Thank you for standing by. Welcome to the Woodward, Inc. Second Quarter Fiscal Year 2019 Earnings Call. At this time, I would like to inform you that this call is being recorded for rebroadcast and that all participants are in a listen-only mode. Following the presentation, you will be invited to participate in a question-and-answer session. Joining us today from the company are Mr. Tom Gendron, Chairman and Chief Executive Officer; Mr. Bob Weber, Vice Chairman and Chief Financial Officer; and Mr. Don Guzzardo, Vice President of Investor Relations and Treasurer. 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 2019 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 13, 2019. 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. I would like to refer to and highlight our cautionary statement as shown on slide 3. As always, elements of this presentation are forward-looking or based on our outlook and assumptions for the global economy and our businesses more specifically. Those elements can and do frequently change. Please consider our comments in light of the risks and uncertainties surrounding those elements, including the risks we identify in our filings. Woodward adopted the FASB Accounting Standard update number 2014-09, revenue from contracts with customers or ASC 606 effective October 1, 2018 and results for the second quarter and first half of fiscal 2019 including adjusted and organic amounts are presented on that basis except as specifically stated otherwise. Prior period amounts are presented under the previous accounting standard ASC 605. We believe the impact of adoption of the new standard will not be material for the full fiscal year 2019. However, we believe there…

Thank you, Don, and good afternoon everyone. In the second quarter of 2019, we delivered strong results in both our Aerospace and Industrial segments marking a record first half of the year. Aerospace markets continued to be very robust, while previously pressured Industrial markets are improving as expected, particularly in both natural gas and diesel engines. We are encouraged by recent economic data that drives more confidence and strength in the second half, although some uncertainty still remains. As a result, we are increasing our outlook for the year. Turning to recent events. We are saddened by the tragedies leading to the grounding of Boeing 737 MAX. We're closely monitoring the situation as the investigation continues to unfold. At this time, we do not anticipate any significant impact in our planned production rates. We will continue to assess potential impacts related to commercial aftermarket from both initial provisioning and legacy aircraft. Moving to our Aerospace markets. Our Aerospace segment again delivered superior results driven by demand for new fuel-efficient aircraft and continued strength in global passenger and cargo traffic. Load factors remain at an all-time high, which continues to drive aftermarket volumes. Defense demand remained strong, particularly for Woodward programs with budgets anticipated to further support incremental military spending. We're seeing healthy activity across most of our Defense markets. Turning to our Industrial markets, in power generation, the globalization and related shift to natural gas, both power generation and the process industries is accelerating. Significant infrastructure investments in pipelines, processing plants, LNG tankers, and terminals are substantially increasing the availability and utilization of natural gas as an emissions-friendly source of energy. We believe this will lead to return to growth for Industrial gas turbines. The tremendous growth in Internet traffic and data storage is also driving demand for data center…

Thank you, Tom. We posted another great quarter. Aerospace segment net sales for the second quarter of fiscal 2019 were $483 million compared to $386 million for the second quarter a year ago, a 25% increase. Aerospace segment net sales were driven by continued strength across commercial and defense OEM and aftermarket programs. The second quarter of 2019 included $33 million of Aerospace segment net sales related to the adoption of ASC 606, primarily due to customer-provided components. Commercial aftermarket sales were up 32% compared to the prior year quarter or up 21% on a consistent ASC 605 basis. Woodward commercial aftermarket sales were exceptionally strong for both legacy aircraft and additional provisioning. For the remainder of the year, we anticipate commercial aftermarket growth to moderate versus the prior year based on the strength of the second half last year and the potential for lower initial provisioning due to the grounding of the Boeing 737 MAX. Aerospace segment earnings for the second quarter of 2019 were $102 million compared to $75 million for the same quarter in the prior year. Segment earnings for the second quarter of 2019 were increased by $9 million related to the adoption of ASC 606. The increase in Aerospace segment earnings was predominantly driven by higher sales volume across all market categories, partially offset by increased variable compensation related to our strong financial performance in this first half. Segment earnings as a percent of segment net sales were 21.1% for the second quarter of 2019 compared to 19.3% in the same quarter of the prior year. Under consistent application of ASC 605, segment earnings as a percent of segment net sales would have been 20.5%. Turning to Industrial, Industrial segment net sales for the second quarter of fiscal 2019 were $276 million compared to $162…

[Operator Instructions] And our first question comes from the line of Sheila Kahyaoglu from Jefferies. Your line is open.

Thank you. Good afternoon, guys.

Hi, Sheila.

Hi. I guess the first question the commercial aftermarket business was up 21% in the quarter. Can you talk -- can you parse that demand a little bit? What was the initial provisioning driven versus the legacy business? And then how are you just thinking about MAX production going throughout the year?

I'll give you the split and then Tom can comment maybe on the MAX.

Yes.

You know, initial provisioning, while up obviously significantly is still a relatively small percentage of the overall total. So, the larger element of growth is related to legacy aftermarket, which really represents those fleet dynamics and increased airtime on the aircraft that we’ve got more content on. And -- but initial provisioning is strong and remains so.

Yes. I think, Sheila as we're looking at the MAX, I think as many of, the production lines are staying wet. We're still producing at the 52 per month rate. And for the foreseeable future, we think that will hold. Obviously, why we said there's some risk or uncertainty in the second half is if the MAX doesn't come online, there -- I suppose there is a risk to those production rates, but at the moment, we would say initial provisioning is probably the larger of the uncertainty tied to the MAX versus OEM production. That's at least our view at this time.

Thanks for that color. And then just on L’Orange, it continues to perform well. Can you maybe give a little bit more commentary around where you're seeing the biggest benefit from a revenue synergy perspective or from an end-market perspective there? A – Tom Gendron: Yes. Well first the integration of L’Orange has gone extremely well. We're ahead of schedule. We're getting to the synergies we were identifying. On top of that, the end markets are still doing well. We're seeing good utilization in the marine market which is driving aftermarket sales. Oil and gas is still performing well, and so those are the primary drivers both OE and aftermarket, and the outlook for the remainder of the year is still -- it's really solid, and it's been performing as anticipated, maybe slightly better than anticipated. Q – Sheila Kahyaoglu: All right. Thank you. A – Tom Gendron: Thanks Sheila.

Our next question comes from the line of David Strauss from Barclays. Your line is open. Q – David Strauss: Thanks. Good afternoon. The 16% organic Industrial growth in the quarter, could you break that out by end market, power gen versus transportation versus oil and gas what that looks like? A – Robert Weber: Yes. Quantitatively, you'll see some more detail in the footnote. That's probably the best place to get it. But overall, it was in almost all areas. We saw a lot of strength in large gas, we saw strength in small gas, diesels have been very strong. Wind is probably the -- renewables is the only soft spot really across the board for the Industrial business, so it's kind of as we said in the past year, we expected it to start turning around and that's exactly what we're seeing. Q – David Strauss: Okay. And then in terms of the guidance, I think the guidance is up $0.10 to $0.20 from the beginning of the year, and I think at the beginning of the year, just taking L’Orange specifically you had said L'Orange was going to be $0.35, and I think last quarter you said it was going to be roughly double that amount in terms of accretion. Is that still right? And if so, what's -- kind of what's the offset within that overall guidance increase? A – Robert Weber: Yes. I mean the offset is largely still uncertainty. So, second half, we still see some. We've got lots of things going on, obviously as Tom mentioned, on the MAX and so forth impact that may have. You have the overall breakdown of kind of the various pieces of the puzzle pretty much accurate. Last quarter, we said we thought it would probably jump up, L’Orange would go to $0.60 from $0.35. Now, we think we see that plus a little bit from there. So overall it's more the uncertainty than anything. Q – David Strauss: Okay, thanks guys. A – Robert Weber: Thank you.

Our next question comes from the line of Gautam Khanna from Cowen. Your line is open. Q – Gautam Khanna: Yes, thank you guys. First of all just within the guidance now for the fiscal year what is the aftermarket growth rate assumption? A – Tom Gendron: Yes. The aftermarket -- you talked commercial aftermarket right, Gautam? Q – Gautam Khanna: Yes. A – Tom Gendron: Yes. For commercial aftermarket, we're looking at high-single to low-double digits for the full year. As you get to the second half of the year, we have really high comps versus last year, and we have some uncertainty around the initial provisioning as we discussed earlier. Q – Gautam Khanna: Right. And just to be clear on the provisioning, it sounds like it's fairly small relative to the overall commercial aero aftermarket. Is there any way to quantify? Is it 10%? Is it 15% of the total after... [multiple speakers]? A – Robert Weber: Your number is directionally accurate. [multiple speakers] a 10% of the total. So it's not necessarily small. I mean 10% is still -it's a good part, but it's not the majority. Q – Gautam Khanna: Okay. On the OE shipments related to the new single aisle programs, are you guys -- you talked about the learning curves last quarter. Just curious are they both profitable A320neo shipments and 737 MAX shipments on the engine side and the air frame. Are you planning -- are you tracking to the plan of being kind of at OE average margin at this point [ph] by the end of fiscal year? A – Tom Gendron: We are. We will -- but just for reference we're continuing to see margin enhancement as we move into 2020 though. So we're not at our target, but we…

No. We are contracted to flex with them.

Okay. But so far no change to cash terms or anything of the sort?

No. There is none no. Okay, so like I said at the moment, we're tracking to the production rates. We're watching like everybody, but we're optimistic it will come online in the near future. And this time period we'll then use to catch up on the supply chain's past due. So that's current outlook, but that's why we call it uncertainly and some risk in the second half since we never know what will exactly happen. But at the moment our outlook is consistent.

Okay. Thank you. Appreciate it.

You bet.

Our next question comes from the line of Christopher Glynn from Oppenheimer. Your line is open.

Thanks. Good afternoon.

Good afternoon.

So $100 million of revenue beaten in the quarter, congratulations. On the guidance, it implies really for both segments second half revenue's notably a little less than the second quarter rates, that's contrary to your normal seasonality. So just wondering if there are any particular pronounced bullets of revenue that was recognized in the quarter that kind of spikes out from your estimation of the underlying markets or your participation therein?

No. What I would say is we're tracking well. We had a real solid first half. We're looking at second half and we're just factoring in some uncertainty. But there really is nothing else pulled in or changed. So we'd be continuing to address the markets and just reflect some uncertainty as we always look at whether it's the MAX, the renewable market or volatility that we always see in China. Those are the things that could affect the second half but nothing is pulled in.

Okay. And maybe saying that -- asking that a little different way. Was there something in the quarter that developed within the market trends that -- what was the biggest upside from your perspective?

We saw, I would say, continuing and strong aftermarket particular in Aerospace. But we also saw good aftermarket in Industrial. China is -- our China end markets, which is covering transportation oil and gas and the power were healthy and actually quite strong. So those led on the positive. As Bob highlighted earlier, the renewable was kind of pressured, but most our end markets and activity came in strong, possibly a little stronger than we really were anticipating up front. Looking forward, we see the markets continuing strong just with the uncertainty that we've been highlighting that we're watching carefully.

Okay. And in terms of the comment that the shift to natural gas for power gen and processing is accelerating. Wondering if you could just kind of clarify the term processing there. I'm not sure what that refers to. And then just a little more color on the characterization of acceleration.

Yes. So what we're really looking at there is one with natural gas, it's -- we've highlighted before, it's a very eco-friendly energy source. So, from an emission standpoint, very positive. The cost or the pricing on natural gas is quite good today, quite low, so that's driving demand. So the fundamentals are very strong. What we mean by processing would be pipelines LNG, particularly LNG plants both -- on both ends of the supply of LNG and the use of LNG. We're also seeing natural gas being used more because of the price as a feedstock and the petrochemical activities. So that's where we're seeing the demand to increase for natural gas. We see that continuing with the abundant supply and the pricing. So -- and then we're also seeing higher use in transportation and particularly in Asia. So that's driving further demand. So, that combination is where we're seeing the growth.

Great. Thanks for the color.

Yes. You’re welcome.

[Operator Instructions] And our next question comes from the line of Pete Skibitski from Alembic. Your line is open.

Hi guys.

Hi, Pete.

So is providing revenue guidance more difficult or more unpredictable under ASC 606 versus 605? I'm trying to get to -- I'm not sure if can you answer this or not whether the revenue guidance boost was more due to your markets or more due to maybe kind of unpredictable this customer inventory area?

Yeah. The overall guidance is related to both. So, there is an element of the customer provided inventory. Now that we have a number of quarters under our belt and we have better visibility to that, I would say it's similar to any other forecastable item in terms of how we see that going forward. But the other piece of it is largely the performance overall. And so the combination of those two things are what's causing us to raise the sales guidance.

Okay.

I don't think it's gotten any more difficult.

Okay. Got it. Okay. And so, you've been confident enough to raise your revenue guidance even with the H2 uncertainly. But you didn't raise your free cash flow guidance. Can you tell us why that was?

Well, I think it's because it's a robust free cash flow guidance. So, I think at the moment, we do think it's really a solid number. And at this point, we think that's a good number still.

Okay. Last question. In your first quarter 10-Q the cash statement. You guys didn't disclose all the working capital changes in your cash flow statement like you normally do. Is that also a 606 issue, or is that going to be kind of the norm going forward?

It will be the norm going forward. It's not necessarily related 606. But just a summarization in the Q.

Okay. Okay. Thanks, guys.

Our next question comes from the line of Chris Howe from Barrington Research. Your line is open.

Yes. This is Chris Howe, Barrington Research. Good afternoon and great quarter.

Thank you, Chris.

Had a few questions here. The first, previously this is just for bookkeeping, you had mentioned the enforcement of the regulations in China occurring around July. Has that already occurred, or July is still the expectation?

July is when they adopt what they call China VI emission regulations. So that's actual firm date. And they're driving towards that and we expect at this time that those regulations will be adopted in the summertime.

Okay. And then in terms of L’Orange, you mentioned the integration is going to plan. As we look at full year guidance and perhaps even longer term towards the 2023 targets that you provided at Investor Day, how should we look at the upside here in terms of margins? And what potential there is to go beyond where they are now?

We were -- yeah, where we highlighted for industrial margins is to be at 16%-plus. This year, we said we would hit 14%. So, I think we're tracking well. And as we move forward we see line of sight to get into that 16%-plus. So I think that's still holding and that does include the L’Orange business being a part of what's emerging from that.

turbine sales:

We fully expect the gas turbine part of it and when we look at our turbomachinery, we have gas turbines, steam turbines to compressors. We definitely see that picking up and moving forward. So, we've seen stabilized and slightly growing in total. The renewable side or our wind business is a little more pressured. And we've highlighted this in the past, it's more based on our customers’ market share and that we have versus looking at the whole market. And so, we have some pressure there. And just happens to be the programs we're on and our customers' success rate. So that's actually what's driving the renewable side. But on the turbomachinery side, it's turned the corner and we anticipate it to start turning up as we move into 2020.

Okay. Great. And then one last thing. We're still looking at 6% organic growth within industrial if we exclude L’Orange that for the year?

So we're higher than that.

Yeah. We believe it will be above the 6%, closer to high single.

Okay. Thank you.

Yeah. Thank you.

[Operator Instructions] And our next question comes from the line of Michael Ciarmoli from SunTrust. Your line is open.

Hey, good evening, guys. Thanks for taking the questions. Nice results. Maybe just to stay on that line of questioning. I mean, so, the Industrial organic growth doing a little bit better than expected. It sounds like L’Orange is doing better than expected. What about on the Aerospace side? What's driving the bulk of the upward revision there? I mean, was it just the aftermarket since that update or that outlook has now been updated? - Tom Gendron: Aftermarket and then the other thing to highlight which we did a little bit in our prepared remarks is our military defense activity is very robust at the moment. And we've seen enhanced sales and our order book is strong and the -- what I would call the RFP, the proposal activity is very strong. So we're seeing a good tailwind from Defense spending, and strong commercial as well. So, basically the Aerospace market is very healthy. The only big uncertainly out there is the MAX. And like we said, right now it's tracking to production rates. And we're very hopeful to see it get back online soon. Q – Michael Ciarmoli: Got it and what about just the operating margin aspect of the guidance, I mean you're clearly getting better organic performance. Why aren't you getting any additional operating leverage there? I would've thought, even with the -- on the Industrial side with that organic piece performing much better the cost you've taken out over the years. And even with Aerospace it sounds like you're still hitting on those learning curves, hinting that you're going to get margin enhancement as these OEM programs commence. So it seems like to get to that 20% aero margins are just going to be flattish to be flattish. And again lot of uncertainty in Industrial,…

And we do have a question from Pete Skibitski from Alembic. Your line is open. Q – Pete Skibitski: Yeah. Just a couple of follow-ups guys, on Duarte, is the Duarte relocation completed? I'm just trying to understand if we should expect any more EPS adjustments related to Duarte or not? A – Tom Gendron: Duarte will be for the most part completed by the end of May. Q – Pete Skibitski: End of May okay, got it, so maybe one more quarter. Okay. A – Tom Gendron: Right, we still have some in this quarter, the upcoming quarter. Q – Pete Skibitski: Got you and then, Tom, I think in the past you talked about tougher comps in the precision weapons area. Is that something that maybe you've been surprised about the demand just continues to be kind of toward? A – Tom Gendron: Yeah. In our smart weapons area, the demand has been strong. The outlook right now if I -- it can vary. As you guys know with the Defense procurement. But I'm looking out probably another two years of strong demand maybe more. But right now, it's been very healthy and continuing. Q – Pete Skibitski: Okay. And I appreciate color. Thanks guys. A – Tom Gendron: Okay. A – Robert Weber, Jr.: Thank you.

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

Okay. Well, thanks everybody for joining us today. And I appreciate the questions. And we'll look forward to seeing many of you during the next quarter and before our next call. So thanks again for joining. Bye.

Ladies and gentlemen, that concludes our conference call 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 1-855-859-2056 for U.S. or 1-404-537-3406 for non-U.S. and by entering the access code 3186128. 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 lines.