Tom Gendron - Chairman and CEO Bob Weber - Vice Chairman, CFO and Treasurer Don Guzzardo - Corporate Director, IR and Treasury.

Greg Konrad - Jefferies Gautam Khanna - Cowen & Company Pete Skibitski - Drexel Hamilton David Strauss - Barclays Christopher Glynn - Oppenheimer Drew Lipke - Stephens, Inc. Rob Spingarn - Credit Suisse Michael Ciarmoli - SunTrust George Godfrey - C.L. King.

Thank you for standing by. Welcome to the Woodward, Inc. Second Quarter Fiscal Year 2018 Earnings Call. At this time, I would like to inform you that this call is being recorded for rebroadcast and 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, Corporate, 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 2018 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 7, 2018.

The phone number for the audio replay is on the press release announcing this call as well as on our website and will be repeated by the operator at the end of the call. Before we begin, I would like to refer to and highlight our cautionary statement, as shown on slide three.

As always, elements of this presentation are forward-looking or based on our 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 including the risks we identify in our filings.

As previously announced, Woodward will be providing financial results as reported under U.S. GAAP and on an adjusted basis. We refer to adjusted amounts.

They will exclude the transition impacts of the change in tax legislation as well as the following special charges, restructuring charges, Duarte move related costs, and M&A transaction and integration costs. Also our financial outlook is being presented on an organic basis, which excludes the recently announced acquisition of the L’Orange.

No such adjustments were recorded in fiscal 2017. Please note the tables on slides 12 and 15 and included in the press release, which we believe, will help in understanding both historical results and future outlooks. We also 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 and related schedules. Management uses these non-U.S. GAAP and adjusted financial measures when monitoring and evaluating the ongoing performance of Woodward and each business segments. Now, turning to our results.

Net sales for the second quarter of fiscal 2018 were $548 million, an increase of 10% compared to $500 million for the second quarter of last year. Net earnings were $38 million or $0.60 per share for both the second quarter of 2018 and 2017.

For the second quarter of 2018, Woodward recorded $19 million of pre-tax special charges or $0.22 per share which includes the recently announced $17 million of restructuring charges. Adjusted net earnings for the second quarter of 2018 were $52 million or $0.82 per share.

Net cash generated from operating activities for the first half of 2018 was $57 million compared to cash generated of $130 million for the same period in the prior year. Free cash flow was an outflow of $2 million for the first half of 2018 compared to an inflow of $87 million for the same period of the prior year.

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

Thank you, Don. Welcome to those joining us today. During the second quarter, we delivered strong growth in Aerospace but our Industrial segment’s turbomachinery markets continued to face significant headwinds. Before I get into more detail on the quarter, I wanted to highlight our previously announced acquisition of L’Orange.

The acquisition of L’Orange which is expected to close in the third quarter of this fiscal year, represents a compelling, long-term opportunity.

It is a strong strategic fit for Woodward, bringing a world class OEM partnership, excellent technology and innovation, and a large installed base that we believe will enhance profitability for both Woodward and our Industrial segment. L’Orange’s highly complementary portfolio also adds critical mass and enhances our presence in key end markets.

Additionally, the transaction is expected to be significantly accretive on an adjusted basis for fiscal 2019. Turning back to the quarter, let me provide some more detail on our market segments. The aerospace industry overall remains extremely strong, fueled by record passenger and cargo traffic and ongoing elevated load factors.

Additionally, we are seeing improvement in the business jet and rotorcraft markets while global uncertainty continues to drive increased defense activity. Woodward’s Aerospace business continues to perform well with production increases in the Airbus A320neo and Boeing 737 MAX driving significant increases in commercial OEM sales.

After-market remains strong, supported by initial provisioning on new programs, higher utilization and favorable fleet dynamics. Momentum within our defense OEM business also remained strong, supported by guided weapon sales as well as fixed-wing, rotorcraft and ground programs.

Turning to Industrial and focusing on our three main industrial market segments, within power generation we continue to face challenges related to demand with industrial gas and turbine market as well as a drop off in volume tied to renewables penetration and greater energy efficiency.

Our projections still suggest that the industrial gas turbine market might not recover until 2020. With that said, we have been seeing improvement in other areas within power generation including distributed power applications, utilizing large natural gas and diesel engines.

In transportation, we expect to see improvement in the second half of the year in China as the price of natural gas has returned to traditionally low levels and natural gas vehicles are once again in higher demand. Government regulations affected emissions and weight continue to support conversion to natural gas fuel vehicles.

We also saw some seasonal moderation in demand in the second quarter for natural gas fuel trucks as higher gas natural gas price -- natural gas prices tend to peak during the heating season.

All of this lends itself to continued volatility, but the Chinese government continues to incentivize the use of natural gas vehicles and adjusting supply and demand issues to mitigate future volatility.

We continue to see signs of recovery in the marine and locomotive markets, primarily related to equipment utilization which is the major driver of L’Orange’s business. This is an area where we see significant growth potential as L’Orange’s future status as an independent supplier combined with Woodward will create new opportunities.

Oil and gas remained robust as oil prices have stabilized at levels supporting investments. Rig counts are up sharply from the prior year as global activity has rebounded, particularly in the U.S.

In response to the rapid growth in our Aerospace business and the challenging market conditions in certain segments of our Industrial business, we have redeployed significant resources to newly awarded aerospace project which also highlights synergies available across all of Woodward.

We have engaged and focused strategic initiatives from both segments to take advantage of opportunities and address challenges. For example, the transition from Duarte to Fort Collins will support growth and efficiency in our Aerospace business.

In our Industrial segment, workforce reductions were necessary to align with the industrial turbomachinery market conditions. In summary, our Aerospace business has experienced tremendous growth, continues to be awarded new business.

We believe our Industrial businesses are well aligned with key long-term secular trends that are supported by sound fundamentals. While considerable volatility across industrial market segments has cycled growth over the past few years, we are encouraged by types of improvement in many areas.

The acquisition of L’Orange will provide excellent technology and significant growth opportunities for years to come, strengthening both our industrial segment and Woodward.

As a result of these activities, we believe Woodward is strategically well-positioned, considerably stronger and will deliver improved financial performance and increase shareholders return as we move forward. With that, I’ll turn it over to Bob to discuss financials..

Thank you, Tom. As you’ve seen in our earnings release and as Don mentioned, we’re now providing certain financial measures on adjusted basis in addition to U.S. GAAP. Adjusted amounts will exclude the transition impacts of the change in U.S.

tax legislation that as announced last quarter, as well as special charges related to restructuring, Duarte move related costs, and M&A transaction and integration costs. These charges will be included in non-segment expenses.

We believe it is important to present our results in this way as the adjusted financial measures more appropriately reflect the ongoing operations of the business. A reconciliation of these amounts is provided in the press release, our accompanying slide deck, and our quarterly report on Form 10-Q. With that, let me turn to our quarterly results.

Aerospace sales grew at 20% this quarter, compared to the prior year, driven by strength in commercial and defense OEM and extremely robust aftermarket activity. Commercial aftermarket sales for the quarter were up 29% due to both initial provision and repair and overhaul tied to heavy utilization of existing fleets.

Aerospace segment earnings for the quarter were 18.9% of sales compared to 18.2% in the same period of last year.

Segment earnings were favorably impacted by the higher sales volume in the quarter, which was partially offset by higher manufacturing costs related to increasing production levels, learning curves and the increased R&D spend to support the new program wins we’ve announced over the past several quarters. Turning to Industrial.

Second quarter Industrial segment earnings were down -- segment sales, I’m sorry, were down 10% compared to the second quarter of fiscal 2017. On a constant currency basis, second quarter Industrial sales were down 15%. Both industrial gas turbines and renewables sales were down significantly this quarter compared to the prior year.

This was partially offset by improvements in large engine sales. Second quarter Industrial segment earnings were 6.3% of sales, compared to 9.5% in the prior year period. Segment earnings reflected the negative impact from the lower sales volume offset somewhat by productivity improvements.

At the Woodward level, let me direct your attention to slide 12, which shows the reconciling items from U.S. GAAP earnings to adjusted earnings. In the first quarter, we recorded the transition impacts of the change in U.S. tax legislation of $14.8 million or $0.23 per share.

In the second quarter, as mentioned in the April 9th release, we recorded $19 million of pre-tax special charges or $0.22 per share. These items will be excluded to arrive at adjusted earnings.

Included in the $19 million of pre-tax special charges is $17 million of restructuring charges, which is primarily the $12.5 million of workforce management costs associated with the transfer of the business from Duarte to Fort Collins.

The balance of the restructuring charges are workforce management costs related to aligning our industrial turbomachinery business with current market conditions. R&D spending was approximately $7 million higher in the second quarter of 2018 compared to the prior year quarter.

This increased spending relates primarily to new aerospace programs and we expect the full-year to moderate to approximately 6.5% of total sales. Selling, general and administrative expenses were $39 million this quarter compared to $48 million for the second quarter of last year, largely due to the timing of stock compensation expense.

In fiscal 2017, this expense was recorded in the second quarter whereas this year it was recorded in the first quarter. The effective tax rate for the second quarter of 2018 was 20.9% compared to 24.1% for the second quarter of 2017. The effective tax rate for fiscal 2018 on an organic basis is still anticipated to be approximately 24%.

The adjusted effective tax rate for the first six months of 2018, which removes the transition impacts of the change in tax legislation, was 18.6%. The organic adjusted effective tax rate for the full-year is anticipated to be approximately 18%. Looking at cash flows.

Net cash generated by operating activities for the first six months of fiscal 2018 was $57 million compared to cash generated of $130 million in the prior year period. The difference was largely due to a decrease in payables, primarily resulting from the timing of payments and increased accounts receivable.

Free cash flow for the first six months of the year was an outflow of $2 million compared to an inflow of $87 million in the same period of the prior year. Capital expenditures were $58 million for the first half of 2018 compared to $43 million for the first half of 2017.

We continue to expect capital expenditures for the year to be approximately $110 million. For the full-year, we now anticipate free cash to be approximately $200 million. The decrease from our previous guidance reflects the timing of sales as well as the impacts of the special charges discussed earlier. Lastly, turning to our fiscal 2018 outlook.

As previously mentioned, our outlook is presented on an organic basis. Net sales are expected to be approximately $2.2 billion for the year. We now believe Aerospace sales will be up approximately 12% and Industrial sales will be down approximately 7%, both as compared to the prior year.

Both Aerospace and Industrial segment earnings as a percent of net sales are still expected to be approximately flat to slightly up as compared to the prior year. Please refer to slide 15 as I provide our outlook on earnings.

Earnings per share are now expected to be between $3 and $3.20 based on approximately $64 million of fully diluted weighted average shares outstanding. Our outlook for Woodward’s overall operational performance is unchanged. Improved Aerospace performance is being offset by weaker Industrial performance.

Adjusted earnings per share are expected to be between $3.60 and $3.80. Our adjusted outlook as compared to our previous outlook reflects the removal of the transition impacts of the U.S. tax legislation changes, partially offset by the higher expected shares outstanding.

We will begin including L’Orange results in our guidance after we close, which as Tom mentioned is anticipated to be in the third quarter of this fiscal year. This concludes our comments on the business and results of the second quarter of fiscal year 2018. Operator, we are now ready to open the call for questions..

[Operator Instructions] Our first question will come from the line of Greg Konrad with Jefferies. Please state your question..

Just one clarification question. The free cash flow, you said it now includes timing of sales and special charges.

How much of the special charges that you recorded are cash versus non-cash?.

The significant portion is cash in 2019 but there is an element in ‘18 as well. And so that’s factored into that overall guidance..

Thanks. And then, just on energy, margins obviously were down and it seems like from the guidance that you have a recovery.

Can you maybe give some of the moving pieces on that and then just for the end markets, any numbers around the declines or gains in Q2?.

So, on the industrial side of the equation, what we are seeing, I think is we described as industrial gas turbine, renewables are remaining weaker and continue to be challenging.

And -- but we have, as we mentioned, redeployed a significant amount of resources from our industrial business to attack some of the opportunities that we have in the aerospace side as well as we mentioned some of our restructuring charges were related to our industrial business.

So that is why we are still confident that our overall earnings as a percent of sales will continue to be flat to slightly up, even though it’s on the lower sales..

And just to add to that, second half sales in Industrial will be higher than first half, so we have improvement on sales as well as a lower cost structure. And that allow us to get to where we found flat margins for the year..

Thank you. Our next question will come from the line of Gautam Khanna with Cowen & Company. Please state your question..

Yes. Thank you. Couple of questions.

On the power side, I was wondering if you could talk to weather you’ve seen any pricing reductions after [ph] Woodward and/or order cancellations? Has that been part of the equation or is that -- or is it just the lack of orders?.

Gautam, it’s really lack of orders. So, some orders we would say -- we’ve seen push-outs, which is not necessarily order cancellations but pushed out, but definitely sizable drop in order activity, there is no doubt. .

Okay. And does that -- on the renewable side on the wind side, I know the OEMs have talked about down pricing, so the full systems they sell.

Are you seeing any price pressure for contract renegotiations of the fixed price you’d offer before?.

Yes. The renewable market definitely is challenging, as you’re highlighting. What we’ve -- had happened is ‘18 is we really think is the bottom here for renewables, as I think we’ve highlighted in previous calls. We have been winning back some share with our customer base. We see that increasing sales in 2019.

In those contracts, price, if we don’t see price productivity was an issue. The way we address that primarily was to introducing the brand new converter platform that we’re able to reduce system pricing, but still had margins that we were -- that we have experienced in that business.

So, again, we addressed it with a technical solution, there is no doubt there is cost pressure in that market and that’s the approach we took. But that is built into the contracts that will go into the production next year..

Okay. And just maybe a last one Aerospace.

Can you talk about -- I think on the LEAP engine production ramp, are you guys -- where are you in terms of how far ahead of your customer are you in terms of production, in terms of lead time? And are there any constraints that you see within your own supply chain that could get tested as we move through the year? Because obviously the rate is going up substantially this year in that..

Right. The demand coming to Woodward has -- I would say, the customers are very consistent with that and the reason they need to keep the supply chain full and ramping to those higher production rates that you highlighted. We’re ramping very well.

There have been, as everybody’s read, disruptions in the supply chain out there, that’s not coming from Woodward. We’re tracking -- those that have seen our facilities have seen that we’ve got ahead of the curve.

We do however still have learning curve issues, but in terms of ramping, we’re prepared for the volumes that are coming this year and going into next year. So, we feel good about that and are staying consistent with the overall Boeing Airbus demand profiles..

Okay. So, you don’t have any pinch points that are really going to get dramatic….

No. Gautam, we’re in good shape that way. We’re constantly working our supply base. We don’t make everything obviously. And so, we’re testing our supply base, we’re working with everybody. But we’re not seeing any issues that will keep us from meeting those ramps..

Our next question will come from line of Pete Skibitski with Drexel Hamilton. Your line is now open. .

So, to get to your Industrial revenue guidance, it seems like the utility scale, power generation, the turbines, it seems like would have to be down pretty sharply, maybe 40%, 50% on a full year basis. I guess, number one, does that sound about right that would I think make it kind of consistent with what GE is saying? And then, if it’s -- go ahead. .

No. I think, you’re not far off. .

Okay. And then, I mean, the way, my numbers work, it was probably only less than 10% of Industrial revenue at that point.

So, with this guidance, are we kind of seeing the last in terms of the headwind that utility power gen can really provide to you guys in Industrial, even before the impact of L’Orange? Would you say that’s fair statement?.

Pete, we’re really getting close to like we believe it’s the bottom. It’s a tough one. And I think you’ve seen our customers saying they’ve had difficulty forecasting the demand. We build off of their forecast. We think it’s -- we really do think it’s going to start to turn. I guess that’s the way we’re looking at it.

Inventor has come out of the system; demand is down. So, you see any demand increase, you’re going to see the need for some more inventory, and that will start turning. We’re trying to be pragmatic, and we’re looking to 2020 for recovery or start of a recovery.

But going down much from here, we don’t think it will go down much more; can’t guarantee it, but we think we’re pretty bottomed..

Yes. I mean, it seems like even, if win comes back next year and reciprocating stays strong, it almost seems like Industrial could be up next year even despite more headwinds in power gen, just given how small it’s gotten..

That’s correct. Yes..

Tom, any headwinds from aeroderivative? It seems like the OEMs were a little negative on that also..

Yes. Aeroderivatives are soft right now. We’re seeing -- the only thing in turbomachinery, the industrial gas turbines and we’re seeing as really Industrial, smaller industrials turbine tied to oil and gas, those are being utilized, and we are seeing some demand in that segment. But in the larger power gen side, we’re really not..

And then, just GE, it sounds like existing the distributed power business at the Jenbacher and Waukesha.

What do you think that means for you guys?.

I think it will be probably neutral, little bit on that Pete. And they’re both -- we sell the both those divisions. The new owners I think will obviously keep the supply base, depending on who new owners are, maybe increased opportunities. But, I don’t think, it would be a negative at all to us..

And our next question will come from the line of David Strauss with Barclays. Please state your question..

So, are you taking additional restructuring at Industrial or is this just M&A cost, the difference between $0.37 now and $0.20 that you outlined a couple of weeks ago, is that additional restructuring or is it additional cost related to L’Orange?.

No. I think it was on the April 9 release. We announced $17 million of restructuring; that has not changed. There’s $12.5 million related to Duarte and $4.5 million related to Industrial. That is what we called out, no change in any of that. There are some incremental. So, you will see we had $0.19 this quarter.

The difference between the 17 and 19 [ph] is some of the early transaction costs related to the Duarte -- excuse me, the L’Orange acquisition. We anticipate we will have more of those in the second half as well. So, the $17 million is pretty much all the restructuring that we identified and have identified for the remainder of the year..

Okay, so it’s -- so to summarize, the difference between the $0.20 originally and $0.37 outlined today is just L’Orange?.

Hold on.

I think, the table you are looking at -- so $0.37 is the -- $0.20 of restructuring is the $17 million, so you are looking at the table in the press release?.

Yes..

And then, you notice, the Duarte move, M&A and other items associated with that, so that totaled the $0.37. So, the Duarte move, we mentioned that there would be some accelerated depreciation, duplicate labor costs, actual move costs that you are not able to book as one-time expenses. So, that is the total of the $0.37 that is there.

And so, in that $0.20 is the $17 million of restructuring and the other $2 million of -- to get to the 19 is very basically in that 17.

Does that help?.

Yes. The after-market, that 29% growth.

Can you give us an idea of how that contribution from provisioning and then just what you saw trade off from maintenance and repair?.

What we would say is both were very strong. MRO was high and we are just seeing great utilization of the fleet. And just -- we call our fleet dynamics, just the age and distribution of our hardware is just like in the prime spot. Initial provisioning really was continuing both for the new narrow-bodies through 20neo, MAX but also 787 and like.

We are still driving initial provisioning in both on the quarter strong. I would like to just remind everybody on the call though initial provisioning can be very variable from quarter-to-quarter. We had a good quarter but we are tracking our full year projections for aftermarket. We happened to have a very good quarter.

But just caution everybody, there is quarter-to-quarter variation tied to this activity..

Okay. And then, you specifically called out in your prepared remarks, you’re seeing a pickup on the business jet and commercial helicopter side.

Can you just give a little bit more color there exactly what you’re seeing? Are you actually seeing pulls on you guys from the OEMs?.

Yes. We actually are. One of the things, as you go to our Investor Day deck and you see all the new business jet platforms in it, Woodward has increased content on those platforms. So, you are starting to see the supply chain being felt little bit for those new platforms.

So, that’s adding to our OE sales and we’re starting to see better utilization of the installed fleet, and so we’re seeing a little better on the aftermarket. But, it’s definitely primarily what we’re getting is the new aircraft with higher content coming through..

Last one I have, raw material side.

How is that affecting you guys in terms of higher raw material prices and what ability do you have if any, to pass that along?.

Right now, we’re not seeing it. And with -- I think you’re probably referring to steel and aluminum. Those are going to be difficult to pass along.

A number of our contracts have some material escalation type clauses built into them, but it’s hugely more around exotic materials that can be very expensive and very volatile, generally around aluminum and steel, we don’t see a whole lot. So, we’ll really have to see those tariffs take hold and how much impact there will be.

But at the moment, we’re not seeing any and not planning a huge impact from that..

Thank you. Our next question will come from the line of Christopher Glynn with Oppenheimer. Please state your question..

Hey, good afternoon. The question -- I may have missed some [indiscernible] answer to Gautam’s question. But GE pushed out some of their delivery schedules to the weeks expecting to catch up by the calendar third quarter.

Did you sort of allude to your timeline not being impacted by their timeline?.

Yes. That’s sort I was implying. Yes..

And on the aero margins, the sequential incrementals were quite stellar there.

Just wondering how that -- I know you have learning curve on an ongoing basis, but is that starting to swing your way, to put up those types of sequential leverage numbers?.

What we do see as we move through the second half of this year and in 2019 and just remind everybody, 2019 is the year we said we would get to 20% segment earnings for Aerospace. The way we’re going to accomplish that -- we have this very large OEM ramp coming.

The way we’re going to accomplish with strong aftermarket, initial MRO and the aftermarket which we see continuing forward initial provisioning sales. And then, leverage on our cost -- manufacturing cost basis from the volume, and learning curve which we’re ramping up pretty rapidly right now.

So, as we get to the full volume, when I’m kind of call full volume, as we hit 2019, we’re going to get all the impacts of those. So, we think we’re on track to our goal. And it was -- we highlighted many times that we are going to hold margins and improve as we go forward and get to forward utilization of these factories that we put together.

So, I would say we’re tracking and we expect to continue in the second half of this year with the sequentially improved margins..

Okay. And then as the aero revenue stakes in the back half, normally it’s up into the right each quarter through the fiscal year. You did allude to provisioning being particularly strong in the second quarter and the guidance certainly implied some slowing versus the second quarter growth levels.

But, we’re looking at maybe third quarter revenues maybe being sort of second quarter at this point?.

Well, the third quarter -- last year, third quarter was a strong quarter. So, it’s a tougher comp. But we’re tracking well. We’re going to -- on the sales projections. On the aftermarket, I’m assuming little bit in your question is.

For the full year, the aftermarket is tracking what we thought; we just had a very good quarter, like I said there is quarter to quarter variability. But out full year outlook, the order books that’s still in, the MRO activity, it’s all in line with our forecast..

And our next question will come from the line of Drew Lipke with Stephens, Inc. Your line is now open..

Just to be clear on that last point. So, we’re still looking for high-single-digit growth for commercial aftermarket. And I’m assuming that’s all predicated on the MRO demands and not really assuming any benefit for initial provisioning. Is that the right way we need to think about it? Or at least….

Actually, I think, Drew, we’re really actually looking at low double-digit growth in the aftermarket, commercial aftermarket. So, just for clarity. And it’s a combo, like I said, MRO is strong, initial provisioning is strong. And as we look to second half of the year, we see it continue. Just this is an exceptional quarter..

And then, military aftermarket, I know, you gave a lot of volatility there quarterly, but certainly it seems like we’re seeing the funding picking up there and it should be flowing.

So, what kind of trends are you seeing on that piece?.

Yes. It’s kind of flat. We have to wait as the funding works its way through the system a little bit. We anticipate that will pick up and may move into fiscal year ‘19. But military is flattish. And but we do anticipate that the funding will work its way through and be improvement as we go to next year..

Okay. And then, your content with the airframe OEMs still is not quite where you guys wanted to be, talked about, you’re seeing opportunities are stepping up R&D.

Have there been incremental wins that you’ve seen as a result of the supply chain pressure that the airframe OEMs are putting on the supply chain? Is there any kind of color you can give us there on the pipeline and the opportunity set?.

Right now, there are some opportunities out there that we’re looking at. The main -- but there is nothing new to announce I guess in that category..

Okay.

Are these real opportunities? Or do you feel like you’re more of a stalking horse?.

No, I believe, they’re real. Yes. I believe they’re real. There is a combination. I mean, there are some that are awarded and there are some that are still open. But yes, we believe they’re real opportunities..

And our next question will come from the line of Rob Spingarn with Credit Suisse. Your line is now open..

Few clarification, thanks. So just going back to the commercial -- to the aftermarket growth and Aerospace.

So, you’re saying low double digits Tom, despite the fact that you’re like 25% for the first half?.

Right. You have to look at last year’s second half was strong, Rob..

Okay.

So it’s just comps?.

Yes..

And it’s provision timing?.

Yes..

Okay.

I was going to ask you, just one of those fall away is that your visibility here that provisioning is kind of done and then we’ll just have MRO for the rest of the year, the other way around?.

Provisioning is going to go for years here. So, I mean it’s -- I think, you know well this industry. But as new operators take fleets, as they add new routes, you’re getting -- seeing provisioning. I guess that we’re still seeing provisioning on the 787. So, it will go for years.

It will be -- it’s always stronger in the early years and that we are seeing that. Second half, second half, year-over-year, we had a strong second half. So that’s part of the comparison. MRO looks strong. So, if you -- I’ll just have you guys if you look if you compare to lot of our peers in the industry -- low double digits really is quite good..

It’s excellent, but I don’t hear anything from you now that suggests it goes to zero at the back end of the year which is what it needs to do to average at what you are talking about..

All relative, right? I mean so, you are right, but if you look kind of at the quarterly flow, it’s all relative to each prior year quarter. And so, we did have a strong -- if you look, we had a weak first half, strong second half and that’s kind of -- this time, it’s kind of flipping around a little bit, relatively speaking because of that..

I see.

So, is another way of thinking about this, not to beat the dead horse here but you just sort of filled the channel on the parts?.

No, we’re not implying that things drop the way off. It’s really comps and what we had with good initial provisioning sales in this quarter, there’s some variability to that. But the order book for that is still filling in as we go out over the next 12 months. Our after market is strong, Rob.

We’re going to continue to have good growth in that for years to come..

Okay. I was going to ask you the opposite question for Industrial which is that Tom I think you said earlier that H2 will be up and you’ve talked about bottom being here and so on. But just given the unpredictability, the weakness on, I don’t know if I’m doing my math right here.

But with sales down 7% for the year, I think you’d be -- you’re indicating about $190 million if you will in revenues for each of the third and fourth quarter, which would be a big sequential uptick. And so, other than -- and again, the acquisition is not in there. .

Right, that’s right. .

So, you really are presuming some kind of real recovery here.

How much visibility do you have into that?.

We’re seeing the order book filling. And so, as we’ve highlighted, our reciprocating engine business, our steam and compressor controls business and some of our power management products are doing well. And if you take a look at some of our customers in those markets, they are seeing strong year-over-year growth rate.

So, we are tracking with them, especially on large engine. Our small engine business, we are expecting a stronger second half, as I said in China. That’s starting to materialize. We are seeing orders.

So, it’s really -- increases in those non-turbo machinery markets that are picking up and are driving that increase in the sales first half to second half..

Okay. And then just on the margins there, and just really a clarification, Bob.

But the $10 million in profit in Industrial in the second quarter, that is before restructuring, right? That’s -- the restructurings are below the segment line? Other words, 6% is before any of the stuff you’ve talked about before?.

That’s right. We’re going to show all those, we’re going to include them. Obviously, we’re pulling them out for adjusted. But they’re being non-segment so that they don’t really convolute the operating earnings..

And you’re going to finish the year still at 11% or something margin, little better than last year?.

Yes. We said 10 to 4 flat -- 10.4 was last year flat to slightly up. So.

Even with the second quarter here. So that implies pretty good backend again. Tom is talking about much higher revenues or at least meaningfully higher revenues. So, is it. .

That’s exactly. And we’re going to have leverage on revenues which we’re seeing. And we’re going to have -- we’re seeing the results of our cost out initiatives. So, the combo of those better sales on the lower cost space that’s how we’re going to get those higher margins..

Got it. Last thing, you talked earlier about not being able to pass through some of this aluminum and steel cost, if it should happen.

Is there any kind of math that we can think about in terms of sensitivity? How we think about your input materials as a percentage of cost or anything like that?.

There interesting thing in the whole industry, it’s a way -- we put contracts together from our customers to Woodward; Woodward to our suppliers as we lock in those costs. And generally, we don’t allow changes for those types of materials. So, as I say that, we also are protected with our supply base as well. So, there is a balancing effect there.

And the best way to look at it, everybody in the supply chain is going eat a little bit of that if that occurs. But no one is taking a whole brunt of it. So, we think we’re being able to overcome it with productivity and other cost out initiatives. So, we’re not at the moment seeing it as a material impact in anyway, but it’s primarily due to that.

All these contracts are -- everybody has heard us talk about how we get these very long term or like the program contracts, we pass all the same terms down to our supply base. So, it helps protect us, yes..

Thank you. And our next question will come from the line of Michael Ciarmoli with SunTrust. Your line is now open..

Hey. Good evening, guys. Thanks for taking the questions here. Just a clarifications maybe. The aero margins which showed a tremendous recovery here. Can you maybe just give us the detail? in the Qs, you usually disclose that bridge.

What was the price mix and productivity? Was that still a headwind this quarter or are you starting to get -- because I know that’s kind of been a drag the past couple of quarters.

Are you starting to get some benefit there? I think, you still said you’re working through learning curves but do you have that number for the quarter?.

Yes. You said it right. The bridge you’ll see is still a headwind for us, largely on the learning curve basis. So, the mixed element, if you will, of having a very strong aftermarket is there which is kind of tampering that, but we still have the learning curve impacts going the other way..

Okay.

And do you think -- should we expect that to kind of lessen as we move throughout the next two quarters and into flip positive into ‘19? I mean that’s kind of what you were alluding to when we get those 20% margins?.

Yes. That’s what I was trying to get across earlier. Second half, we start gaining on that learning curve. And we are driving to achieve our cost targets in 2019. So, we’re going on that curve. The volumes are in. So that’s all the part of the plan and we’re tracking. And there is a lot of work to be done there. I don’t want to say there isn’t.

But, we’ve got a dedicated team really pursuing that. And I got high confidence we’ll drive through and meet those cost targets as we transition in next 12 to 18 months..

And then just on the guidance. You took $100 million out, I guess on the top-line. And I’m pretty sure I can tweak the numbers to get down to the $3.60. But, I’m just -- I’m looking at the scenario to deliver that high-end, that $3.80. And it just seems like you’d have to get Aerospace margins north of 22% to even make that $3.80.

So, maybe just some puts and takes, what has to happen to get to that upper end of guidance..

So, first of, it kind of depends on where you started from the original range we gave. But clearly, we believe, we’ve moved the cost structure around enough on the Industrial side of the business but those margins are achievable. And then, on the Aerospace said as Tom said, we’ve got a combination of learning curve.

And then remember there is just raw sales dollars and flow through on the margin that really contributes overall. So, we’ve got a fixed cost base. Most of the capital has all been in place; we don’t see a lot of increases to that. And we’re going to have considerable sales volume increases as we go forward throughout the year.

So, you put the two of those together. And as Tom says, we stay on track with respect to the cost reductions and the learning curves and that’s how you get to the top end of that range. .

Okay. So, industrial flat, so would be all leveraging the aerospace ramp and….

I just want to clarify. There is opportunity on the industrial side as well, it’s not all aero. The industrial margins second half as you can -- you’re doing the math there, what we kind of highlight and there is upside on those margins. So, it’s the combo of those two that get you up to overall..

One other thing Michael that we may -- I don’t know if you know this, on the table we gave back by the outlook, the $0.23 of first quarter charge, the tax is also an element of going from the original 335 to 360 up to the 360 to 380. So, I don’t know if you could that piece. .

Yes.

It just still seems to imply a very strong second half aerospace margin to get up to those numbers?.

Right. And that is what we are planning is a strong margin in aerospace and significant improvement in industrial. .

Just last one, maybe on the aftermarket.

Do you guys expect defense aftermarket to show any signs of acceleration with what we’re seeing with the budget, O&M increases and readiness? I mean, is that going to be a big contributor over the next 6 to 12 months for you guys on that aftermarket -- on the defense aftermarket side?.

In the six months time period, as I highlighted a little bit before, it’s the flow of the money, and it may be a little tough to see in the six months. We go out 12 to 18 months timeframe, I do believe you are going to start to see that flow through.

Does that make sense? It’s just a matter of getting appropriation, getting into the various depots and operating fields, units, and getting that back to Woodward. It just takes time. And so I think it’s probably out of our fiscal year but in fiscal year ‘19..

Thank you. [Operator Instructions] And our next question will come from the line of George Godfrey with C.L. King. Your line is now open..

Thank you. Most of my -- I’d say all but one question has been answered and maybe you’ve already touched on that.

If the gas turbine stays weak at the rate Tom you’re seeing and the recovery doesn’t happen till 2020 but all the strength in the other parts of Industrial continue to improve the way they’re along, is there flat to modest growth in 2019 in the Industrial segment without counting in the L’Orange?.

Definitely, yes..

Thank you. And our next question will come from Pete Skibitski with Drexel Hamilton. Your line is now open..

Hey, guys. Just talking about Aerospace margins, it jogged my memory. Can you update us on how much work you’ve shifted in the Rock Cut and are you seeing the efficiency in Rock Cut that you thought you would see, kind of how much has come out of -- I think the old facility was Loves Park. Just kind of update us on….

Sure. Yes, the facility is really coming to life when you see all the equipment -- it’s much more significant than when did the aerospace factory tours last year. There is still work that’s being done in Loves Park. So, we haven’t finished the transition and everything we intend into Rock Cut, but we are moving quickly on that.

The lines are running but we still are moving up the learning curves on that. We are moving well on those learning curves but we still have a ways I think to hit full efficiency, full leverage really as we move into 2019. But we’re seeing progress as we move through the second half of this year. So, it is tracking well. We are on our plan.

My confidence is high in delivering the earnings in 2019 that we’ve stated we’re going to achieve..

Is there an internal plan, I mean are you going to be out of Loves Park in like a year or so, is that what you are thinking or?.

Well, Loves Park doesn’t go away. It still -- we do our repair and overhaul work in Loves Park and we are continuing to do some legacy hardware there that benefit the lines at Rock Cut. So, what will be -- that facility won’t be fully utilized like it is today.

And anybody that’s been through there knows that we’ve built that -- the original part of the building was 1940, so it’s very old facility. Parts of it are in really good shape. That’s where we are doing our MRO activity and legacy product activity. So that will continue.

But really as we go into ‘19, all the hardware should be in Rock Cut will be there and those lines will running to their designed targets, so ….

Hitting maximum efficiency at Rock Cut next year?.

Yes, right..

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 everyone for joining us today and for your questions. We’ll look forward to seeing you over the next quarter. Thanks again for joining. Bye. .

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