Thank you for standing by. Welcome to the Woodward, Inc. Third Quarter Fiscal Year 2022 Earnings Call. At this time, I’d like to inform you that this call is being recorded for rebroadcast and then all participants are in a listen-only mode. Following the presentation, you are invited to participate in a question-and-answer session. Joining us today from the company are Mr. Chip Blankenship, Chairman and Chief Executive Officer; Mr. Mark Hartman, Chief Financial Officer; and Mr. Dan Provaznik, Director of Investor Relations. I would now like to turn the call over to Mr. Provaznik.

Thank you, Operator. We would like to welcome all of you to Woodward’s third quarter fiscal year 2022 earnings call. In today’s call, Chip will comment on some of his initial observations after joining Woodward, as well as our markets related strategies. Mark will then discuss our financial results as outlined in our earnings release. And at the end of the 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 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 through August 15, 2022, or on our website. 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 three. As always, elements of this presentation are forward-looking or based on our current outlook and assumptions for the global economy and our businesses more specifically, including the expected and potential effects of the ongoing supply chain and labor disruptions, and net inflationary pressures. 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. In addition, Woodward is providing certain non-U.S. GAAP financial measures. We 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. We believe this additional financial information will help in understanding our results. Also, all comparisons made during this call are to the same period of the prior year unless otherwise stated. Turning to our results for the third quarter, net sales for the third quarter of fiscal 2022 were $614million, compared to $557 million, an increase of 10%. Net earnings were $39 million or $0.64 per share, compared to $49 million or $0.74 per share. Net cash provided by operating activities for the first nine months of fiscal 2022 was $86 million, compared to $318 million. Free cash flow for the first nine months of fiscal 2022 was $49 million, compared to $297 million. Adjusted free cash flow was $52 million. Now, I will turn the call over to Chip to comment on his observations, as well as further commentary on our results, strategies and markets.

Thank you, Dan, and good afternoon, everyone. Before we discuss the quarter, I wanted to share some observations from my first few months as CEO. During this time, I met with customers, visited many of our production facilities and engaged with team members. I am impressed by what I have seen so far. I am energized by the role that Woodward has played in helping solve our customers’ fuel and motion control challenges, resulting in improved fuel efficiency, and reduced emissions in both Aerospace and Industrial applications. Woodward has and will continue to develop new technologies to reduce fuel consumption and associated emissions. In addition, our newest R&D efforts executed alongside our customers are enabling a wide variety of clean fuels to power the engines of tomorrow. These efforts are enabling multiple paths to a cleaner, decarbonized world, and I am excited about the opportunities ahead of us. Drawing on my industry leadership experience, I am focused on four main areas, customers, products, operations and our members. Woodward has deep longstanding customer relationships that allow us to collaborate at component or systems levels and help customers solve some of their most challenging problems. I am impressed by our engineering expertise, our technology portfolio and our product road maps. Over the last decade, we have executed aggressive growth strategies to win significant chipset content on some of the most successful platforms in the Aerospace and Industrial markets. Several years ago, Woodward introduced the Woodward production system. Our company’s approach to the lean enterprise journey, we have some showcase facilities and our talented members are engaged in continuous improvement. As a result of our approach, significant value has been delivered to customers and returned to shareholders. My assessment so far, we still have a fair amount of variation site-to-site and our sites…

Thank you, Chip. Our Q3 sales and earnings continue to be negatively impacted by the supply chain and labor disruptions, as well as labor inefficiencies. We anticipated these disruptions and inefficiencies would improve during the quarter, but they did not. They have persisted longer than anticipated and have had a more significant impact than expected. We anticipate these headwinds to last into 2023. Net sales for the third quarter of fiscal 2022 were $614 million, an increase of 10%. Sales for the quarter were again negatively impacted by approximately $100 million due to ongoing global supply chain and labor disruptions. Sales were also impacted by approximately $18 million from unfavorable foreign currency exchange rates. Aerospace segment sales for the third quarter of fiscal 2022 were $402 million, an increase of 18%. Commercial aftermarket and OEM sales were up 44% and 37%, respectively, driven by continued recovery in both domestic and international passenger traffic and increasing aircraft utilization as well as higher OEM build rates. The increase in segment sales was partially offset by delayed shipments of approximately $55 million caused by global supply chain and labor disruptions. Defense OEM sales were down 2%. Defense aftermarket sales were down 12% primarily due to global supply chain and labor disruptions. Aerospace segment earnings for the third quarter of 2022 were $57 million or 14.1% of segment sales, compared to $53 million or 15.6% of segment sales. The increase in segment earnings was a result of higher sales. Segment earnings including as a percentage of segment net sales were negatively impacted by net inflationary impacts, including material and labor cost increases, as well as increases in manufacturing costs related to the supply chain disruptions and inefficiencies related to training new hires. We are taking pricing actions to address inflationary pressures. However, timing can…

Thank you. [Operator Instructions] Our first question comes from the line of Robert Spingarn with Melius Research. Your line is open.

Good afternoon.

Good afternoon, Robert.

Hello, Robert.

Yeah. Chip, a question about commercial aftermarket, is up 44% in the quarter but it was flattish from the March quarter to the June quarter if I have our numbers right and if you could talk a little bit about what happened there, would have expected a sequential increase?

Rob, I am not sure where to start with that one since I wasn’t around for the March quarter. But there is some seasonality in the way we see that business flow in with -- have your removals driven in the summertime, which flows into our -- later in the year.

Yeah. In addition to that, Rob, the other side of this and we have been talking about this for a little while now, it’s really around the deferred maintenance, that’s been out there. The airlines did a really good job during the pandemic and coming out of the pandemic deferring maintenance as long as they could. And you did see good growth in our second fiscal quarter and so we were seeing some of that coming through. It’s still coming through based on the utilization of the aircraft. But some of the timing may be a little different than what you would anticipate from quarter-to-quarter just based on when the airlines decided to do some of that deferred maintenance.

Okay. All right. And Chip, if I could ask a follow-up, and perhaps, focus on your extensive background in the engine business, Airbus has some aggressive production targets out there, obviously, Boeing is doing what it can get the narrowbody up and 787 is going to come back here. But based on your experience, [inaudible] and Arconic after that is it realistic to expect the engine OEMs to be able to meet these longer-term production targets? I am talking about 75 on the A320, that kind of thing, is that going to happen by mid-decade?

I’d be speculating it best, Rob, on that, but these OEMs are very experienced and have a really good command of what their capacity is, and given time, investment and confidence, it’s just a matter of the will to put the capacity in place to serve that. A lot of discussion in the marketplace about if the rates go that high can they be sustained. Is there enough demand to sustain them at that level for long enough to justify the investment and I think that really is a dialog for the airframers and the engine OEMs to come to some conclusion and also look at the pinch points in the supply base and talk to folks like us and investment casting and other places where the investment is substantial to increase capacity. And if everyone gets their head around that there is a demand out there that’s long enough to justify the capacity increase, then there is a good return on that investment. But if people are worried that it’s a bubble or something that would be shorter lived then I have to be a lot of discussion about flattening that out.

Just you mentioned capacity and investment, just on a shorter term basis, is the issue that we see today and particularly on the engine side one of capacity or is it a labor shortage? In other words, the capacity is there, at least to get the near-term rates this year, next year, the problem is labor or do they really need to invest more or is that when you are talking about investment to get to the 25 rates?

So I don’t know enough about where the engine OEMs are on their internals right now, but looking at us and looking at upstream into our supply chain, what I see is a combination of labor and material, and not too much equipment in the way, not too much tooling in the way. And what I say sometimes is that, one company is material shortages, another company is labor shortage if you look, one tier in front of that one. And I think most of what we are seeing experiencing at Woodward is people shortage by and large somewhere in the supply chain whether it’s from the China -- all the way back to a China lockdown, where nobody can go to work or it’s just more of a domestic source that’s having trouble getting staffing ahead of attrition.

Okay. I think that distinction is really important. Thank you.

Yeah.

Your next question is from the line of Pete Skibitski with Alembic Global. Your line is open.

Hey. Good afternoon, guys. Guys, can we drill down deeper into Aerospace earnings this quarter, it was -- you saw some benefit from volume and we are talking about labor here. But you have been through a CapEx cycle, you have I think some of the more modern facilities in automation in the industry. So how come we are not seeing that benefit of automation yet at Aerospace?

Yeah. So -- yeah, Pete, one thing we have had in our prepared remarks was really around the -- both the inflation impact and the labor inefficiency impact. We mentioned back in the February timeframe that we are going to be needing to hire 100 new direct labor members a month for the remainder of the year and getting those members in and trained, would have an impact kind of on our earnings and we are continuing to see that. As Chip just said, related to our capital and I appreciate you are commenting and anybody that seen our facilities knows that we are -- have a very automated facility and we will be able to get the product out at rates that we are talking about. But it does come down to having trained members and having trained machine specifically and being able to get them in, get them hired, get them up the learning curve, we have seen attrition, you have probably heard me talk previously about the number of retirements that we have had. But we are still seeing that retirement and the attrition and so as we are trying to get those members in and on the lines and productive on the line, that’s the impact we are seeing here in the short-term.

And you know, we actually…

Okay.

We have some site-to-site variability in terms of how much is automated on the machining. And so, if you go to a place like Rock Cut, you will see a lot of automation. If you go to a place like Santa Clarita, you might see a lot more manual participation and the machining process and having trained labor ability to facilitate and efficiently get through making a quality part the first time and the target build rate for the shift is something that we are going to continue to put a focus on.

When you guys talked about net inflation, it seems like we have talked about that for at least a couple of quarters now. Should we assume or are you assuming that within a couple of more quarters, your pricing actions just start to take hold? So by I don’t know, the second quarter of fiscal 2023, we should see some net inflation improvements hopefully?

Yeah. So, Pete, thanks for the question. That is a good story for us overall. We have talked about, we are able to realize the price, but the timing may be delayed. So generally let me break it into two buckets. The first being on our OEM side of our business, typically its contractual based, industry based and during the calendar year, increases that we get. So what we saw on January 1, 2022, we did see a price increase, but that only has the 2021 inflation impacts. What we will see in January of 2023 is the industry based pricing increases that we will get based on the 2022 inflation, which I think where everyone is aware, has been significantly higher than any preceding year in any last few decades. So that’s one price realization that we will see. In addition to that, we do have catalog pricing increases that we put in for our aftermarket and that is both on parts and labor, and we have put that pricing increases in. However, some of it takes some time to flow through. For example, if we have purchase orders from our customers, we don’t re-price them. So, although we did start to see some price realization here during our third quarter, we would anticipate that price realization to grow as we go forward.

Okay. Thanks for the color, guys.

You are welcome, Pete.

Thank you.

Your next question is from the line of Matt Akers with Wells Fargo. Your line is open.

Hey. Good afternoon, guys. Thanks for the question. I wanted to ask if you have any early thoughts on next fiscal year and given kind of the slower narrowbody ramp-up we have Boeing and Airbus. On the other hand, I guess, maybe you guys had some catch-up work from this year, if you have any thoughts on just how to stack up relative to some of the long-term target to you at the Investor Day?

Well, maybe those are a couple of different questions. I think it’s too early to really have any specific remarks about 2023, other than saying that the demand is strong and our customers saying we in a note to all members this week. I said I have met two kinds of customers on the road is I have traveled around. One kind is upset, because we are past due on deliveries. The other kind is worried that we are not expanding capacity fast enough to meet the 2023 demand, but we haven’t impacted them yet on being past do. So, I think, the trend for 2023 on the demand side is quite strong and we are very bullish about that. The challenge is it’s such an unstable supply chain environment that we are focused on really getting our arms around that and making sure we understand that well enough before making any statements about what 2023 looks like. I will let Mark comment on anything from Investor Day.

Yeah. So, Matt, as we had discussed in Investor Day, we have the overall Woodward sales CAGR over the next five years at 9% and generally consistent across both segments. As Chip just mentioned, we do see demand is strong and so that wouldn’t be anything that we would be changing today and we will look forward to having that discussion in early calendar 2023 at the Investor Day.

Great. Thanks. And then I guess if I could ask a little more detail on some of the supply chain disruptions and I think chips was one that you highlighted at the Investor Day, as I think it was kind of the long pole in the tent. Is that getting any better or is labor kind of the bigger focus now, just if you could kind of touch on some of the individual components there?

Sure. On the computer chips, that go on the printed circuit board assemblies that go into our different kinds of how we use or equipment that we shipped our customers. A number of those supplier problems that we encountered have gotten better, some by doing things like screening, industrial grade or military grade, chip requirements against commercial grade chip. So we have been doing some different kinds of substitution of components that meet the requirements on -- when we had shortages of the ones that were on our bill of material. We have also worked through brokers and things like that to find enough supply. The main activity though has been redesigning our PCBAs to accept the higher volume chips that are being produced for Automotive in the current generation. And so as we look at long-term, how do we -- how do we stay ahead and be proactive, we are looking at a different cadence on our product management lifecycle as far as that goes maybe a quicker turn time there on redesigns for supporting high volume chips. We have had a number of issues with suppliers that have labor shortages. We have been responding to those in a variety of ways, some of which is been to in-source or dual-source ourselves if it’s machining operations. We have had quite a lot of activity on that. So, we have retired on the order of 20 different supplier risks since the last conference call, but new ones have cropped up and it’s just -- that’s the nature of the current supply chain. We had one in the raw material category that impacted our Rock Cut plant and that was something that resulted from the China lockdown and labor shortage there, their inability to ship some ceramic insert parts to one of the mills that we get aluminum, ingots poured, the net ship to a forging supplier of ours. So it’s like three-tier is away from us that labor problem was encountered and we have been working through alternate sources there to make sure we can recover production for the rest of the year on that one. So I guess to summarize some of the earlier problems that were highlighted a quarter ago have been solved but new ones have shown up. And we are deploying our resources further into the material stream and working hard to control our destiny by bringing a little bit more in-house.

Great. Thank you.

Yeah.

Yeah.

Your next question is from the line of David Strauss with Barclays. Your line is open.

Thanks. Good afternoon and welcome, Chip.

Hey. Good afternoon. How are you, David?

Good. So I want to ask about the defense side of the business, it looks like from a sequen it was down full year-over-year, but looks like from a sequential standpoint that the business actually grew, have we hit bottom there on the defense side, mainly talking about the OEM side?

Yeah. The defense OEM side David is, we have been talking about for some time now, right, the softening on the guided weapons, specifically the JDAM product line. We weren’t able to completely offset that with the rest of the guided weapons programs Small Diameter Bomb and AIM-9Xs. Actually, as we have looked forward here, it is starting to stabilize. However, we do still anticipate some of the JDAM softness to continue as we go forward. But we do anticipate and I think you have heard us -- had heard us talk about that we do anticipate that the defense OEM side of our business, we would excluding the JDAM impact that we would expect to grow. And you obviously with the war in Ukraine and what some of our NATO allies may do, we would anticipate that that would be an opportunity for us as we go forward.

Okay. And Mark, any sense or indication when the JDAM portion actually bottoms out or hits zero for you guys?

Yeah. I’d love it. So I wouldn’t say bottomed out, hits zero. The one thing that we have a little bit longer visibility to is the DOD orders for that. But as we have talked over the last few periods, the one thing that always can, I won’t say dropped in like it’s next month or anything. But we do get foreign military sales orders on that program and they can be not necessarily as long of a lead item of visibility to us. So, that’s always the opportunity for us based on what the foreign military partners might do over the next couple of years. But you can see in the DOD budgets that there is still some softening there with the current ordering pattern that’s out there.

Okay. And on free cash flow, it looks like your guidance doesn’t imply any sort of working capital reversal in the fourth quarter. I think year-to-date you seem like a $120 million or so increase in working capital. How would you expect that -- some unwind from here and then in terms of the Investor Day guidance, Mark, is the $2 billion over five years for free cash flow, is that still good?

So, I mean, let me take the shorter term one. So, you are right, obviously, the investment in working capital has primarily been inventory. We have increased that significantly since the beginning of the supply chain disruption that’s impacted us well over $100 million I think. What we would anticipate for the rest of this year? As you say, we don’t see much improvement with kind of the sales that we have in Q4. We do anticipate receivables would increase based on the timing on those sales. We may get a slight decrease in inventory as we ship that product out. But generally working capital would be pretty constant from where we sit at June 30th. As we look out to the future, one of the things we have talked about is a lot of these, as Chip even mentioned, our demand is strong. These sales are not lost based on the positions that we are in. So it’s just the timing of cash flow. And so, what we are looking at as we move over the next four-plus years is that approximate $2 billion that we talked about at Investor Day would still hold and it’s just a timing initiative as we go forward and we will look forward to again kind of given our thoughts are along the five-year plan when we have our Investor Day in early calendar 2023.

All right. Thank you very much.

You are welcome.

Your next question is from the line of Chris Barry, sorry, Chris Howe with Barrington Research. Your line is open.

Good afternoon, Chip and Mark.

Hey, Chris.

Hi, Chris.

Just wanted to follow up -- hey. Just wanted to follow up on some of your comments or wording used for the China region, as it pertains the Aerospace, you mentioned you see some rebounding and you also mentioned some positives in the Industrial area. But can you just put China into further context, amidst the constant level of uncertainty that seems to overlay that region and how we should anticipate kind of China coming back as we get to a more normal Aerospace margin? In other words, how much is China taking away from where you would like Aerospace segment earnings to be?

Well, I think, it’s fair to say that we weren’t very positive on China or we didn’t meet come across as very positive on China. So it’s very hard to predict. As you know, it’s not really market driven, it’s driven by the government at the top and so hard to predict using first economic principles. Our positive statement was really around Asia Power Gen and that’s not really China, I think that’s ex-China is what we are looking at there. We don’t have a good visibility to improvements in the natural gas truck market. So we are not calling any forecast for improvement there. We just have to wait and see. As far as the commercial aircraft, commercial airline traffic, we are seeing the start of that recovery and what we are counting on is the government not to get in a way of that. For us, the opportunity there if 737 MAX starts flying again and carrying revenue passengers, we will look to opportunities for initial provisioning with airlines that take deliveries of the 737 MAX going forward. So that’s really where our opportunity is generating cycles. Therefore, the aftermarket, new aircraft being delivered there and initial provisioning for those airline customers that get a certain critical mass of planes in their fleet.

Okay. Perfect. Then one quick follow-up, as I think about fiscal year 2023 to an extent to which you can comment, do you still anticipate kind of getting back to historical levels on a run rate basis, maybe not so much in the early part of 2023, but as we get to the latter portion of 2023 to return to pre-COVID levels?

Yeah. And what you mentioned is exactly what we talked about at Investor Day. Obviously, with the demand that we are seeing out there, we were anticipating that in Q4. We will be returning to pre-COVID levels. I would say with the demand that we are still seeing, we would still anticipate that.

Okay. Thanks for taking my questions.

You bet.

You are welcome.

Your next question is from the line of Gautam Khanna with Cowen. Your line is open.

Hello, guys. I was curious just on sales reduction and what is -- it looks like it’s implying like 58% detrimental margins, is that right? And then the arrears of $100 million, what is the guidance in that for the fourth quarter and when do you expect to have those caught up, will we see a quarter or two of kind of above normal shipments as still when?

So to answer the first question kind of the volume decline and the impacts thereof, it does come down to be fairly, I believe your math 50% is in the ballpark definitely. But really a lot of that’s off the back of both the inflation impact on material and labor and also the labor inefficiencies, as I have mentioned earlier, related to the new hire training and the impact that has related to training them and then putting them on the line and then trying to get those numbers up and productive. The other impact that in the quarter that we had and it’s primarily the euro was the FX impact, and that’s really to say, I call a translation impact. It’s just translating our euro based business that has revenue and costs in euros and that has an impact when you translate those over the dollars when dollars almost at par with the euro, which it hasn’t been in almost 20 years. So that’s definitely within the quarter, the impact that we had. Related to the supply chain disruption, what we mentioned is, we do plan on that continuing into 2023. As Chip mentioned, obviously, we have a lot of activity, we have redeployed a lot of resources, we have a lot of suppliers that are in our escalation program that we are working with on a daily and weekly basis, but we don’t plan for that to be until 2023.

Got it. And just to be -- so we should not think of adding $100 million, $150 million or whatever the variances from the original guidance to next year, it will still be a gradual workout, okay?

Yeah. Gautam, I think the fact of the matter is that, there is not enough capacity to just sort of shoot out all that past due, it’s going to happy burn down over the year 2023. I think it’s still being potentially aggressive to say we get everything out next year just due to the fact that I think we will be managing supply chain disruption externally and internally through 2023. So we will be doing our best to burn that down and we will burn it down, how much, I don’t know, but I think you can count on the fact that it won’t be a slug output in a single quarter.

Thank you, guys.

Yeah.

You are welcome.

Your next question is from the line of Sheila Kahyaoglu with Jefferies. Your line is open.

Hi. Good afternoon, guys. Thank you and welcome Chip. Chip since this is your first quarter…

Thank you.

… kind of a tough one for you. I think we could all agree that Woodward has done a good job in terms of organic growth and increasing EPS over the years, but the quarterly volatility is fun for us, not for the stock price. So what are your observations in terms of how you can maybe improve forecasting if you have any yet?

Well, I am not sure about forecasting at Sheila, but one of the things that, I think, drive some variation quarter-to-quarter is operational performance. And so at least that’s the thing I have seen in my brief less than 90-day tenure as a thing to work on. And so I really think that’s an area to focus, to develop excellence internally as well as maybe add a few resources to the team in the lean continuous improvement arena. And so I think that’s really the focus there is to get a very predictable delivery and quality performance and that will help us have a lot of confidence around the financial numbers that we put forth.

Okay. Thanks for that. And then, on just the Aerospace margins, when we look year-over-year, revenues are up almost 20%, sequentially they are up 10%, but yet your EBIT dollar is flat with the prior year and almost the prior quarter, like, so what sort of drove that margin in the quarter, that we have talked about at labor since February, supply chain for several quarters now, so what kind of got worse in the quarter?

Yeah. So, like you mentioned, we have been talking about the impacts on both labor and material inflation, even if you go back to early in the year, we talked about that, we wouldn’t be able to get productivity to offset the labor and material inflation. Obviously, with the acceleration of the inflation even here during our Q3 that had an impact on us in the earnings on a year-over-year comparative basis that did impact us. The continuing of hiring of the -- of new members and getting them in and trained, Sheila, you will recall we talked about needing to have get hired, 100 hired on average kind of per month over the remainder of the year. That -- our attrition has picked up a little bit. So we are hiring, we are a little behind on hiring to that rate and also then being able to get those people online, getting them through our offline training and putting them online and making them efficient. The third one, really on the Aerospace side of the business, Chip mentioned earlier, we are talking about the impact of the bill, all the way back to the kind of the China shut down is the kind of the root cause of that, that does have an impact on our production in our flow capability, and obviously, that volume output when it slows and it’s not moving smoothly and efficiently that has an impact on overall earnings also.

Okay. That makes sense. And then the last question for you, Mark, when we think about your contracts in Aerospace again, where are you falling behind in place and when we think about commercial aero defense, helicopters, jets, and on the OE and aftermarket side, and where are you headed?

Yeah. The biggest impact in the short-term is definitely been on the commercial OEM side. I mentioned earlier on the call. That’s generally the contracts are in the sea based increases on a calendar year. And so as the first half of this calendar year, the inflation has been significant, we have not been able to re-price those at this point. Again, it’s just a timing difference that we will be able to realize those prices and we will realize them in the January timeframe, but that’s definitely the largest impact that we are seeing.

Okay. Awesome. Thank you.

Okay. You are welcome.

[Operator Instructions] Your next question comes from the line of Michael Ciarmoli with Truist Securities. Your line is open.

Hi. Good evening, Chip, Mark. Thanks for taking the questions. I guess just if we went back to last quarter, it sounded like the guidance then assuming any recovery in the supply chain, but obviously the outlook got significantly worse. And I guess even Industrial, the revenue down significantly, did the China nat gas, I thought I was under the impression that was kind of baseline. But I guess what significantly got worse on the Industrial side of the business to drive this drastic of a change on the revenue equation?

Yeah. So, I will take kind of the top level and then I will double click into the Industrial side. So, our range previously at the low end, assume that things were going to get any better generally in the supply chain disruption and what we are calling out now with only one quarter to go is, yeah, they are not getting better and you, obviously, heard about -- you heard Chip talking about kind of the things that we are seeing out there. So, what really that impact has is related to a lot of inefficiencies, the continuation of the higher inflation impact, the supplier disruption, cost impact, we have -- as Chip mentioned, 20 plus suppliers in the highest escalation, supplier escalation process that we are in, where we have people on-site. So, redeploying people, redeploying engineering resources for redesign, et cetera, et cetera, and so there’s a lot of costs that are impacting that. Related to Industrial specifically, I would say the largest individual impact is really the currency impact. A lot of our -- it’s not China. I mean you are right, Michael, we talked about the word we used last time was the OH market that evaporated and we kind of anticipated that would remain that way for the remainder of this fiscal year and that definitely transpired. So, it wasn’t China that was the OH business specifically, it was really the -- primarily the euro impact generally you remember our L’Orange business that we acquired in 2018, it’s a euro denominated business, and unfortunately, the currency rate, the euro to dollar, that impact is offsetting all of the growth in all of the other markets and Industrial that we are seeing and that’s an essence why we are ending up flat for this year.

Got it. That’s helpful. And then maybe just one other one back to, Gautam, I think it was Gautam who was asking this question about picking up this $100 million. What would be the biggest governor on capacity? I mean pre-COVID in Aerospace, you guys did $1.9 billion and we are doing quarterly revenue close to $500 million. Is it labor, would that be the biggest chokepoint in capacity? I mean, obviously, you just mentioned other suppliers and materials. But, certainly, you have done $500 million revenue quarters before. So, what would be the biggest hold-up to getting there and getting more products out the door?

It’s labor, Michael. I mean, our labor and our supplier’s labor, is really the biggest to use your word governor on the ability to increase throughput. And we are putting new strategies in place on development pipelines and bringing people on board that are somewhat qualified and we will train the rest of the way as far as machines go and assembly technicians. The rest, there is additional labor categories like programmers for CNC machines and things like that, when you think about how to get a high mix, low volume through some of the lines, you need some of these talents as well, I mean that’s with both us and our supply base. And we are going work to attack that part of the problem but that’s really the biggest constraint.

That’s helpful. And then just the last one, as we look to maybe, about January kind of 2023 price increase environment, do you guys expect that you can get sort of a real price increase there or is this going to be price increases that are just going to offset the headwinds from inflation and maybe won’t be that accretive to margins?

Yeah. So the -- how I will speak to that one. So really the January 1 is just the contractual based on indices, which in essence is just offsetting the cost increases that we are seeing that are coming through during calendar 2022. You are familiar enough with our business, you know the price realization on the aftermarket side based on kind of our sole source position, our high intellectual property, we are on the hot part of the engine, on part of our Aerospace business, so that’s where we would have more opportunity for price realization ahead of just cost.

Perfect. Thanks, guys.

You are welcome.

Your next question comes from the line of Noah Poponak with Goldman Sachs. Your line is open.

Hey. Good afternoon, everybody.

Hello, Noah.

Good afternoon, Noah.

I think the revenue CAGRs that you have laid out for the segments applying to next year or does that look more back end loaded in the multi-year period given some of the headwinds?

Yeah. I’d say it’s a five-year CAGR. I mean, obviously, the math works over the five years. Obviously, our 2022 revenue based on both the supply chain disruption impact and the currency impact kind of get you to a different basin in the first year, but it’s definitely over the five years, and I mean, as Chip mentioned, we see strong demand across most of our markets and that’s what’s driving that CAGR.

Okay. And I guess I am still not understanding the Aerospace margin down sequentially and year-over-year when the revenue was up sequentially and year-over-year. I understand that the items you are just -- you are talking about in terms of supply chain and labor and cost inflation. But, certainly, you have those last quarter and to some extent a year ago. Is it really incremental cost to solve those issues, I am struggling a bit there still.

Yeah. So, it’s a couple of things. One is -- I will start with the one you mentioned, the incremental costs to resolve some of these issues. Chip mentioned at the investment that we are looking to make. We have dual-sourced through in-sourcing, we have redeployed significant amounts of people, we have redeployed engineers to help on redesigns to help on transitions from bringing on another external source or moving capability internally and all of that as cost and that’s definitely impacted us. Also sequentially, if you think about the inflation impact that we are all seeing through the April, May, June timeframe, right? I think we are all especially in June anticipating that it was at peak then would be coming down and then sure enough June comes in that it’s even higher than what it had been prior to that. So we are definitely seeing that also. I would say generally that’s the two impacts that we see as the investments that we are making to help with the supply disruptions, but we can get improvements starting to move forward and also continue to a high inflationary period that we saw during our fiscal Q3.

How long do you anticipate making these incremental investments and expenditures?

I think we are going to be experiencing the supply chain disruption probably well into 2023. But as we bring more operations in-house, as we realign our supply chain with those that are performing and not having disruptions, I believe we will see lower costs later into the year and be able to burn down that past due backlog. Just to give you an idea of the type of activity we are already engaged in. We have moved 500 plus parts this year already and there is another 2x that in process and being identified for -- from two kinds of planning processes. In our park transfer process is taking a lot of resources right now, but it’s the right way to deploy our resources, because we want to serve customers, we want to restore our profitability and we are just going to have to work through this over the next year and get where we want to be from a simpler supply chain and a more robust supply chain, it’s also resilient and that we play a larger role. And frankly, we do a better job of how we engage with our suppliers and transmit our demand, get their re-back that that demand is received and they can meet it. These kinds of things that may sound simple, but when you are earning this complex of an operation, sometimes those things aren’t as clear as they need to be. So I think this is going to be with us for a bit, but we will be stronger on the other side of it.

Okay. You have had guidance to cover the Aerospace segment from pre-pandemic the 20% plus while exiting fiscal 2023. Is that still in the scenario analysis or should we push that out a bit just given these new items?

Yeah. I am not really ready to confirm any forward-looking guidance on profitability, Noah. But I can tell you that I will be smarter and will understand more in November when we talk about 2023 and then the same in late February when we have an investor conference and we will be able to, I think, paint that picture with a little bit more clarity for you.

Okay. Yeah. That’s fair. Okay. I appreciate it. Thanks so much.

Thanks.

Yeah. You bet.

There are no further questions at this time. 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 p.m. Eastern Daylight Time by dialing 1-800-770-2030 for a U.S. call or 1-647-362-9199 for a non-U.S. call and by entering the access code 4278216. A rebroadcast will also be available at the company’s website, www.woodward.com. We thank you for your participation on today’s conference call and ask that you please disconnect your line.