Woodward, Inc. (WWD) Q3 2016 Earnings Report, Transcript and Summary

Thank you for standing by. Welcome to the Woodward, Inc. Third 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 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. Don Guzzardo - Director-Investor Relations & Treasury: Thank you, operator. We would like to welcome all of you to Woodward's third quarter of fiscal 2016 earnings call. During today's call, Tom will comment on our markets and related strategies, and then Bob will discuss our financial results. 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 August 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 three. As always, elements of this presentation are forward-looking or based on our outlook and assumptions for the global economy, our markets and our businesses more specifically. Those elements can and do frequently change. Please consider our comments in light of the risks and uncertainties surrounding those elements. We also direct your attention to the reconciliations of certain non-U.S. GAAP measures included in today's slide presentation and our earnings release and related schedules. Management uses these non-U.S. GAAP measures in monitoring and evaluating the ongoing performance of Woodward and each business segment. Now turning to our results, net sales for the third quarter of 2016 were $508 million, an increase of 3% compared to $495 million in the third quarter of 2015. Earnings per share were $0.81 for the third quarter of 2016 compared to $0.66 in the third quarter of 2015. EBIT for the third quarter of 2016 was $69 million compared to $63 million in the prior year third quarter. Strong performance in our Aerospace segment was partially offset by ongoing weakness in our Industrial segment. Free cash flow excluding the after-tax proceeds from the formation of the joint venture with GE was $31 million for the first nine months of fiscal 2016 compared to an outflow of $19 million for the first nine months of fiscal 2015. Capital expenditures for the first nine months of 2016 were $129 million compared to $191 million in the prior year period. Now, I will turn the call over to Tom to comment further on our results, strategies, and markets. Thomas A. Gendron - Chairman, President & Chief Executive Officer: Thank you, Don, and good afternoon to those joining us today. We delivered solid sales and operating earnings this quarter despite continuing economic headwinds. We saw strong performance in our Aerospace segment, particularly in defense, with Commercial remaining solid. Our Aerospace growth will continue to accelerate as new aircraft platforms continue to launch. In Industrial, our results were weaker than expected as a result of the persistent global macroeconomic challenges and uncertain environment that has caused end users to delay new capital investments. With that said, we did see sequential sales and operating profit improvement in the third quarter and we'll continue to believe that many of our industrial end markets are at or near the bottom of the cycle. We expect continued improvement in the fiscal fourth quarter. Moving to our market segments, starting with Aerospace. Commercial Aerospace markets are strong and industry order backlogs remain in very healthy levels. Returning from the Farnborough Airshow last week, it was impressive to see the new and refreshed aircraft showcased and flying at the show. This included the neo, the MAX, the 787-9, the A350, the E2, the C-Series, and the Joint Strike Fighter. All of these aircraft are moving into production and together represent significant market share gains for us. The A320neo powered by the Pratt & Whitney Geared Turbofan engine has entered into service and the first deliveries of the A320neo powered by the LEAP engine are expected to occur this month. The 737 MAX certification testing is ahead of schedule and is expected to be launched early next year. Both programs have significantly expanded content for Woodward and represent a significant increase in our overall market share. Commercial aftermarket continues to be driven by strong passenger traffic. For Woodward, we anticipate accelerating growth related to initial provisioning as new narrowbody programs launch. As expected the commercial rotorcraft and business jet markets remain soft largely related to continued economic weakness specifically in the oil and gas industry. Defense sales, both OEM and aftermarket continue to accelerate as a result of the heightened level of global instability and favorable budget conditions. Increased demand for smart weapons that use our actuation systems continues to be a growth driver. With no anticipated change in the geopolitical environment, we expect defense to remain strong for the foreseeable future. Turning now to Industrial, the positive long term market trends we have discussed in the past remain as relevant as ever, namely expanded use of natural gas, increase in global emissions regulations, and a rising middle class. These trends were main drivers of future growth. In the near term, however, our industrial businesses continue to suffer from the impact of depressed natural gas truck market, principally in China, and reduced overall demand due to global economic weakness and lower oil prices. Within transportation, while the Chinese government continues to increase its incentives to use natural gas versus diesel, the natural gas truck market remains highly depressed due to uncertainty around the regulatory environment. Power generation and related markets continue to show pockets of strength driven largely by aftermarket activity in both gas and steam turbines as the existing equipment continues to be used and kept in service along the periods. Investment in new equipment, however, remains soft. Within oil and gas, conditions have not improved and sales into related markets continue to decline. Initial indications for 2017 point to a slight recovery. While we believe we are at or approaching the bottom of the trough in many of our end markets, we have and will continue to take action to address the reduced industrial demand environment to pursuing aftermarket and other near-term related sales opportunities and adjusting our cost structure. As we go forward, we'll benefit from the structural and discretionary cost reduction actions taken across our businesses. We will continue to identify and implement further opportunities to drive growth and improve operating earnings leverage. In summary, as we look ahead to the remainder of fiscal 2016, we expect the positive momentum in Aerospace to build and the Industrial segment to show improvement. As new aerospace programs launch and industrial markets stabilize, we'll transition to a strong cash-generation cycle following years of heavy investment in new platforms and capacity. We remain highly confident in our long-term outlook for both businesses. We have industry-leading technologies serving top global customers, with strong recurring revenue streams focused on attractive end markets. Now let me turn to Bob to discuss the financials in more detail. Robert F. Weber - Vice Chairman, Chief Financial Officer & Treasurer: Thank you, Tom. As has been the case in recent quarters, our third quarter reflected strengthening in the Aerospace segment and persistent macro weakness in Industrial is impacting our results. Importantly though, the strategic actions we took earlier in the year have begun to favorably impact our operating results. We generated a 9% increase in EBIT on a 3% increase in sales, resulting in the highest operating leverage we have had in almost two years. These favorable trends should accelerate in the fourth quarter and beyond. In Aerospace, sales increased 7% this quarter fueled by strong OEM and aftermarket and defense sales and continued healthy large commercial and regional OEM jet sales. This was partially offset by ongoing weakness in business jet and rotorcraft sales. While we experienced typical commercial aftermarket variability this quarter, the aftermarket remains robust and sales were up 9% year-to-date. Aerospace segment earnings for the quarter were $58 million or 18.7% of sales, compared to $46 million or 16.1% in the same period last year. This reflects 25% earnings growth on a 7% sales increase. The improvement was driven largely by the higher sales volume and aftermarket mix. Our Industrial segment sales were down $7 million in the quarter or 4% compared to the same quarter fiscal 2015. This reflects the significant improvement from the year-over-year second quarter decline of 11% and the first quarter decline of 24%. As Tom mentioned, sales were negatively impacted by further deterioration in natural gas truck engines in China and continued weakness in reciprocating engine power generation and other large capital projects. This was partially offset by strength in wind converters and aftermarket sales. There was no meaningful foreign currency impact. Third quarter Industrial segment earnings were $22 million or 11.0% of sales compared to $31 million or 14.8% of sales in the prior year period. Segment earnings were negatively impacted by lower sales volume and product mix, along with cost associated with bringing our Fort Collins facility online. While our fiscal third quarter did not meet our expectations related to our Industrial segment, we continue to expect marked improvement in the fourth quarter. At the Woodward level, gross margin percentage for the third quarter of 2016 was 27.0% compared to 29.0% for the prior year period, reflecting industrial headwinds and facility costs. Research and development for the third quarter of 2016 decreased to 5.9% of sales from 6.8% of sales in the prior year quarter. Selling, general and administrative expenses for the third quarter of 2016 were 7.2% of sales, compared to 7.9% of sales in the prior year quarter. Overall, we are on track to realize the anticipated savings from the strategic actions we took in the first quarter. The effective tax rate for the third quarter of 2016 was 19.5% compared to 24% for the third quarter of 2015. We now expect our full year tax rate to be approximately 23%. The tax rate for the quarter and the full year is being favorably impacted by the effect of the new stock compensation accounting treatment and reinstatement of the research and experimentation credit earlier this year. Net earnings for the third quarter of 2016 were $51 million or $0.81 per share compared to $44 million or $0.66 per share in the third quarter 2015. Strong Aerospace performance and a lower tax rate in the quarter offset continued weakness in our Industrial segment. Looking at cash flows, operating cash flow was $362 million for the first nine months of fiscal 2016. Excluding the impact of the proceeds from the formation of the joint venture with GE, net of taxes paid to-date, operating cash flow was $160 million for the first nine months of fiscal 2016, compared to $171 million for the first nine months of fiscal 2015. Free cash flow, excluding the net joint venture formation proceeds was $31 million for the first nine months of fiscal 2016, compared to an outflow of $19 million for the first nine months of fiscal 2015. Capital expenditures are continuing to decline from prior levels, with $129 million spent in the first nine months of 2016, compared to $191 million for the same period in the prior year. As we approach the end of the fiscal year, we may see some capital expenditures move into our next fiscal year. We still anticipate free cash flow to be approximately $100 million for the full year, excluding the net proceeds related to the joint venture formation. Year-to-date, we have executed $125 million in share buybacks and our anticipated full year share count is in line with our previous guidance. Lastly, turning to our fiscal 2016 outlook. As we discussed during the second quarter call in April, we expected a second half weighted year. As it turns out some of our industrial sales and earnings have shifted into the fourth quarter and beyond. However, most of the growth drivers we discussed previously remained the same. Furthermore stronger than anticipated performance in Aerospace has offset continued pressure we're experiencing in industrial. Looking at the fourth quarter specifically, the strategic actions we took in the first quarter are expected to produce additional cost savings in the fourth quarter. On a segment basis, in Aerospace, we expect continued strength in defense market and commercial sales momentum to build as the narrowbody programs began to launch. In Industrial, increased heavy frame gas turbine OEM sales continued aftermarket strength and strong orders from our wind turban customers are expected to generate significant fourth quarter improvement. Turning to the full year, we now expect Woodward total sales to be approximately $2 billion. We project Aerospace segment sales will be in the upper end of our previous guidance. Industrial segment sales will be lower than our prior expectations and subject considerable uncertainty as we close out the year. Additionally, we now anticipate segment earnings as a percent of sales to Aerospace to be stronger than our previous guidance and industrial to be down from our prior expectations. With regard to earnings per share, we expect the negative impact of the larger than anticipated decline in industrial segment sales will be offset by the lower tax rate and stronger Aerospace performance. Therefore, we are maintaining our fiscal year 2016 earnings per share guidance of $2.75 to $2.95. This concludes our comments on the business and results from the third 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 Our first question comes from the line of Gautam Khanna with Cowen & Company. Please go ahead. Gautam, your line is open.

Okay. Terrific. Thank you. Good afternoon. Robert F. Weber - Vice Chairman, Chief Financial Officer & Treasurer: Good afternoon.

Hey, wanted to just explore the aftermarket deceleration, plus 1% commercial aftermarket. Earlier in the year, it was north of 10% if I recall. Is there anything specific you can attribute the slowdown to on any specific programs or what have you? Was it engine versus actuation, any sort of color that'll parse that number? Thomas A. Gendron - Chairman, President & Chief Executive Officer: I think what you really should look at is the year-to-date number. And I guess, we do get quarter-to-quarter variability. We're up 9% year-to-date. The aftermarket is strong. The fundamentals are good. The engine shop visits are up. It was a good quarter a year ago. So I think it's just really quarter-to-quarter variability and year-to-date strong. That's the way I would look at it. I don't think there's anything else beyond that.

What does your guidance imply for the fourth quarter? I mean, previously, you've said plus 5% for the year. What are you anticipating? Thomas A. Gendron - Chairman, President & Chief Executive Officer: Still in that range.

Okay. Just maybe a basic question. You have a $0.20 range still for the year with one quarter to go. I guess I'm curious, why such an extreme range? Thomas A. Gendron - Chairman, President & Chief Executive Officer: Well, I think the nice thing is that's been our range since day one for the fiscal year and as we move into this quarter where we've got a big fourth quarter, there is some uncertainty in it, so we felt we just stay consistent, leave it where it was.

Okay. And then, previously you talked about some of the HA class industrial gas turbines being a big opportunity in the second half of the fiscal year. In your new guidance for Industrial, have those opportunities slipped to the right, or what specifically – maybe if you can just talk for a second about the IGT side where the aftermarket's still strong but what about the OE side. Thomas A. Gendron - Chairman, President & Chief Executive Officer: IGT is doing very well, both OE and aftermarket. We have strong shipments planned in our fourth quarter moving in our first quarter. And I think as everybody on the call is aware of that our customers in that market have large projections for their second half of the year. And we're tracking those well. So really no change there. The bigger uncertainty has been around some anticipated recovery and some of our reciprocating engine end markets and those are coming a little slower. We're seeing some things move a little bit to the right so not disappearing, just a little bit on the delay and slower recovery than we were anticipating upfront. But IGTs, wind, aftermarket are all doing well, OEM, some of the recent lines and our steam turbine line on the OE side is soft. So that kind of continues.

Okay. And the one last one on the tax rate. 23% obviously there is a bit of a catch-up, what should we be anticipating the tax rate to be in subsequent years beyond the current fiscal year? Robert F. Weber - Vice Chairman, Chief Financial Officer & Treasurer: Well, so historically, we've always said we're kind of in that 30% but every other year, we had R&D credit that caused that to be up quite variable. But that that's been locked in. We will be a little bit under that and the changes in the treatment of stock option compensation allowing it to be deductible, if you will, for tax provision purposes will also bring that down a bit. So 23% reflects some other investment credits and so on. So it will be somewhere north of that but probably below that 30%, so call it a 26%-ish sort of rate.

Okay. 26%. Thank you. I'll turn it. Robert F. Weber - Vice Chairman, Chief Financial Officer & Treasurer: 26% to 28%. Thank you.

Okay. Thanks, guys. Thomas A. Gendron - Chairman, President & Chief Executive Officer: Thanks.

Thank you. And our next question is from the line of Sheila Kahyaoglu with Jefferies. Please go ahead.

Thanks, guys. Good afternoon. Thomas A. Gendron - Chairman, President & Chief Executive Officer: Good afternoon.

Just a follow-up on the HA turbine. Based on what GE said, if we assume you'll ship about 20 units in the fourth quarter and maybe a few slip into your first quarter, would that – should we anticipate an additional $30 million of revenue for the fourth quarter? And I guess, did you ship any this quarter in terms of the HA turbine? Thomas A. Gendron - Chairman, President & Chief Executive Officer: We have been shipping them. And as you know, Sheila, the GE forecast is on a calendar year and we're trying to time it into our fiscal year. So the positive is we are shipping today. We're going to fulfill that demand and we will hit quite in a bit in our fourth quarter, but it obviously rolls also into the first quarter. So it's a mix. But it's in progress right now.

And in terms of the industrial order rates across the businesses, have any of them improved on a sequential basis or year-over-year? Robert F. Weber - Vice Chairman, Chief Financial Officer & Treasurer: On order rates, industrial order rates? Thomas A. Gendron - Chairman, President & Chief Executive Officer: Well, what we can say is if you look at sequential quarters, you will see that even though we're down year-over-year, we have started to see small increase sequentially. We will see it increase in the fourth quarter. We do see some indications, however slight, of changes in order volume. So we really do believe we're at the bottom of the trough. And because we have multiple end markets, we do believe that they're all at or near the bottom, and some have started to turn. So we are seeing that and we believe, as we move into 2017, that we will see a turn in the markets. The big question still and as we move into providing 2017 guidance later is at what ramp upwards really be. And at the moment, we're not really in a position to call that out. But we are seeing the turn. So we have good confidence that we really are at the bottom and moving upwards from here.

Okay. And then one on the Aerospace profitability, I guess how should we think about the timing of the narrow-body shipments as it relates to you guys and just the low volume starting out of the gate in new facilities and what that does to your margins? Thomas A. Gendron - Chairman, President & Chief Executive Officer: Well, we are producing that hardware already out of those new facilities and that cost is reflected. So what I would say is the improvement in Aerospace margins is trending towards the long-term goals that we highlighted and have committed to deliver. I feel real good about that and we're actually a little ahead of that plan. But we factored in the new facilities, the ramps, the initial – the aftermarket sales that go with that ramp-up. There's a lot of variables in there, but that's all part of our margin growth that we anticipated and are tracking well too. So I guess that – hopefully, that answers that we're tracking to our plan.

And then, last question. In terms of free cash flow, it was a little lighter than anticipated. Is that just timing of inventories and what is the CapEx expectation for the year. Robert F. Weber - Vice Chairman, Chief Financial Officer & Treasurer: CapEx expectation is pretty similar to what we've had in the past. We had $180 million at one point. We said it could be as low as $170 million, given continued large projects, there could be some pushed into 2017. So it's going to be in that, call it $170 million area. In terms of free cash flow, I think, other than quarterly variability, we're still on the $100 million we said at the beginning of the year. And so we still anticipate that that will be the full year. We did see some – some of the sales increased right at the end of the quarter and that's helped a little working capital in the quarter, but that's kind of normal variability. So we still anticipate the full year of $100 million.

Okay. Thank you. Robert F. Weber - Vice Chairman, Chief Financial Officer & Treasurer: Sure.

And our next question is from the line of Pete Skibitski with Drexel Hamilton. Your line is open.

Hi, guys. I just wanted to ask more about Industrial. And I guess, Tom, I wondered if you could help us understand more on the industrial side. Going back to the last call, you guys said you had pretty decent visibility into the second half of the year and when I think about power gen OE, my vision is big capital project with kind of long time horizons. So it's kind of hard to understand or maybe I'm wrong here. Are projects being canceled or coming under funding pressure because of a slower economy? Help us understand kind of what's going on in power gen OE, if there is a geographic element or not? Thomas A. Gendron - Chairman, President & Chief Executive Officer: On the power gen, so just to hit it, the IGT power gen is tracking well and is on what we were forecasting. Power gen associated with wind is doing well and it's growing. Power gen that would be tied to newbuilds, tied to steam turbines is down. That tends to be Asia-related and now that is a little softer than we were thinking. Power gen tied to reciprocating engines, so gas and diesel engines, is a little slower than we were anticipating. Those latter ones are shorter cycle. The turbine side is long cycle. So from the standpoint of visibility, the visibility on the long cycle is holding. Visibility on the short is a little slower. Some movement into the fourth and out of the fiscal year has occurred. So that's kind of the balance wrapped around that.

Okay. And then, I mean, for the full year, you're getting easier comps but still seeing some weakness. So is it – power gen as a whole, are you guys expecting it down on a full year basis now? And the other thing I'm very curious about is what's the split in power gen between OE and aftermarket at this point? Thomas A. Gendron - Chairman, President & Chief Executive Officer: Well, I don't think power gen – we are looking at a very sizable fourth quarter as you can anticipate from the numbers and a lot of that is in power. So I think you're going to see a strong finish the year in power. I don't know specifically split on the OE and aftermarket on power. We're having good aftermarket tied to the IGTs, not strong as good aftermarket type steam turbine, that's been strong. But the aftermarket right now is helping – that's one of the strengths of Woodward, is we have a gigantic installed base. We're getting good revenue out of the installed base, offsetting softness in the OE. The fourth quarter is moving and the first quarter is the bigger IGT bulge that's coming and wind continues to do well. So it's a balance between all of types of power gen segments but, overall, it's going to be good and we expect a strong fourth quarter.

Okay. And last one, Tom, maybe I didn't hear you right, but just. In your opening comments, were you alluding to the potential for another cost takeout round in Industrial? Should we expect that or are you uncertain about that right now? Thomas A. Gendron - Chairman, President & Chief Executive Officer: No, that's now what we're alluding to. We're alluding that we're still driving cost out of the organization. But I think what you're asking is, are we foreshadowing a restructuring charge, and that would not be the intent of those comments. Robert F. Weber - Vice Chairman, Chief Financial Officer & Treasurer: And a lot of the original savings that we talked about are in the fourth quarter. So we'll continue to savings but we were not implying there would be another action case.

Okay. Thanks guys. Thomas A. Gendron - Chairman, President & Chief Executive Officer: Yeah.

And our next question is from the line of Robert Spingarn with Credit Suisse. Please go ahead. Robert M. Spingarn - Credit Suisse Securities (USA) LLC (Broker): Hi, good afternoon, guys. Thomas A. Gendron - Chairman, President & Chief Executive Officer: Hi, Rob. Robert M. Spingarn - Credit Suisse Securities (USA) LLC (Broker): I wanted to ask you, since the visibility on the Industrial side is what it is, but you have fairly good visibility in Aerospace. Either Tom or Bob, when do you see the growth rate really kicking in between the OE and the provisioning? Is there a particular quarter that we're to see all that come together? Thomas A. Gendron - Chairman, President & Chief Executive Officer: Well, right now, on the provisioning for the Aero – Commercial Aerospace is what you're referring to, right? Robert M. Spingarn - Credit Suisse Securities (USA) LLC (Broker): Yeah, primarily. That's not – yeah, it's not really a defense question. Thomas A. Gendron - Chairman, President & Chief Executive Officer: Yeah. So the provisioning really is tied to new operators and new routes. That's where – that's the best tie. So what you're seeing is as the program coming to launch and getting out there, the first in line operators, we start calculating, so it really starts to curve just as the operators are taking their new aircraft and actually slightly before and then as they have multiple aircraft, depends on the route structure they're doing. So we've got a good handle on that. We're looking at it. So it's actually beginning – we're really starting to see it in this fourth quarter and it will start progressing in 2017. So it is happening already, low because we're not really in full production but really getting into production but it is beginning. Robert M. Spingarn - Credit Suisse Securities (USA) LLC (Broker): I'm asking the question, Tom, because it seems like it's two good things at the same time. You're ramping OE and all of the takers are new, all the customers are new on the – at least on the narrowbodies for the most part, especially on the GE side, right, on the Boeing side? Thomas A. Gendron - Chairman, President & Chief Executive Officer: We're on both sides, that's the beauty of it right now. Yes. That's what we've been highlighting. Robert M. Spingarn - Credit Suisse Securities (USA) LLC (Broker): Right. And so – okay, so that being the case, as long as we're on fourth quarter, historically, your Aerospace margins really tick up nicely in the fourth quarter. It sounds like they will again, but is it the kind of magnitude we've seen over the last several years, a couple 100 basis points or given the strength that we've just had, is it not quite that strong? Thomas A. Gendron - Chairman, President & Chief Executive Officer: Yes. That's where we look at. We're going to have a strong fourth quarter in Aero and it will be up. You've got to get handle on the history if you're going to – we have some of that normal seasonality and we're expecting a large fourth quarter in both segments. We're anticipating positive margin increases. Robert M. Spingarn - Credit Suisse Securities (USA) LLC (Broker): Okay. And going back to CapEx, Bob, you updated us on what you expect for the rest of the year. Can you just let us know, given where you are on your big construction projects and other projects, how does this play out and at one point should we start to see an acceleration in free cash flow conversion toward – I guess, you probably never get all the way up to 100%, but what's the target level and when do you get there? Robert F. Weber - Vice Chairman, Chief Financial Officer & Treasurer: So we're still targeting, we've gave that long-term target of $1.5 billion over the five years. We believe we were on a good path related to that. The facilities are largely complete. We will continue to have equipment purchases as we go forward. And so, CapEx is going to be – we called out kind of in that $100 million range would be equivalent to depreciation, amortization as we move forward over the next five years. Next year, we'll probably see a decline towards that level with some of the project, the equipment cost being pushed into 2017 but definitely get closer to that level as we go forward. So it's beginning. So it's beginning this quarter. It will begin more again in the fourth quarter and then in 2017 we'll start to see a real meaningful drop. Robert M. Spingarn - Credit Suisse Securities (USA) LLC (Broker): Okay. And then just lastly, Tom, we've talked about recently the supply chain and things that are happening there with regard to on the commercial side, the OEMs in the supply chain. Can you just refresh us on where you stand in that process? How things have worked with your OEM customers, your level of IP and how you feel, just strategically about your pricing power going forward? Thomas A. Gendron - Chairman, President & Chief Executive Officer: Well, the main thing to – on the pricing, I think working with supply chain, first and foremost the issues are – we've stress test – our OEMs have stress test at Woodward, both the engine manufacturers and the airframers to ensure that we can deliver on their rate plan. So from that standpoint, we're in a very good shape and that also went down to our supply base. In terms of contracts and pricing, I wanted – where we are with pricing is all these new programs are really locked in with life of the program type pricing arrangement. So we're basically locked in. We have some protections for inflation. So I view that as a very good thing. We're going to be able to hold our pricing, but there isn't really opportunity to increase pricing but we're not going to be under – all the price negotiations have already occurred. So we're kind of locked in. So I don't know if that was your question again. Robert M. Spingarn - Credit Suisse Securities (USA) LLC (Broker): Yeah. No, it is. A lot of other suppliers, it sounds like they're not necessarily locked in or contracts are being reopened, or there's some continued discussion as opportunity to increase share comes across, but not quite the same for you, it sounds like. Thomas A. Gendron - Chairman, President & Chief Executive Officer: All these new engine platforms and where we had new on the airframe, it's more of this. And a lot of that's tied to, let's say, tied to the tech hardware we provide, to the intellectual property that's tied to it. So it's more of a typical model these days Is to negotiate the long-term agreement and lock everything in, or basically for just the life of the program. Robert M. Spingarn - Credit Suisse Securities (USA) LLC (Broker): Okay. Thanks for the additional color. Thomas A. Gendron - Chairman, President & Chief Executive Officer: Sure.

And our next question is from the line of William Bremer with Maxim Group. Please go ahead.

Good evening, gentlemen. Thomas A. Gendron - Chairman, President & Chief Executive Officer: Hi, Bill. Robert F. Weber - Vice Chairman, Chief Financial Officer & Treasurer: Hi, Bill.

Appreciate the comments on the initial provisioning. I was hoping you could quantify that a little more than what you did. I know we're starting to ship the little quantity into four quarter as well as 2017, but I was hoping to get a little more in terms of granularity there. Thomas A. Gendron - Chairman, President & Chief Executive Officer: Yeah. Bill, probably not going to give any more detail on – there's a lot of factors that go into that. We do our best working on forecasting light. The initial provisioning is going to be meaningful contributor to our aftermarket. But just as meaningful are the large amount installed base in particular CFM, V2500, GE90, they're going through accelerated shop visits right now as its kind of the units in the field by the hours accumulated and that's actually a major driver of our aftermarket as well. So, initial provisions can be a nice matter and it's always a good part of a new program as you launch, but aftermarket in total has always elements and we had lot of strength in other areas. Initial provision is just one that's coming.

Can you give us an update on defense and smart weapon for you? How was that this quarter? How much did it accelerate? Thomas A. Gendron - Chairman, President & Chief Executive Officer: The defense is doing quite well for us. And then on the smart weapon, this is really where we do the vent actuation controls is increasing and if you go out and look you can see that there's been a large increase in DoD and foreign military sales around these smart weapons. So that has gone up and it's continuing to increase in rate. So that's very positive for us. The other positives that are coming are the Joint Strike Fighter locked in a couple years of orders with the DoD. I think it's very positive and the new tanker KC-46 is going to now move into initial production. It's another good program for us. Overall, from smart weapons to new launches to hours being put on planes and maintenance, defense is actually a positive going forward here from 2016 into 2017.

All right. Got one for you, Bob, in terms of Industrial, do we have an opportunity in Industrial to beat last year's fourth quarter? Can we be up year-over-year in top line there? Robert F. Weber - Vice Chairman, Chief Financial Officer & Treasurer: Yes, it's going to be tough. Our fourth quarter's always strong. We anticipate this one to be strong as well. It will be very close. And so that may give you some idea. We've seen sequential improvement here now since the first quarter. So we see strong sequential in the fourth. Tom referred to seasonality as well as some specific contracts that we're hoping will be in the fourth quarter as opposed to being pushed out. So, yes, there is the possibility and it will be close.

And are we also calling that out on the operating margins there as well for the fourth quarter? Robert F. Weber - Vice Chairman, Chief Financial Officer & Treasurer: The volume always helps the operating margin, yes.

Agreed. Thank you, gentlemen. Robert F. Weber - Vice Chairman, Chief Financial Officer & Treasurer: Sure.

And our next question is from the line of Michael Ciarmoli with KeyBanc Capital Markets. Please go ahead.

Hey, good evening, guys. Thanks for taking my questions. Maybe just to stay on the Industrial margins theme. Can you guys elaborate, the volumes have been up, you're still not back to those 1Q margins, has this been the plan for the benefits of the restructuring to all really hit in the fourth quarter or you guys kind of surprised that you're not maybe getting a little bit more leverage and drop-through given where you've come from sequentially? Robert F. Weber - Vice Chairman, Chief Financial Officer & Treasurer: Yeah. No, I'm not surprised. It was always fourth quarter related. There was some in the third and if you recall, I mentioned that the Fort Collins facility did start up here in the second and third largely. So the impact has always been fourth quarter related, not necessarily only because of the savings on the cost reductions, but also related to the new facility in the second and third.

Got it. And then, maybe just on that fourth quarter and the full year. So can you give us – are the swing factors, if we were to sit here and look at the $2.75 to $2.95, are the swing factors all going to be industrial or kind of what you're alluding to based on provisioning? Can we see some potential swing factor there in Aerospace? Just what gets you down to $2.75 versus up to $2.95? Thomas A. Gendron - Chairman, President & Chief Executive Officer: On the Aerospace side, if you want to say, the swing factor will be on-time introduction of LEAP-powered neo. All looks good. Aftermarket associated with that, aftermarket sales associated with our other legacy program. So that is a little different in the OEM side. We forecast, we're pretty darn accurate with it. But to get down – when you get down to the last month, some things can shift in and out of the quarter. So that can have an impact and could push up or down on the numbers. The Industrial side is, we have a very large volume to ship and there can be some movement from September to October and in November. So those are the factors and it's really a matter of executing on plans and ensuring and primarily around the aftermarket sales of both the aircraft and industrial coming through in the quarter as projected.

Got it. Thomas A. Gendron - Chairman, President & Chief Executive Officer: That's where the range will come from.

Okay. Perfect. And then, Bob, you talked about the tax rate. It looks like you also had other income of $5.6 million in the quarter. Can you just articulator or elaborate what that was? Robert F. Weber - Vice Chairman, Chief Financial Officer & Treasurer: So part of it's the JV, right, so roughly one half of that number. I think we call out in the Q you'll see is related to the joint venture. So net impact of the joint venture as we've said is insignificant overall, but we do have the geography change of the income from the JV's now down in other income line. And the Q will break that out each quarter.

Okay. So should we expect that level of other income on a go-forward basis? Robert F. Weber - Vice Chairman, Chief Financial Officer & Treasurer: Well, yes, we hope the JV will continue to grow. As those programs that are in the JV, the large engine stuff continues to grow. So that number should grow kind of with Aerospace as we go forward.

Okay. And then just the last one for me maybe going back to Rob's question on pricing. So locked in pricing as rates continue to climb and if Boeing and Airbus do take these rates higher, you guys won't see any step downs. Is that the way we should think about your contracting? Thomas A. Gendron - Chairman, President & Chief Executive Officer: Yes. Our pricing is solid and the way I would look at it is everything's been factored into our guidance and with the volume, we get the leverage on margin and that's part of how we're going to get that $20 million plus segment earnings that we've been highlighting to you for a few years here.

got it. Okay. Perfect, guys, that's all I have. Robert F. Weber - Vice Chairman, Chief Financial Officer & Treasurer: Thanks. Thomas A. Gendron - Chairman, President & Chief Executive Officer: Thanks.

And we have a follow up from the line of Gautam Khanna with Cowen and Company. Please go ahead.

How far in advance of an H class turbine delivery do you guys ship? Thomas A. Gendron - Chairman, President & Chief Executive Officer: We ship quite a variety of hardware on the machine. So some of it is shipped to site, so it's not much in advance. Some of it is shipped to be integrated into the turbo machinery, and that is shipped a couple months in advance.

Okay. And so you're already seeing – in the quarter just reported, you've seen some of the benefit of that second-half calendar-year ramp that GE has talked about? Thomas A. Gendron - Chairman, President & Chief Executive Officer: Yes, it's just started, yes, but we are seeing some of it. We did see some in the third quarter. We're going to see significantly more in the fourth quarter.

And then in the first quarter again, right? It will continue. Thomas A. Gendron - Chairman, President & Chief Executive Officer: Correct. It will continue, yes.

Okay. I just wanted to explore again the commercial aftermarket in the quarter, recognizing it's lumpy. But your comments on kind of scope of engine overhauls and first shop visits and what have you, it seemed quite consistent with what you've said in prior quarters, and yet the growth rate was only plus 1%. So again, I was just trying to ask if you could give us any granularity on what you saw on the engine side versus elsewhere perhaps. If there was any change to that level of activity, or was it a function of a compare or some other item? Thomas A. Gendron - Chairman, President & Chief Executive Officer: Yeah. I think we have to look at it, as we had a strong quarter last year. And so sometimes you have a strong quarter compare and I think that's what we have on the aftermarket. And I would also say if you look at a plus 9%, that varies year-to-date. That's very strong and compared to a lot of our peers, I think that's very strong. And so you're seeing the effects coming through. So it is sometimes timing between quarters and year-over-year comparison, but we'll bring in fourth quarter, as I was just previously stating, we should have a good fourth quarter on an aftermarket as well. So there aren't any negatives out there that we're seeing on the aftermarket. If anything, I think the current and longer-term trends are positive just due to the installed fleet, the mix we have with that fleet and the new units coming online. So I know it looked a little funny year-over-year, but I think overall, 9% through the first nine months is showing that we have a strong aftermarket and then it's going to continue.

And can you comment on the trend sequentially, June versus March? How do the revenues track in the aftermarket? Robert F. Weber - Vice Chairman, Chief Financial Officer & Treasurer: Not sure I follow, Gautam, but I think we've said it can have quarterly variability and it did, so it clearly was down the 1% and then the first two quarters were pretty strong at that time. We said we didn't expect that to hold and we continue to maintain – it's always around the traffic level. Traffic is 6.5% to 6%. And so we anticipate we're going to migrate to that level as we go forward.

I ask because, obviously, you reported last one month into the quarter. And it sounded at the time as though – recognizing the formal guidance is still up mid-single digit, it sounded as though the strength of the first half was continuing. And so I'm just wondering did you see any change within the quarter? Robert F. Weber - Vice Chairman, Chief Financial Officer & Treasurer: No.

Was there any trends you can ascertain or I don't know? Robert F. Weber - Vice Chairman, Chief Financial Officer & Treasurer: I don't think we meant to imply it, if we did. Because we maintained the 5% and we said we anticipated it would moderate. I think we referred to favorable overall in terms of accelerated shop visits and so on. So a 9% rate is still above that 5%. And so it's been strong, but quarterly variability's still expected to moderate down to the 5%. But it remains to be seen.

Right. Which implies that the September quarter will be again close to zero. right? Robert F. Weber - Vice Chairman, Chief Financial Officer & Treasurer: It would imply that. And again, if it is, we would still maintain that's quarterly variability, not necessarily a trend.

Okay. All right. Thanks a lot, guys. Robert F. Weber - Vice Chairman, Chief Financial Officer & Treasurer: Sure.

And we have a follow-up from the line of Pete Skibitski with Drexel Hamilton. Go ahead.

I guess a quick housekeeping question, I guess, for Bob. Hey, Bob, it seems like you guys have been running pretty lean on the corporate expense side in the last couple of quarters. It kind of implies, call it, a $45 million run rate on a full year basis if we exclude the first quarter special charges. So I'm just wondering should we expect an inflection up in the last quarter here in corporate expenses? Or is $45 million going forward the new lean run rate that you guys are on? Just your thoughts... Robert F. Weber - Vice Chairman, Chief Financial Officer & Treasurer: Yes, I'm looking at my boss and there's clearly no intent for it to go up. So no, we continue to run a fairly lean corporate environment and we will intend to do so. So we anticipate getting further leverage on that as we go forward into the 2017 and beyond. So no, in the absence of something special, I don't mean to imply any cost reduction or anything like that. But usually what you see is whether we have joint venture expenses or something like that that pops up, we tend to stay overall very lean in a corporate environment.

All right, great. Thank you.

And Mr. Gendron, there are no further questions at this time. I will now turn the conference back to you. Thomas A. Gendron - Chairman, President & Chief Executive Officer: Okay. Well, I appreciate everybody joining us today and thank you for your questions. And over the next quarter, look forward to seeing many of you. Thank you.

Ladies and gentlemen, that concludes our conference call for today. If you would like to listen to a rebroadcast of this conference call, it will be available today at 7:30 PM Eastern Daylight Time by dialing 1-888-266-2081 for a U.S. call. Or 1-703-925-2533 for a non-U.S. call and by entering the access code 1673285. A rebroadcast will also be available at the company's website, www.woodward.com, for 14 days. We thank you for your participation on today's conference call and ask that you please disconnect your line.