Woodward, Inc. (WWD) Earnings Call Transcript & Summary

Good morning. Welcome to Woodward's 2022 Investor Day. Thank you for attending. It's great to see a lot of you in person. My name is Dan Provaznik, and I'm Woodward's Director of Investor Relations. First, we'll start off with a few housekeeping items. Can you go to the next slide? Safety first, from a -- should we need to evacuate, there is an emergency exit at the front of the stage to my right. And then the doors that you all came in through, please exit go down the stairs and then exit the building through the courtyard. Restrooms. Restrooms are again, out the doors that you came in to the right just beyond the registration desk. And last lunch will be served following the presentation. Box lunches will be available for those of you who are unable to stay. Out of respect for others, please silence your cell phone during the session. Woodward has a culture of continuous improvement. And so please use the comment cards that are on each one of you -- each one of the tables to give us feedback on how we can improve this event in the future. Please leave your comment cards at the registration desk when you exit. Could you advance the slide, please? I'd like to introduce the Woodward team. So today, you will hear from Tom Gendron, our Chairman and CEO; Tom Cromwell, our Vice Chairman and Chief Operating Officer; Mark Hartman, our Chief Financial Officer. And then also from the Woodward team, Chris Fawzy, our Corporate Vice President, General Counsel, Corporate Secretary, Chief Compliance Officer and the person with the longest title at Woodward apparently. And we also have Rajeev Bhalla, a Board member present as well today. Turning to the cautionary statement. I'd like you to refer to and highlight our cautionary statement as shown on Slide 4 of the presentation. 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 COVID-19 pandemic. These elements can and do frequently change. Please consider our comments in light of the risks and uncertainties surrounding these 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 the non-U.S. GAAP financial measures, which are included in today's presentation and the related schedules. We believe this additional financial information will help in understanding our results. Turning to today's agenda. Tom will start with the Woodward overview. Mark will present and review our financials. Then Tom will review and provide insight into our Aerospace business. After the Aerospace review, we will take a short break of approximately 10 or 15 minutes. After the break, Tom will discuss our Industrial business, and then Tom Cromwell will provide an operational review. Tom Gendron will then do a wrap-up, and we'll close out the presentation. We will take questions immediately after the financial aerospace, industrial and operations sections of the presentation. For those in the room asking questions, please raise your hand, and we will come to you with a mic so that not only everybody in the room can hear the question, but also the people that are online can hear your question as well. For those of you online, there is an option for you to enter a question as well, and I'll be monitoring that list and asking those questions to the presenters. After the wrap-up section, Mark will join Tom on stage for a question-and-answer period to close out today's session. Now I'd like to introduce Tom Gendron, Woodward's Chief Executive Officer and Chairman of the Board to kick off the day with a Woodward overview.

Well, it's great to be here and see everybody in person. I was talking to a few of you during the break. It goes back to December of '19 since last time I was in New York City. So it's good to see people, no face mask, getting back at it. So I got a high-level overview to start us off. And as Dan said, we're going to dive into more details on our outlook in each of the business segments as we go through the day. First what I'd highlight is we feel we really performed pretty well during the pandemic. As [ every ] said, it was kind of unprecedented event. We had a nearly complete shutdown of the commercial aircraft market. Through that, though, we were able to still generate a lot of cash, which is a hallmark of the company. We maintained solid liquidity. It was one of our concerns going into pandemic to ensure we had the strength to navigate the pandemic and ensure that Woodward came out strong. We held up our margins, what I think quite well, given the drop in volume and like. And as we move forward, we look to build on that, and we're going to talk about how we're going to build on that today. Just kind of going back, I wanted to let everybody know what our vision and focus is as a company. Many of you know us, but if you're new to Woodward or the Woodward story. This is kind of our guiding principles. On our vision, we want to be the global leader in energy conversion and control solutions, targeting the aerospace controls market, industrial equipment controls market. One of the things we've always been focused on is improving efficiency, reducing emissions. But we kind of highlighted as we updated this, that working with our customers, we are helping enable the path to a cleaner decarbonized world. And we'll talk a little bit about that today as well. For those that aren't familiar with the term energy conversion and control solutions, really what we highlight there is that we, through our applications, convert all forms of energy into electric power, into motion. So it's like motion control, fluid power as well as propulsion. So that's the idea. And it doesn't matter if it's a fossil fuel based, renewable or new decarbonized type fuels. So that's the prime focus of the company. What we look at is like the value proposition, this is how we would phrase for our shareholders. When you look, we've got tremendous opportunity in aerospace. This really comes from years of market share gains and being on some of the best platforms in the industry. A lot of content that's leading to a substantial aftermarket over the next 5, 10 years. Our industrial markets are also attractive, and they are really driven by efficiency, emissions reduction, and again, being on the right platforms on a global basis. We've got a great track record of organic growth, which has been really facilitated by a strong R&D investment. We really believe in organic growth and then supplementing that with M&A and other activities. But that organic growth is something that we leverage between -- and the R&D investments between both segments, industrial and aero later in the presentation, I'll talk a little more about that. Part of that value proposition too is our True North operational excellence journey. And there wanted to have the best operations to go with the world's leading control systems. But it's also the drive margin improvement, and that's a big part of where we're going with that. As I said earlier, we are able to drive a lot of free cash flow. Mark will talk a little bit about that. We've got -- the business can generate excellent cash. And as we go forward, we'll talk a little bit to -- we had made a lot of the investments that were necessary. So pre-pandemic, a lot of you that know us know that we had very large capital expenditures to support the growth that was coming. Pandemic hit, that capital is all in place. So we're talking about how we're going to leverage that going forward to also help drive cash. And then we think -- and for all of you that we're very disciplined with capital allocation, whether it's in terms of capital expenditures or M&A to ensure that we keep solid shareholder returns. We think we've got a compelling strategy. The first is, we really target niche markets. So I would say aerospace is a niche market, but when you dive in there, the areas we concentrate on are large but specialized. And then the same thing goes for our industrial controls. Heavy emphasis on industrial equipment, primarily engines and turbines, specialized equipment, attractive opportunity because they got long life, good aftermarket. We do play in with that R&D investment. We have proprietary solutions. And then one of the aspects that's also key value is basically everything we do, we're sole sourced in their long-life assets that we're on, and so that drives further aftermarket. We've kind of coined part of our strategy is to be indispensable to our customers. And the way I look at that is our customers wouldn't think of building a plane and engine or turbine without Woodward because we bring the best solutions and help them bring the best product to market. We've got a really large installed base, both on aero and industrial, and we're leveraging that into significant aftermarket growth. And with that brings very -- or very positive margins. A new thing that's really going across all our markets is really the look to decarbonize. And so we're really with our customers, and I'll talk a little bit about that as we get into the business segments. We're really enabling them to transition to lower decarbonized solutions. And finally, [indiscernible] a big part of our strategy is always to be disciplined with capital deployment. So kind of hitting just real high on the markets. Most of you are probably pretty familiar with the story on aerospace. You've got -- today, it's probably changed and you're going to hear us talk about a stable defense market. But really, when you look at the commercial market, the projections and the outlook are for substantial growth, and in particular, substantial growth in narrow-bodies where we have very high content. On the industrial, if you look at the right side of the page, what you see -- and I think this is a reality out there. All forms of energy, the demand is going up. So if you look out over approximately the next 30 years, all forms are going up, including renewables and new alternative fuels. That plays well for our Industrial business and that we're hit on that and that we're providing solutions that help reduce emissions, help make equipment more efficient. And then with that as well, helping enable the energy transition to new fuels, decarbonized fuels. So the outlook for this is long-term growth in both of our market segments. We've got good share, and we're going to continue to capture and turn that into revenue and enhanced earnings. So some of the key growth drivers across is infrastructure, global infrastructure development. And we really look at this as the movement of people and goods is increasing substantially. That translates into aircraft, ships, rail and other logistic applications. Power gen demand is going up, and then we're seeing more and more from the [indiscernible] Previous chart, more demand for energy worldwide. Emissions reductions. We've talked about that, that emission reductions has always been a driver of growth for Woodward. So over the years, demand for -- the demand for cleaner products, cleaner environment has been in place for decades. And every time there's new emission regulations or drive for cleaner applications, that means more business for Woodward. So it's always translated into more applications for us. And then the energy transition, globally, there's a shift. People are looking for cleaner fuels that's also going to require a big infrastructure expansion to support those fuels. Interesting part is as you do in that transition, many of our applications will have multi-fuel, which drives increased content for us. And there's ongoing technology and new applications coming that provide some growth opportunities going forward. Woodward has always been committed to sustainability, good governance and corporate responsibility. I'll hit a little bit on this for everybody, but it's been in the fabric of the company for well over 100 years. So if you look at their sustainability, I didn't -- we didn't want to walk everybody through it, but I ask go out and look at our sustainability report, you can download it off of the page here or you can get on our website, but it really documents all the things we're doing around sustainability. If you look at corporate responsibility, this is an interesting one. Really back in the 1940s, the Woodward family and our previous CEOs back in the day, really had a philosophy, and this is document, we really call it stakeholder philosophy. It was documented in the Woodward Constitution that was truly documented and incorporated in the company 50 years ago, but it really predates that. It really goes back to 1940s. And it was really the philosophy of balancing between all your stakeholders, and this has been something we've strived for. And really, we always start with shareholders that we look to drive a long-term return to shareholders that represents a superior investment. But it's also about supporting customers as a trusted partner. Our members, that term was brought up as a part of the organization that we treat them very well. They're essential to our success, and we really look to provide meaningful work, good career opportunity and a good living. Suppliers are critical to Woodward, and I'm sure we're going to get some supplier questions today and working with them and ensuring that they also have a good business and we're a good partner for them. And finally, in the communities, hallmark of Woodward as well is always to make our communities a better place to live and work. And so this has been a philosophy of the company for a long time. As we look over to ESG and we'll talk a little bit about this as we go into segments. We've always been, like I said, driving to clean up the equipment we provide controls to, reduce emissions, improve efficiency. And over the years, we've helped substantially reduce the emissions from the equipment we are a part of. But that's the first. But then internally, we're committed to reducing the emissions out of our operations. On the social side, we've got a diverse workforce that we're looking to really continue to grow and develop and train as the world in operations and things are changing. We're looking to develop our own people and bring them along. As I highlighted as well, we're really embedded in the communities we operate in. In many of the communities, we're one of the largest employers, and so we feel a responsibility to help improve those communities. And on the governance side, I'm really proud to be part of the organization that has really solid governance. We've -- as we highlight here, I'm the only non-independent director. So all our directors are independent. Each one was hired for a purpose to bring skills to the company, different experiences to help guide and direct the company. And as I said, the Woodward Constitution is overriding umbrella of how we operate the company. It flows into all of our policies and procedures. And I think it sets a very good overall governance and compliance mentality within the company. So kind of with that, flowing out there. All that comes together and we're helping -- we always use our tech always innovating for a better future, but we're really trying to enable the path to cleaner world. So with that, I'm going to turn it over to Mark, who is going to go through our financial outlook.

Great. Thanks, Tom. I echo Tom's comment on, it's nice to be back in person in front of everybody and versus I know me staring in my office, staring a lot of you on the computer screen. It's nice to see a live face, so I'll look forward to catching you a lot later on break and lunch also. So I'm going to go through the financial highlights. And first one and to really just kind of do a reflection, the first few slides here is going to be a really a reflection of the last couple of years and specifically 2021, also and then taking a look at '22. And then we'll talk about our long-term financial targets and outlook. As Tom mentioned, we consider that we've navigated the pandemic pretty well. We did generate a significant amount of cash flow. It was the #1 focus for us really 2 years ago today when the pandemic was -- hit us. That was something that we focused on very quickly, liquidity and cash generation, and we did generate over the 2 years, a significant amount of cash. And really, that helped us strengthen our balance sheet, improved our liquidity and really gave us a lot of opportunities to accelerate ourselves out of the pandemic. We also -- I've talked to a lot of you about the investments that we made during the pandemic. One of the hallmarks of Woodward is we invest in downturns and through downturns so that we come out of them even stronger. And whether that be in our strong R&D investment, Tom will talk -- Tom Cromwell will talk about our operational improvements that we've made that is allowing us to leverage and come out of the downturn very strong and then the improvement in the capital expenditures. I know I talk a lot of you about our facilities and some of you have made it to our facilities and [ you ] see the automation that we've put in place and continuing to be able to leverage that with something we definitely focused on over the last 2 years. So as we look ahead, as Tom just highlighted briefly, and we'll talk more about in the aerospace and the industrial section, our markets are recovering, and we do have strong growth. We are projecting to be at returning to 2019 sales levels in 2023. And as we exit 2023, we are anticipating that we'll be at our segment target levels, which I'll talk more about. So if you look at kind of the last few years, see what happened with sales. Obviously, 2019 pre-pandemic, half of our fiscal 2020 was impacted by the pandemic and then 2021, taking a step down. And now market is recovering. We're starting to grow and see a strong step-up in '22. When you look at earnings, all right, we're looking to leverage that sales volume. We have the capacity in place. And really that opportunity then is in front of us to leverage that through strong incremental operating margin. The one as we talked about in the November time frame and highlighted again in the January time frame for our guidance, one of the headwinds that we do have is the return of the variable compensation structure. Just to remind everybody, our variable compensation goes across all of our members, so across every single employee and the principle of the plan is we have to have earnings per share higher than the prior year. So in essence, we didn't have any variable compensation impact in 2020 or 2021. And so returning that back into the cost structure. And then finally, in 2022, we've talked about the inflationary pressure. We typically talk about inflationary pressure and offset by productivity. Obviously, in the environment that we're in today, we weren't able to offset all of that with productivity and so that was a headwind to us for '22. Still anticipating a solid free cash flow, though, another year, as you see on the slide, approximately $315 million. We will have an investment in accounts receivable as sales return. That will definitely be a working capital matter that will hit us, but we look at that as obviously solid because the sales are returning and that we're able to collect that cash. It will just be a timing matter during the year. So when you look at our business, now if you start at the segment level, Aerospace, about 63% of the company. Industrial, about 37%. You can then see the breakdown underneath those. Tom will talk a little bit more about each one of those submarkets that we have there. And then you look at who we're partnering with. I mean, we partner with the industry leaders. We are with the big boys with the who's who is in our industry, and we partner and collaborate closely with them. As Tom mentioned, one of our key strategies is how do we become indispensable to our customers. and this strong partner list that we work with. So looking kind of over the last few years, First, starting on sales. You can see the growth pre-pandemic up to 2019. As I mentioned, 2020 and '21, the pandemic effect, kind of put in a 2-year pause is how we talk about it. Now we're accelerating out of that into 2022. What's really driving that is across almost all areas of our business. Our commercial aero on the OEM side with build rates increasing is a significant opportunity for us. The aftermarket with both legacy and the dynamics of the fleet is really a higher Woodward content, which will be a big opportunity for us in the short term, and we'll talk more about in the longer term is quite a story for us. When we're looking at the defense markets, we were considering them stable. We'll see, obviously, with the current situation that's going on, there might be some positive upside there with some opportunities with some of our foreign military partners, and we can talk more about that. Power generation demands are growing, developing world is really what's driving that. Tom will talk more about what's really driving a lot of that need. And as you saw on the one chart he already showed, the increased demand of energy and then the mix of that energy is going to be a positive for us. And then on the marine side, really the utilization and new ship orders are really driving that side of our business. So then when you look at kind of the impact on our adjusted earnings per share, obviously, we had the pandemic-related decline, which was really the sales decline is what impacted our earnings. We were aggressive verily early on in the pandemic of -- we took out over $100 million of costs in FY '20, and that's how we were able to manage so well through the pandemic more recently, and we've called this out, we have the COVID disruptions with supply chain and labor disruption that has impacted us. And Tom Cromwell will talk a little bit more about that later today. So on the Aerospace side, you can see kind of the same story here as the Woodward story, significant impact starting in really -- the second half of 2020, still with us through 2021, and now we're at an inflection point and going up for 2022. The higher content on the MAX and the NEO is what's really driving the future growth on the aerospace side. And we are anticipating them to be able to leverage that sales volume increase to be able to increase our segment earnings by a significant up 200 to 300 basis points it's really going to help us drive that earnings flow from the sales volume increase. On the Industrial side, again, the impact in 2020 and 2021 related to the pandemic. We are anticipating up low double digit to mid-teens sales growth in 2022 and then flat to up 150 basis points on the industrial margin. You can see here, 12.9% in 2021 and been up -- or flat to up 150 basis points in 2022. And I'll talk more about what we're anticipating for the future on both segments here in a few slides. So we've talked about this, really the strong free cash flow generation. That is a big part of the Woodward story. Really, as we go forward and the earnings improve, we'll be able to leverage those earnings down through our cash flow. The 1 thing we talk a lot about, and we've mentioned, and we'll talk more about is really we're at the maintenance level of CapEx spending. So we did the large investments previously. And now going forward, we just really need to be able to maintain our CapEx and so that will also help us generate cash flow. We did have significant improvement in working capital during the pandemic. As you see here with $315 million in 2020 and $427 million in 2021 for cash flow. The significant driver of cash flow was our improvement in working capital. For example, inventory, I think we declined over $100 million during the pandemic. So a big focus for us there. And then as I mentioned, we are anticipating with receivables increasing that we will have some headwind on the working capital side as we move forward. We do target conversion greater than 100% of net income to free cash flow, and we've continued to prove that we can do that. So moving into CapEx. Really, we're kind of -- we identified this as kind of 3 cycles we had here. Tom mentioned earlier in the middle part of the last decade, we had a very large capacity investment that we really put in place that -- for those of you that have seen our facilities, whether it's in Niles, Illinois; Rockford, Illinois; or Fort Collins, Colorado. That was that $0.5 billion that we spent to recapitalize the company and make that large investment. Then during '17, '18 and '19, as our markets were growing and our content share grew, we were still adding capacity in that period. And then COVID hit in 2020, and you can see there we had a decline in CapEx down more to that maintenance level, which is kind of where we're anticipating we'll be at in this $50 million to $80 million area going forward over the next few years of really just again, maintaining our capital, maintaining our equipment that needs replacements for any of you that a bend [ over ] Woodward facility. You see some of the equipment is well used, and we like that. But we've also made investments in state-of-the-art facilities and equipment to really improve our productivity. So what has that led to on the balance sheet? We have a strong balance sheet overall. You can see from the leverage level here, the yellow line. 2018, we had the L'Orange acquisition. We took our leverage up. And again, a hallmark of Woodward is this is what we do. We do disciplined M&A., and we can take our leverage up and then we're able to take that cash flow and very quickly pay off the debt and bring our leverage back down. And you can even see that we were able to do that during the pandemic even with the impact, but the cash flow has allowed us to pay off all of our prepayable debt. And that's where we're at now with that $750 million of debt on our books, a lot of capacity to increase that as needed. And then even as our markets recover, our earnings improve, that will improve our balance sheet even more. So now moving a little bit looking ahead, financial targets. We are anticipating high single-digit sales growth, and I'll talk more about that related to aerospace and industrial coming up. We still have the objective overall if we want to take that sales growth and double it at the earnings line. So that's something that we very much focus on leveraging that sales volume and being able to leverage that through earnings, which then allows us to leverage the conversion of greater than 100% of net income for free cash flow. And really with the sales growth and where we're at, we are anticipating that both Aerospace will be 20% plus. Industrial will be 16% plus margins. And that will be our recovery, and I'll talk more about that here going forward. So our 5-year outlook. So through 2026, on the Aerospace side of the business, we are anticipating a sales CAGR of between 8% and 10%. And what will really drive that is the strong commercial growth that we have. And as I mentioned and as Tom mentioned, really the content wins on the current generation, the MAX and the NEO and on the wide-bodies as international demand improves. The wide-body content gains that we have is also significant. And so as the build rates ramp across that commercial business, it will really drive our sales and will drive our earnings overall. Also to remember is really the aftermarket opportunity. And the aftermarket opportunity is both on the legacy, the CEO, for example. And in this period, we're starting to see the new generation aircraft, the MAX and the NEO really driving a lot of that aftermarket growth as they start seeing their first shop visits, Tom will talk more about that in the Aerospace section. On the defense side, we anticipated in our outlook that defense would be relatively stable. Again, we'll see where that goes with the current situation and what some of our foreign military partners do and what the U.S. decides to do, and we'll be prepared for that. But that would be an upside opportunity for us if it was something other than what we anticipated in this outlook of being stable. And then one of the new opportunities, the new strategic arena that we're looking at going and actually have been successful in penetrating some is on the growing space side of the business. Tom will talk more about that as to what we see our opportunities there. But it's a good fit for our technology and working with and being indispensable with the space customers is definitely a strategy that we have. Industrial side, also significant sales growth, 8% to 9% sales CAGR is what we're anticipating in our outlook. Really, as we've talked, we've been bouncing along the bottom in the trough for a 5-year period. We're starting to see all of the markets improving. As we highlight here, on the marine utilization and new ship builds new ship orders has definitely improved, and we're seeing with that utilization, the aftermarket opportunities are very strong in front of us. We've talked about the -- really the energy and the power demand across really a lot of our markets, power gen and oil and gas and alternative fuels. Tom mentioned that, and we'll talk more about that regardless of fuel source, we have the technology, the capability to handle that and help our customers through that. With all the content that we have out in the field across all of our Industrial business, it does drive a strong aftermarket opportunity for us, which is great. As that equipment is used, especially in today's time, looking with oil as a for example, where it's at, we would anticipate that the aftermarket opportunity would be significant there. And then really, the decarbonization efforts and really the rising energy demand definitely gives an opportunity with all the capital expenditure that we anticipate that the end users will be performing over the period. So what does that lead to on free cash flow? Again, a big part of the Woodward story is our strong free cash flow generation. We did generate $1.4 billion from 2017 through 2021. We are anticipating that from 2022 to 2026, we will generate approximately $2 billion. We will maintain the greater than 100% free cash flow conversion. And really, that maintenance level of CapEx, as we've talked about, $50 million to $80 million a year is all we really need as we go through this whole period because of the big investment that we made in the middle part of the last decade. So what does that allow us to do? Cash, obviously, gives you a tremendous amount of opportunities to invest in organic growth, inorganic growth on M&A fronts, being disciplined there and returning it to shareholders, which really is what a big part of our story is our disciplined capital deployment process. If you think about a lot of our organic growth and what drove that was our investment in R&D. Tom mentioned it, we've invested historically 5% to 7% of sales in R&D. I would say more than most of our peers and competitors. But my opinion on that is I think our shareholders have seen a tremendous return on that R&D investment. The other is the capital expenditure investment that we've had, really is allowing us to drive productivity, drive efficiency on the factory floor and Tom Cromwell will talk more about that. Disciplined inorganic growth opportunities. We do have an active funnel. As you probably all know, we do acquisitions, but we do them in a disciplined focus. We really focus on the markets that we serve, the strategic arenas that we're in. We look for technology. That's a good fit for ours. We look for customer opportunities. Innovation is really the inorganic growth opportunity that we have. Then as you think about returning capital to shareholders. We've had the long-term commitment to returning at least 50% of net earnings to shareholders via dividends and share repurchases. We've had a -- just recently, we announced a significant dividend increase. But over this period, from '17 to '21, you can see that we've paid off about $177 million in dividends. Just recently, in January, the Board approved a share repurchase program over the next 2 years. So in 2022 through in 2023, $800 million to be able to return that capital and that cash that we have been generating back to the shareholders. And you can see kind of the number here over the 2017 to 2021 time frame. We did return $243 million, and we're obviously looking to increase that with the $800 million share repurchase authorization that the Board gave us over the 2 years. With that, I will pause for questions. And if you have a question in the room, I'll remind you, please raise your hand so we can get a mic to you.

Mark, just on the return to peak revenues, I guess, or return to 2019. You called out that CAGR, but it seems like on Aerospace, I guess maybe you exit this year, $1.6 billion in the Aero segment, if you get to that mid-teens. It seems like you need a pretty steep ramp in '24 as well. Is that doable given the current wide-body market? Do you need the wide-body to come back? Do you need -- I know you forecasted this year for sort of the precision weapons to be down. You said defense is stable. But what needs to happen is MAX at [ 47 ] a month alone, good enough to get there? Maybe just some color on getting back to peak, what needs to happen?

Yes. And that's a good question, Michael. Thank you for that. So as we really look at the opportunities in front of us, it is around the commercial aftermarket -- or I'm sorry, the commercial aerospace side is really OEM build rates, as you'd expect. And I mean, wide-body returning? yes, but it's not significant. Really what drives our business is the narrow-body. So the build rates Boeing ramping their build rates, we're anticipating 31-ish by kind of the end of this year, and then you all have heard kind of some of the same [ posturing ] that we've heard from Boeing, and we'll be able to meet that. We have the capacity to be able to get to those build rates that they have. The other is really the opportunity is on the aftermarket side. With the strong utilization during the pandemic, I have always said that the airlines did a very nice job during the pandemic to defer maintenance on the aircraft that they were using and whether it's next generation or prior generation aircraft using a lot of green time and that will have to come through. We'll have to come back for the aftermarket growth. And we -- I say that, we're starting to see that, right? We saw it really in our first Q1 with the significant aftermarket growth that we had year-over-year, starting to see that opportunity present [ themselves ]. So really, that's what we're anticipating is going to really help us drive there again, on the defense side, you mentioned the guided weapons. Yes, we've talked about really the JDAM decline and the softness there. The rest of the defense business, we're anticipating will be stable, and that will be -- stable itself out over the future years. And so with that and what's happening really on the commercial aerospace side, that's how we get back to those 2019 levels.

Mark, I've got an online question from Christopher Glynn of Oppenheimer. In terms of inorganic growth, how much time is spent or pipeline activity in adjacencies versus reinforcing core technologies?

Yes. I mean so it's actually interesting. When you think about our content gains, for example, on the last -- on the MAX and the NEO. We do have a lot of technologies that we do use. And if you think about then the technology that we have and some of the adjacency opportunities, if you call space, missiles kind of an adjacency with our technology. That's a big focus for us currently. And so that is an opportunity that we're looking at that we're starting to win in, and we do see that adjacent opportunity. The other is, as I mentioned, we continue investing during the downturn to be able to come out of the pandemic even stronger. And well, how do you do that? Well, you continue to invest, you help your customers out through problems they face. And those problems may either be technical problems that we're helping them with or maybe their own supply chain problems that we can help them with. And so we continue to invest there to capture adjacencies to capture additional content as we move forward. And that is a big focus for us, and we are seeing a lot of opportunities there. David?

David Strauss from Barclays. I think you mentioned you're going to touch on this maybe a little bit later on today. But can you talk about the progress in terms of that, the pandemic impact, supply chain, labor availability, how you're progressing on that? That's the first question. And then the second question, on the $2 billion target. So you gave us the exact same target for '19 to '23. Can you just talk about puts and takes between what you were looking at then versus now?

Yes. I'll take your second one first, and then I'll go back to your first one. Really, the way that we look at it is the pandemic really was a 2-year pandemic pause. And so you look at the puts and takes and the growth that's in front of us now is very similar to where we were in the 2019 time frame. So we'd already recapitalized the company. We would be at a maintenance level of CapEx with the market growth, the build rates, the power generation demands, the marine market opportunities that's really what we're seeing kind of coming out of this after this 2-year pandemic pause. And so it's a very similar story and concept to the 2019 guidance outlook that we gave at the $2 billion. Related to the supply chain, COVID disruption that we've called out, Tom Cromwell is actually going to cover that. We've talked about it's really supply chain and whether it be the impact of them trying to come out of the pandemic labor disruption for them was similar to what it is for us. We've talked about the variants, I call it the holiday time variant that kind of hit our business from the November through the January time frame. Absenteeism was high. Tom will talk more about kind of how we're seeing all of those recover, and what the rest of this year kind of looks like as what we're anticipating with the disruption impact. And so I think he'll be able to hit on a lot more of the details when he covers that.

Another online question from Robert Spingarn at Melius. Why the shift to higher repurchases versus M&A? Is M&A more difficult post pandemic? I understand why you pulled back on Hexcel at the beginning of the pandemic, but could that deal resurface?

Yes. So the first thing to note on the M&A front. With the higher $800 million share repurchase authorization, we still have capacity to do M&A. So this isn't an either/or with our balance sheet and with the cash flow that we have, we still have capacity. We've always talked about we're a disciplined acquirer. Tom, it seems like daily notes to me that he's never paid a double-digit multiple, EBITDA multiple. And so we've always been disciplined on that. Obviously, with where the markets are today, where EBITDA is for a lot of companies. And with the liquidity that's available out there, getting a deal done at that -- at those levels would be difficult. So when we're looking at the opportunities in front of us, the strength of our balance sheet and still leaving ourselves dry powder for M&A. That was how we got to the -- we could still do the $800 million over the 2 years and allow us ample opportunity to do M&A. We have a robust funnel. We continue to develop that funnel during the pandemic, and we look forward to growth opportunities on the inorganic front in a disciplined matter also. Related to the Hexcel deal, the industry was at a different point, a different time, pre-pandemic. We're not looking for a transformational acquisition of the Hexcel nature. And just things were different then than they are today.

If I could just cut at Mike's question in a different way. Pre-pandemic, I think you're at 110 narrow-body deliveries per month. Are you assuming you get back there in '23 on a combined basis? And then beyond '23, it looks like, given the fact that you said defense is stable, you're going to continue at that -- roughly at that growth rate on the OE side. So what are your rate assumptions beyond '23? And then a second one on aftermarket. Can you just give us some color on what your I think you said recovery in '23 there as well? So what's your capacity assumptions, market assumptions beyond '23?

Yes. So we are anticipating as we're exiting '23 that we'll be at approximately those build rates really, it's matching up with what Boeing and Airbus are talking about. Again, we have a capacity to do that. So that's not an issue for us. We'll have to bring labor in and as Tom mentioned on our January earnings call. We are talking about having a need for hiring 100 direct labor members a month for the rest of the year to be able to help us meet the ramp, not just on the aerospace side of the business, but really across all sides of the business. On the aftermarket side, we've talked about this deferred maintenance that has been out there and maybe some of you heard me talk about the bullwhip effect of the opportunity that's in front of us, not only from current utilization, but from all the deferred maintenance. And what we see there, the continuing recovery of -- if I think of it as within country domestic type travel, right? We're approaching 2019 levels. The laggard at this point is international travel, really the widebody market. But we are anticipating that will start to improve. We'll have to see where the -- if there's other variance that come through the impacts, but it feels like things are starting to open up, the concept of traveling to Europe, again, I think is out there for a lot of people. And so we'll start seeing opportunities and are anticipating some growth there as we move forward. But the aftermarket opportunity with the fleet dynamics that are out there is very good for us because -- and Tom will cover this a little bit later. When you actually look at the flying fleet and what we anticipate going forward, our content is a lot stronger than pre-pandemic.

Another question from Gautam Khanna of Cowen. In what year do you expect to achieve the 20% and 16% Aero and Industrial margin goals? Is it in '23 for Aero and later for Industrial?

Our anticipation is as we are exiting fiscal '23, that's when we would anticipate to be at the 20% plus and 16% plus for Aerospace and Industrial, respectively. So really, as we're exiting '23.

I Matt Akers from Wells Fargo. So could you talk about inflation? I think you commented you won't be able to pass 100% of what you are seeing through this year, can you comment on how big that is and then some of the big sort of commodity price swings we've seen lately. To what extent can you pass those through and how does split out across the 2 businesses?

Yes. So the inflation impact, as we even called out in the November earnings and kind of slide deck, inflation impact, net of productivity with productivity is both labor and productivity and price productivity. So it is a headwind for us for FY '22 in the -- obviously, the cycle where we're at, inflationary pressures, both on the labor side and the material side are higher than they've been historically. Our ability to pass it through is really two kind of avenues. One is through our aftermarket capability, and we have -- we control the catalog pricing for that and are able to increase that appropriately for the price opportunities that we have for -- and the cost that's out there. On the OEM side of the equation, it depends. But generally, we have across most of our OEM customers the ability to do indices-based increases. Typically, on an annual basis, most some of them are January time frame that we're able to increase based on the indices. Now some of them have what we call [ banding ] that are right, the first x percent, we have to absorb through productivity. And then after that, we get it. Others are shared across that, and others are just an increase overall. So there is some offset that we have on the OEM side, but really the opportunity that we really have is on the aftermarket side to be able to offset a lot of that cost.

Mark, so you talked about the increase in accounts receivable this year, but can you talk broader, bigger picture working capital where you kind of benchmark yourselves, I guess, on a net working capital basis and what's implied in any improvement in net working capital as a percent of sales or whatever that's implied in that $2 billion forecast for free cash flow?

So the way we benchmark ourselves generally, we would say, AR, we're in good shape there. We don't have collection issues. We're able to collect timely from our customers. So really AR is just the timing of shipments and then being able to collect that after those shipments. The inventory side, I mentioned earlier, we did -- we were able to take inventory down significantly during the pandemic. I would say when we look at our inventory as a percent of sales as, for example, we still see opportunity there. And what will really then drive us forward is as sales grow and as we're able to hold inventory and I'll throw payables in there also, kind of the inventory payables offset each other. If you think about the 3 big pieces of working capital, receivables, inventory payables, inventory payables, if I net them together, we're anticipating we'll be able to hold that at about the same amount today. And so therefore, as a percent of sales, as our sales grow, it would decrease as a percent, and that's some of the opportunity that we're looking for. And Tom Cromwell will talk about some of the investments and how we're doing that through Kaizen activities and really operational focus that Tom and his team have brought to the organization and really being able to leverage that as we move forward.

I have one final question from online from Robert Spingarn. Any evidence of higher defense demand yet, your concentration in smart munitions would suggest the current environment could yield demand for Woodward, as you mentioned earlier, any ideas how inventories look?

Yes. We haven't seen a specific orders today. However, I think as you all anticipate, it is a potential that is out there. The great news for us internally is we have the capacity to produce more, and we've done that previously. Obviously, the supply chain would have to also get ramped up to help support that. There's -- I'll say there can be short-cycle businesses in there and long-cycle businesses, whether it be a country wanting to order F-35, okay, well, that's a little bit longer out. There's short-term, hey, and if they want a new aircraft, all right, well, what are you going to arm that aircraft with or what are you going to arm your current aircraft with and the opportunity around the smart weapons side is potentially more short term if those orders started coming in. We've talked -- I've talked with some of you about the foreign military sales opportunity can come quick, and we don't have a lot of visibility to that. And so that's -- it's something we're watching. Obviously, the last, what, 2 weeks has been pretty crazy. But we do see that as an opportunity that will potentially show up. That's really not baked into our outlook at this point. Okay. Thank you. I'll turn it back over to Tom.

Okay. I'm going to hit and kind of discuss our Aerospace segment. I'll see if I get this to forward. There we go. Today, or if you looked at fiscal year '21, we're about 50-50 commercial and defense. That ratio was really driven by the trough that we had in '21 on the commercial side. I'll talk on the next slide a little bit going forward. But what we do have between the commercial and defense is we're on the best platforms in the industry, as you go through. And if you really look and go to the appendix in your books, you'll see some of the key programs we have and the content on them. I'm not going to go walk through that, but it's there for your reference. And you'll see that it's truly the best programs in the industry. As we look forward, though, and again, I'll put this as Mark said, we -- in our 5-year projection, we didn't anticipate defense growing in real dollars. So -- but what you see here is that we're going from 50-50 to 2/3, 1/3 commercial. That change is really driven by production rates ramping back up on the narrow bodies. You've seen biz jets go up, we'll see wide bodies towards the end of this period starting to recover. But we do see with the high content we have on the in-service fleet that the aftermarket is going to grow. And one of the things that Mark was highlighting in some of the drivers in aftermarket, the one that wasn't touched on is, as we start seeing the ramp in the narrow bodies, we will also see increase in initial provisioning sales, and that's starting to happen. That would basically dormant during the 2-year pandemic pause. So we're seeing that grow. And so that yields more of what we would be expecting 2/3, 1/3 as we go forward. It's also a positive as the aftermarket grows that's also a big part of how we get to the 20-plus percent segment margins. I'm going to go through the next few slides kind of what do we -- what do we do in Aerospace. And this goes back to where I said we've got a very attractive niche markets. You get really bucketed in 3 key areas that we focus on: integrated propulsion systems, flight deck controls and then aircraft actuation. So those are the prime focus for the company. If you look at flight deck, really what you have here is anything the pilot needs to touch to operate the aircraft. And so we talk about the side sticks, throttles, the rudder brake pedals, flap levers and then other devices that are in the cockpit. So very sophisticated. This is also tied to fly-by-wire aircraft. You may be surprised to know, but there's still aircraft out there that fly with cables. We don't participate in that. It's all fly-by-wire, very sophisticated equipment and flight critical. The integrated propulsion system. So this is actually the controls on the turbine, but also on the nacelle. So there, we do the complete fuel system combustion control, which is really fuel injection, ignition, sensing. We do electronics as well on smaller engines. And then thermal management, which consists of oil and air control. And then on the nacelle, we do the TRAS system, Thrust Reverser Actuation System. In terms of actuation, it's a broad area. So we go all forms of actuation. So really what you're looking at here is hydraulic, electromechanical applied from flight controls to auxiliary actuation around the aircraft. So that's our focus in aircraft. The outlook, and we've kind of already hit on this, we're getting through the pause of the pandemic. We're seeing recovery in traffic. We are seeing a demand on the MRO side, and that is picking up. As we said, Mark highlighted, the airlines did, I think, a brilliant job of managing the green hours on their aircraft, that's coming due, and we're starting to see that. So they did a great job, but now the aftermarket activity is picking up, particularly on the engine side. We start to see that hit in build rates as we get through '23 and then into '24 with wide-bodies and full aftermarket recovery. On the defense side, really, when you look at this, it shows growing, but in real dollars, it's fairly flat at the moment that this is what we've built into our forecast. Obviously, with the Russia Ukrainian situation, some of this is -- I think it's going to change, but we have not seen anything to date, but we do anticipate that we'd probably see a little higher budgets coming domestically, but also internationally. We've had great success over the last decade winning on platforms. This -- the model, in particular, in our world where we create the OEM control systems. The reason you go for that is to get the aftermarket. And these applications are highly utilized, and they do drive a lot of aftermarket. So again, I refer you to the appendix, so you can get more detail on the OE side. But as you look at the growth drivers, and I'm going to walk through some of these with you. You see the OEM market share gains that we've had, that story is a question we were asked[indiscernible] . Those programs we won earlier went on pause, the ramp and the forecast outlook for those are continuing. We think they're back on the trajectory they were. The aftermarket, we got a huge installed base, it's growing. And I'll have a few slides to show you what that looks like. Really, one of the surprises, I have to tell you, I was personally surprised when the pandemic hit, I thought biz aviation was going to collapse, and it did the exact opposite. People wanted to get around in a safe manner. And so that's kind of really exploded. And so we see that growing for the period here of the [ LRP ]. We had a lot of defense platform wins. I'm going to talk a little bit about some of our new initiatives around space and missiles. And then decarbonization in the aircraft world is happening, and I'll talk a little bit about what we're working on with our customers there. So all of these, we think, are going to support the growth over the 5-year period. But we got to understand, and this is -- we talked about organic growth and being disciplined. 5 years is really short in aircraft. We really are looking out 20 years and planning for the next 20 years. So you'll see some of that. So some of that revenue is happening now, but a lot of it we anticipate in a decade or more. And so we constantly invest across that type of spectrum. And you realize that as we go through some. So first, I think we've hit the slide, the commercial order book. This is -- the graph is deliveries, but the order book is strong. Deliveries are picking up. We've got a number of rate increases that are being proposed by Airbus and Boeing, exactly when they're hit those rates and has some uncertainty to it, but they're definitely going to ramp up. There's a high demand for, in particular, narrow-bodies. We expect the wide-bodies to come back. And on the wide-bodies, we've got great position on wide-bodies. 777X is a very big program for us. It's been delayed for a long time. That's going to come back online. 787 will come back, you see like A330 and A350. So I do anticipate, as we move through the 5-year period, you're going to see wide-bodies come back, and it's good content for Woodward and those drive a lot of aftermarket as well. This is really the big part of the story for Woodward Aerospace. With all these wins we've had, if you go back, first, what we talk about is the content wins, and this is the various components we have on an aircraft. So if you look at the growth in those from 2016 to 2026. It's a very large increase, basically 3x what we had going forward. That -- those components as they're being operated generate aftermarket revenue. And so first, we had to get those OEs. That was a lot of work, a lot of investment. We have it. We've got the capacity to deliver it. They start utilizing it, then it's going to drive aftermarket and the aftermarket looks like this. So I think some of you are asking, where is it coming from like it's that installed base, legacy and future. And we think we're going to grow well above the market, 10 points higher than the market in the aftermarket. And so we've got a -- we're showing you really a 10-year look, but it grows substantially in the 5-year period, accelerates in the second half. And you just got to think about that, that's all these new aircraft going into service with the high Woodward content getting utilized and then the aftermarket flows. So this is going to drive growth for Woodward for really decades to come. And it's something that we really focus on and ensure that we get what I call our entitlement level of that activity coming back to Woodward. This includes both MRO as well as initial provisioning. A little bit on biz aviation. Again, if you reference the appendix, you'll see good content on almost all the new biz jets and the larger ones are the ones that generate the best revenue, but we see growing at about 7% versus 4% for the market. We think this is going to stay strong for a while. If you track what drives it. It's generally corporate profits and inventory and the used inventory is very low. So we see that this is -- over the 5-year period, it will be a continued good growth. On the Defense side, similar, we've got a great portfolio across all types of aircraft, fixed wing, rotorcraft, weapons. We're on the growth platforms of the future. I'll talk a little bit about where I can. In the weapon side, we're advancing new missiles, and we're working on a number of hypersonic applications with our customers. And so we think we'll be growing faster than the market here, in particular, the market may grow quicker as we've all highlighted here. So some of the key programs that are driving growth [ here ] on the left side here. So ones that we've won that are moving and still going into production. And then as you look at the new opportunities, the new rotorcraft as that competition goes through, we're participating in that. It will depend on who wins and which aircraft for the amount of content we have. We're working on the next-generation air dominance aircraft. We're working hypersonics -- we got a lot of UAV activity going, and we do have actuation on some land vehicles, particularly M1A1 tanks and some other ones that are coming along. So those are the new defense opportunities being worked. A lot of those will take time. Those will probably start to appear towards the end of our 5-year outlook, but definitely during the decade. So what I want to talk about is a couple of key growth areas. In addition to our core, as I said, we're looking at missiles and hypersonic opportunities. We're looking at space. And a big one really is around the energy transition in aerospace as well. So go through those. As we're looking at like missiles and hypersonics, if you just take back what do we do, two of the key areas for us is propulsion control and motion control. And so on these vehicles, it's exactly the same thing. They're different, but our propulsion control, meaning fuel systems, combustion systems, air management, thermal management, are all applicable. And then they all have actuation. So as you go through that, you see example of an -- what we call a [ cass ] system. So the actuation really to help fly a missile into its target. So this is really the key. It's leveraging current Woodward technology into new defense applications. The space market is interesting and kind of a highlight to, for years at Woodward, I've said we're going to stay out of space. And the reason for that is that it was a lot of one-offs and is more like engineering services than it was production. Our focus is being commercial having great technology, apply that to products and produce products in volume. And what we're seeing is that this market is changing and you're getting volume now. And we like it, and there's a commercial mindset happening. And we said one of the mega trends that we were focusing on was the commercialization of space. So whether it's launch vehicles or satellites, you're seeing a commercial mentality from what was cost-plus mentality, low-volume mentality. So we're in here. We're getting a great response from customers. We're winning a lot of programs, both on launch as well as on satellites and that plays again to our core strengths. So it's really -- and this, again, it's around propulsion control and motion control applications. And so we see this as a growth opportunity. starting now, we're winning and we're getting some programs moving. They will be in that 5-year period, accelerating in the 10-year period. In terms of decarbonization, I'm sure all of you have been seeing. There's a lot of pressure on the aerospace industry, in particular, Commercial Aerospace to reduce the carbon footprint of the aircraft. So really, as you look at it, key areas that are being considered is really around first efficiency. So it's really around the propulsion efficiency, but also aerodynamic efficiency. It's around new fuels and it's around more electric, okay? So those are where you see the key drivers. Then there's other things that aren't applicable to us, it would be like controlling operations, flight patterns and things, that's not where we play. But these are some of the key drivers that everybody is trying to do to help reduce the carbon footprint aircraft, and we're in here and I have a few things on each of these. So if you look first, is aerodynamic efficiency. And if you follow us at all, one of the key ways of doing that is what they call thin-wing technology. So a very thin long wing is more efficient. It creates problems for fitting the actuation into the wing. We've created a new flight control technology. We're working with our customers that help solve that issue. And so as new programs come, we see that, that could be a growth opportunity, also helping enable the thin-wing technology to take place. That technology is -- requires a new wing, which means you need a new aircraft. So it will come with time, but that's one of the key drivers. The other is SAF, sustainable aviation fuel. We've been working on this a long time. All the programs that you see where they've been testing it, Woodward controls have been involved. It's primarily a materials and ceiling issue, but we're there helping our customers make sure that they can use any variety of SAF. A big one that's getting a lot of attention, especially in Europe and -- is hydrogen. So there's really 2 looks at hydrogen. You'll see fuel cells discussed. But so you can use hydrogen fuel cell, generate electric power, drive a prop or something to get propulsion. The other is you just burn it in a turbine. And if you burn hydrogen, it's emission-free. So we're also working on that. What's interesting here is we've been -- and I'll get to it later in the Industrial segment, we've been working on hydrogen in our industrial business for a long time. On our industrial gas turbines, we have that. So when we've been with customers, they're very pleased to see that we already know what needs to be done. We're working with them on the hydrogen on the propulsion side. Also in our Industrial business, we've done fuel cell controls. And so we're bringing that to a number of these demos that are taking place and -- so basically, the way I look at it is any fuel that's going to get used in aircraft, we're already working it. We're already enabling our customers and we're partnering with them to bring these to light. The other one, of course, you've heard a lot in the industry about advanced engine concepts. These concepts are being developed. We're working with our customers on those two. So this is where that R&D investment continues to go. It will generate future organic growth. A lot of these are targeted for the 2030s time frame. So back to stay relevant and to be there, you've got to invest today for the long term. So most everything I'm highlighting here is 2030 or beyond. More electric, all electric. First, you got to generate the power. So we're working as I already highlighted on that. But then we've got a great portfolio of electric actuation sensing and things that will help facilitate the more electric aircraft and again, we're working with our customers on that. So all this is helping for the next-gen programs when they come out to be lower carbon footprint be ready, and we're proving all that technology out today and over the next 5 years, so that aircraft entering service in the 2030s, will have some of this and it will be Woodward. So kind of a summary on our aircraft segment. Production is ramping. The aftermarket is growing. We're going to capture more revenue from that. We see some really nice opportunities for the longer term in both space and defense. We're enabling sustainable aviation. We will be there, and we see a good growth rate over the next 5 years in the 8% to 10% range. So with that, I'll take questions if anybody has them.

Tom, Mike Ciarmoli, Truist. I know this environment is highly fluid, but oil prices where they are now and maybe even thinking back to what we saw in '08, '09, you put out a very compelling 10-year aftermarket growth forecast. How are you thinking about even in real time now, any behavioral changes from the carriers? You had that legacy base that showed modest growth. Are there a lot of planes left that could be retired? Just how are you guys thinking about that? Or what's kind of built into the forecast? And I know this is evolving pretty quickly.

Yes. Well, first, it's a great question. I mean as we look back, and if you really go back, I've been in the industry for 40 years. So if you went way back in time, high oil prices really kill the airline industry. It was really difficult on them. The airlines have learned to handle the higher energy costs. What it did drive in the '08 and through today is fleet renewals to the newer, more efficient aircraft. So I see if prices stay high, that you will see a shift occurring to the more efficient aircraft. A lot of that's already occurred, but there's still more that can transition. The positive side of that is we are even on the legacy on the more efficient aircraft that we see staying into service. We were looking at retirements. And as of now, we're not seeing a huge impact from near-term retirements. We think the new aircraft will come in as you see the second half of that ramp, second 5 years. So right now, I don't see it as detrimental. It could affect the flying public, if you get too expensive of tickets, that could. But what I anticipate those today, a lot of it is leisure travel occurring. I do believe business travels. I [indiscernible] come back -- I think a lot of you guys flew here, right, and came in. So I think business travel is going to start picking back up, and it can offset some of that. So right now, I think it's primarily, it may sound funny, but primarily a positive because it will shift people to the aircraft that we have more content on, which then if you take a little bit of a longer-term view, which is what we do as a company, that's going to be a good thing because it will drive a lot of aftermarket.

A question from Noah Goldman Sachs. Is the stable defense revenue forecast, including JDAM or excluding JDAM?

No, it includes JDAM at the rates that we see, they buy those and what they refer to as lots. And so that we have a projection for the next few years of lot size, and that's what's in our outlook. If the disruption in Europe drives more. That's not in our plan. So I think that question was asked to Mark a little bit too. We could see an upside. We're not -- we don't have any indication of that at this point. But as you look at the guided weapon smart weapons, I wouldn't -- it seems logical that it will increase, but that's not in the outlook.

[indiscernible] from UBS. I guess as I think about that last thing you just said, are there some offsets within Aerospace that could offset any benefit you get in defense with Russian aircraft or just flights in that area all together. So there's that opportunity [indiscernible] option.

So if I got right, is it negative? Are you saying?

Yes. So I guess there's this possible positive in defense. It seems like there could be almost an offsetting negative within a small area of the aerospace.

In commercial, yes. That's the case. So right now, what you would be seeing is new aircraft going to Russia are on hold. So that can -- the near term, I think that demand will be taken by other airlines, around the world. So -- but it could long term be a little bit of an offset, but they're not a huge market either. So from that standpoint, I don't see it that way. Hopefully, Ukraine holds and protects their country, and they're going to need a lot of development. And so I think that will drive some -- hopefully, some new aircraft as well.

And then as I think of your aftermarket, not much of that is really discretionary right? We think most of that's sort of required unlike some other people.

Yes. That's the beauty of -- and I'll highlight in our aftermarket, the largest part of it comes from engines. And if you look at Aerospace aftermarket, engines is the largest part of the MRO market. The beauty of that is the engines run no matter if there's 1 passenger or 200 passengers on a plane. So as you go forward, you do have to maintain them, and that maintenance is there. And so we track it, and we have pretty good analytical tools to look. So we track from engine hour, shop visits, utilization rates, so we can forecast that pretty well. But it is -- that's why I use the term entitlement. Entitlement just meets, we know there'll be this much service activity in terms of parts and labor and initial provisioning. The key is that we capture -- capture that back to Woodward. So we could forecast pretty well what that looks like. So we've got good confidence in that outlook. And it's not real discretionary. If you're going to fly the planes, you're going to have to do the maintenance.

And then just last one on the 10-year outlook. I assume provisioning tails off at the sort of later in the decade, maybe get a little benefit on 777X. But I can't imagine there's much mid-decade to some extent.

Yes. It's correct. But you also have to think there's a to your pause and then there was the MAX pause that's beyond that. And so there's a pent-up demand that I think will carry out beyond 5 years of provisioning. And then as you pointed out, the 777X as that comes in will drive some additional provisioning. But over time, it's a correct statement. As the fleet gets established, provisioning is in place, it starts to drop off. So that would happen. But I think it's going to be strong for 5 to 10 years still really.

I've got a question from [ Gil ] at Stone Run Capital. How will the C919 from China affect your business long term? And how much content do you have in that plane anyway, if any?

Yes. So first on the content. The prime content that we have on the plane is on the LEAP engine, okay? We have some minor components that go through some of the Tier 1s on there. But the main one is the engine. We have it in forecast. It's very, very small dollars in the forecast for C919. There's a big question in my mind, when it will be certified and who's going to actually operate it. I think it's going to be small, small revenue. So from that standpoint, it's pretty immaterial to our outlook.

Another question from Rob Spingarn. Tom, on hydrogen, do you agree that the -- with the Airbus view that it could be in service by 2035? Or with Boeing that a true use of hydrogen and aircraft propulsion is in the 2050 time frame?

Yes. I think the difficulty with hydrogen is the hydrogen infrastructure and that it's available where you're going to fly the aircraft. So I always say, like, okay, if you're going to fly from New York to Des Moines, is there going to be hydrogen in Des Moines. And I think that's a huge challenge. I think it's going to take a long time. There may be some applications like Airbus is looking at that will be, I'm going to say, more niche in a smaller geographical area where you might be able to do that. Other than that, I'm a little more leaning that it's out of ways as Boeing predicts.

I've got one from -- another one from Christopher Glynn at Oppenheimer. With the expectation for aero margin at 20% plus exit rate exiting 2023, should we expect nice leverage and mix benefits past that as aero aftermarket increasingly leads growth or expect funding future growth investments?

Yes. Yes. No, we're anticipating that question. And we put a plus on it that we do expect as we move forward through our 5-year that would be on the plus side of 20%. What we really want to do first is deliver the 20% and show that it's sustainable. And then we're up outlooks after that, but you definitely could look that as that aftermarket kicks in, in particular, in the 5- to 10-year period, that will accelerate margins.

Tom, David Strauss from Barclays. Your aftermarket sales, are they all time [ and ]material? Or do you sell power-by-the-hour as well? What's the mix there?

Yes. We do have some power-by-the-hour agreements but it's through the OEMs and -- but it's at aftermarket pricing. So as we have some of our long-term agreements with customers, if they're selling that, we're participating on some of the newer applications. What I would tell you is that's a smaller portion of the aftermarket. Most of it is still time [ and ] material.

And what's the rough breakout aftermarket direct to your airline customers versus through the OEM?

Well, what you -- yes, it's probably -- it's going to be more like 90-plus percent to airlines. We do -- it all depends if the engine OEM has the maintenance contract, then we're going through them. But you might be surprised that that's not the largest for the full maintenance, which includes our hardware. Sometimes there's maintenance, it's just on the turbomachinery. It doesn't include all the components all the accessories. And so we end up still direct. So it's smaller when they include all the accessories into those contracts. When they do, we work through the OEMs. But bulk of it is direct to airlines.

And the last one I had, you mentioned future vertical lift. Who's -- Textron versus Lockheed, what's better for you in terms of the outcome there?

Yes. It would be Lockheed, it would be the higher. We're working with both, but we'd have better content. The other one, too, is just as a reference, the T901 engine, which is being used on the FARA application is a very good application for Woodward. And then we have actuation sensing pilot controls all going on those CLOs.

First question from Noah, Goldman. Tom, 16% Aero aftermarket over the next 10 years. Do you see it well above the first half of that period, then below it in the second half, just given compares? And how much of that outperformance versus the end market is provisioning? And how much is NextGen aircraft positioning?

Yes. So if you look at the growth rate, it's strong in the first 5 years, as you see, and it accelerates a little beyond that. In the first 5 years, you have more initial provisioning and then that MRO starts to kick in. And then in the second 5 and beyond, the MRO really accelerates. So what you got to look at is as aircraft goes into service, we expect to see first initial provisioning and then we see shop visits approximately in a 7-year time frame. And so you could just start stacking deliveries, 7-year time frames, and then multiple shop visits over their life, and that's how you get to those out years growing better in '16 as you go, but that's out at the end of the decade.

Mike Ciarmoli, Truist. Just on the decarbonization and maybe a little bit longer term, but are you positioned well, or do you have content already with some of the eVTOL providers? I mean could that be a market opportunity when we think about those, whether it's, I guess, Joby, Archer or Lilium, any of those players could drive content growth for your share gain?

It could. We're looking at some of those with actuation. I'm a bigger believer that some of that electric will be more used not for passengers but for logistics. And as such, we're looking at some of those -- we're partnering with some customers. But I don't -- frankly, in the next decade, I don't see it as a real large -- I don't see large revenue coming from that. But we are active, but it's not going to drive a lot of revenue in the near term.

You have a question from Pete Skibitski at Alembic. Tom, you mentioned strong content on the 777X. Will that revenue flow through Woodward or flow -- first flow through the JV like your current wide-body content?

Yes, great question. It's going to flow through the JV. And so that the earnings will show up on our JV line. But let me also make a point on that. We produce those products in Woodward factories, and we sell some of that into the JV and then earnings and aftermarket revenue flow through the JV back to Woodward. So there is top line and there is a JV earnings line. So it's a little more -- it's complex, but it does drive top line growth. So I want to make that clear.

I just want to make sure, I guess, I'm thinking about the OE versus aftermarket correctly, kind of over the 10-year horizon. It looks like aftermarket will be up like 4x based on the compounded growth. I'm guessing OE maybe doubles. And so just the mix within the segment is going to skew significantly towards aftermarket versus OE and -- is there anything that would, in your mind, disrupt that pattern from happening? And is there any reason why I know you said a 20% plus on the margin, but if you really think out '26 to '31 type of time frame, it could be plus-plus.

So yes, that -- I [indiscernible] anything disruptive, but what you could see is a launch of a new aircraft. You got to think of the timing here. And then new OE sales can come in here, but we are going to move to more aftermarket heavy for a while. And then you will see there will be some new program launches and that brings it back. But that's what will change that. But yes, for the 10-year period, we're going to start being more weighted to aftermarket than OE.

I just want to mention -- I think that's all the questions in the room. There are some questions coming in online that are related to some of the other areas. So I'm just holding those till the appropriate areas. So just -- so the people online know that I'm not ignoring their questions. And I think we're ready for...

Yes, we're going to take a break for 10 minutes. Is that it?

Yes. Why don't we meet in 10 minutes?

Yes. Great. 10 till, how does that sound for everybody. I think that makes it 12 minutes.

Okay. I'll give everybody a minute. Let's get back started up. Okay. We're going to rotate over to our Industrial segment. I'll kind of give you an overview and then take questions on this as well. So first, if you look at our industrial and I know from time to time, we get a question that's harder to understand our Industrial, and I get that. And I'll explain on the chart as to why. But when you get back to think about it, what we really are about, again, our engine, turbine and power management controls, for reciprocating engines and industrial turbomachinery that are used in the industrial equipment market. And I highlight that and that it's not automotive. When you think engines, a lot of people think automotive or on highway trucks, we're industrial equipment, okay? So -- and that's what this chart is kind of showing you. But today, 3/4 of it is engines going into applications in power generation, oil, gas and alternative fuels and transportation. And 1/4 of its Turbomachinery and going into the same markets. Turbomachinery a lot less in transportation, but if I put military, marine as transportation, there's turbines on that. So that's the focus. And then when you then say these applications between the engines and turbines being applied in there for power gen, could be for large baseload, it could be for distributed power, it could be in data centers, backup power. The oil and gas obviously hits all parts of oil and gas. And right now, we're putting alternative fuels in there, because there's going to need to be an infrastructure for alternative fuels, which is going to be the processing and distribution of them, and that's going to drive demand for some of our equipment. And then transportation, the main ones that we put in here are marine. That's the largest part of the transportation. We highlighted other off-highway equipment, so that could be like mining trucks and rail and some other things that aren't as large. And then we do have this niche business in China, which is around natural gas trucks, okay? So that's how we look at it. Next couple of charts hopefully explain a little more. So in the center here, if we look at on the reciprocating engine side, so this could be from small industrial engines that you could see in construction equipment up to massive engines for ships or mining trucks, okay? And what you have here, and this is why it's a little challenging to always say, okay, how do I model this? Or how does it flow is we're showing an engine here in engine generator, but if you just think of the engine, we make -- and I'll go on the next slide, what we make for. But just think of it as the whole control system for the engine. That same engine, 1 model engine can go into a data center, it can go into a mining truck, it can go on a ship. So that's where tracking it gets a little difficult, I think, for everybody. But that's how this market flows. It's not a one to one -- one engine to one application. So hopefully, that's a little helpful, but this is the prime. And then as you saw in the other, it breaks down the 2 largest parts of this really power transportation. And then oil and gas will be growing, I believe, as we move forward here. So that's where the applications go. But what we do in this is really what you see is the same things we do in aircraft and the same things we do on industrial turbomachinery. We provide a system solution. We control fuel, air and exhaust. We provide electronic controls, software and algorithms to control the engine, and we also provide what we call combustion control. And combustion control just means you inject fuel, you light it, you sense it and then you control it. So we do that for all these engines. So as we look at some of the applications, some of them we provide all of this, sometimes working with OEM, we provide part of it. So it varies from engine to engine and customer to customer, but we have the capability to do everything to control the engine as well as the generators that go with them. If we look at Turbomachinery, so what I mean by turbomachinery is industrial gas turbines, steam turbines and compressors, okay? So they're all rotating Turbomachinery. Those really end up in 3 areas. We're actually one of the largest providers of controls for military marine applications. So a lot of the modern vessels use turbines in the U.S. fleet and other fleets around the world. But the biggest markets are really around the oil and gas, processing, petrochemical and power generation is where these end up. And so we play across those. So those -- and again, an application of, let's take it, industrial gas turbine can be used -- that turbine could be used with a generator for power gen or could be put on a compressor and could be in an LNG plant. So that's where you track and flow. So it does make it look challenging to -- for all of you to model it, and we're trying to best we can to help you with understanding it. But I just want to know, that's where the applications go. And then the product line, again, will look familiar. The form factors are different. But you see, again, we do the fuel systems. We could provide a complete system solution. We provide actuation around it. We provide, again, the combustion part fuel injection, ignition. We do a lot of electronic controls. And this is one that ties into the electronic controls, but around the machinery is this very dangerous equipment, if you lose control of it. It could be catastrophic for a plant or for the loss of life. So they have what they call functional safety systems around it, and we're a large provider of those safety systems that go to ensure that there's no runaways on the turbines. So this is the products we bring, whether it's -- it depends on -- if it's a gas turbine centrifugal compressor, but it's the same mix of products. So some of the -- I want to go through some of the growth drivers. So that's what we do in our Industrial business. But I go through some of the things that are driving the industrial segment of Woodward, first and foremost, as I think I said in the overview upfront is emission reductions, decarbonization. That's been a driver for a long time. And you'd have to see if you went back 30, 50 years, some of this equipment was around engines and the engine controls were very basic, but you had very high emissions. Today, as you -- every time you need to tighten it up or clean up these engines, it means more controlled technology needs to be put in. And that's exactly what we bring to our customers. So that's a big driver of growth and will continue to be as we move forward, and we go into the energy transition. The other is that energy demand, every outlook from every international agency that looks at energy shows all forms of energy increasing. Renewables is the fastest growing. Gas is right behind it, but all forms are growing in between now and 2050. So that demand will flow into the type of equipment we provide. We talked previously, infrastructure and transportation continuing to grow and require this type of equipment. And then in our Industrial market, we also have a very large installed base. It's continuing to grow, and it's driving aftermarket, and we're looking for detailed ways, strategies to pull more out of that aftermarket. So these are the prime growth drivers on Industrial. Yes. Just starting with aftermarket, one of the things that's happening right now, and we're seeing this as we move through fiscal year '22 and '23, as we are seeing a recovery in the marine aftermarket, and we're also seeing oil and gas aftermarket picking up. So we think that's going to accelerate. And I think today, with what we're all seeing with energy prices, I think that's going to continue to accelerate. We are doing a lot of strategic work with our OEM customers on helping to partner with them to service their equipment. We've added a larger presence in the Middle East, and -- but that's in particularly around oil and gas, and power generation support. And what we're seeing around the world and in the Middle East is increasing demand for upgrades around power in the petrochemical area. And so the upgrades are around transition to cleaner fuels. So we are seeing demand growing to change some of the applications from burning oil to burning natural gas, and then you will also see a movement to other types of fuels over time. For a while, there was a lull in upgrades, but people are looking for modern controls to go on it. You do have the same obsolescence issues you have with like laptops and other things that occurs in these plants that use this equipment. And so we're seeing upgrades around that. And then there's a bigger push around safety and the cost to insure and safety systems are growing. And a big one that we think is going to make its way across all these markets we're in, is in cybersecurity. And you may be surprised to know a lot of the equipment out there is not up to date for cybersecurity and so there's a big push to do that. So we see this as all growth drivers in the aftermarket and areas where we can play and help grow that to a higher percent of Industrial revenue. Energy demand, we've been hitting this, and you've seen these types of charts but what it really is just -- the point of them is to show all forms of energy are increasing. And when you see this when they say petroleum, it's petroleum and other liquids, so that would be biofuels, it could be what they call power-to-X fuels and the like, and I'll talk about that a little bit. So that's in that category. So we see all that moving forward. We are seeing natural gas continuing to grow. And I think you'll see that even I think in Europe, they're now calling it clean fuel, that was a change. Asia, that's the case. So we're going to see more and more, I think, natural gas utilization around the world. And then we're starting to see what we're calling the energy transition, it will be slow, but the movement to cleaner or 0 carbon fuels. So what are we doing, again, to enable the energy transition? So you move across, obviously, improving efficiency is at the heart of any of these. Helping adapt the engines and turbines to be able to use low carbon, 0 carbon fuels, more integration of renewable power and more electric. And to get there, you've seen a lot of things that drive activity at Woodward as well as our R&D. Temperatures are going up, tighter control and accuracy are happening, more sensing, new advanced algorithms and controls, more advanced combustion logic and recipes. So -- and then you see electric solutions. So I'll talk a little more about these, but those are the drivers and issues that we have to help our customers solve. If you look at, we say, enabling the energy transition. What's interesting, we were tracking a little bit what impact have we helped our customers with, okay? So we always say we're enabling or supporting them. And if you look over the last 60 years, we could see some data that the emissions from industrial turbines has really been reduced to 60%. And then we're going for further reductions. So it's been a great progress in that time period, but can increase. And the same thing on internal combustion engines or RECIP engines, it's been down 35% over that time period with the look to further reduce. So we've been working that from the beginning of the company, it has all been about efficiency improvements, efficiency improvements drive, reduced emissions. So as we go forward, we're looking at new solutions really around current energy sources and then helping to be able to use alternative in 0 carbon type fuels. The way we're looking at that and when we talk about it, I'm sure you've heard some of these happening hydrogen, again. Ammonia and methanol are just proxies for hydrogen, okay? And it allows you to get into liquid form with no emissions. And then ethanol, which is like a kind of equivalent like sustainable aviation fuel. Today, it may -- we haven't highlighted this much during previous investor meetings, but we've been providing gas or hydrogen gas enabled valving for industrial turbines since 2018. Today, we got over 23 active programs going to ensure these gas turbines from various manufacturers can run on 100% hydrogen. And we're collaborating with engine OEMs, the reciprocating side to either use hydrogen or the proxies for hydrogen. So maybe you might have seen like in the marine market, Maris, one of the biggest ship owner logistic companies in the world, is now requiring or saying they're going to have all their ships methanol enabled going forward. What's interesting about that, so we, today, are working and demonstrating the ability to use and some of you that have been to our Port Cons facility in our test center. Today, we're working there on hydrogen programs, ammonia and methanol and ethanol, to bring all these to market. So we've got a lot of active programs on the RECIP engine side for that. The thing that's interesting about this, so I think the question came on aircraft, okay, when is hydrogen going to be widely available? Or today, there is ammonia, there is methanol, but they're not green, okay? So it's really about getting green hydrogen, green or they talk about blue, which is really using fossil fuels to develop these, but carbon capture, okay? So all that's being worked in bringing these. So the interesting thing, and this is like for the ships or for a lot of the power generation for industrial turbines, all the customers want to ensure their machine is hydrogen or its proxy enabled. And so that meaning to us is we're shipping multi-fuel system applications. So even though some of those fuels aren't readily available in a green form, we're providing what you hear the dual fuel or hydrogen enabled. So these -- like these ships, these power plants, are going to have multi Woodward fuel systems. So actually, our content is going up, even though the transition is going to occur over a number of decades. So this is a big area, it has been spec-ed in on these industrial equipment applications to ensure that they're ready, because those applications think about it, they're in service for 20 to 40 years, sometimes longer. You put in a new gas turbine power plant, no matter what fuel it's burning, it's going to be there 30-plus years. So they want to make sure they're ready. And so it's actually a positive to us and a lot of work going on at the company for this and making sure all our customers are ready as that transition occurs. We're also looking at electric, I mentioned earlier on the aircraft side, fuel cells and the control. So when I say fuel cells, we're doing -- some people refer to it called balance of plant, but basically, it's the interesting thing about a fuel cell -- this will be interesting for engineers. But if you black box the fuel cell stack, it looks just like an engine control. Everything that wraps around it, you control fuel, you control air, you got the controls -- you actually got to manage the water that comes out. So it's exactly the type of products we make. So we're working with a number of our customers that are moving to fuel cells. We started on the Industrial, we're bringing that to Aero and then back. So it's a collaboration and joint R&D across the company. We're also doing some hybrid electric-type applications. We're not doing hybrid drives. We're doing hybrid engine. So that can then be put in an application with a traditional transmission. So that's another one that can enhance fuel efficiency. And then across -- any time you go more electric, there's going to be a lot of electric actuations, and that's something we specialize in. So you got the fuel -- first is efficiency, then is the fuels and then it's electric. And our R&D is covering all these. And this, again, will materialize over time, really more like a decade is when you start -- should anticipate seeing this, but all the work is happening today. So a little bit on Industrial, just kind of wrap up, hit it a number of times. The demand for energy is just going to keep going up. There's going to be a lot of content growth from multi-fuel applications, to support the long-term requirements of the industry. Efficiency, they keep harping on efficiency, but I forgot to say earlier, take a step back. All -- current today, efficiency translates to lower emissions, but it's also less fuel burn is how you get the lower emissions. Now you put in these new fuels, they're all a lot more expensive than oil and gas, a lot more. So efficiency is even more important. You get lower emissions, but they're very expensive. So you need to have efficiency. So efficiency is number one, no matter what you're looking at. And then we're enhancing the ability to adapt and use these alternative fuels. They are also more difficult control to use. So it's more advanced control systems. So that's good for us, more complex. We always like tough complex applications, and it's good. We do see -- again, we're coming out of a multiyear trough on our industrial, so we are seeing about 8%, 9% growth over the next 5 years. We have the capacity in our facilities, so it's about leveraging that capacity into higher earnings. So that's -- how do we get 16% plus. A lot of it is we're not optimized on our capacity. And then the second part of it is the aftermarket is coming back, and we're targeting more aftermarket growth, like I highlighted. So that's how we're going to get the margins up. Growth we see is there, and so we just got to turn that into the right margins and profit. So kind of with that, I'll take questions on our industrial side. And then when I'm finished here, I think Tom Cromwell is up next, and Tom is going to talk, as we said, about how we're handling supplier disruptions and then also our operational excellence journey.

[ Ellen Liu ] from Jefferies. Just diving into the margin target a little bit more, you've underperformed your targets for the last decade or so. So how do we think about how you're going to get to 16% by 2023? Just a little more detail on the puts and takes.

Sure. So everybody hear that? I think so. How we get there? So I think there are several elements. First is the aftermarket does carry better margins on the OE side. Industrial aftermarket is not at the same margin as aero aftermarket, but it is -- has good margins. So capturing more of that and hitting these new areas in these upgrades that I was highlighting, that will drive some good margin there. The other is that our turbomachinery business, really, the market collapsed on that. And some of you may remember, some of the turbine guys flooded the market, then it collapsed and there's a lot of things that happened there. That is now turning. And we're seeing some good growth projections coming on turbomachinery. Turbomachinery -- industrial turbomachinery controls for us is a good margin business. So as that comes off a really low point for a number of years, that will add to it. And then we're continuing to optimize facilities for productivity and then the operating leverage on sales where we have the capacity in place that all combined is how we get there. Yes.

from UBS. So I guess if we go back to the slide of what we do, in these businesses, what's the overlap there with the aerospace side? I mean, I know there's a significant amount. You talked about optimizing footprint, but I think a lot of the factories are kind of spinning out, things that go to both sides of the business. Is there anything you don't do? Or I guess, if you look at those slides, what do you do in industrial that you don't do in aerospace?

Yes. So one -- it's a great question. So we're talking about -- we really do the same thing in each -- in all our businesses. So hopefully, I'm glad you picked that off the slides. That's correct. I'd say the one thing that we do in industrial that we don't do an arrow is the safety systems. It's not huge for us, but that's a growing part. We also and we do more electronics in industrial than we do in aerospace as well. So those are slight differences. But the functions that we provide to the manufacturers are really the same. With respect to our factories, so when we say like, okay, we do a fuel system for an industrial turbine, for industrial recip engine, for an aero turbine, truly it's the same and some of the control algorithms and things that we do are the same, and I could highlight that. We've created a what's called Paydex systems, the electronic control for small aircraft engines. We used our industrial turbine guys when they were in the lull to help us create that product. Now we've pushed them back and they're working on cybersecurity and functional safety and the next-gen control. So we can move people back and forth, but the factories are very different. So a fuel metering unit, if you want to say, fuels valving for an aircraft engine like the LEAP engine, I can hold. The fuel valves for an industrial turbine would cover this stage and they're probably taller and I am and weigh -- I don't know, Tom, what are they? 600, 700 pounds. Okay. They do the same thing but in a different form factor. And actually, the technology and understanding that is very similar, it's just the form factor is massively different. But what that means is the factories specialize, and there are some that we do both aero and industrial, but it's very limited. Most everything is specialized because of the form factors that are so different. I hope that helps. Yes.

Mike Ciarmoli, Truist. Just back to the margin question within industrial. Outside of the mix shift skewing radically towards aftermarket, is there a specific product mix that's optimal for you guys to drive margins? For example, if nat gas engine sales take off, is that better than, say, big demand for reciprocating? Or if we see the E&P markets for oil take off, I mean ideally, what would be your preferred sales volume to really drive margin growth there? Or I guess what are the highest margin products?

Yes. The highest margin products are electronic controls. So whether it's power management, recip engine or turbine, so that's highest margin. But you might be surprised, and this is back to the volume leverage. We carry good variable margin on basically all -- almost all the industrial products. The issue we have on some of that though is volume is not there, we're not getting that through to the bottom line. And that's because of the support and overhead costs that go with it. So there's some variation, but they're not low-margin products. So that's -- and where they have been, like when we had our renewable power business, that became a very low-margin business. Very commoditized, and we sold it and got out of it. So we're really concentrating on products that have good variable margin. I always manage our variable margin because we've got good variable margin, and you got to control your volume and your overheads, and you get to a good profit. So it would be misleading to say that we have bad -- I just want to be -- they're not bad. There's some variations. I would say, just answer a little more your question, the highest margin is electronics. The second would be around the turbomachinery control. And the third would really be, right in there, would be our fuel injection business and L'Orange is a good margin business. And then I would lump the rest after that.

The question from Pete Skibitski at Alembic. Tom, with the recent spike in both crude oil as well as natural gas, how does this impact the China CNG demand in the near and midterm?

Yes, good question. Right now, the price of natural gas in China is high, and we are seeing some pressure. We called that out earlier in the year. That has not changed. So the pressure from the higher price of gas has limited near-term demand, hopefully that was somewhat clear in our earnings release last one, but we're not seeing any change in that. So it is putting pressure on that part of the business.

I've got a couple of questions on the sales outlook for Industrial. When you think about the guidance for this year of low double digit to mid-teens and then you think about the cyclical recovery, can you give us some indication of the profile of the growth over the next 5 years because presumably, it's going to be front-end loaded? And could you help us understand the split between what's maybe cyclical recovery versus structural growth?

Yes. In the 5-year period, the majority -- I would say the majority of it is going to be a cyclical recovery. The reason is -- and for those that have followed us for a while, if you remember why we were winning on the aero side for those narrow bodies, we also captured a lot of applications, particularly around natural gas and then some new engine applications. So that all had a downturn in a pause. And so that market share is still there. Our industrial has some similarities to aero. Almost -- I would say almost everything we do is sole-sourced. The lives on the products, if you exclude the China natural gas trucks, okay, I would say the life of the products are all in the 10- to 50-year time frame. So you have long lives. And during the pandemic downturn, there was not a whole lot of new applications coming out. What was happening was using -- developing alternative fuels and things, but it was the same main platform. So I see that. The aftermarket, though, has some growth opportunity that we see accelerating towards the second -- I'm going to say years, 3 through 5 and then on beyond that. But a lot of it's just the recovery in these markets are coming back.

And maybe just a follow-up. I think it's been 4 years since you bought L'Orange, I think it's next month is the anniversary. And one of the sort of major attractions was that you'd be able to win more business with Caterpillar, Cummins, so basically the non-Rolls-Royce Power Systems customers. How is that initiative going? And how much of that is baked into the guidance?

Yes. So we are seeing that 1 area where we're seeing more growth coming. So this is L'Orange with the traditional Woodward is in Asia. And so what's happening is we're looking at some of these larger engine applications we're coming in with the whole solution. So we've got actually the industry's best fuel injection systems. And then now to help those customers, we're bringing the electronic controls, some of the actuation and the like. With large western, it goes back to my comment earlier, they haven't created new engines, but they are, and we are working with almost all the major reset manufacturers that do this industrial-type engines on alternative fuels. So it's the same engine, if you want to say it's the same engine, but they now want, so they have to change the fuel system, the fuel injection and some of the control algorithms, but the engine has not changed. So that's coming in. But that is not going to be in the next 2, 3 years, a lot of revenue. It will be 5 to 10 years as those all go to production. So that's a little bit. So we're really happy. The L'Orange business is picking back up. The marine market, as was highlighted is picking up, the aftermarket from them is picking up. It's all starting to move, and it's primarily the current product range. Yes.

Tom, David Strauss from Barclays. Did you -- have you said how big the aftermarket is within industrial? How does it break out OE versus aftermarket? And where does the aftermarket sit relative to, I guess, peak levels?

Yes, we have given that information or indications of it, markets. But in terms of peak, it's -- so you got it off the top of your head, Mark. I'm just...

Yes. Compared to peak, if you think about where we were...

No, I mean in a percentage first, so I might hit on the peak.

Yes, it's probably 40-60 aftermarket. Some of the -- as we look at our Industrial business, as Tom was mentioning, it goes into many applications. So we always don't know where the units eventually end up. And so that's why it's a little bit tougher for us to tell aftermarket versus OEM, but I would say it's a little heavier OEM than aftermarket.

Yes, yes. And just a little further on what Mark highlighted. One of the reasons that there's a difference on some of the industrial applications or a lot of them, the aftermarket goes through the OEMs. And it's a different business model, just structure. And that's what Mark's referring to. Sometimes it's hard to track. We have a pretty good indication. Then we do some direct end user as well. So that's clear. We're below peak aftermarket. And the main, I would go back is, we really saw -- one of the -- a couple of areas that drive very good aftermarket is in the oil and gas value stream and in the marine market. And both those were down. We're seeing signs that are coming back. But equipment was down, utilization for a while was down, but we're seeing some of that rig counts, other things are picking up. So we're seeing that improve. And with that picking up, that's where some of those upgrades, I was talking about earlier, are going to come into play as well. So I think we're a few years away from peak or anything close to peak in the aftermarket. It's going to take a little time to get back.

And as you think about that 8% to 9% revenue CAGR, looking by end market between transportation, power gen, oil and gas, are they all in a similar range? Or is one leading and one is lagging by a fair amount?

They're different. So some of the growth -- we're expecting better aftermarket growth, part of that is just strategic initiatives we put in there to capture more. So that's probably a little higher. I would say base load power generation is a slower growth, so probably -- and the others are probably similar.

Okay. A question from Robert Spingarn. Tom, actually, 2 questions. First, on cybersecurity upgrades. How specifically does Woodward participate in that? I'm assuming if the controls are vulnerable, they are networked and therefore, are they primarily soft grade upgrades with high incremental margins? And the second question is, you showed the emissions reductions over the past 60 years. Is there a quantifiable target looking forward over a particular period?

Okay. Well, I'll first talk about the cybersecurity. The issue with the cybersecurity, there is cybersecurity out there on current applications. But to meet the new cybersecurity requirements, the installed base -- the majority of the installed base of controls, electronic controls cannot meet those new requirements. And it kind of comes down to the functionality as well as the computational as well as the software that's required. So I do believe there will be a large upgrade going around the U.S. for sure and other parts of the world. So what that really means is it's a control system upgrade. So you take out the old and you put it in a new. And that would be primarily targeted at power generation, petrochemical plants, process, water, any critical infrastructure, I think, is going to change. Just for clarity for everybody, we are in the process of developing new electronic controls that can meet the cybersecurity requirements that are coming. And so that's -- we're trying -- and it's a big investment we're doing, and it will be targeted for that. And I think there'll be a nice upgrade program coming. And again, that's more, I'm going to say, in the '24 -- calendar year '24 and beyond time period because we got to get it out, you got to get all these things going. But it's very necessary, and it's going to be down the road, it will be mandated just for the safety of our infrastructure. And the second question, Don, remind me again. Sorry.

The emissions reductions over the last 60 years, is there a target going forward?

Yes, the target that we hear from a lot of customers is 0. And as funny as that sound, but that's -- that idea is you're going to use these new fuels. And so as surprising as that's what people are talking about. Now the infrastructure and the availability of having green fuels with 0 carbon emissions is going to be a long time and costly. So in the meantime, we're working on efficiency gains in the 10% kind of range that will help drop emissions. And then we're working on blended fuels, so you might not -- if you use a blend of natural gas and hydrogen, a 30% blend, you can get about 80% reduction in emissions. So when I highlighted on 1 of the charts that we already have those in service, it does greatly reduce it, but you still have to have hydrogen. And it needs to be green hydrogen, otherwise, you're producing the mission somewhere else. So that activity is going. So we -- first and foremost, we think we get maybe another 10% or so out of efficiency, and then you got to bring in these other fuels to really drive -- driven lower. Okay. I'll turn it over to Tom Cromwell. And we figured this is going to be something on everybody's mind, and so we brought Tom, who's doing a great job driving our operations.

Thank you, Tom. Good morning, everybody. Great to see everybody's face. Good to be in person again for sure. I'm really going to cover 2 topics. I'm going to start with COVID disruptions, the impact that's had on our company and how we see that recovering. And then secondarily, I'm going to transition into our overall Woodward production system, operational excellence and how that fits together with the long-term improvements, long-term margin enhancement. So that's the main topics here. So if I jump in, just as a reminder, at the end of Q1, these are the COVID-related disruptions we talked about, $70 million in total. I would say that's bigger than you've seen from some companies. If you think back to some of Mark's earlier discussions, we took -- during the pandemic, we took inventory down by about $100 million. So we were aggressive with taking inventory down, reducing total inventory rates. We were changing material practices, because Mark also talked about, if you look at working capital, one of our opportunities as a company, we still have the room to take inventory as a percentage of sales down from what it is today. So we were making some changes in our material planning and ordering practices to bring material in and smaller lot sizes, pull it through the plant at a faster pace. So I would say more like a heavy truck type industry. We weren't at automotive levels where you're bringing product in every day, but we were certainly bringing product in on a more regular basis. The key to that, though, is you have to have consistent flow of materials. So I would say, as we come out of this pandemic as businesses started to ramp up, we've seen the impact of that more significantly than some companies because our supply base struggled to get ramped initially. And because we had some of those smaller lot sizes coming in, they've really needed to catch up. So if you look at it, we had one specific aero supplier that was a big disruption for us. We've seen other components here that were an issue. And then internally, we were facing some labor shortages in our own plants getting ramped back up. So I'm going to talk about each one of these and where we're at in the recovery process. I'll just touch on the labor shortages, though, first. So what we really saw was as we got to late last summer, we started to see attrition increase. We saw wage rates moving in some of our key markets, we saw people being suck out of Woodward, members being sucked out of Woodward. And so we adjusted wage rates in the beginning of October, it's in our plan. It's part of what Mark talked about with inflationary pressures. But what that's done is it's allowed us to spool up our hiring. We've got much better incoming new member rates. I'm going to talk about that. So our path to recovery there is quite good. So these are the key areas that we were impacted by and in general, how we see them recovering. So the aerospace specific supplier issue that we're facing -- that has continued to get much better during this quarter. We see ourselves recovered there as we head into next quarter. Overall supply chain disruptions, machine parts, other things, that has gotten better here in the second quarter, for sure. We see it continuing to get better in the third quarter. I believe we'll be in good shape overall with our supply base as we finish this fiscal year. The chip challenge, the electronic chips, that has continued to be a real challenge for us. Getting good supply, consistent supply of chips, even though this second quarter has been challenging. We're starting to see it get a little better in the later part of this quarter, but that certainly needs to continue. And we really don't see full recovery until we get into next fiscal year. Our internal labor, as I talked about, as we adjusted wage rates. Our hiring process is improved dramatically. We really see ourselves in good shape from an internal labor standpoint with where we need to be as we go into the third quarter here. The other -- the right-hand side of this slide, though, just to be clear, these sales haven't been lost. So we definitely have the sales going forward. We just delayed them into the second half of the year. So if I talk about some of the additional actions to manage the supply chain and COVID-19 disruptions, we put an executive management process in place for our critical suppliers. So we have 28 suppliers currently in this process. They get executive management review. So I have a review with our supply chain teams literally every week to go through those 28 suppliers to make sure we have enough support on-site presence with them. We're on site with our most critical suppliers. So we're in there really managing them. And then I would say across the company, we've redeployed people out of our engineering organizations out of other places within the company to specifically manage the supply base and even some of our internal plant disruptions as we're smoothing things out. From a labor standpoint and thinking about headcount again, Tom and Mark have both talked about this. Our hiring rate needs to be about 100 new members through the balance of this fiscal year to get our internal labor rates where we need them to be. You can see since the beginning of the calendar year, we've actually hired 279 people. So that was as of late in February. So we're ahead of that 100 member per month pace. We see the pipeline coming in, a high degree of confidence we'll stay on pace there. We'll take care of our labor requirements. The point on the top there is, from a capacity and utilization standpoint, we've talked about it, our facilities are well capitalized. So a big part of this is getting back to second and third operations -- second and third shift operations in all of our plants. The other point here is we have a very strong onboarding process. So as we get new members in the door, they essentially don't touch any product for the first 2 weeks. We give them a good company orientation. We give them all of the key safety, health-type things, but then we also spend several -- 2 weeks with them off-line in training cells before they actually go to the production line. And what we found is that shortens their learning curve dramatically makes them much more productive, much more effective, and it also doesn't take away from our teams on our shop floors. So now I'm going to transition. That's kind of where we're at from a supply-based disruption standpoint. I'm going to transition into the longer-term operational performance piece, our True North vision, where do we want to be? It really is the perfect safety, perfect quality, perfect delivery and zero waste standpoint. But if you look at our business, look at what we do, it is a high-mix operation. So we really kind of say low to medium volume with high mix. So our plans are complicated from an operations standpoint. So our Woodward production system, there's 4 key areas. You can see here, value stream architecture is the flow of product through our plants. So it's how they're laid out, how our value streams flow. We use a strong leader standard work cadence, that's the guidance to our leadership teams on the cadence of meetings they're going to use, the structure they use to run the plant. We're very aggressive with continuous improvement. I'm [ going ] to talk more about that, but at the same time, process adherence is standard work for our members on the plant for. We want them doing the same thing all the time until we find a better way to do it, and then we want them to use the new standard work with the better process. And then the other key piece here is sales and inventory operations planning, that's our long term. We're always looking at an 18- to 24-month rolling sales plan and then building our supply plan and our supply base plan around that. So what do we get from this production system? It's definitely about productivity and efficiency in our plant floors. If I looked at the hiring needs that I talked about, had we -- if we weren't making all these improvements, we would need to hire significantly more members than what we have today. So we've been able to drive productivity and efficiency in all of our plants, which has reduced the total number of new members we've needed to hire. The other key here, though, is faster flow through our plants. We talk about a lot about velocity or lead time reductions. This is very much about serving customers faster and better than we have. And so what does that mean financially? Obviously, it's better working capital leverage and then certainly stronger cash flow. So if you look at over the last 3 years, what are some of the bigger transitions we've made. We've certainly hired in a stronger operations team. So we brought in a number of new plant leaders that came out of more like heavy truck ag and off-highway markets, they may have some automotive experience in their background, but they understand what a lean good flowing plant looks like. But typically, we also wanted them to have some of that experience in more of that lower volume, high mix type operation. So we've been able to find really good talent and brought them into the company. What we're now doing is using that talent and our processes in this Woodward production system to develop internal talent as well. So in the future, we can fill more of these roles from within the company. We've also added quite a bit around real-time metrics, so much better data reporting out of our plants. Real-time, I can look at any plant today and see exactly how they performed, how much product did they build, what did their scrap rate look like, where are they at from an inventory performance standpoint? So it's given us great transparency in and out of each one of our plants and allowed us to run them in a much more disciplined manner. So from an improvement process standpoint, we've gotten better at all the things listed here, resource planning, layout and flow. But I would say our base methodology for improvements is Kaizen activity. So we've run over 250 Kaizens in the last year across our plants. What a Kaizen would be is, let's say you have a line that has 8 operators in it, and it produces 20 parts a day, we will do a week-long process. We'll go specifically to that value stream, we'll look at the layout and flow through that value stream. And often, we can reduce the number of members needed in that line by 20% to 40%. We typically could increase output pretty dramatically. And oftentimes, if you look at velocity, let's say in the past, it may have taken us 10 days to get a part through that value stream. Often through these Kaizen activities, we can cut that down by more than 50%. So instead of taking 10 days to get a product through, we can cut it down to 5. So this has been a great improvement process for us. It's about continuing to drive efficiency and effectiveness on our plant floors, and it will be core to how we continue to improve margins going forward and also working capital. We're also focused on digital transformation in our plants. And you can see it here, it's a lot about how do you take a design from our drawing boards straight into the operations process with minimal human invention, how do you get from a model part to getting it into your machining centers seamlessly automatically with minimal human intervention? How do you teach your robots? How to move these materials. So we've got very good systems for that. We continue to get better though and stronger there as well. We're also adding a fair amount from an automation robots and cobotics, we're adding that to a number of plants, which also reduces that requirement for new members. So a lot of work here. Closed-loop manufacturing, that is, if you take a machining center, historically, we would have needed a trained machinist to run machining centers. With a closed-loop manufacturing, you tie a vision or inspection system right to that machining center. And so as a part comes off, it goes into a CNC-type inspection machine. You take all the critical dimensions off of that, and then it feeds the data back into the machining center and makes all of your offsets and adjustments automatically. So you take that human intervention that we would have had in the past and that skilled machinists and you can really replace it with a lot of this automated processing. So those are the things we're using to, again, drive productivity, drive efficiency in our plants. So in summary, where are we at? This Woodward production system over the last 3 years, we've evolved it dramatically. We've learned how to drive continuous improvement in these big Kaizen event process improvements into our plants. It's become very effective, very efficient for us. So we know how to keep driving margin and improvement out of our plants. But the second piece, and Tom and Mark both touched on it, we've already spent the capital on new buildings. If you walked into a Rock Cut facility, if you walked into our Niles facility, they are fantastic buildings, fantastic locations we've added the right equipment. You can see it on the picture here. We've got great machining centers, great equipment in our plants. Now it's all about just volumes coming back and utilizing that equipment better across all 3 shifts and obviously driving the leverage out of that. So really strong performance. We've got a good system, and we're in good shape going forward. So at that time, do we want to take questions at the end of the operations section? Okay. Good. I think from a timing standpoint, that will work better.

I've got 2 slides to wrap up. I know we're getting close to noon, and a lot of you probably have to -- we have lunch, but a lot of you I know have to run. So 2 more slides and then we'll take questions on any topic. I hit some of this already, but just we get at the question lot, why do you have industrial and aero? And first, I'm going to go back and say, we do the same thing. In each segment, we get a lot of leverage across it. I highlighted some of that. It's not only technical leverage, but our business system is identical, our core processes are the same. Tom just hit like our production system is the same. So we're able to leverage that across. We also leverage people back and forth where the demand is, and so we can leverage the people and the talent. Some examples where we've done it, we talked about electronic controls. We created a whole air valve line for aerospace. It was all developed with our industrial team. We have the ignition systems that came out of industrial to aero. So there's a back and forth of technology and product development that we leverage. And then the whole decarbonization, energy transition efforts we're doing as a company, and it's in every 1 of our markets. So those are leverage points. So there's a good reason to have the company as one. And a lot of times in industrial we can move a little bit faster than aero, so it gives us a chance to develop some things a little quicker. So just really the final wrap-up. We have won a lot of business over the last decade. We had a pandemic pause. That business is coming online now and is back to growth. We've got a large installed base, both on aero and industrial, and we're leveraging that to drive profitability and margins. We're in the thick of the energy transition, helping our customers meet all the requirements they need out there. We are leveraging the Woodward technology into new areas. So examples were like space, missiles and things that we're growing, and they leverage our current technology base. We do have the capacity. We hit that a few times, but the capacity is in place to handle the 5-year forecast. So this is where we get the opportunity to leverage those sales. We are forecasting strong continued cash generation, and we're dedicated to disciplined capital deployment. So that's kind of the wrap, and we can take questions. Tom and myself or Mark, whatever is on your mind, we can take.

I'll start one off from Gautam Khanna, Cowen. How much of the $70 million of supply chain-related sales delays have been made up?

I would say the -- so good question. I would say the second quarter has still been challenging. We saw definitely the Omicron variant here in the U.S. impacted is definitely in the January time frame. I would say, in our European plants that actually transitioned more into the February time frame. So during the second quarter, it's been both for us internally and our supply base. There's been some high absenteeism periods. I would use our plants as an example, there were times we would see 25% to 30% absenteeism out of a plant in a specific area. So the second quarter has still been rocky. But as I've talked, the second half of the second quarter is getting much steadier, it's getting more consistent. So I think we'll carry that momentum really into the third and fourth quarter.

I'll do another one from Noah Poponak at Goldman Sachs. Are the revenue CAGR targets entirely organic? Or do they assume some eventual acquired revenue contribution?

Yes. They're all organic.

Matt Akers from Wells Fargo. You guys have sort of hinted that maybe there's room for M&A despite the big buyback. Are there any areas that you're targeting? I know some of the changes lately have been more on the industrial side. Should we expect that to continue? Or just any thoughts on that?

Yes. So the M&A, we just don't add acquisitions just to grow. The acquisitions are always targeted to further develop our system solutions, build out customer base within the markets we are that are applicable to what we do. So we've got a constant funnel of looking at potential companies. What we're looking at today, and some of those take years to develop and look at, the multiples are really high. And so to be rational to make sure that we're actually deploying capital in a good return to shareholders that's what we're saying we'll be disciplined. And so we're very careful. Some of you were not active, but we're not going to go out and acquire something that you can't get a good return on. So -- and today's market is a little challenged that way. I'm not saying it's impossible, it's a little challenged that way. So we have the bandwidth, as Mark highlighted, but we just have to see when the good opportunities arise.

We have a question from [ Pratyush Mishra ] at Berenberg. Do you consume any of the minerals such as titanium, nickel, neon that may see supply risk due to the Russia-Ukraine situation?

Yes. So yes, we do use minimal amounts. Titanium is not something we use extensively. Nickel, we have a number of nickel-based alloys, but it's a small part of the content of the base materials. So I think we're seeing commodity inflation, cost pressure, if you will, more than we're seeing any significant supply base issues at this point in time. So as we look forward, we've taken some forward positions on some raw materials, and we continue to pull in some additional material, but I'd say it's there we'll continue to monitor closely.

Okay. Another question from Robert Spingarn. On the 5-year free cash flow outlook versus the 2019, Mark highlighted it's really a shift to the right of the prior assumptions. But does the mix change a bit with somewhat higher energy and slightly lower aero, especially wide-body? Or do you see a full recovery to pre-pandemic aircraft production rate targets?

Yes. So as we highlighted with the sales growth that we have, 8% to 10% for aerospace and 8% to 9% on the industrial side, there isn't a significant shift from where we're at today. obviously, aerospace being almost 2/3 -- or I'm sorry, the 50-50, but aerospace is growing at about the same as industrial. I wouldn't say a significant shift from that perspective, but rather the opportunities within, as Tom highlighted, on the industrial side, all the markets are recovering there on the aerospace side, especially on the commercial aerospace, that's where the shift in the opportunity will really be.

[ Brad Rodgers ] with Wells Fargo. Going back to aero. Earlier, I think you did a nice job laying out the growth that hits over the next 10 years and then the R&D spend 10-year plus. How do you feel about like pipeline programs that maybe fill in the 5 to 15 years as you look forward?

Well, we're looking at -- anything -- near-term revenue. What I'll highlight is right now, we made the decision to reengage in space, as I talked about earlier, that's moving so quickly that we started that a little over 2 years ago, and we're now starting to see revenue. And so we see we can move quickly on some of those applications. So we're targeting ones where we can, so those will add some, if you want to call it, near-term, midterm revenue. A lot of it is planning for the big programs. That's that longer-term R&D to make sure we're there. But where we can, even some of this -- as I talk on the industrial side, some of the energy transition activity actually is going to generate some revenue because they're going to be multifuel systems. So we see some of that happening in the 2- to 5-year period as well. So there is some good opportunities. Where we can, we're always interested in revenue. So we're always looking for those opportunities.

Another question from Rob Spingarn. How is fiscal Q2 trending relative to the guidance plan that you provided in late January?

Yes. Did you...

Tom highlighted that a little bit. So just to be clear, we give annual guidance. And in that guidance, what we are anticipating is truly a second half recovery, which I think Tom just mentioned, where we were at kind of during the Q2 period. So we still -- again, we haven't lost the orders -- we're working our way through the disruption issues, as Tom has highlighted, but we're still anticipating the second half recovery.

I think that's all the questions. So we'll wrap up. Our team is going to be here. We do have -- I think lunch is back where we had breakfast. And if you can stay and join us, we can continue the conversation over lunch. But I appreciate everybody here. And online, thanks for joining us online as well.

Thank you.