Tom Gendron - Chairman, President and Chief Executive Officer Bob Weber - Chief Financial Officer.

Sheila Kahyaoglu - Jefferies Tyler Hojo - Sidoti & Company Julie Yates - Credit Suisse Pete Skibitski - Drexel Hamilton William Bremer - Maxim Group J.B. Groh - D.A. Davidson Michael Ciarmoli - KeyBanc Capital Markets Steve Levenson - Stifel.

Good day, ladies and gentlemen and welcome to your Woodward’s Second Quarter 2014 Earnings Call. At this time all participants will be in a listen-only mode. But later there will be a chance to ask questions and instructions will be given at that time. (Operator Instructions) And as a reminder today’s conference is being recorded.

And now I would like to turn it over to your first host, Bob Weber..

Thank you, operator. I’d like to welcome all of you to Woodward’s second quarter of fiscal year 2014 earnings call*. In today’s call, *Tom will comment on our markets and related *strategies and I will discuss financial results* as outlined in our earnings release. At the end of our presentation we will take questions.

Those who have not seen today’s earnings release you can find it on our website at woodward.com. We’ve 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 through May 6, 2014.

The phone number for the audio replay is on press release announcing this call and will be repeated by the operator at the end of the call. In addition a replay of this call will be accessible on our website for 14 days. Before we begin, I would like to refer to and highlight our cautionary statement as shown on Slide 3.

As always, elements of this presentation are forward-looking or based on our outlook and assumptions for the global economy and our businesses more specifically. Those elements can and do frequently change. Please consider our comments in light of the risks and uncertainties surrounding those elements.

We also direct your attention to the reconciliations of certain non-U.S. GAAP measures included in today’s slide presentation and our earnings release and related schedules. Management uses these non-U.S. GAAP measures in monitoring and evaluating the ongoing performance of Woodward and each business segment.

Turning to the quarter, net sales for the second quarter of fiscal 2014 were $482 million compared to $486 million in the second quarter of last year. Earnings per share were up 8% to $0.66 for the second quarter of 2014 compared to $0.61 for the second quarter of last year.

EBIT for the second quarter of 2014 was $63 million compared to $57 million for the second quarter of the prior year, an increase of 10%. Free cash flow for the first half of 2014 was $56 million compared to $46 million for the first half of 2013 with operating cash flow increasing approximately $30 million.

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

Thank you, Bob and welcome to those joining us today. Our quarter was encouraging as many of our markets are showing signs of recovery from depressed levels over the last several quarters and operational improvements contributed to stronger earnings. Our defense markets remain weak but we expect improvement in the second half of the fiscal year.

Now more specifically on aerospace. Commercial aerospace both OEM and aftermarket remain solid on deliveries, backlog and passenger miles driven by the demand for more efficient aircraft and an improving economy. One particular bright spot is the regional jet market where we have seen growing strength over the last four quarters.

This is primarily due to aging aircraft and introductions of new platforms. The commercial rotorcraft market is benefiting from the expansion of the oil and gas industry for both new and existing platforms.

While defense OEM and aftermarket was soft in the first half we saw a significant improvement in aftermarket this quarter from an unusually low first quarter. In addition we believe order volumes and contracts and process support our full year expectation to approximately a 10% sales decline from last year.

Next generation aircraft engine and airframe platforms would drive significant growth for Woodward in the coming years and we remain focused on program execution to meet milestones and deliverables. Turning to energy, aeroderivative gas turbine sales remain solid as a result of strong demand from power generation and compression markets.

Heavy frame gas turbines are showing signs of recovery that support improved sales for the second half. The demand for compressed natural gas systems for buses and trucks continues to be solid although government incentive issues mainly in China have caused some volatility this quarter.

Power generation demand in both large gas engine applications and smaller diesel gensets continue to strengthen as global economies recover and demand for distributed power increases. Our large engine fuel systems activity also benefited from increased shipbuilding as marine markets are showing signs of recovery on improved economic activity.

Wind turbine activity improved from a depressed prior year. We also received the new multi-year contract for converters in Brazil. In summary, we delivered increased earnings on flat sales as a result of continued emphasis on improved operating performance.

We see substantial and exciting growth ahead of us with the upcoming launch of new aircraft platforms, expansion of natural gas usage and continued global economic improvement. We believe the investments we’re making today is supporting this growth will continue to enhance shareholder value. Now let me turn back to Bob for the financials..

Thank you, Tom. As you heard Tom summarize the quarter pretty well so I’ll go straight into the segment results. Aerospace segment earnings continued to reflect lower defense sales and significant investments with respect to new product launches.

Narrow-body prototype hardware deliveries were up this quarter and as we’ve said in the past will be a source of volatility going forward. Aerospace segment earnings recovered from the first quarter and as a percent of sales were relatively flat compared to the prior year at a little over 15%.

Segments earnings were favorably impacted by operational improvements and cost control initiatives offset by the impact of reduced sales volumes and increased prototype deliveries. We believe second half segment earnings will improve sequentially with anticipated increased overall sales volumes.

In particular we expect improved defense sales volume, energy segment earnings as a percent of sales were 14.4% compared to 11.3% in the same quarter of the prior year. Segments earnings reflected the impact of operational improvements and improved wind turbine converter sales.

This quarter reflects continuing trend of improved earnings performance across our energy segment. We believe this second half will show continued progress. At the Woodward level gross margin percent for the second quarter of 2014 was 29.5% compared with 28.3% for the second quarter of 2013.

Gross margin percent increased primarily due to operational improvements in our energy segment. Research and development costs were $36 million for the second quarter 2014 compared to $34 million for the second quarter of 2013.

As a percentage of sales research and development was 7.4% in the second quarter of 2014 compared to 7% in the second quarter of 2013. We will continue to see quarterly variability primarily due to the timing of achieving development milestones.

Selling, general and administrative expenses were $35 million or 7.3% of net sales for the second quarter of 2014 compared to $37 million or 7.6% of net sales in the second quarter of 2013 primarily due to cost control initiatives. The effective tax rate for the second quarter of 2014 was 21.1% compared to 15.7% in the second quarter of 2013.

The tax rate for both quarters included favorable adjustments related to prior year’s tax matters which had a similar impact on both periods. The tax rate volatility that incurred in this quarter was anticipated in our outlook and our full year tax rate expectation remains unchanged at approximately 28%. Looking at the balance sheet and cash flows.

We generated $125 million of cash flow from operations for the first half of 2014 compared to $93 million for the same period of the prior year primarily as a result of improved working capital. Free cash flow for the first half of 2014 was $56 million compared to $46 million for the same period of the prior year.

Capital expenditures were $69 million in the first half of 2014 compared to $47 million for the same period of the prior year reflecting growth and spending related to our capacity expansion projects.

For the full year we continue to anticipate capital expenditures to be approximately $220 million subject to the inherent variability of large scale construction projects. Also in this first half we repurchased $100 million of Woodward’s stock under our $200 million board authorization. Lastly our outlook remains unchanged.

We continue to expect our fiscal 2014 sales to be between $1.95 and – $1.95 billion and $2.05 billion and fiscal 2014 earnings per share to be between $2.10 and $2.30 per share. This concludes our comments on the business and results for the second quarter of fiscal 2014. Operator, we are now ready to open the call to questions..

Okay. Ladies and gentlemen we’ll now begin our Q&A portion of today’s call. (Operator Instructions) Okay. So I do show numerous questions coming into our queue. And we’ll take our first question from Sheila Kahyaoglu from Jefferies..

Thank you very much. Good afternoon..

Hi, Sheila..

Hi, Sheila..

Just wanted to callout aerospace margins again, they were very good considering just the sales drop you had in the quarter and that was similar to the Q1 drop.

Can you perhaps discuss the cost cutting initiatives that you have in place and how sustainable they are and also maybe discuss the impact of defense and how should we be thinking about it throughout 2014?.

Yes, I think Sheila on the cost reduction we’ve been containing costs, we had good mix and I really look at the first quarter was more of anomaly than a trend. I think we’re back where we really believe our margin should be and that we’ll enhance them going forward in the second half as sales increase.

What we’re looking at overall for defense we talked about earlier that we believe defense is going to be in the flat minus plus minus 5% to 10% and I think we last quarter kind of talked about plus minus 10.

We’re really looking second half when we get sales in because we’re seeing an increase these quarters in bookings coming in on the defense side that would be for the full year would be down about 10%. So we’re seeing some recovery there..

Hey I guess this leads me to my next question in terms of the magnitude that would be was pretty large this quarter and it seems like things improve in the second half both from a top-line and operational perspective.

Is there any reason why that’s been just the EPS guidance for the year?.

Well the guidance is a range and we believe we’re still be in the range and that we still have volatility in terms of – in terms of our programs and milestones, in terms of (entry) costs and also we’re looking at potential volatility still in some of our markets and we want to ensure that we get the defense.

So we think the guidance is good and historically our second half is always higher in the first half. And we believe that last quarter and we’re kind of hold of that and we think we’re solid in the range..

That’s great.

And then just to clarity so both operationally margins should improve in the second half of both segments?.

We believe they will..

Okay. Thank you very much..

Thank you..

Thank you..

Thank you. And our next question is coming from Tyler Hojo from Sidoti & Company. One moment Tyler and your line is now open..

Yes, hi, good evening. I guess just in regards to the military in the quarter.

Could you give us an actual growth rate for 2Q?.

For Q2, we were down from the prior year in mid-teens kind of range ish and up slightly sequentially from a very depressed first quarter. So we’re seeing a little bit of a trend backup which is giving us some support for that second half..

Yes, just to add on to Bob’s comment. We – if you remember from the last quarter we said we saw quite a bit of defense sales being held up with the sequester discussion and other uncertainty. And we’re starting to see those orders coming through as we anticipated.

We just were off to a slow start and I think the market kind of froze there for a little bit and now we’re seeing it come in the order books filling in. So that’s how we’re confident in the second half that defense will recover..

Okay.

Is it safe to assume that the book to bill just in terms of the defense product portfolio was north of one in the quarter?.

Yes. It would be safe to say it was definitely positive. I think the other thing we called out earlier was a lot of contracts that will free up in the third and fourth quarter. So there are systemic issues there because of the sequester concerns that Tom mentioned that will free up in the second half..

Got it.

And the sequential improvement in military, would you say that was more predicated on aftermarket which gave you the improved mix on a sequential comparison basis?.

I think when you look at the improvement we had an improved commercial aftermarket in the second quarter..

Okay..

I think that combined with cost focus and other improvement in the commercial OEM side all combined to get us back then we got to look at as we got back to where we should be in the aerospace margins..

Right.

But commercial aftermarket was only up I think 3% year-on-year correct?.

That’s correct..

Correct..

Okay, alright. Fair enough. And then the other question I had was just on the commentary in your presentation around CNG bus being a positive but volatile. And I'm assuming that’s because of the new energy policy that’s in place in China that went into effect last year.

But is that indeed the case and I guess how is the volatility impacting you from that?.

Well, with the volatility over freight incentives is really on the price of natural gas versus the price of diesel fuel and that range moves, it’s somewhat set by the government in China. And that price volatility then drives volatility and demand and also volatility in the OEM supply chain. And so that’s what we’re referring to.

And so it moves through that period and we still anticipate some more volatility go in the second half of the year..

Okay. Would you – if memory serves I mean these CNG buses have pretty good margins.

Do you expect this to be a headwind or a tailwind for you in FY ‘14?.

Overall closer to neutral in terms of sales..

Okay, got it. Alright, great. Well I’ll jump back in the queue. I appreciate it..

Thanks..

Thanks..

Okay. Thank you. And our next question comes from Julie Yates from Woodward (sic) Credit Suisse. Please go ahead, Julie..

Good evening..

Good evening, Julie..

Hi, Julie..

Just back on commercial aftermarket 3% on relatively easy comp seems light relative to what other suppliers have been reporting. What and I think comps get a little bit tougher in Q3.

Any comments there and what are you expecting for the full year in commercial aftermarket?.

Well we see commercial aftermarket trending up in the second half of the year, but quarterly variability does occur on that Julie but we – year-over-year we’re seeing sequentially moving up as we go into the second half here..

Okay.

And then are there any dynamics in the second half that we should be thinking about related to incentive comp or R&D?.

Well Julie incentive comp is part of our cost structure and depending on how – if we perform better there is always additional incentive comp tied to better performance.

R&D we have – as you know we have a lot under development and there is quarter-by-quarter fluctuations and we were in the period right now of a lot of prototype deliveries and that may vary from quarter-to-quarter.

So overall we see it closer to flat but there will be – but there could be some variability in there just on timing and as programs evolve. So there is always a little bit of – we’re trying to give a little bit of word of caution on prototype deliveries as we go – as we’re entering into flight testing and like on the big commercial programs..

Okay. And then just on – lastly on SG&A it looks like it came in as a percentage of sales the lightest it ever had.

In history that company is that just cost control?.

We’ve been – yes, given that sales as we started off the year we’ve been tied on cost control and I think that’s what you’ve seen come through..

Okay. Thanks..

Thank you..

Thank you. Our next question comes from Pete Skibitski from Drexel Hamilton..

Hi, nice quarter guys..

Thank you..

Hey just on not moving up the bottom end of the guidance range, is that concern over CNG or is it concern over R&D prototype timing, is it incentive comp, is there any one or two things you would point to, to not doing that?.

You hit quite a few that we would put in that category. There is a variety of them. We still are watching carefully that the order book and making sure sales come in and we believe that our – from the beginning of the year we believe that was good guidance and we’re going to make that guidance. At this point we still think it’s solid..

Got it, got it.

And just one follow-up, Tom, when should we start seeing an aerospace kind of your initial ramp on the 320neo?.

We’ll start moving up in 2015..

Got it. Okay..

Yes..

Great. Thanks very much guys..

Thank you..

Thank you. And our next question comes from William Bremer from Maxim Group..

Nice quarter gentlemen..

Hi Bill, thanks..

Hi Bill..

Let’s go to the operating margins on aerospace.

Looking out to the third quarter, do we expect these margins to now that we’re starting to see more of the projects break loose, margins sequentially higher or do we fall back into sort of what we did last year?.

No, we do anticipate that we’ll continue to see sequential improvement as we go forward. The larger sales volumes in the third and fourth quarter will contribute to that..

Okay..

Hopefully defense will come back as we’ve been talking about and seems starting to trend up and that will contribute..

Okay.

And then going into the energy side, did the weather have any impact on overall sales for the quarter?.

I wouldn’t be able to attribute to that, Bill..

Okay..

If there was we wouldn’t be able to pull that out..

Okay.

Any activity on the pipelines?.

We had a gas compression and we called out in the prepared remarks is improving. And so we’re seeing pipeline activity and a lot of that is tied to the aeroderivative, turbines also driving compressors and so yes we’ve seen that across the gas value stream..

Okay.

And the stock buyback do you believe that you complete the remaining this year?.

It’s – we had the authorization, it’s three-year authorization so we’re continuing to be looking at it, but we’re not calling out whether or not we’ll complete it this year..

Okay, gentlemen, thank you..

Thank you..

Thank you. And our next question comes from J.B. Groh from D.A. Davidson..

Hey, guys. Thanks for taking my call and I had one left here.

On the energy margins, the incrementals were really strong, is that a result of mix or cost cutting or what’s driving that there and I guess I will ask the same question, the sustainability of that for the balance of the year?.

I think our energy business we’ve been highlighting our lean manufacturing journey. We are seeing good productivity coming through and on our energy side we are getting the results of the operational improvements, the margin improvements and the leverage on sales even though the sales have increased a slight, it does provide benefit to us.

So as we move forward and I think if you recall we’re on our path to get to our targeted energy margins which we had highlighted before. So I think you’d see it continued over the next couple of years continued margin enhancement in that segment..

Okay, great. Thanks. That’s all I had..

Okay. Thank you..

Michael..

Hello..

Yes, hello. Our next question comes from Michael Ciarmoli [KeyBanc Capital Markets]. Michael, your line is open..

Great. Thanks. Nice quarter guys. Thanks for taking my question..

Thanks, Michael..

Bob, you talked about the cost containment and I was wondering that the cash flow, free cash flow was especially strong. Can you give us a sense you mentioned some improvements in working capital.

Should we think that those improvements and actions you’ve taken, is that going to be sustainable, should we expect sort of a shift here in your free cash flow generation?.

You can tell from our expectation of $220 million for the full year. We’ve got a lot on our plate for the second half..

Sure..

Whether or not – whether and etcetera will allow us to spend all that if we were to do that obviously the free cash flow would come down considerably from where we’re at. But at this point probably staying on this path there is more likely then degrading significantly.

So we believe that between improved working capital management and probably a little bit later on the overall spend that we should be in pretty good shape in the free cash flow..

Can you just elaborate on the working capital management, what sort of areas, was it inventory, was it purchasing? If you can give us some kind of clarity on what exactly, what measures you guys took there?.

We have two main areas of focus both inventories and receivables or probably two – I should add payables in there as well, but predominantly receivables and inventory management.

And Tom mentioned our lean journey then we’re seeing a lot of improvement related to inventory management associated with that and then sometimes just overall timing of sales can help you out on the receivable side. So we continue to believe it will contribute..

Got it. And then just on the - within aerospace, within the kind of larger commercial transport side on the OE. Can you give us a sense of -- you mentioned you’re seeing* strength on the regional jet, strength on the rotorcraft.

What kind of revenue growth are you seeing within that OE maybe split between some of the newer platforms like 87 versus legacy? And you did mention you’ve got a lot of prototype revenues flowing through, are those or prototype deliveries.

Are those a meaningful contributor to revenues right now at this point?.

Well I’ll answer the last one first. Prototype, lot of these programs we fund the prototypes with Woodward R&D dollars and so it’s actually a headwind..

Okay. Got it..

On the rotorcraft and regional particularly like regional was in at real trough and so we’re really seeing it just coming off the trough. So when we’re calling it out it just we’re pleased to see it coming off very bottom of the market, rotorcraft was down and starting to improve. So those are positive to us.

We even seen hours and usage on business jets going up and so we anticipate that over time that those jet markets will recover. We’ve got new and growing content on these platforms. So it’s all contributing. And as you saw we don’t have huge revenue growth yet but we’re seeing improvements coming in the second half and moving into 2015.

So we believe that will all contribute to the revenue side that can positively impact margins as we move over the next couple of years..

Got it. And then there have been a couple questions on the guidance range.

The 777X is that something that you guys are probably spending already but is that something that could ramp up? Do you see that ramping up this year or is that more of a fiscal 2015 event for you guys in terms of maybe R&D or just really getting the selection process kind of whittled down here?.

Yes. What’s been our approach to our business we’ve been working on the technologies that we will be proposing on the 777X for several years now. And so that R&D has been our total R&D expenditures. So today we’re actively working both the airframe and the engine side..

Okay..

But right at this moment it’s in the RFP phase and so we’re actively bidding on that program, obviously a tremendous program and we’re going to try our best to secure improved content. So that’s in the work, but that’s already been built and has been in our R&D numbers for the last couple of years..

Perfect. Alright, great. Thanks for taking my question. Nice quarter guys..

Thanks..

Thank you..

Thank you. And our next question comes from Steve Levenson from Stifel. Please go ahead, Steve..

Thanks. Good afternoon everybody..

Hi, Steve..

Just in relationship to the prototypes again and that it’s creating a headwind for you now.

Are these pretty much finished designs or do you anticipate changes that result from the flight testing?.

Well in the type we produce being controlled systems. Generally, we always get changes during flight testing, it’s just part of the natural evolution of the development of an aircraft. So that’s all built into our plan, built into our outlook.

So it’s anticipated we program management for changes and so yes that will happen I am sure of it and it is we have it covered..

It’s already provided for, okay. That’s helpful. Thanks.

And second how do you see the actual delivery and lead times for a lot of these products for leaping your turbofan and do you have to build inventory?, is there much of an investment in working capital required?.

Yes, but I really anticipate that working capital increase to be more late 2015, 2016 timeframe. It’s not a 2014 issue..

Got it. Okay. Thanks very much..

Thank you..

Thank you..

Thank you sir. And our next question comes from Pete Skibitski from Drexel Hamilton..

Yes guys just a couple of follow-ups.

Can you tell us was incentive comp a headwind or a tailwind this quarter for margin rates? And then can you just update us on what your expectation is for wind for the year, I might have missed that?.

Incentive comp this quarter largely flat with the prior year so not a lot of impact either way tailwind or headwind. And in wind we’re seeing the past that we called out early in the year maybe slightly over that in terms of sales growth and so we’re on our realignment path there..

Yes. And on the wind side just kind of remind we really thought last year that second, third quarter, particularly the third quarter was the trough and we’re confident that truly was the trough and we’re recovering from that trough. So that’s a positive for that, that product line for us..

So it should be up in the full year?.

Yes it will..

Got it. Thank you..

Yes..

Okay, thank you. And Mr. Gendron, there are no further questions at this time. I will now turn the conference back to you..

Okay. Well, Bob and I appreciate the questions and we look forward to talking to you guys everybody over the following quarter and next third quarter’s conference call. So thanks for joining us again today. Bye..

Okay. Ladies and gentlemen that concludes our conference call today. If you would like to listen to a rebroadcast of this conference call, it would be available today at 7:30 P.M. Eastern Daylight time, by dialing 1 (888) 266-2081 for a U.S. call or 1 (703) 925-2533 for a non- U.S. call and by entering the access code 1635544.

A rebroadcast will also be available at the company’s website at www.woodward.com for 14 days. We thank you for your participation on today’s conference call and ask that you please disconnect your lines..