Woodward, Inc. Q3 FY2025 earnings call

Management Statement and Operational Highlights

• Strong Performance: Reported strong third quarter results exceeding sales and earnings expectations, driven by robust demand in Aerospace and Industrial segments and disciplined execution.
• Safety Initiatives: Focus on safety via Human and Organizational Performance (HOP) program, with 7 new sites rolled out this year to enhance risk identification and safety measures.
• Key Milestones: Selected to provide spoiler control actuators for Airbus A350, a major achievement for commercial flight control; completed acquisition of Safran's North American electromechanical actuation business, strengthening position in electromechanical actuation technology.
• End Market Updates: In Aerospace, supply chain challenges impact aircraft deliveries but legacy engine LRU overhauls and LEAP/GTF service activity remain strong; in Industrial, gas turbine portfolio (LNG, oil & gas) and marine demand are strong, with focus on lean transformation for capacity and lead time improvements.

Segment Performance

• Aerospace: Third quarter sales were a record $596 million, up 15% year-over-year. Defense OEM sales were strong, up 56%, commercial services sales rose 30%, commercial OEM sales were down 8%, and defense services sales were down 16%. Earnings for the Aerospace segment were $126 million, with margins expanding 140 basis points to 21.1% of segment sales.
• Industrial: Third quarter segment sales were $319 million, down 3% year-over-year. Excluding China on-highway and divested combustion product lines, core Industrial sales grew 9%. Oil and gas was up 16%, marine transportation up 16%, and power generation was flat but up double digits excluding the divestiture impact. Industrial segment earnings were $48 million, with core margin expanding to 15.6% of sales.

Guidance

• Raising full year sales and earnings guidance. Expected consolidated sales to be $3.45 billion to $3.525 billion.
• Adjusted EPS expected between $6.50 and $6.75, with Aerospace margins between 21% and 21.5% and Industrial margins approximately 14.5%.
• Adjusted effective tax rate expected to be approximately 17%.
• Free cash flow expected to be between $315 million and $350 million, lower due to increased working capital needs.

Risks

• Macro environment uncertainties including tariffs, geopolitical matters, and supply chain dynamics that could impact business performance.
• Uncertainties in the global economy affecting demand and operational conditions for the business.

Q: Someone asked about the marine -- so the marine is doing better than you've talked about the long-term profile, given industry capacity kind of at that level. So just curious what's driving the upside this year. Maybe it's simply price, but also curious if you're taking share in some respect or building out the naval profile alongside commercial and merchant?

A: Chris, I think the easiest way to think about how marine is going for Woodward is that our customers are taking share as well as the capacity increases and orders from the shipyards and the services business. So it's like those 3 things. It's price, it's the platforms that we're on, their winning positions on the ships, and then the service opportunity from the utilization is quite strong.

Q: Bill, you ballparked quarterly sales rate for the Greenville divestiture. Could you speak to the impact to the Safran deal on results and then also what the cash usage was for this quarter?

A: For Safran, when it got announced, they sized the business. And we're focused on taking it, growing it and at the end, improving it. The cash usage for the quarter related to Safran deal details weren't disclosed in detail.

Q: Maybe Chip, can you give a little bit more color on this A350 spoiler win? I mean, in terms of what the expected chipset content will be, I guess, my understanding, you've got to develop your own IP. When maybe those first sales are going to occur? And any kind of expected margin profile you could talk to? It sounded like maybe the existing incumbent on this walked away, just given their return profile. And I guess a couple of hundred million of investment sounds kind of significant for just that 1 platform. Is this a broader play to position yourself for future kind of actuation spoiler wins on that next-gen narrow-body?

A: The spoiler actuator business is substantial. The A350 program is a good one. We're targeting 2028 entry into service for our hardware. On margin, quite often on programs, they can be margin dilutive, but with this displacement, we know the rate we have to catch. It's a substantial but manageable investment and a broader play for future opportunities.

Q: Bill, you ballparked quarterly sales rate for the Greenville divestiture. Could you speak to the impact to the Safran deal on results and then also what the cash usage was for this quarter?

A: For Safran, when it got announced, they sized the business. And we're focused on taking it, growing it and at the end, improving it. The cash usage for the quarter related to Safran deal details weren't disclosed in detail.

Q: Sheila, following up on the new facility. How do we think about the few hundred million? Is it '26 and '27 so $300 million over 2 years? And I know I'm making up numbers here. How do we think about the payback on that? And the commercial...

A: We look at this to be about a couple of hundred million dollar investment, spread out over '26, '27. Some could leak into '28 but most between those 2 years. We think it's a good program with good returns.

Q: I had a couple of questions. And perhaps -- I dropped so I'm just curious. Did you address China natural gas and what demand signals you're seeing from those customers?

A: We've reinstated that Q4 will be around $10 million. The overall economy continues to dampen the demand and the order rate in that business.

Q: Big picture, have you seen any demand erosion from U.S. trade policy and all the changes we've had with U.S. trade policy since April anywhere in the portfolio?

A: I wouldn't say we've seen demand drop off. I think we've seen some maybe unnatural volatility and some delays and then spikes. We had some delayed China service orders earlier in the year. And then we've had some piling on of orders maybe at 1.5 to 2x the normal amount in third quarter and fourth quarter.

Q: Previously, you had this free cash flow target out through 2026 of $1.2 billion cumulative. Is that now off the table, given the reduction in the free cash flow forecast for this year and what you're talking about, it sounds like for CapEx next year?

A: I think sort of our underlying business and our plan, we still are -- we still see being able to deliver the $1.2 billion. But we're still figuring out exactly the CapEx spend in '26 and that may have an impact on it. We'll come back with more clarity at the end of the year.

Q: Chip, just to clarify an earlier comment you made, were you saying that LEAP and GTF aftermarket revenue is approaching legacy narrow-body aftermarket? or was the comment that total revenue from LEAP and GTF including OE is approaching legacy aftermarket? I just want to clarify that.

A: The point was that in the aftermarket, in the service business, which is comprised of spare end items, repair and overhaul as well as spare parts, in those categories, that LEAP and GTF are gaining and getting into the same ZIP code as the legacy.

Q: Chip, when we think about growth in power generation over the coming years, should we be looking at the growth at GE Vernova and Rolls-Royce when we think about your growth? Or are there any specific nuances with respect to Woodward's position that would drive a meaningful divergence between what those OEMs are looking at and then what you might look at?

A: I think broadly speaking, we see the same kind of growth they do, but it can get a little bit nuanced in terms of which platform wins which application because if a certain gas turbine wins, it starts to win more or a certain recip engine, this liquid wins, then our hardware may or may not be on those OEMs. So broadly speaking, if you average the OEMs, I think you'd get something close to what we're seeing.

Q: Chip, in the beginning of the year in the initial guidance, if I recall, you had contemplated Aerospace aftermarket revenue growing low to mid-single digits. And year-to-date, it's now, I have it up 24%, I think that's right. The excess 20 points of growth, how much of that is pent-up demand, extended duration of the legacy fleet versus how much of that is sounds like maybe the LEAP and the GTF are coming along a bit faster than you planned at the beginning of the year?

A: It is a combination of both of those, as well as price. We see few signs of the legacy slowing down. And LEAP and GTF has continued to deliver more units into overhaul for us.

Q: Gavin, on LEAP, GE a week or 2 ago, said they expect a 25% shop visit CAGR through the end of the decade. Anything to keep in mind about your growth rate relative to that?

A: That's an exciting growth rate. For us, some of our LRUs are not necessarily correlated with a shop visit in terms of when we see them. We're more correlated directly to hours and cycles.

Q: Gavin, on JDAM, I didn't see the step up in the budget. Do you guys have that contract locked in? Or just wondering your visibility on that going forward.

A: So we have POs from our customer and we're responding to those and fulfilling. I don't know what the locked in you're referring to, but we have POs from our customer