Woodward Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 16, 2023

There are 13 speakers on the call.

Operator

Thank you for standing by. Welcome to the Woodwork Incorporated 4th Quarter Fiscal Year 2023 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 are invited to participate in a question and answer session. Joining us today from the company are Chip Blankenship, Chairman and Chief Executive Officer Bill Lacey, Chief Financial Officer and Dan Provisniak, Director of Investor Relations.

Operator

I would now like to turn the call over to Mr. Provisniak.

Speaker 1

Thank you, operator. We'd like to welcome all of you to Woodward's 4th quarter fiscal year 2023 earnings call. In today's call, Chip will comment on our strategies and related markets. Bill will then discuss our financial results as outlined in our earnings release. And at the end of the presentation, we will take questions.

Speaker 1

For those who have not seen today's earnings release, you can find it on our website at woodwork.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 November 30, 2023. 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'd like to refer to and highlight our cautionary statement as shown on Slide 3.

Speaker 1

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. Those elements can and do frequently change. Our forward looking statements are subject to a number of risks and uncertainties surrounding those elements, including the risks we identify in our filings. In addition, Woodward is providing certain non U. S.

Speaker 1

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.

Speaker 1

Now, I'll turn the call over to Chip.

Speaker 2

Thank you, Dan, and good afternoon, everyone. Improved execution, Coupled with robust demand and progress on our strategic priorities delivered strong top line growth in fiscal 2023. Our focus on improving operations resulted in increased output, which allowed us to serve customers better and deliver enhanced margins. I'd like to thank our team members for their hard work in a challenging environment. Their commitment to Woodward and our customers resulted in a strong finish To fiscal 2023 and frankly, a strong start to our fiscal 2024.

Speaker 2

As anticipated, The strategic investments we made to strengthen our supply chain resulted in significant improvements in the second half of the year. Our robust supplier escalation process proactively identifies at risk suppliers and creates mitigation plans To ensure continuity of supply, our rapid response machining centers are working as designed and we continue to leverage our machining capabilities to offload suppliers and our internal shops as they run into short term capacity constraints. Woodward's full engagement and proactive problem solving with our suppliers has vastly improved the stability and performance of our supply base has become integral to our overall supply chain management process. We believe we are well positioned to deliver on future demand. Earlier in the year, we streamlined the Aerospace and Industrial segments and added experienced leadership to the company to accelerate our lean transformation.

Speaker 2

We integrated the Turbine and Reciprocating Engines business units into 1 industrial business. We reduced structural costs and achieved pricing to offset significant inflation. We initiated a product portfolio rationalization effort, which focused on pruning lower performing products to both simplify operations and improve profitability overall. Through the fiscal year end, we eliminated approximately 18,000 SKUs. While these were relatively easy actions to take, The next wave will require more finesse and a customer connected approach to product lifecycle management.

Speaker 2

This is a multi year project And we will provide updates along the way. We integrated the engine and airframe business units into 1 aerospace business. We brought the hydraulic and fuel systems business units closer together with the combined engineering and program management structure. The electromechanical systems and electronics team is also part of the streamlined organization, which uniquely positions Woodward To be competitive across the entire spectrum of aircraft electrification scenarios. We simplified the way we interact with aerospace customers With one commercial team calling on and supporting customers.

Speaker 2

In its 1st year as an integrated organization, productivity improved As new members became proficient and pricing actions were successful in offsetting the material and labor inflation that we faced in 2023. We doubled down on strategic investment in operations excellence and talent development to accelerate our lean transformation. We started with one value stream analysis in each of the segments, motors in aerospace and gas flow valves for land based turbines In our Industrial segment, each of these actions required application of significant resources With more than 30 people organized to detail all the process steps, lead times and inventory positions from customer order entry To shipping the product and collecting cash. The results of this type analysis allow us to identify and eliminate waste and deliver more value to customers. The output from each week long event is a 12 month transformation plan to cut lead time in half and double the inventory turns for the value stream under transformation.

Speaker 2

We have since placed 2 more value streams under transformation, SOGAV in industrial and servo hydraulic valves in aerospace. We are going narrow and deep as each of these efforts require dedicated resources. Turning to innovation, we continue to invest in and develop technologies that reduce fuel consumption and emissions In both aerospace and industrial applications. Our innovations enable multiple paths for a cleaner future, representing opportunities for Woodward in the years ahead. Together with our customers, we are developing solutions That utilize a wide variety of alternative fuels to power the engines of tomorrow.

Speaker 2

As we mentioned earlier this fiscal year, We were selected by Airbus to provide a balance of plant control solution for the fuel cell system in their 0E aircraft demonstrator. This project leverages our leading fuel control technologies to enable sustainable air travel using hydrogen fuel. The Airbus demonstrator program aims to introduce a 0 emission aircraft into service by 2,035. On the industrial side of the business, we have several projects underway with multiple alternative fuels Across a diverse array of applications, including power generation, marine, agriculture and mining. These projects are targeting new engines as well as conversions and upgrade opportunities for engines and service.

Speaker 2

Moving to our markets. Commercial aircraft utilization rates continue to rise with domestic Passenger traffic exceeding 2019 levels and international travel largely recovered. In defense, due to geopolitical developments and government spending proposals, we expect R and D and procurement to increase. We continue to see strength across our industrial markets. In power generation, demand remains strong, driven by growth in Asia, Increases in global aftermarket activity and continued demand for backup power.

Speaker 2

In transportation, The global marine market remains healthy with shipyards at capacity and higher utilization driving current and future aftermarket activity. Increasing demand for alternative fuels across the marine industry should continue to drive expanded OEM and aftermarket opportunities as multi fuel engines contain greater Woodward content. In oil and gas, global investment in LNG infrastructure development continues. Demand for natural gas Heavy duty trucks in China increased significantly over last year due to a number of factors, including wide LNG diesel price spread and a steady supply of natural gas. Woodward benefited from this resurgence in demand Beginning in our 2nd quarter, followed by a sharp uptick in the 3rd and 4th quarters with sales approximating the historical Quarterly peak level of roughly $50,000,000 We converted these orders into sales, utilizing inventory on hand and existing production capacity.

Speaker 2

Our market analysis, including recent customer visits indicates continued Strong demand for LNG heavy duty trucks in China. However, this is a volatile market and as history has shown, The promise of these sales can evaporate quickly. We are evaluating the durability of the elevated market demand and are developing an operational plan that allows us to be flexible and resilient to significant swings in volume. In summary, Our markets are strong and demand for Woodward products and services remains robust. Our strategic investments to stabilize and strengthen our supply chain and improve operations are yielding sustainable results.

Speaker 2

The resulting output increases and productivity are reflected in our financial performance. We have taken a lot of ground in 2023, but we have more work to do. As we look ahead, Woodward remains committed to operational excellence, talent development and innovation, which we believe will drive long term growth and deliver value to our customers and shareholders. I will now turn the call over to Bill to review our quarterly and full year results as well as our fiscal year 2024 outlook.

Speaker 3

Thank you, Chip, and good afternoon to everyone. Net sales for fiscal 4th quarter were $777,000,000 an increase of 21%. Net sales for fiscal year 2023 were $2,910,000,000 an increase of 22%. The increases in the quarter and full year were driven by continued strong demand across most of our end markets, Increased output resulting from the strategic investments we've made in the business and price realization. Aerospace segment sales for the Q4 of fiscal 2023 were $455,000,000 compared to $408,000,000 an increase of 11%.

Speaker 3

Commercial OEM and aftermarket sales were up 19% and 21%, respectively, driven by higher OEM production rates, continued growth in both domestic and international passenger traffic, Increasing aircraft utilization and price realization. Defense OEM sales were down 13% in the quarter, primarily due to lower sales of guided weapons. Defense aftermarket sales were up 18%. Aerospace segment earnings for the Q4 of 2023 were $78,000,000 or 17.2 percent of Segment sales compared to $63,000,000 or 15.5 percent of segment sales. The increase in segment earnings was primarily a result of price realization, higher commercial OEM and aftermarket volume And productivity gains, partially offset by inflation and higher annual incentive compensation.

Speaker 3

For fiscal year 2023, Aerospace segment sales were $1,770,000,000 compared to $1,520,000,000 for the prior year, an increase of 16%. Aerospace segment earnings for fiscal year 2023 were $290,000,000 or 16.4 percent of segment sales compared to $231,000,000 or 15.2 percent of segment sales for the prior year. Turning to Industrial. Industrial segment sales for the Q4 of fiscal 2023 were $322,000,000 compared to $232,000,000 an increase of 39%. The increase was driven by higher volumes across all markets as well as price realization.

Speaker 3

In the 4th quarter, sales for on highway natural gas truck production in China exceeded 10% of total Industrial segment sales. Industrial segment earnings for the Q4 of 2023 were $54,000,000 or 16.9 percent of segment sales compared to $21,000,000 or 9% of segment sales. Industrial segment earnings increased due to higher sales volume, productivity and efficiency gains, Price realization and favorable product mix, partially offset by inflation and higher annual incentive compensation. For fiscal year 2023, Industrial segment sales were $1,150,000,000 compared to $863,000,000 for the prior year, an increase of 33%. This represents record sales for our Industrial segment.

Speaker 3

Industrial segment earnings for fiscal year 2023 were $162,000,000 or 14.1 percent of segment sales compared to $83,000,000 or 9.6 Percent of segment sales for the prior year. As Chip mentioned, we continue to make progress on strengthening our Industrial business. The strategic investments we've made to improve operational performance, including increased output and price excellence, drove approximately 200 basis points of improvement in Industrial segment earnings as a percent of segment sales In fiscal 2023. We are in the early innings of transforming the Industrial business, But once fully realized, we expect normalized industrial margins as a percent of sales to be in the mid teens depending on the sales mix. Non segment expenses were $24,000,000 for the Q4 of 2023 compared to $17,000,000 Adjusted non segment expenses for the Q4 of 2022 were $21,000,000 Non segment expenses were $131,000,000 for fiscal 2023 compared to $81,000,000 for 2022.

Speaker 3

Adjusted non segment expenses were $96,000,000 in fiscal 2023 compared to $78,000,000 primarily driven by higher annual incentive compensation. At the Woodrow level, R and D for the Q4 of 2023 was $32,000,000 or 4.1 percent of sales compared to $30,000,000 or 4.7 percent of sales. For fiscal year 2023, R and D costs were $132,000,000 or 4.5 percent of sales compared to $120,000,000 or 5% of sales. SG and A for the Q4 of 2023 was $66,000,000 compared to $50,000,000 For fiscal year 2023, SG and A was $270,000,000 compared to $203,000,000 For both the quarter and the year, the increase was primarily due to higher annual incentive compensation. The effective tax rate was 15.7% for the Q4 of 2023 compared to 6.5%.

Speaker 3

The full year effective tax rate was 15.7% for fiscal 2023 compared to 14.1%. For fiscal 2023, the adjusted effective tax rate was 16.8% compared to 14.3%. Looking at cash flows. Net cash provided by operating activities for fiscal 2023 was $309,000,000 compared to $194,000,000 Capital expenditures were $77,000,000 for fiscal 2023, compared to $53,000,000 Free cash flow was $232,000,000 for fiscal 2023 compared to $141,000,000 Adjusted free cash flow was $238,000,000 For fiscal 2023 compared to $144,000,000 The increase in free cash flow and adjusted free cash flow was primarily due to increased earnings, partially offset by higher capital expenditures. Leverage was 1.5 times EBITDA at the end of the 4th quarter compared to 2.1 times EBITDA.

Speaker 3

During fiscal 2023, dollars 177,000,000 was returned to stockholders in the form of $51,000,000 of dividends and $126,000,000 of repurchased shares under a Board authorized share repurchase program. Lastly, turning to our fiscal 2024 outlook. Woodward's fiscal 2024 outlook includes a continued strong demand environment and improving operational performance throughout the year. Total net sales for fiscal 2024 are expected to be between $3,100,000,000 $3,250,000,000 Our Aerospace segment outlook includes increasing revenue and margin expansion, driven by continued strength in commercial markets and increased defense activity. For fiscal 2024, Aerospace sales growth is expected to be between 10% 14% and Aero's earnings are expected to be 18% to 19% of Aerospace sales.

Speaker 3

Our Industrial segment outlook includes broad based market strength and improving operational performance. Given the volatility and limited visibility into the China on highway natural gas truck market, The outlook assumes peak sales levels for the Q1 with minimum activity through the remainder of 2024. For fiscal 2024, we expect Industrial sales growth between 4% to 6%. Industrial segment earnings are expected to be 13% to 14% of Industrial segment sales. At the Woodward level, the adjusted effective tax rate is expected to be approximately 21%.

Speaker 3

We expect free cash flow to be between $275,000,000 $325,000,000 And capital expenditures to be approximately $100,000,000 Earnings per share is expected to be between $4.70 $5.15 based on approximately 62,000,000 fully diluted weighted average shares Outstanding. This concludes our comments on the business and results for the Q4 fiscal year 2023. Operator, we are now ready to open the call to questions.

Operator

Thank you. The question and answer session will begin at this time. Please stand by for your first question, sir. Our first question comes from Scott Micas from Melius Research. Please state your question.

Speaker 4

Hi, Chip. I was wondering, the balance sheet is pretty solid. LEAP and GTF shop visits are going to be ramping up. So you should have a lot of cash flow growth over the next few years. So I'm just wondering what are your latest thoughts on capital deployment?

Speaker 4

And then if you're thinking about M and A, is there a preference for aerospace or general industrial?

Speaker 2

Good afternoon, Scott. Good to hear from you. So we are looking at that cash generation opportunity. And Like we shared before, we're taking a balanced view on capital allocation. You can see that we're inching up the capital expenditure Planning to take advantage of things that we believe are high return opportunities in automation and other Margin expansion opportunities inside our factories and supply chain.

Speaker 2

And we're looking at all the other Levers and capital allocation in a balanced way. We're very active in terms of looking for really Outstanding strategic fits of companies to consider for acquisition opportunities, but we don't have anything Specific to discuss at this time, but we remain very active there to make sure that we could take advantage of High return opportunities that are great fits with the company.

Speaker 4

Okay. And then I have a question for Bill. It looks like the Aerospace segment missed the low end of the margin guide by about 20 bps for the full year. And I think if my math is Correct. The commercial OE sales were down quarter over quarter.

Speaker 4

So I was just wondering if you could provide a little bit of color on that.

Speaker 3

Sure. Thanks for the question. Again, as you know, our Aero business in Q4 overall, our business had A strong quarter on top line with 21%. Q3 was even stronger at 30%, Scott, and as we sorry, Steve. And so when we talk about our Q3 specifically, some of that strong growth Is attributed to a new component that achieves certification in the customer demand It was steep.

Speaker 3

And at that point in time, we recognized a lot of the initial production And over time, we will achieve a more stable rate. So it was really that strong Q3 in Aero And a little bit of timing that caused us to miss that kind of quarter over quarter sales. But again, it was a very strong quarter for ARO.

Speaker 2

Okay. Got it. Thank you.

Operator

Your next question comes from the line of Scott DeCel from Deutsche Bank. Please state your question.

Speaker 5

Hey, good afternoon. Good afternoon, Scott.

Speaker 6

Bill, I think you're guiding to higher incremental margins Space in 2024 than what you did in 2023. So I was wondering if you can talk a bit about what enables that higher incremental margin rate. Thank you.

Speaker 3

Sure. As we we'll get into a little bit of more of that, Scott, as we get into our Investor Relations, our Investor Day on December 7. But again, as we look at the strong markets in the commercial side, In the volume there that will definitely help in that guide as we get to 2024.

Speaker 2

And Scott, just to add a little bit to that. We've deployed a lot of effort into the We anticipate, plus the learning curve of these newer teammates, so we anticipate continuing to Get cost out of our operations. We're actually facing a little bit of a mix headwind from 2023 to 2024 As the strong OE demand and the build rates dictate that we'll have to sort of rise to that occasion, but we still anticipate with our Strong lean transformation programs being able to generate productivity, and we have some pricing Year over year that we're also counting on.

Speaker 6

Okay. Yes. And just on that last point, I think last year when We got the guide. You gave a sense for what those price realizations would be. And so I was wondering if you can say what you expect that price realization number to be this upcoming year in fiscal 2025.

Speaker 2

We're not ready to do that just yet, Scott. But we anticipate to improve. We're also facing some inflation in the supply chain. So not able to share more of that right now.

Speaker 6

Okay. And then last question is the revenue from guided weapons that trough yet?

Speaker 5

That trough yet?

Speaker 3

We continue to look at that in 2024. We are expecting it to Reached that point. And so we'll continue to see how that all goes. But in 2024, yes, we expect it to Yes, it's trough.

Speaker 7

Thank you.

Operator

Your next question comes from the line of Sheila Kahyaoglu from Jefferies. Please state your question.

Speaker 8

Thank you. Good afternoon, guys. So I wanted to ask about industrial. Hi. You gave great color there in the prepared remarks.

Speaker 8

You also mentioned $50,000,000 of sales from China natural gas sales and normalized margins in the mid teens. So I guess 2 part question Shin, on this industrial margin, when you back that out, it implies about 50% drop through on the China business. I guess is that fair to say? What are you assuming on China natural gas sales for 2024? And what do we think drives the core business to mid teams given you've averaged about 10% over the last decade?

Speaker 3

Yes. Sheila, thanks for the question. Yes. In our prepared remarks, we did discuss that we did hit our historically Quarterly peak of around $50,000,000 And so that's kind of We're willing to discuss. We also, as it relates to Oh, Continue to feel that it's a very volatile business and we discussed what we were willing to include in our 2024 guide.

Speaker 3

So we felt like we provided some, as you said, some increased detail On Oh, and we're going to leave it at that for now. So just

Speaker 2

to get to the rest of your question, Sheila, the underlying performance of the other Product lines and components of the industrial business, we're seeing good improvement on the operations And we've had some strong pricing on long term agreements come through over the past year that we believe will Connect for us over the next term and provide that lift to margins in the industrial business.

Speaker 8

Okay. And then just sticking to industrial then, I guess, what drives the biggest deceleration year over year on the top line in your view. Can you go through the bits of what you've kind of baked into those that assumption?

Speaker 3

Yes. Again, as we spoke, Sheila, about our the way we're assuming China on Highway business In 2024 is near peak historical sales in the Q1, minimum amount in the remainder of the year.

Speaker 8

Okay. Thank you.

Operator

Your next question comes from the line of Pete Skibitski from Alembic Global Advisors, please state your question.

Speaker 9

Hey, good afternoon guys. Nice quarter. Thanks Pete. Just a follow-up on Sheila's question again on as it relates to China CNG. So should we given that 1 quarter will have An ongoing kind of peak level of China CNG in it.

Speaker 9

Is the Q1 going to be the high revenue and margin quarter for the year for industrial?

Speaker 2

We don't know the answer to that, Pete. I mean, that's just what we're honestly trying to say is that we have visibility to orders in the Q1 that we think we can count on shipping. Past that, it's upside opportunity for us. We're positioning our supply chain to Try and be able to deliver that on a sustainable way if that demand continues. But what we're forecasting and kind of committing to guidance wise is just what we can see.

Speaker 2

Does that make sense?

Speaker 9

Yes, there's no downside risk from China CNG in your guidance. It's only kind of upside opportunity, I think is what you're saying.

Speaker 2

That's what we're trying to say. And also really all of our end markets that we're serving, we believe will have growth in sales. And so that's kind of it looks good to us, but we just don't want to get out in front of ourselves with our experience on the China Oh before.

Speaker 9

Okay. And just one follow-up for me on the marine market. It seems like China exports are slowing and Europe, So Germany seems pretty weak in terms of growth. So I'm trying to understand what's driving the strength in the marine market. Are we just sort of going through Kind of a replacement cycle for aftermarket demand.

Speaker 9

Can you shed any color on that market And the visibility you have?

Speaker 2

Yes, I mean, there are a lot of sub segments to that market. There's cruise ships, there's Ferries and like you said, the container ships and there's auxiliary engines and there's main engines. And so when you look at what Woodward's Scope of supply is, we've got a lot of places that can still be growing even if China freight drops off or the pricing changes And makes people have a little less utilization on that specific submarket.

Speaker 9

Okay, great. Thanks guys.

Speaker 2

Yes. Thank you.

Operator

Your next question comes from the line of Christopher Glynn from Oppenheimer. Please state your question.

Speaker 10

Hey, good afternoon, Chip, Bill, Dan. I was curious if you could go a little bit Deeper into what you're seeing into the defense markets, I know you expect procurement to increase, that's pretty straight. I also mentioned expect R and D to increase. Does that refer to internal and external? And what are kind of the 2024 drivers and longer term next couple of years that you're seeing as defense demand It starts to take a little shape here.

Speaker 2

So we've seen I think I said this in the last quarterly call as well. We've seen an increase in quote Activity, requests for Woodward to quote components and subsystems and systems for different types Of Defense Vehicles, we've seen that activity go up in terms of the number of quotes we get and we've also seen the urgency and The turning of those quotes go faster than in recent times. So not really referring to IRAD, our internal R and D, that's pretty stable In terms of our platform development, but as far as specific customer requests, we've seen that increase and hold steady at an increased rate.

Speaker 10

Okay, great. And just taking a look at Big picture, you have new management team working on lots of execution and portfolio streamlining. How's everything coming together? I mean, it looks great, but from a cultural perspective, middle level managers, how's That translating down from the C suite.

Speaker 2

Well, These things always take time, Chris. But what I've been really pleased with is the lean transformation activities when we engage a full Team of these 30 plus people in a value stream analysis, we have that team includes Frontline operators, 1st level supervisors, it includes supplier managers, customer service reps, Plant entire VP of Operations Plant Managers and I even participated in 1. So We're sort of doing the full on engagement approach to moving the needle from That focus on reducing lead times and serving customers better and eliminating waste, so far so good on that. But these things take time And it'll take a multi year journey to get where we want to go, just to be candid.

Speaker 10

Yes, great. Well, it sounds like you have 4 very productive processes, 2 under at each segment Underway. Is that something where you develop leaders in muscle memory and you have 8 or 10 of them and 24, 15 or 20, 25, is that reasonable way to think about it?

Speaker 2

Yes, sir. You've seen this movie before. And Each one of these activities before a value stream can qualify to be under transformation, they need to be able to identify 3% Of dedicated resources that are going to be with that activity for a year. And so it takes a lot of pre work and like you said, we then generate Leaders that have been through the process to take on the next one.

Speaker 10

Great. Thanks for the explanations.

Speaker 2

Thanks much.

Operator

Your next question comes from the line of David Strauss from Barclays. Please state your question.

Speaker 11

Thanks. Good afternoon, everyone.

Speaker 2

Good afternoon, Dave.

Speaker 11

Chip, You mentioned the headwind that you'll have on the aero margin side from higher OE growth. Could you give a little bit more Granularity in terms of what you're forecasting within that 10% to 14% for aero between aero OE after Morgan, then maybe just defense bucketed altogether?

Speaker 2

Yes. This is the kind of headwind that we really like because from a long term We're creating an installed base that will pay back dividends over time. So it's the kind of headwind we'll take every time. I don't think I'm prepared to break down exactly how that works. And really to some extent, it'll play out over time.

Speaker 2

And we'll be able to demonstrate our ability to hit those rates and Throughout the whole supply chain. So I'd be premature to say exactly what it is because I really don't know exactly how it's going to turn out. But I just want people to know that It's a good headwind and that's something we're going to overcome with margin expansion on both the OE side based on our productivity and Investment in getting cost out of those products as well as work in the aftermarket as well as we can.

Speaker 11

Okay. And then on Guided Weapons, it sounds like you're expecting at the bottom here, but I mean, should we or are you expecting that business to start growing again given what's going on like with JADAM and Small diameter bomb, would you actually expect that business or do you plan for that business to start growing again?

Speaker 2

We don't really have any expectations of that, and we have no firm information along those lines. But customers have called us and asked us about our capacity and ability to respond and we've done our homework with our supply chain to make sure our suppliers can respond. And If it does crank up a higher order rate, then we'll be ready for that. But as of now, we have no Orders to move in that direction.

Speaker 11

Okay. And then last one for me, I think for Bill, it looks like your I can't tell exactly, but it does look like your free cash flow guide, cash from ops guide For next year includes some sort of working capital headwind, it looks like. Could you just elaborate on what exactly you have assumed from a working capital perspective? Thanks.

Speaker 3

Yes. In our working capital, We are seeing our inventory working capital is actually going to be pretty good, Not a it's not going to be a heavy impact, David. AR, We will expect to see some of that will be a bit of a challenge there going up as sales go up. And so that will offset some of the other areas and is the headwind that you're seeing there in working capital.

Speaker 11

Okay. Thanks very much.

Speaker 3

You're welcome.

Operator

Your next question comes from the line of Gavin Parsons from UBS. Please state your question.

Speaker 2

Thanks. Good afternoon. Good afternoon, Kevin. Hey, Kevin.

Speaker 5

Can you just talk a little bit about how you position the China truck business to reduce margin volatility if demand does fall off?

Speaker 2

Well, there's really no way to position it to Reduce volatility if demand falls off. We're just trying to say that when demand is strong, it's a Profitable good business and when demand is not strong, we fall below a certain level, it's a bit of a drag on the overall industrial segment. And We're trying to have enough levers in our planning process that we're able to deal with that As it comes through and that's how we planned 2024 is delivering at that peak volume type of level in the Q1. The other quarters we planned and are ready to deliver on all of our other product lines into all of our other end markets and make that plan.

Speaker 5

Got it. Great. And then maybe just in terms of your price strategy, you've talked about kind of value pricing. Where are we today in terms of getting price just as inflation pass through versus implementing your value pricing strategy?

Speaker 2

We're pretty early in the days in terms of value pricing strategy. I think that really comes into play on new product Introductions where we're able to provide a component or a system to a customer that provides more value than the last system does. And so that's where that muscle comes into play and confidence comes into play. As far as our current portfolio, We have opportunity in the aftermarket in some product lines to price for value there where Our products are highly differentiated, have plenty of IP in them to deliver value, compared to more standard parts that More of a commodity, we don't aren't able to command that type of value pricing in the aftermarket. So that's how I think about it right now.

Speaker 2

But as far as Really developing that capability, it's going to be applied mostly to the new products. Thank you.

Operator

Your next question comes from the line of Gautam Khanna from TD Cowen. Please

Speaker 12

I was wondering at the Investor Day, What might be different in your presentation this year than in prior years? Like what And just give us a sneak preview into what you guys anticipate discussing?

Speaker 2

A sneak preview. Gautam, I love your questions. You've always got something for us. Yes, I guess the sneak preview is that You're going to see more players on the stage and folks are going to talk about their businesses, Experts are going to talk a little bit about their products and what value they provide to customers. And I truly believe we'll tell A compelling story just like we did last time about the exciting content that we have on, For example, narrow body, aircraft that is going to pay dividends long into the future, and that our Industrial alternate fuel solutions are going to be highly valuable no matter what way our customers and Energy sources go in the future.

Speaker 12

Thanks. And I I was wondering if you could talk about visibility in the industrial market outside of CNG where you've guided obviously Q2 A lot lower in that business. How do you feel about the other major product categories and end markets? So reciprocating engines and what have you.

Speaker 2

Yes. It still feels relatively strong, Gautam. It feels like From the demand for standby power remains strong. The equipment businesses in mining and agriculture remains strong. Marine remains mostly strong, per my earlier comments.

Speaker 2

We haven't received any market softening signals from our customers. We've received some Signals to reduce or push out orders in marine, but we feel like that signal was largely Due to some over ordering, now with relatively better confidence in the supply chain, it's normalizing, As well as we think end of the calendar year inventory management. So we feel like Every signal that we test in the marine, oil and gas and power generation markets still Feedback to us that they want us to deliver it at the rates we're projecting, and we still have past due that we're trying Vigorously to burn down.

Speaker 12

Thank you.

Speaker 2

Yes.

Operator

Your next question comes from the line of Louis Raffetto from Wolfe Research. Please state your question.

Speaker 7

Hey, good evening guys. How are you?

Speaker 2

Good evening, Louis. How are you?

Speaker 7

Good. I apologize.

Speaker 2

I may

Speaker 7

have missed some of these, but Did you tell us what the full pricing was? I know you'd upped it from 5% to 7%. Did you actually say what it ended up being for the year?

Speaker 3

No, we did not. Louis did not give that update.

Speaker 7

Can you give it or we have to wait for the Okay.

Speaker 3

We will say we met what we discussed and exceeded it.

Speaker 7

Okay. And then I guess just for you, Bill, the tax step up, what's driving that step up in 2024?

Speaker 3

Yes. As we see our earnings increase, Louis, We are tax rate increases along with that. And so that's really the key driver there is the increased earnings.

Speaker 7

All right. And then one more just because I may have missed the step up in CapEx.

Speaker 3

Yes. On the CapEx piece here, we continue again as we talk about our capital allocation and where we can get returns. We see that in an area where we have automation opportunities. We want to continue to invest in the maintenance of Our machines to continue to drive productivity as well as safety. So that's really what where we're looking at investing Our CapEx increase.

Speaker 7

Okay. And then just last one. I know you gave the growth For the end markets in industrial, but did you have the segment growth numbers for the year for reciprocating engines and industrial turbine machinery?

Speaker 3

No, no, don't have that. We did not give that.

Speaker 1

And Louis, just for the end of the year, this is Dan Probasnik. You'll see in our K tomorrow, we're going to be making a switch and showing that information in our K based on the 3 markets, Transportation Oil and Gas and Power Generation.

Speaker 2

It really reflects how we're running the business now.

Speaker 7

Makes sense. All right. Thank you very much.

Speaker 3

Welcome. You're welcome.

Operator

Your next question comes from the line of Gavin Parsons from UBS. Please state your question.

Speaker 5

Hey guys, thanks for the follow-up. And just wanted housekeeping, what is the industrial book to bill for the year?

Speaker 2

I don't think we have that in front of us, Gavin.

Speaker 5

Okay. No worries. You said K is coming out shortly. Great.

Speaker 2

Yes, it's strong. We're receiving lots of plenty of orders to cover our build rates, but I just can't quote you a number in a fraction right now.

Speaker 5

No worries. I'll wait. And then it looks like no buybacks implied in share count. I know we talked about capital deployment at the beginning of the call, but are you assuming you accumulate Cash of the

Speaker 3

year? Yes. Right, Gavin. We don't assume that through the year, and we'll just continue to Monitor it and make decisions as we go on as it relates to share buybacks.

Speaker 5

Okay. Thanks again.

Speaker 2

Welcome.

Operator

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

Speaker 2

Thank you. And thanks to everyone for joining us today. As a reminder, Our Investor Day is scheduled for December 7 in New York City. And I look forward to seeing you there and sharing more at that time. Have a good day.

Operator

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 Time by dialing 1-eight hundred-seven seventy-two thousand and thirty for a U.

Operator

S. Call or 1-six forty seven-three sixty two-nine thousand one hundred and ninety nine for a non U. S. Call and by entering the access code 4,278,216. A rebroadcast will also be available at the company's website, www.woodward.com, for 14 days.

Operator

We thank you for your participation on today's conference call and ask that you please disconnect your

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Earnings Conference Call
Woodward Q4 2023
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