. We will produce the A350 spoiler plus additional aerospace products at this facility. Within industrial, our Gladney expansion is ahead of schedule and on track to become operational by mid-2026. This expansion will provide increased capacity to meet the growing demand for data center backup power, with enhanced levels of automation, improved flow, and higher inventory turns. To support our growth, we're making increased strategic investments in our company with robust returns for projects that increase capacity, and improve productivity with a specific focus on automation. Turning to operational excellence, we continue to make steady progress. We are focused on improving the fundamentals and I expect our teams to pick up the pace to improve flow and unlock more productivity in this coming year. Everything starts with safety at Woodward. We continue to roll out our human and organizational performance program to reduce injury risks and increase levels of protection. We are on track to have HOP in place at all of our sites this calendar year. We're also investing in immersive training for our team leads, and first-level supervisors. We are starting to see the benefits as they apply what they've learned, solving problems within cycle time, rebalancing work to optimize labor and create flow, and coaching their teams more effectively. I'm excited by our progress so far. We're also making strides in stabilizing our supply chain. Although we are still experiencing some supplier performance shortfalls, Woodward has made progress in optimizing our supplier network while helping our strategic suppliers improve their own quality and delivery when required. Industry-wide efforts to stabilize demand signals are benefiting our planning and delivery performance. I'm pleased to see our investments in automation paying off by reducing our demand for labor. We're also realizing the expected benefits in safety, quality, delivery, and cost as we refine our project execution and rebalance value streams. Our automation focus is on jobs with high turnover, repetitive or ergonomically challenged tasks, and high applied force requirements. Our workforce is embracing these projects and understands the benefit in their daily work. We will continue to invest in automation in 2026 and beyond. Innovation is alive and well at Woodward, and we made prudent investments in technology development for new military programs, the next single-aisle, alternative fuels, automation, and services delivery. We continue partnering with our customers to shape how our technology solutions can elevate the value of their next-generation products. As we look ahead, our priorities for 2026 are centered on strong execution, including capturing continued growth in our markets, driving operational excellence, and meeting our customers' evolving expectations. In aerospace, we are prepared for increased OEM orders as the aircraft manufacturers stabilize and increase production rates and as defense customers continue to signal strong demand. In commercial services, we are prepared for MRO growth as legacy aircraft continue to fly longer and more LEAP and GTF engines enter their maintenance cycles. We do expect somewhat muted top-line growth in commercial services compared to 2025 which benefited from outsized demand for spare end items and some advanced buying. In industrial, we are ready to meet sustained demand across our core markets of transportation, power generation, and oil and gas, and continue to expand our capabilities and global presence in industrial regional repair, overhaul, and upgrade offerings. Our guidance for 2026 reflects our continued confidence in the growth trajectory across our segments, and our continued operational discipline. We are on track to deliver the three-year sales and earnings targets we set at December 2023 Investor Day. We do expect a modest adjustment to our cumulative free cash flow target as we make the strategic decision to allocate more capital toward organic high-return, growth investments, including automation at multiple sites and the Spartanburg facility. 2025 was a year of record performance and significant progress, as we executed on our strategy, and delivered on the commitments we've made to shareholders. We intend to build on the strong momentum in 2026 and beyond. And now I'll turn it over to William F. Lacey to share more detail around our financial performance in 2025 and our outlook for 2026.

Ready, Chip? I'm ready. Thank you, Chip, and good evening, 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. Net sales for 2025 totaled $995 million, an increase of 16%. Net sales for 2025 were $3.6 billion, an increase of 7% and the highest on record. Earnings per share for 2025 were $2.23 compared to $1.36. Adjusted earnings per share for 2025 were $2.09 compared to $1.41. For 2025, earnings per share were $7.19 compared to $6.01. And adjusted earnings per share were $6.89 compared to $6.11. At the segment level, our aerospace segment delivered double-digit sales growth and substantial earnings expansion for both the fourth quarter and full year driven by strong performance in commercial services, and defense OEM. Fourth quarter aerospace segment sales were $661 million, up 20%. Commercial services sales increased 40%, while commercial OEM sales were essentially flat. Defense OEM sales increased 27% and defense services were up 8%. Aerospace segment earnings for the fourth quarter were $162 million, with margins expanding 520 basis points to 24.4% of segment sales. The improvement was driven by strong price realization and higher volume partially offset by strategic investments in our aerospace manufacturing capabilities as well as inflation. For the full year, the aerospace segment delivered record annual sales and earnings. Segment sales were $2.3 billion, up 14%. Commercial services sales increased 29% reflecting both favorable pricing and higher volume supported by sustained high utilization of legacy aircraft and improved throughput by the MRO shops. LEAP and GTF activity also continues to increase further contributing to commercial services growth. I do want to note that toward the end of the fiscal year, while underlying commercial services demand remained strong, we believe a portion of the growth was influenced by certain customers making advanced purchases to take advantage of a window of trade stability. Defense OEM sales increased 38%, primarily driven by strong demand for smart defense. In addition, new JDAM pricing took effect during the fourth quarter, which contributed to the strong year-end performance. Aerospace segment sales growth was partially offset by a 6% decrease in commercial OEM sales. The decrease was largely due to the Boeing stoppage earlier in the year and our discipline and measured production ramp that followed along with inventory normalization by airframers that occurred in the second half of the year. Moving into 2026, we expect these headwinds to ease as airframe production rates increase. Defense services sales were down 2%. As a reminder, while the timing of this business can be lumpy, demand signals remain healthy. Aerospace earnings for 2025 were $507 million or 21.9% of segment sales compared to $385 million or 19% of segment sales. The 290 basis point improvement reflects solid price realization and higher sales volumes. Partially offset by strategic investments in manufacturing capabilities, unfavorable mix, and inflation. We're making these strategic investments to enable future growth by expanding manufacturing engineers, to support our ongoing efforts to increase automation. In addition, we have been increasing and developing our production frontline and team leaders to improve supervision, training, and problem-solving to drive productivity, improve cycle times, and increase output. Turning to industrial. As a reminder, my comments reflect the reclassification of certain sales between the end markets that Daniel Provaznik mentioned earlier. Industrial segment sales for the fourth quarter were $334 million, up 11% from $302 million. Our core industrial sales, which excluded the impact of China on highway, grew 15% in the quarter. Transportation sales increased 15% and oil and gas sales grew 13%. While power generation grew only 6% due to the impact of the divestiture of our combustion business in the second quarter of this year which had averaged approximately $15 million of quarterly sales. Excluding the impact of the divestiture, power generation sales grew in the mid-teens on a percentage basis. Industrial segment earnings for the fourth quarter were $49 million or 14.6% of segment sales. Compared to $38 million or 12.6% of segment sales. Within our core industrial business, margins expanded 330 basis points to 15.2% of core industrial sales, driven by price realization partially offset by expected inflation and planned strategic investments in manufacturing capabilities. For 2025, industrial segment sales were $1.25 billion compared to $1.3 billion, a decrease of 3%. Excluding the impact of China on highway sales, core industrial sales increased 10% to $1.2 billion compared to $1.1 billion for the prior year. Marine transportation grew 9% driven by both price and volume. As elevated ship build rates support strong OEM engine demand and lay the groundwork for future services opportunities. Oil and gas sales grew by 14% as volume growth was driven by greater midstream and downstream gas investment. Power generation, excluding the impact from the divestiture of our combustion business, grew 22% driven by our operational improvements that increased output to meet growing demand in various gas turbine systems value stream. Industrial segment earnings for 2025 were $183 million or 14.6% of segment sales compared to $230 million or 17.7% of segment sales. This decrease was largely a result of lower sales volume and unfavorable mix. Both related to reduced China on highway demand partially offset by price realization. Core industrial margins for 2025 were 15.2% of segment sales, an increase of 110 basis points. This expansion reflects strong operational execution, price realization across the portfolio, and our ability to drive incremental margins from higher volumes. Partly offset by expected inflation and planned manufacturing investments further improve productivity. Non-segment expenses were $41 million for 2025, compared to $31 million. Adjusted non-segment expenses were $35 million in the fourth quarter compared to $27 million. Non-segment expenses were $126 million in 2025, compared to $120 million. Adjusted non-segment expenses were $133 million in 2025, compared to $112 million. At the consolidated Woodward level, net cash provided by operating activities for fiscal 2025 was $471 million compared to $439 million. Capital expenditures were $131 million for fiscal 2025 compared to $96 million. The increase in capital expenditure was driven by ongoing investment in automation and production to improve operations and prepare for growth. In addition, in 2025, we purchased the land for our new facility in Spartanburg, South Carolina. And this project is rapidly moving forward. Free cash flow was $340 million for fiscal 2025 compared to $343 million. The decline in free cash flow was primarily due to higher capital expenditures partially offset by higher earnings. As of September 30, 2025, debt leverage was one times EBITDA. During fiscal 2025, as anticipated, we returned over $238 million to stockholders, including $107.73 million in share repurchases and $65 million in dividends. In November 2025, we successfully completed our previous three-year $600 million share repurchase authorization. More than one year ahead of schedule. Reflecting our ongoing commitment to return cash to shareholders. We recently announced a new three-year share repurchase program authorizing the repurchase of up to $1.8 billion of common stock. This significant expansion reflects the board's confidence in Woodward's strategy, long-term growth outlook, and ability to consistently generate strong free cash flow. In fiscal year 2026, our guidance assumes returning between $650 million to $700 million to shareholders in the form of dividends and share repurchases. From a capital allocation perspective, we remain committed to a disciplined and balanced approach that fully leverages our strong balance sheet to drive growth. We are investing organically to advance automation and complete our new Spartanburg South Carolina facility while also actively evaluating selective returns-driven M&A opportunities. Our strong balance sheet positions us to act decisively when the right opportunities arise. Now turning to our 2026 guidance. As we look ahead, we remain focused on our value drivers: growth, operational excellence, and innovation. Our fiscal 2026 guidance assumes a sustained strong demand environment supporting continued sales growth and further margin expansion. At the consolidated level, Woodward net sales growth is expected to be between 7-12%. Aerospace sales growth is expected to be between 9-15% and industrial sales are expected to grow 5% to 9%. In aerospace, we expect sales growth across the segment weighted towards OEM driven by a return to growth in commercial OEM and continued strength in defense OEM. Commercial services growth is expected to moderate as 2025 included high levels of spare LRU purchases as well as the advanced purchases I mentioned earlier. Defense services are expected to show modest growth. Industrial sales are anticipated to grow across all of our primary markets. We expect power generation growth to be muted in the first half due to the divestiture of our combustion product line. We anticipate China on highway sales in 2026 to be up approximately $60 million in line with 2025. Woodward adjusted earnings per share are expected to be between $7.50 and $8.00 based on approximately 61 million fully diluted weighted average shares outstanding. And an expected effective tax rate of approximately 22%. Aerospace segment earnings are expected to be 22% to 23% of segment sales, and industrial segment earnings are expected to be 14.5% to 15.5% of segment sales. Adjusted free cash flow is expected to be between $300 million and $350 million. Capital expenditures are expected to be approximately $290 million, which includes continued investment in automation, and approximately $130 million dedicated to the build-out of our new production facility in Spartanburg, South Carolina. The increased spend also includes investment in MRO readiness, and the start of a multiyear ERP upgrade project. Some additional items to help you with your modeling. We expect year-over-year price realization of approximately 5%. Non-segment expenses should be approximately 3.5% of sales. Consistent with historical trends, we anticipate performance to strengthen across the quarters of fiscal year 2026. Our fiscal 2026 guidance positions us to meet or exceed the long-term sales and earnings commitments for 2024 through 2026, which were established at our last Investor Day. Free cash flow is expected to be below our three-year target, reflecting higher strategic investments to support sustained long-term growth, including our new Spartanburg facility. We plan to introduce our next three-year outlook at our Investor Day in December 2026. This concludes our comments on the business and results for the fourth quarter and fiscal year 2025. Operator, we are now ready to open the call to questions.

Thank you. And the question and answer session will begin at this time. If you are using a speakerphone, please pick up the handset before pressing any numbers. Should you have a question, please press star 1 on your push-button phone. Should you wish to withdraw your question, press star 1 a second time. To be able to take as many questions as possible, we ask that you please limit yourself to one question and one follow-up. Your questions will be taken in the order they are received. Please stand by for your first question. And our first question comes from the line of Scott Stephen Mikus with Melius Research. Your line is open.

Chip and Bill, very nice results.

Howdy, Scott. Thank you.

Chip, I had a question kind of on the aftermarket dynamics, particularly in engines. So the Leap MRO network is much more internal relative to the CFM56 network. So when you ship a fuel metering unit, or any component on the LEAP engine, just how are you sure whether it's going to the aftermarket or OE channel? Are you being paid a different price versus both? Just given that GE and CFM more broadly is trying to route as many component sales through the Leap MRO premier network.

Thanks for the question, Scott. We are sure about the PO status that comes to us, whether it's an install or a spare end item in terms of what customer is ordering it. So we have clear line of sight what type of unit that is.

Okay. And then given the investments that you're making in automation, I was at the Rock Cut campus, it was very impressive there. Is there anything structurally that you see that would potentially prevent your LEAP or GTF aftermarket margins to where they couldn't potentially reach CFM56 or V2500 margin levels?

Well, Scott, there's nothing structurally in the way of that. It's kind of up to us to understand, you know, what the customers are seeing in the field with the units and developing the right repairs and overhaul procedures. And we're learning we've learned a lot with the first units that have come back, whether it be the pump or SCU or FMU on LEAP or it's the GTF fuel nozzles or actuation. So we're pretty confident that we have the right design for repairability and service solutions for our customers that will achieve the right profitability. Thanks, Scott.

And our next question comes from the line of Scott Deuschle with Deutsche Bank. Your line is open.

Hi, good evening. Bill, what growth are you assuming for legacy narrow-body engine aftermarket in 2026?

Scott, for said legacy narrow body? For Yeah. Like, think, narrow body engines.

Yes. Yeah. So, we obviously, we saw we saw a really good growth in '25. And based off of that, we would expect sort of single-digit growth rates coming through in 2026. On the legacy narrow body. We expect to see some price, obviously come through and volume at these levels will be tough, but the MRO shops surprised us last year, so we'll see if they get some more productivity. But I would say single digit.

Okay. And then, Bill, does the EPS guide include any benefit of the recent share repurchase authorization increase? Or do you not really assume? That authorization or repurchases, excuse me, the guide?

Thank you. Yes. We do expect put that into our into the guide.

Okay. And then last question, Chip. Can you give us any sense as to how much your current power generation revenue is tied to Caterpillar? And I'd be curious if you could talk a little bit about the growth outlook you expect from that customer in the years ahead.

Well, we've been receiving pretty healthy growth from all of our power gen customers. And Bill and Daniel talked about a little bit of reclass that went on, and it was really by examining where all of our customers and products were being used. Some traditional oil and gas customers have been involved in more power gen type applications, maybe not utility grade but behind the meter type applications. And folks like Caterpillar and INEO and Baker Hughes are all kind of playing in that segment of the market. So it's a very interesting aspect of the power gen growth opportunity that we're capitalizing on. As far as carving out just a single customer like Caterpillar, we don't do that. But I think you can be satisfied that as they grow, we grow. We're on some of their gas engines with SOGAV and valves and actuation, and we're on some of their liquid fuel engines with actuation and governor products. So we've got a good staple of products distributed on their products, and it varies by application.

Thank you. And our next question comes from the line of Sheila Kahyaoglu with Jefferies. Your line is open.

Hi guys. This is Kyle on for Sheila. Thanks for taking my question and great quarter. I hope that kind of extend question here on the commercial aftermarket because I think you said muted next year. You gave a the prepared remarks are pretty helpful. I think you said LEAP GTF by the end of calendar year '26, the same or larger than legacy. So when I take that in connection with the single-digit comment you just gave to Scott, I mean, I guess it implies that maybe the pull forward that you saw in this quarter and prior quarters is significantly larger than maybe I expected. So maybe if you can just kinda walk through those puts and takes to round out that comment. Are you thinking about LEAP GTF growth next year? In light of what the OEMs are saying? And the magnitude of the pull forward that you saw this year and whether you're sure that's not repeating or whether there's potential that was actually restocking. Thanks.

Yes. Thanks for the question. We really do believe there will be strong repair growth for LEAP and GTF. We believe, like Bill was saying, there'll be either flat to a little bit of repair growth on V2500 CFM-five. But the big variable is this lumpy order behavior that we saw last quarter on spare end items. A pretty substantial demand there. And those are quite high-priced individual items to be ordered compared to a repair. So when you think about the total top line, it has an outsized effect on that top line as well as the earnings. So we don't forecast that happening again. There could be additional activity. We don't rule that out, and we're prepared to capture that if it shows up. But I don't think it's prudent to forecast that or put that in our plan because we don't have any line of sight to that at this time.

And if I could just follow-up on the price comment, Bill. Said 5% next year. I assume that's more weighted to aerospace and increasingly weighted to aftermarket. So maybe any additional color by segment and by subsegment within that? Thanks.

Yeah. Correct. At the total Woodward level 5%, in the comments we talked about, the JDAM price increase in the fourth quarter, including Bob. We'll see that flow through the '26. And so with that, and some catalog growth, we will Arrow will outpace industrial slightly, but we still also will see good price result from our industrial team as well. Thanks a lot for your question.

And our next question comes from the line of Noah Poponak with Goldman Sachs. Your line is open.

Hey guys. Thanks for the question. Can you quantify in absolute dollars whatever you're deeming to have been lumpy or pulled forward in the aerospace aftermarket in 2025 revenue?

Yeah. Noah, it's as you can imagine, it's hard to quantify. Because, you know, the customer isn't telling us exactly kind of their thought. But here, I'll give you a few numbers. That will be in the footnotes of the 10-K. Back where we lay out by segment, sales by region. And you'll see that, from 2024 to 2025, sales grew $50 million. So some part of that $50 million is normal growth. Then some part of that is a part of this advanced purchases. It's just hard to quantify exactly.

Okay. That's helpful. And can you quantify where LEAP and GTF aftermarket came in for the year 2025 versus 2024?

So the LEAP and GTF are gaining on the legacy, let's put it that way. And like I said before, they're kind of in the same

Okay. Great. That's super helpful. And then just on the Aerospace segment margin, the guidance requires a pretty significant slowdown in the incrementals. I guess in the fourth quarter, you're saying the incremental benefits from the items we just discussed and therefore it's sort of a leveling out over the two years or is there more to it?

Yeah. So the no. I think your question is about the incremental coming down from about 42 and a half for aero and coming down in 26. And it's a few things. It's our OEM mix growing on the aero side which is a mix down. And then yes, the and so that's the main driver is just the amount of OEM that we expect to come through in 2026.

And just a reminder about that is a good thing. So we're creating the installed base to get the services revenue and earnings on later.

Okay. Thank you. I appreciate it.

Thanks, Noah.

And our next question comes from the line of Christopher Glynn with Oppenheimer. Your line is open.

Thank you. Good afternoon.

Good afternoon.

So, yes, curious on the defense side. A specific and a general question. You know, where are you with guided weapons clarity longer term, how those programs and what orders are flowing through? Should we anticipate that growth is kinda leveling off on a sequential basis? Or the volume still ramping? I know you have a big price aspect to growth in that category.

So, you know, our guided weapons programs plural, JDAM, small diameter BOM, STB, and AIM9X are all kind of having a little bit different behavior. JDAM is up substantially. But we feel like that will remain level for a good while. And then we don't have any orders for the other two, but we have indications that customers are asking us to do capacity studies and work with supply chain on capacity studies. So some of these things are leading indicators that these other product lines might experience some growth opportunities, but we don't have anything specific Chris, on that right now.

Okay. Great. Thanks. And you mentioned global capacity investment for the industrial aftermarket. I'm guessing that's oriented towards the marine side, but just wondering if we could drill into that investment element there.

Yeah. So we've been doing a little bit of flag planting here and there on MRO shops. So when you think about a power plant and all of the scope of supply that we could provide to aeroderivative or heavy-duty frame power plant installations. Just like an aircraft engine, they undergo maintenance cycles, and we're finding that have the ability to grow our service content with these customers when we're a little closer to their region. So we've done some of that in the prior couple of years. And we anticipate doing a little bit more of it just to try and closer to the customers. And grow the opportunity to service our fuel metering valves and other types of scope of supply like that that are on our customers' gas turbines. And as well reaching out with the opportunity to do some repair in reciprocating engines.

Great. Thanks for that.

You're welcome.

And our next question comes from the line of Gavin Parsons with UBS. Your line is open.

Hey, thank you. Good evening.

Good evening. Hey, Gavin.

Guys, what are you assuming for OE destocking? And it would be helpful if you could that out kind of by airframe and engine.

Thanks for the question, Gavin. It's a little difficult to parse that out for you. That detail of a way. A customer standpoint. But we feel like, broadly speaking, somewhere in our second quarter sort of time period, if airframe customers and engine customers hit the rates and pull like they've forecast for us. We could be destocked by sometime in that second quarter towards the end of our first half fiscal year.

Okay. That's helpful. And then on CapEx going forward, should we kind of assume that normalizes once you finish kind of the A350 build-out or by the end of the decade are we starting to look at build-out for, maybe a new single aisle?

Yeah. For right now, Gavin, we'll know, we'll say that the Spartanburg investment is causing that peak. Know, we're gonna continue to kinda look through '27, '28, '29, and we'll give you a clear view in December. Of what's out there. We're looking understanding our next single aisle investments. But right now, the Spartanburg is sort of what we see there on the near horizon.

Got it. Thank you.

Welcome.

And our next question comes from the line of Michael Ciarmoli with Truist Securities. Your line is open.

Hey, good evening, Nice results. Thanks for taking my questions. Maybe just to stay on.

How are you?

Just to stay on Gavin's question there, the CapEx for Spartanburg can you support or will that have enough capacity to support programs beyond the A350? I mean, there kind of does it build out contemplate next-gen single aisle?

Thanks for the question. The investment in Spartanburg, that facility, has additional capacity over and above the A350 for us to put select product lines in there that makes sense and are synergistic. But if we're betting on a successful campaign for next single aisle scope, that facility would not by itself be able to support NSA volumes. We have bought enough land there to build a sister facility for NSA support. So we are thinking ahead. Where it makes sense on small amounts of investment dollars, but we're not putting any big investment dollars on NSA capacity. We'll have to really take a look at what that horizon and life cycle looks like from the design phase through the build and flight test phase and lay that out in comparison to our and what's going on with legacy programs before we decide how much additional capacity we'd need. So that's a thought exercise. Even know, like Bill was saying, we'll share more at Investor Day in December. But some of that NSA thought exercise will mature as we understand from the Airbuses and Boeings of the world about what that time frame looks like.

Okay. Fair. And then just back to Noah's question, actually. You were talking about incrementals, but I guess just absolute margins looking at the low end of the range, really no margin expansion. You're obviously hitting and exceeding the targets. And you talked about the OEM mix which makes sense. But as you're seeing this ramp on LEAP and GTF, is there margin dilution there on services? I mean, you have to get over some learning curves? I mean, I'm assuming straight spare sales would be highly accretive on those platforms. But is there anything else dilutive with the LEAP in the GTF ramp up there?

Yeah. I'll jump in and Chip maybe cover me if I miss a part. But, no. No. The LEAP GTF service margins are good. It really is, the impact of the overall OE and how that impacts things. Obviously, on the low end of the range, it contemplates some other headwinds. But to the point about LEAP GTF, margins are good. Again, OE mix is the primary driver of the rate expansion that you're seeing in our guide.

I'll just follow-up and say that we intend to expand margins, and that's what you see a guide there that allows for some headwinds to get in the way of intent. But we've got plans in place and programs and the automation benefit that we're planning some realization of for 2020 we intend to get productivity.

Perfect. Thanks, guys.

Jump back in the queue.

You bet.

And our next question comes from the line of Gautam Khanna with TD Cowen. Your line is open.

Yes, good afternoon guys.

Afternoon, Gautam. Hey, Gautam.

Just to elaborate on the first question, which we've written about before, which is this LTSA versus spot aftermarket dynamic on LEAP versus CFM. Is it do you guys are I'm just curious, like on CFM, 56, when you sell into a spare part into the GE network, I presume that's a lower price than what you would sell into if it's an MRO or airline outside the network. Does that same logic apply for LEAP when it when you're selling a spare part to a direct user, like an airline, versus when you sell it through the GE internal MRO network? And if that's true, why wouldn't there be structural differences in profitability between those two platforms in the aftermarket over time.

Well, the reason why there's no structural difference is because there's really no structural difference to the contracting Gautam. And when we sell spare end items, it can be to an airline. It can be to an MRO shop that has a variety of people under different agreements. We have some asset management contracts with some of the bigger MROs just like us CFM or GE or CEFRON network. So the whole landscape is similar between the previous generation and this generation. So when you think about repair, it's also the same thing. So whether it's a spare end item, spare parts, or a repair, we have fairly similar contracting principles in the LEAP ecosystem that we do to the CFM dash five. And so I think there's nothing to nothing really there to explore further except that we have a lot more LRUs to take care of.

Gotcha. Thank you. And a follow-up on the mix dynamic within the aftermarket. I know you talked about repairs and I think that's distinct from spares. So I just want to get a sense is the overall aftermarket profitability next year a little bit softer than it was in '20 than it will it was in '25? Just based on kind of more repair, less spares? Or is there any nuance there that you're trying to convey?

Really, no nuance to convey there. We have a good blended service earnings profile for 2026. We're pretty happy with that. We'll see if the spare end item, if more comes through than we forecast, it did last year, I mean, it's really hard to tell. We'll have some upside if that happens.

Thank you very much.

You're welcome.

And our final question comes from the line of Louis Raffetto with Wolfe Research. Your line is open.

Hey, good evening, guys.

Hey, Louis. Hey, Louis.

How should we think about the return of capital to shareholders? Is it gonna be balanced across the year? Or is there any reason to think it will be skewed one way or the other?

Yeah. Louis, our plan is to spread it out evenly through the year. We'll see how things go, but the plan is to stay in the market throughout the year.

Alright. Thank you. And then I guess on FSG margins, last several years, the first quarter has been substantially below the rest of the year. Is that something we should sort of expect again here in fiscal 2026?

So I'm sorry, Louis, the margins in Q1 we missed your first words. Margins. Sorry, FSG margins in Q1 have been below sort of the second quarter, third quarter, fourth quarter?

Lose the plan? I'm not quite sure we'd say FSU. I'm sorry. I mean, aerospace. Apologize.

Oh, okay. Yeah. It's a Florida state. Yeah. Yeah. I'm getting my

Yeah. Correct. That is the normal trend. In aerospace and in industrial that Q1 is usually our lowest margin quarter and it sort of grows sequentially throughout the rest of the year.

And then just last one on tax rate. You've had some benefit from option exercises the last few years. I assume with the 22% rate, not expecting anything like that, but certainly could have that benefit depending on how that plays out.

That's exactly right, Louis. With the prices that we've seen, over the last couple of years, and as we estimate out, we don't foresee that outsized tax benefit from option exercises. So that is what is behind that 22% effective tax rate.

Great. Appreciate it.

Okay. Thanks, Louis.

And that concludes our question and answer session. Mr. Blankenship, I will now turn the conference back to you.

Thanks, everyone, for joining today's call. We hope you all have a wonderful Thanksgiving holiday.