Don Guzzardo - Director, Investor Relations and Treasury Tom Gendron - Chairman and Chief Executive Officer Bob Weber - Vice Chairman, Chief Financial Officer and Treasurer.

Sheila Kahyaoglu - Jefferies Gautam Khanna - Cowen & Company Robert Spingarn - Credit Suisse Pete Skibitski - Drexel Hamilton Michael Ciarmoli - KeyBanc William Bremer - Maxim Group Jim Foung - Gabelli & Company.

Thank you for standing by. Welcome to the Woodward Inc. Second Quarter Fiscal Year 2016 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 will be invited to participate in a question-and-answer session.

Joining us today from the company are Mr. Tom Gendron, Chairman and Chief Executive Officer; Mr. Bob Weber, Vice Chairman, Chief Financial Officer and Treasurer; and Mr. Don Guzzardo, Director of Investor Relations and Treasury. I would now like to turn the call over to Mr. Guzzardo..

Thank you, operator. We would like to welcome all of you to Woodward’s second quarter fiscal year 2016 earnings call. In today’s call, Tom will comment on our markets and related strategies and then Bob will 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 again included some presentation materials to go along with today’s call that are also accessible on our website. An audio replay of this call will be available by phone or on our website through May 3, 2016.

The phone number for the audio replay is on the press release announcing this call and will be repeated by the operator at the end of the call. 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 the earnings release and related schedules. Management uses these non-GAAP measures in monitoring and evaluating the ongoing performance of Woodward and each business segment. Turning to our results.

Net sales for the second quarter of 2016 were $479 million, a decrease of 3% compared to $493 million in the second quarter of 2015. Earnings per share were $0.65 for the second quarter of 2016 compared to $0.66 in the second quarter of 2015. EBIT for the second quarter of 2016 was $60 million compared to $63 million in the prior year second quarter.

Strong performance in our Aerospace segment was offset by continued weakness in our industrial segment. Free cash flow for the first half of 2016 including the $250 million of proceeds from the formation of the joint venture with GE was $262 million compared to $14 million in the prior year period.

Capital expenditures for the first half of 2016 were $99 million compared to $109 million in the prior year period. Now, I will turn the call over to Tom to comment further on our results, strategies and markets..

Thank you, Don and welcome to those joining us today. The fiscal year is progressing largely in line with our overall expectations despite ongoing market challenges. For the second quarter, our aerospace markets continued to be very healthy with particular strength in commercial aftermarket and defense.

In our industrial segment, while we have seen some additional sales deterioration as a result of economic headwinds and slower growth in China, we believe many of our markets are at or near the bottom of the cycle. Our second half is historically stronger for us and we expect this year to follow the same pattern.

Significant challenges remain, but we are still on track to deliver our full year guidance. Moving to our market segments in more detail starting with aerospace, commercial sales continue to benefit from strong capacity utilization, increased passenger travel and solid order book backlogs for next-generation aircraft.

As you know, several major new programs are nearing launch, including the A320neo and 737 MAX, which both have significantly expanded content for Woodward. And looking forward, we continue to pursue and secure additional content on the Boeing 777X and the A330neo.

Commercial aftermarket continues to be strong driven by repair and overhaul needs in general as well as a favorable shop visit cycle for the platforms we are on. As expected, the commercial rotorcraft and business jet markets remain soft, particularly in emerging markets as this segment is highly correlated to the oil and gas industry.

On the defense side, given the heightened level of global instability and favorable budget conditions, our defense sales have accelerated. We are on nearly all existing major defense platforms for fixed wing and rotorcraft as well as new programs such as the Joint Strike Fighter and KC-46 tanker.

We are also seeing increased demand for smart weapons that use our actuation systems. With no anticipated change in the geopolitical environment, we expect defense to remain solid for the foreseeable future. Turning now to industrial. Expanded use of natural gas and increase in emission regulations will continue to drive our long-term growth.

However, in the near-term, our industrial business continues to be adversely impacted by the economic slowdown in Asia, the depressed natural gas truck market in China, reduced demand as a result of global economic weakness and lower oil and gas prices.

For the second half, we are seeing orders pick up in several of our markets such as gas and wind turbines and we are also seeing an impact from increased content on heavy frame gas turbines as a result of new product launches. We also benefit from the signing of a new long-term agreement with a large turbine OEM.

In addition, our aftermarket initiatives to drive upgrades that improve machine efficiency, lower emissions and extend the operational usefulness should serve as a key driver going forward.

Power generation related markets have shown some pockets of strength driven by aftermarket activity as the existing equipment continues to be used and kept in service for longer periods. However, investment in new equipment remains soft.

Electricity generated from natural gas is increasing and gas turbines historically used as peakers are now being used as base power generation and are driving demand for upgrade and retrofit activity. The wind turbine market remains stable as a result of the demand for clean energy and favorable government incentives.

In the steam turbine market, we are having success in aftermarket upgrades and services and new product launches are beginning to gain traction which together is helping to offset depressed new equipment sales.

Within transportation, despite the favorable change in the regulated price spread in China between diesel and natural gas that we mentioned last quarter, the national gas truck market, in fact the truck market in general, in China remains weak due to overall economic condition. Lastly, in oil and gas, conditions continue to be depressed.

In summary, as we look ahead to the balance of fiscal year ‘16, we expect the positive momentum in aerospace to continue and the industrial segment to show improvement in the second half.

The strategic actions we took last quarter will favorably impact our second half performance and enhance long-term profitability while improving the operational excellence our customers expect.

As new aerospace programs launch and industrial markets stabilize, we are transitioning into a cash generation cycle following years of heavy investment in new platforms and capacity. As we indicated during our Investor Day last December, we expect to generate approximately $1.5 billion of free cash flow over the next 5 years.

Now, let me turn over to Bob to discuss the financials..

Thank you, Tom. As we have said, this quarter reflected strength in our aerospace segment and weakness in industrial. In aerospace, sales increased 3% this quarter driven by strong commercial aftermarket and defense sales, which was partially offset by lower business jet and commercial rotorcraft OEM sales.

Aerospace segment earnings for the quarter were 17.4% of sales compared to 16.2% in the same period last year. The improvement was driven largely by the increased sales and aftermarket volume. Our industrial segment sales were down $23 million in the quarter or 11% compared to the same quarter of fiscal 2015.

Sales were negatively impacted by slower growth in China and continuing economic weakness partially offset by strength in the gas turbine aftermarket. Industrial sales for the quarter were negatively impacted by approximately $4 million due to foreign currency exchange rate movements.

Second quarter industrial segment earnings were $19 million or 10.3% of sales compared to $27 million or 12.9% of sales in the prior year period. Segment earnings were primarily impacted by lower sales volume, which is somewhat offset by the effects of cost reduction measures.

At the Woodward level, gross margin percentage for the second quarter of 2016 was 27.8% comparable to the prior year period. Research and development for the second quarter of 2016 increased to 6.6% of sales from 6.1% of sales in the prior year quarter.

Selling, general and administrative expenses were largely consistent at approximately 7.8% of sales for the second quarter of both years. The effective tax rate for the second quarter of 2016 was 24.9% compared to 23.9% for the second quarter of 2015.

Looking at cash flows, we generated $362 million of cash flow from operations for the first half of fiscal 2016. Excluding the $250 million of proceeds from the formation of joint venture with GE, cash flow from operations would have been $112 million compared to $123 million in the same period of the prior year.

Free cash flow excluding the joint venture proceeds was $12 million for the first half of 2016 compared to $14 million for the same period last year. Capital expenditures are beginning to decline with $99 million spent in the first half of 2016 compared to $109 million for the same period in the prior year.

Excluding the effects of the joint venture, we still anticipate free cash flow to be approximately $100 million for the full year. In the second quarter of fiscal 2016, we repurchased 1.9 million shares of our common stock for an aggregate purchase price of $88 million.

Lastly, turning to our fiscal 2016 outlook, before I address our full year outlook let me again highlight some of the anticipated factors impacting the strength of our second half as compared to the first half, which were incorporated in our original guidance.

First, the strategic actions we took in the first quarter will produce cost savings predominantly benefiting the second half. On a segment basis, in aerospace we expect continued strength in the commercial market overall. Additionally, smart weapons and defense aftermarket sales are projected to be considerably stronger in second half.

In industrial, increased sales related to the signing of a long-term supply agreement that Tom mentioned, continued aftermarket strength and strong orders from our wind turbine customers are producing considerable second half improvement.

Turning to the full year, we now expect Aerospace segment sales to be up 4% to 6% and Industrial segment sales to be down 2% to 4% from the prior year.

Additionally, we now anticipate Aerospace segment earnings as a percent of sales to be up 100 basis points to 150 basis points and Industrial segment earnings as a percent of sales to be flat to down 100 basis points.

Considering this, we are maintaining our fiscal year 2016 guidance of 1% to 2% growth in sales and earnings per share to be between $2.75 and $2.95. This concludes our comments on the business and results for the second quarter of fiscal 2016. 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 is from Sheila Kahyaoglu of Jefferies. Your line is open..

Hi. Thank you for taking my questions. I guess I have a few questions on Industrial, so first off I guess can you talk a little bit about the new OEM agreement and I am guessing that’s with a gas turbine OEM and how that compares to the rest of your business in terms of sizing it a little bit.

And I guess do you think the Industrial guidance is conservative enough, because I can’t run through the math that quickly Bob, but I am still coming out to high single-digit organic growth exiting the second half of the year and margins up about 500 basis points, so just wondering how that – how the cost savings is factoring into the Industrial guidance?.

I will let Tom speak to the LTSA first or....

Well, yes the LTA is for the gas turbine OEM. We are not able to disclose it at this time, but it’s very positive agreement going forward long-term relationship as well as new product sales..

And then, Sheila I won’t – I can’t do your math at this time that quickly in my head, I can assure you that as we did and when you take the ranges and you can kind of take the midpoint and so on, we believe it’s kind of right in the heart of the guidance that we have given.

So from the Industrial perspective, I think what we really highlighted we hope is that there are a number of factors, most notably in our industrial turbines side of the equation, which also includes our wind business, that are probably out of the norm from what you are expecting on the dire impacts of oil and gas and economic conditions.

We have not assumed much in the way of recovery in those areas at all. And so it’s really focused on some of the things that are different for the second half than they were for the first. The other thing when you look historically at Woodward, this is – this pattern is no different than we almost always experience.

Our first half, most notably our first quarter is always considerably weaker than our second half, most notably our fourth quarter and we don’t anticipate this pattern will be any different..

Okay.

And just in terms of the aftermarket on the IGT side, how big or how much of the business does that consist of?.

We don’t – I think this is an area we have kind of called out that we do not have specifics on the aftermarket because it’s a little different than it is on the Aerospace side. But it is significant and it has been strong for us for almost 18 months to 2 years now..

Utilization has been high. In the aftermarket, our order book is strong and we have real solid order book for upgrades, repairs and overhauls in the second half of the year. So that’s been a positive lower natural gas prices have driven utilization and we are seeing a strong aftermarket on gas turbines, but we are also seeing it on steam turbines.

So the aftermarket is going well offsetting a lot of softness on the OEM side..

Understood, so it’s more project based business where you have decent visibility.

And then just last question, did you mention the full year tax rate guidance, is that still 28%?.

Yes. No we did not mention it. We anticipate it will be very close to that, might be slightly lower but pretty much on the 28%..

Okay. Thank you..

Thank you. Our next question is from Gautam Khanna of Cowen & Company. Your line is open..

Yes.

First, I was hoping you could elaborate on the margins at Industrial given the restructuring, last quarter came in a little bit light and I just wonder if there are any specifics you can provide around mix or pricing or de-leverage, given sales were up sequentially, so how should we think about that?.

Well, overall, what we would say is we still had lower sales relative to prior year and also say some of the margins impact is the negative leverage on sales being down.

And the second part of that and as Bob highlighted there in the prepared comments, the majority of the cost savings that we plan, we had to get through that in the first half of the year and that is going to start showing up here in the third quarter and fourth quarter.

So it’s a combination of the volume and the cost savings from the restructuring activities will be taking place in this latter half of the year..

Okay.

In terms of the – when you guys have described your position on leap of some of the programs that are ramping over the next couple of years, are there – do you have some pricing over that period or are there – is there any sort of re-established pricing or step-downs in pricing that occur as these programs ramp that we should be mindful of, particularly on the leap and elsewhere?.

Right. Really across on these new programs going into service which is pretty traditional with our contracts, its firm pricing, so there’s nothing that we should be thinking about it in terms of steps..

Okay.

And I wanted to ask about the profile of CapEx through the year, how it’s going to stay then?.

Sure. One comment I would have is the major capacity projects that we had in terms of the new buildings and the new facilities have been completed in the first half of the year. We still have some equipment to come in second.

So we are going to start to see year-over-year decline in the CapEx in the second half of the year and moving forward to more normalized CapEx going into ‘17. So we are….

The last one, so….

On budget, so we are feeling good about that..

Okay. On the aerospace aftermarket, I was wondering if you could update us on what you are expecting this year.

Is it still plus 5% for the year? And if you could parse out in the quarter, if you saw – if you could attribute any of the strength, the double-digit growth to any pockets within the aftermarket be it engines, be it provisioning, be it actuation, what have you, where did you see the strength if you could parse it for us?.

Sure. We had a good across-the-board aftermarket quarter. We had good initial provisioning in sales. We had good shop visits.

If you really look – we have very – we are in good programs – we have very favorable dynamics if you look at engine programs such as CFM B2500, if you look at the installed base and this planned shop visits, they are very much going up and that’s very positive dynamic for our aftermarket business.

And then the other part I would also say is we had good defense aftermarket as well. So overall, the aftermarket was strong in all elements. And going forward, we see that continuing and continuing the new programs launch would drive initial provisioning sales and those shop visits of all the installed base are a positive trend for multiple years.

So, we think we are on a good track with the aerospace aftermarket..

And what is your guidance for the year on aerospace aftermarket? Is it sales volume?.

Yes, still no change, approximately 5%..

Okay. Thanks a lot. I will turn it over..

Okay..

Thank you. Our next question is from Robert Spingarn from Credit Suisse. Your line is open..

Good afternoon..

Good afternoon..

Sticking with the aftermarket, I thought I might ask you if you are sensing any trends vis-à-vis destocking of the surplus material, meaning are you starting to see a little demand strength, because there are fewer parts in the dessert maybe some of those older aircraft coming back into service?.

Well, definitely there is – some of the older aircraft are still – I would say still flying and the retirements have been pushed out. So, I think that helps in the aftermarket, but I also think we are actually hitting the bigger drivers. I think we are hitting favorable dynamics on the number of years.

A number of the engine programs in particular have been in service and they are hitting their shop visit cycle that’s very favorable. And so you got to take all the installed base and look at that.

And I am sure you have seen that data is published and it’s very favorable and I think that’s what we are more than anything is driving some of the favorability in the aftermarket.

But also when you go on to the new programs that have been ramping up in particular like the 787 driving initial provisioning and then as we look forward, the new narrow-bodies, the MAX and the Neo are going to continue that IP. So, we feel pretty bullish about our commercial aftermarket..

It’s interesting, Tom that you are seeing 787 provisioning when I guess most people were done with that a while back.

Is there any kind of particular reason for that?.

I can’t. I don’t know against other companies. It’s part of the program and timing and when they buy certain RUs when they do the provisioning and it just happened to be favorable to Woodward and our content here..

Okay.

And then on the shop visit cycle, the strength you are talking about, we are talking about CFM56 you said earlier, we are talking about the -7s for the most part?.

For Woodward, it’s -5, B2500, G90 would be the three big programs that are really improving for the aftermarket for Woodward. -7 is not as big a program for Woodward. We have some, but it’s more the -5 versus on the A320 as well as B2500 on A320..

And is it just too late for any kind of resurgence in -3 or CF6 or any of that?.

I would say, back to question earlier, they fly those planes longer versus retired and that’s a positive, because they will drive – they really drive part sales and the like, but we are not looking for a big increase there. And I think the dynamics are around the programs that I highlighted..

Okay. And then when we look at your switching to industrial, you have talked about sort of scraping along the bottom here, you have got a sequential increase in revenue I think from the fiscal quarter one to two and that seems to be different than the pattern a year ago.

So, is the bottom behind us now?.

Well, when I look at it, I really believe we are at – if you look at the bottom of a cycle or bottom of the trough, we are not at the bottom, we are pretty darn near it and we are anticipating seeing that improvement as we go forward. Now, some of the markets may be slower. We are not anticipating a huge increase in natural gas trucks sales in China.

So there is one that we are not for the rest of fiscal year, but we are seeing some of the other ones starting to turn. As we move into ‘17, it’s our belief that we are going to start seeing some recovery..

Okay. Thanks, Tom..

Thank you. Our next question is from Pete Skibitski of Drexel Hamilton. Your line is open..

Hi, guys.

Just curious on aerospace, if you can maybe give us a rough order of magnitude of how much headwind you see in the first half of the year from rotorcraft and biz jets?.

It was significant. It’s been down for quite a while and it’s one of those areas where we kind of felt we are in the bottom, but it was significant decline again..

Okay, okay.

So double-digits, is it safe to assume?.

Yes..

Okay. And on industrial, again similar question on the first half of the year, I just want to give a sense of it sounds like transportation was now the most in the first half, but I am not sure if it was or if oil and gas maybe was. It sounds like maybe power gen was down as well.

Could you just give us a sense of rank order of the headwinds you see in the first half of the year in your three industrial areas?.

Well, if you look – first quarter of ‘15, we still had good sales of natural gas truck and bus and then it collapsed after that. And we are still at the – if you want to call it, the collapsed level. So, when you compare our first half to first half, you have to remember that we have that.

So, that’s down relative to that, but sequentially, after it was down, it’s just been down and it’s kind of stayed down. We have seen some drop-off in sales of like some power generation equipment. A lot of that goes into oil and gas and that’s been down. We have seen some construction equipment down.

So, there has been a lot of stuff that we would tie back to – if you really want to look at global GDP, you probably saw some of these numbers out, the global GDP was down. A lot of that’s come straight into the industrial markets. So, we are seeing that across the board.

But then we are also seeing some new activity coming in Industrial Turbomachinery. And as we highlighted with some of the content gains second half will be stronger in those areas, but we are not really calling up the natural gas or some of these other equipment markets. We are not calling those up..

Is there any clear kind of slowing if you know like construction of power utility plants, have you seen that at all globally?.

Overall – I would say overall, they are down, but for Woodward, you have to look at the applications we are on and the new plants that are being installed and we have actually a favorable mix there. And so as we go into the second half, we have got some good order book for new builds as well as good order book for aftermarket upgrades and retrofits.

So, sometimes, it’s actually in the mix of who is one, which plant and how it goes and it just happens to be a favorable one for us. But you do look at the overall market all players counted, it’s slightly down and distributed power is down a little more than the baseload larger turbines..

Okay, okay, very helpful. And last question maybe more for Bob, so Bob, you got the $250 million in this quarter from GE and then it sounds like you will pay out roughly call it, $95 million in cash taxes in the second half.

So that let’s call it a net $150 million plus the $100 million underlying free cash flow, so we should think about $250 million kind of overall free cash flow for the full year, does that sound right?.

Yes. Your math is pretty close. We will obviously try to minimize the tax payment as much as we can, but your timing is correct and you are directionally correct on your math..

Okay, got it. Thanks so much, guys..

Thank you. Our next question is from Michael Ciarmoli of KeyBanc. Your line is open..

Hi, good afternoon guys. Thanks for taking my questions.

Maybe if we could just go back to Gautam’s question on the Industrial margins, was there anything in this current quarter, any associated spending with restructuring, I am just trying to figure out as he was pointing out, the margins were down from the first quarter on higher volumes, so was there anything – was it mix, was there any additional spending in this quarter?.

There is always – we have had some as we have moved into the new industrial building in Fort Collins and so on, there is always some spending. I can’t say there is anything significant that’s new.

I think Tom mentioned the major factor that actually we were kind of had to overcome a bit was the negative flow-through related to the fixed cost coverage associated with sales decline of that magnitude. So at this point, nothing unusual and those significant cost savings on that side of the house either, that will all be in the second half, so..

But didn’t you have the same negative flow-through in the first quarter?.

We did, but overall, it continued to deteriorate, so..

I think one comment I would make could be at the root of some of your question is margins on product margins are holding, prices holding – we get some mix between OE and aftermarket that can impact the overall margins. But there is nothing fundamental changing biggest issue is volume.

And then there is some – when you go through some cost reductions and cost savings measures, there is a timing on the cost versus savings and that you are seeing some of that in the quarter. That will clear out as we go in the third quarter here, you will see the positive effects of that versus negative overhang.

But in terms of business, the key factors are on margin are holding, so we are confident of that going forward..

Okay.

And it sounds like the orders were – the order kind of loss you was pretty good, I mean did you guys see a book to bill in the quarter in that segment above one or can you kind of give us some sense of where the bookings were?.

We definitely have that and the overall book for OE sales is much better in the second half. We have that. We got line of sight to that. And a lot of the aftermarket upgrades we already have the orders in-house, we have line of sight too. So we feel good about the strength of the order book in the second half on the Industrial business.

So that’s part of the pickup as well as we will see the effects of the cost savings coming through in the second half..

Okay, yes.

And just – I mean to get to that guidance for margins of down $100 million to $150 million, I mean we are going to have to see a pretty good pickup second half profitability over the first half, but it sounds like between the line of sight you have with orders and maybe the type of work, you seem pretty comfortable there?.

Yes, we do..

Okay.

And then just quickly, back on Aerospace, I think you said commercial OE was down, can you give us sort of order of magnitude of how much it was down and maybe what platforms outside of biz jet and helicopter?.

That’s the main factor..

Was commercial transport down as well?.

Mainly flattish, there is a little movement on a couple of line rates that you are familiar with like 747-8, 777, but it was really – when we give a number like that, it’s commercial heli [ph] , biz jets, as well as personal and regional jets in there as well and so it was primarily heli and biz jets..

Okay. And then last one for me and I will jump back in the queue.

Given the lead times you guys have on some of the new programs, when should we expect to start to see that commercial trends for Boeing, Airbus revenue growth accelerate here, given the content gains, is that more going to be a ‘17 event, I mean just trying to think, do we see a gradual increase or more of a step function?.

We are going to start seeing it in the fourth quarter. And you will start seeing ramps into ‘17 and ‘18.

So the ramp is a multi-year ramp, but – and actually in Aerospace history, it’s a fast ramp, but you are going to start seeing it some occurring – some of the growth we are going to have in the fourth quarter in Aerospace and then really accelerate in ‘17 and ‘18..

Perfect. Thanks guys. I will jump back in queue..

Thank you. Our next question is from William Bremer of Maxim Group. Your line is open..

Good afternoon gentlemen..

Good afternoon..

It seems like the year is playing out as you envisioned, any trends that you are seeing either during the quarter or subsequent to the quarter that have surprised you in anyway?.

Well, what we would say is from the launch of the year, we probably have seen a little bit more softness wrapped around some of our reciprocating engine markets and so that would pick up the natural gas truck. It also picks up some of the construction equipment and some of the small power generation.

That came out a little softer than our initial plan, but it was countered by stronger Aerospace than we plan, not by much but those two are offsetting each other, but yes there was a little bit there Bill that we saw down. We were anticipating the new program launches. The order books particularly around Turbomachinery, that’s occurring.

The new product content is occurring and the order book in the second half is going as anticipated. So we did see a little softness on what we generally call our faster cycle business.

Even though it’s not real fast of our business, it’s a faster cycle, it was a little softer than initial projection but we had little strength out there in other areas..

Okay.

In terms of just the overall restructuring, is it completed for 2016 at this time?.

No. Not all the activities associated with it. Almost all are initiated or in process, but we really won’t see a lot of the impact of that as we go into the second half. But no, not all are completed..

Okay.

And my final is on unallocated expenses there, is that sort of the new run rate we should be utilizing going forward there?.

Yes. It will vary as we go from year-to-year and quarter-to-quarter, but that’s not substantially different than we would anticipate otherwise.

You are talking about the 2-ish percent in that segment?.

Yes..

And remember that in the first half that included the special charges, so you want to back that out..

Okay, great. Thank you..

Thank you, Bill..

Thank you. Our next question is from Jim Foung of Gabelli & Company. Your line is open..

Hi, good afternoon everybody..

Hi, good afternoon Jim..

Just getting back to the commercial OE sales, particularly transport, I was just wondering are you seeing any push-out in commercial aircraft deliveries as the airframe manufacturers transition from the traditional airplanes to the new reengine airplanes?.

We are not seeing anything that hasn’t been announced in the line rate changes, Jim. So this is nothing in addition and the order books are reflecting pretty accurately there their stated line rates. So we are tracking pretty closely..

It’s just that one guy who reported earnings, lowered their commercial growth rate expectations because of that kind of deliberate, I guess planning on the airframe manufacturers to build the re-engine aircraft carefully and so there is kind of saw some delay as they make that transition from the old line to the new line, but you are not seeing any impact on that, right.

Okay.

And then I guess the other thing you mentioned in your call you said you get potentially more opportunities to win business in 777 and the A320neo, could you just talk a little bit more about your progress in that and in terms of like has the amount of potential business where you could get change?.

Well, we are doing well on both platforms. We haven’t announced the content for aircraft. I think we are probably on those two applications do it at our Investor Day this upcoming number. But we are, on both of them at the moment at higher content that we had on their earlier generation.

There are still RFPs out that we are responding to, so we anticipate to win a little bit more. And there would be good platforms for us with increased content over the previous platform. So we are pretty pleased with that..

Okay.

But potentially, there could be some business to come later on if you are able to win some of the RFPs?.

Correct..

Okay. Alright, great. Thanks so much, guys..

Thanks..

Thank you. Our next question is from Gautam Khanna of Cowen & Company. Your line is open..

Yes. I just wanted to follow up on your comments on the IGT upgrades that you are working on.

Is this the advanced gas upgrades or what specifically are you referencing and can you describe a little bit about your content on those sales and how the margin profile is compared to the OE side?.

Yes, we have a wide range of upgrades with some of them as you are highlighting and calling out our gas pack updates. We have dual system upgrades that are out there. We have controls upgrades that are out there depending on which machine it is, so both from aeroderivative up to frame style machines.

So – and on the aftermarket, the way we go to the aftermarket on the IGT side as we collaborate with the OEs, the original equipment manufacturers and margins are relatively similar, at times, we get a little better, but relatively similar, so positive activity going on and I would say neutral to positive margins..

And has pricing continued to hold up in that product category or have you seen any incremental pressure there?.

Well, there is always – we are not going to say with all our OEMs in every market segment we are in, there is always pressure on prices. We always take a collaborative approach whether I am trying to find ways to value engineer the products to get cost out system optimization. So, we are always working on that.

So, yes, there is always cost pressure, but I think in the way we do business and creativity, we work to hold or enhance our margins while we try to drive cost out for our customers. And so I am just saying that’s universal on all our platforms..

Okay.

And just one last one as we ramp on the OE side in aero on the A320neo and a number of the other platforms that are ramping next year starting in Q4, are they going to contribute at the OE margin, are they going to be better or worse given the rock cut facility and the like? I am just wondering how we should kind of face these in as some of these new products start to hit?.

Yes. What I would say that with all the initiatives we have put in place on improving our operations, our costs, the product, our cost structure and then you take the balance as these new programs ramp up, we do expect to continue to improve our aerospace margins and we talked about our target of getting to 20% plus segment margins.

I think we did that again at the Investor Day. That has not changed and so you could see we are making progress last year to this year and our expectation is to continue that improvement and as these get into full production that we will also be getting our margin target..

Okay. So that was the last one. I do have one more, which is just again on the commercial aftermarket. It sounds like your commentary seems better than plus 5 for the year, 5 to 6 for the year.

Can you make any comment about how the trends have been since the quarter or if you built backlog in the quarter and what your visibility is for the third and fourth quarter in terms of year-over-year?.

We feel confident in that aftermarket increase for the year. We do believe there is some opportunity out there. There will be some timing as we get into the fourth quarter primarily more around initial provisioning than around repair and overhaul.

So, there is possibility, but there is definitely going to be a timing issue as we hit the fourth quarter whether it will be fourth quarter and roll in the first quarter, but the outlook is good and we are confident in the outlook..

Alright, thank you very much..

Thank you..

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

Okay. Well, thank you all for joining us and also for the Q&A session. We appreciate your questions and we look forward to seeing you over the next quarter and again thank you for joining us today..

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