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Woodward Inc (WWD) Q4 2018 Earnings Conference Call Transcript


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Woodward Inc (NASDAQ: WWD)
Q4 2018 Earnings Conference Call
Nov. 07, 2018 , 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome to the Woodward Inc. Fourth Quarter and Fiscal Year 2018 Earnings Call. At this time, I would like to inform you that this call is being recorded for rebroadcast and that all participants are in a listen-only mode. Following the presentation, you will be invited to participate in a question-and-answer session. Joining us today from the company are Mr. Tom Gendron, Chairman and Chief Executive Officer; Mr. Bob Weber, Vice Chairman, Chief Financial Officer and Treasurer; and Mr. Don Guzzardo, Vice President of Investor Relations and Treasury.

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

Don Guzzardo -- Vice President of Investor Relations and Treasury

Thank you, Operator. We would like to welcome all of you to Woodward's fiscal year 2018 and fourth quarter earnings call. In today's call, Tom will comment on our markets and related strategies and then Bob will discuss our financial results as outlined in our earnings release.

At the end of the presentation, we will take questions. For those who have not seen today's earnings release, you can find it on our website at woodward.com. We have again included some presentation materials to go along with today's call that are also accessible on our website. An audio replay of this call will be available by phone or on our website through November 21, 2018. The phone number for the audio replay is on the press release announcing this call as well as on our website and will be repeated by the operator at the end of the call.

Before we begin, I would like to refer to and highlight our cautionary statement as shown on slide three. As always, elements of this presentation are forward-looking or based on our outlook and assumptions for the global economy and our businesses more specifically. Those elements can and do frequently change. Please consider our comments in light of the risks and uncertainties surrounding those elements, including the risk we identify in our filings.

Woodward is providing financial information as reported under U.S. GAAP and on an adjusted and an organic basis. Please refer to our press release and related tables, as well as the appendix of today's presentation for the definition of adjusted and organic. Management uses these non-US GAAP and adjusted financial measures when monitoring and evaluating the ongoing performance of Woodward and each business segment. We believe this will help in understanding both historical performance and future results. We direct your attention to the reconciliations of non-US GAAP financial measures, which are included in today's slide presentation and our earnings release and related schedules.

Now, turning to our results for the fourth quarter. Net sales for the fourth quarter of fiscal 2018 were $719 million, an increase of 19% from the prior year quarter. Organic net sales for the fourth quarter, which exclude L'Orange were $641 million, an increase of 6% from the prior year quarter.

Earnings per share were $1.16, adjusted earnings per share were $1.39 compared to $0.98 for the fourth quarter of the prior year. And for the full year, net sales were $2.3 billion, an increase of 11% from the prior-year. Organic net sales were $2.2 billion, an increase of 6% from the prior year. Earnings per share were $2.82. Adjusted earnings per share were $3.85 compared to $3.16 for the prior year. Net cash generated from operating activities for fiscal 2018 was $299 million compared to $308 million for the prior year. Free cash flow was $172 million for 2018, compared to $215 million for 2017.

Now I will turn the call over to Tom to comment further on our results, strategies and markets.

Tom Gendron -- Chairman and Chief Executive Officer

Thank you, Don, and good afternoon everyone. 2018 was an exciting and strong year for Woodward. We have maintained our focus on driving long-term growth and building value for our shareholders. First, we continue to invest in several significant programs which position us to accelerate growth in Aerospace, track systems for the Airbus A320neo, A330neo and Boeing 777X and the fuel system for the GE9X or some of the key program investments that will deliver future growth.

In Industrial, China's sixth compliant natural gas engine systems, grew emission-compliant diesel engine systems and new power converters and next generation wind turbines are also exciting programs launching this year. The production ramp-up of both the 737 MAX and A320neo continues and we are successfully meeting these demands. We're intently focused on maximizing our operational excellence associated with these new programs and have improved our profitability through the launches.

Additionally, in line with our ongoing strategies to optimize enhance our operations to meet evolving market conditions, we are relocating our Duarte operation to the Drake Campus here in Fort Collins. We believe this initiative will allow us to support the growth within our Aerospace segment, while maintaining the highest quality of products and services for our customers.

And lastly, we completed the transformational L'Orange acquisition in early June. This acquisition has proven to be an exceptionally strong fit within our Industrial segment with this excellent technology platform, large installed base and deep relationships with key customers. We are confident this business will continue to be a strong contributor, both financially and strategically to our Industrial segment and to Woodward overall.

Moving to our markets. Our Aerospace segment performed extremely well in 2018. Our share gains in next-generation platforms are driving strong OEM growth. Favorable MRO activity based on fleet dynamics and initial provisioning are delivering exceptional aftermarket growth. The demand for new fuel-efficient aircraft, global passenger and cargo traffic, high load factors, new operators taking on next-generation aircraft are all contributing to market strength.

For business jets, we continue to see improvement primarily as a result of new programs with enhanced Woodward content. Defense OEM activity remains solid due to demand for guided weapons and general increases in global defense spending.

Turning to our industrial markets. In power generation, the long-term secular fundamentals remain in play, but as expected, industrial gas turbines and renewables were the critical points of volatility as we continue to navigate disruption in the market. We believe our sales in the turbomachinery market have bottomed and that we will see a slow recovery over the next two fiscal years.

Renewable power continues to increase its share of the power generation market and large reciprocating engines are expanding in data center and backup applications. In transportation, marine aftermarket is showing strength as a result of increased global industrial activity. In Asia, the regulatory environment and related enforcement continues to promote the use of natural gas trucks and orders are increasing. The Chinese government is investing in necessary infrastructure to increase supply and storage capacity to mitigate volatility related to spikes in both the demand and price natural gas as we previously experienced.

Oil and gas markets remained robust with higher oil prices and rig counts increased in our global basis. In regards to L'Orange, our integration is proceeding as planned and we are encouraged by the growth we are experiencing in number of their markets as well as the opportunities for future sales synergies. With respect to tariffs we're being proactive in developing strategies to mitigate potential effects on Woodward. To date we have not seen any significant impact, now although there is a high degree of uncertainty, we do not anticipate a material impact going forward.

In summary, we believe we are strategically well-positioned to accelerate our financial performance. Our Aerospace segment continues to perform extremely well and we have strengthened our industrial segments to take advantage of future opportunities. We intend to deliver on our commitments to profitability for both our Aerospace industrial segments. We're also returned to strong free cash flow and remain committed to our five year free cash flow target of $1.3 billion to $1.5 billion by fiscal 2020.

We are aligning our teams through our True North initiatives to capitalize on opportunities to substantially improve our operational performance and ultimately maximize free cash flow to drive superior shareholder returns.

Now with that, I'll turn it over to Bob discuss the financials in more detail.

Robert Weber -- Vice Chairman of the Board, Chief Financial Officer, Treasurer

Thank you, Tom. Results for the quarter were solid and largely in line with our expectations. Aerospace, sales increased 16% this quarter compared to the prior year quarter, driven by better than expected strength in Commercial and Defense OEM as well as commercial aftermarket. Commercial aftermarket sales were up 18% compared to the prior year quarter and 22% for the full-year. This was the result of favorable fleet dynamics for Woodward, very strong global passenger in cargo traffic growth and next generation initial provisioning.

Defense OEM growth was primarily driven by smart weapons and with increases in global defense spending, we expect a favorable defense environment to continue. Aerospace segment earnings for the quarter were 22.4% of sales compared to 21.4% in the same period last year. Segment earnings were positively impacted by the higher sales volume in the quarter. The investments we have made in the facilities and lean operations are beginning to benefit segment earnings and we continue to focus on additional operational efficiencies.

Turning to Industrial, fourth quarter Industrial segment sales were up 24% compared to the prior year quarter, largely driven by the addition of L'Orange. Organic industrial segment sales were down 13% primarily due to weakness in industrial gas turbines and natural gas fueled trucks in Asia, partially offset by increased sales in renewables. Fourth quarter Industrial segment earnings were 3.1% of sales.

Adjusted industrial segment earnings were 13.2% of segment sales compared to 11.1% in the prior year period. The increase in adjusted segment earnings was primarily driven by higher overall sales volume. However, lower than expected China natural gas fuel system sales tempered earning somewhat. At the Woodward level, the decrease in gross margin for the fourth quarter and the year was primarily attributable to purchase accounting impacts of the L'Orange inventory step up and amortization of the backlog intangible asset. Both are recognized as a non-cash increase to cost of goods sold.

For fiscal year 2019, we expect to record approximately $25 million of backlog amortization. R&D spending for the quarter and the full-year of 2018 was higher compared to the prior year periods. The increased spending relates primarily to new Aerospace programs as well as the R&D attributable to L'Orange. Selling General and Administrative expenses were $52 million this quarter compared to $46 million for the fourth quarter of last year.

The increase in SG&A expenses was primarily due to the addition of L'Orange SG&A. For fiscal 2018, SG&A expenses were $193 million compared to $177 million last year. The increase in SG&A expenses for the full-year was primarily due to the special charges associated with the acquisition of L'Orange of approximately $13 million and the addition of the L'Orange SG&A. The effective tax rate for the fourth quarter of 2018 was 5.7%. The adjusted effective tax rate was 18.9% for the quarter compared to 28.3% for the fourth quarter of 2017.

For fiscal year 2018, the effective tax rate was 17.9%. The adjusted effective tax rate for the full year was 16.8% compared to 20.7% for 2017. Looking at cash flows, net cash provided by operating activities for fiscal 2018 was $299 million compared to $308 million for the prior year. Capital expenditures were $127 million for 2018, compared to $92 million for the prior year. The increase was primarily due to the Drake Campus renovation and L'Orange capital expenditures. Free cash flow for 2018 was $172 million compared to $215 million in the prior year. Free cash flow for 2018 was impacted largely by the higher capital expenditures.

Lastly, turning to our fiscal 2019 outlook as you saw in the press release, total net sales are expected to be between $2.65 billion and $2.8 billion for fiscal 2019. With Aerospace sales up approximately 10% over the prior year. Additionally, we expect Industrial sales to be up approximately 30% compared to the prior year predominantly driven by the L'Orange acquisition. We continue to evaluate the impacts of the new revenue recognition pronouncement and do not believe it will have a material impact on our sales or earnings for fiscal 2019.

Aerospace segment earnings as a percent of net sales are expected to be approximately 20% and adjusted Industrial segment earnings as a percent of net sales are expected to be approximately 14%. Consistent with new pension disclosure guidance, in fiscal 2019, we will classify interest cost associated with pension obligations in interest expense. As a result for 2019, we anticipate interest expense to be approximately $45 million. We anticipate Research and Development costs to remain at approximately 6% of sales.

The adjusted effective tax rate for the year is expected to be approximately 21%. For 2019, we anticipate capital expenditures to be approximately $120 million. Free cash flow is expected to be approximately $300 million, which returns us to our long-term target of about a 100% conversion rate. Adjusted earnings per share are expected to be between $4.40 and $4.70 based on approximately $65 million fully diluted weighted average shares outstanding.

I'd like to remind everyone that historically our fiscal first quarter is sequentially lower due to normal business trends and fewer working days as a result of the holiday schedule and plant shutdowns. For 2019, we anticipate a similar pattern. This concludes our comments on the business and results for the fiscal year and fourth quarter of 2018.

Operator, we're now ready to open the call to questions.

Questions and Answers:

Operator

Thank you. The question-and-answer session will begin at this time. (Operator Instructions) And our first question comes from the line of Sheila Kahyaoglu. Sheila?

Sheila Kahyaoglu -- Jefferies LLC -- Analyst

Hi, good afternoon, guys and thanks for the time.

Tom Gendron -- Chairman and Chief Executive Officer

Thank you. Hi, Sheila.

Sheila Kahyaoglu -- Jefferies LLC -- Analyst

Hi, Tom, maybe can we talk about Industrial you saw another double-digit decline it seems to be bottoming out, but not -- not so much, how do you think about the organic pieces of the business in the moving parts in 2019?

Tom Gendron -- Chairman and Chief Executive Officer

Yeah, organically, we're looking at about approximately 6% growth in fiscal year '19.

Sheila Kahyaoglu -- Jefferies LLC -- Analyst

And is there any way to comment on the moving pieces and just may be touch upon pricing to?

Tom Gendron -- Chairman and Chief Executive Officer

Yes. Well, the moving pieces as I said in the prepared remarks, we have seen our Turbomachinery business bottom, so as we look in this year '19, we think that's going to be basically flat. In China, we're actually seeing a large order intake right now and it's really tied to the government really moving forward with China VI emission regulations starting equipment in July next year and that supplying in the big cities, both to natural gas and diesel engines. So, we're starting to see a lot of large ramp up for that and that's been positive and that's a big turn in the industrial. We're also seeing on the power side large orders for data centers and backup power, in addition, the oil and gas market is doing well. So, we -- we are seeing organically a shift upwards, and then as we highlighted, with the additional L'Orange were be about 30% overall sales growth.

Sheila Kahyaoglu -- Jefferies LLC -- Analyst

Got it. Is there any way you could comment on the pricing, maybe you're seeing IGT business, are you seeing any of that or how is the content shift that unlike the power at the data centers versus -- sorry, go ahead.

Tom Gendron -- Chairman and Chief Executive Officer

Yeah, the pricing, we're not experiencing price pressure right now, especially if you, I think, your first question was around the turbine market. Yeah, it's the volumes are so low, there is no, we're not adjusting pricing at all. So, on the remainder of the business, it's typical where there are some opportunities for price realization and there are some that are locked into contracts, so we have productivity commitments. But I would call it normal, there's nothing unusual going on. So, right now that's holding and -- the markets are turning as we were expecting them to and we're seeing as the year goes on how raising proceeds.

Sheila Kahyaoglu -- Jefferies LLC -- Analyst

You thought, you would have enough to talk about the IGT business bottoming with the launch, but people were bringing --

Tom Gendron -- Chairman and Chief Executive Officer

That's OK, Don. I actually, I think it's a good one that everybody raised and I'm sure, am I get some more questions, but because of lead times and things that are associated with that business, we had the decline last year, and it was severe, and we have seen the bottom. So from our standpoint, that's good, and where we also on the new machine, so as the market recovers, just kind of reminder everybody has been tough market, but as things recover, the new machines, the H-Class machines coming out on the large side and then the newer aeroderivatives and small industrials all have more content Woodward content per turbine than we used to have. So when that recovers, we're going to get a nice effect from that. I think, it's going to take couple of -- couple of fiscal years to see get more back to where we think long-term, it should be, but that is leases in a positive direction.

Sheila Kahyaoglu -- Jefferies LLC -- Analyst

Thanks. And then just on L'Orange if I can. How are you integrating the business, but using in the sales channel, and any sort of synergies there?

Tom Gendron -- Chairman and Chief Executive Officer

Yes. We have quite a bit of synergies within the business definitely in the supply chain. We also -- biggest areas in sales synergy expanding the customer relations, I think as we highlighted, when we acquired L'Orange. They are now independent of an engine manufacturer. It is opening doors, we are getting a great reaction from the larger industrial engine customers that it would be applicable to. We're starting to see progress on that, so that's moving forward. The integration activities to get L'Orange on all our systems separating from Rolls Royce Power is going very well. The teams are doing well together, so we're very positive and the integration is on track and we're confident in achieving our synergy targets.

Sheila Kahyaoglu -- Jefferies LLC -- Analyst

Great. Thank you.

Tom Gendron -- Chairman and Chief Executive Officer

Thanks, Sheila.

Operator

Our next question comes from the line of Gautam Khanna. Your question please.

Gautam Khanna -- Cowen Inc. -- Analyst

Yes, thank you, guys. Thank you.

Tom Gendron -- Chairman and Chief Executive Officer

Hi, Gautam.

Gautam Khanna -- Cowen Inc. -- Analyst

Hi, sorry for the noise in the background, but couple of questions, first on aerospace, what are your expectations for aftermarket growth -- fiscal '19 and if you comment on transit prohibiting as well?

Tom Gendron -- Chairman and Chief Executive Officer

Okay. Yeah, in aerospace aftermarket, we had a very strong fiscal year 2018, we really look at strength continuing into fiscal year '19. But as you can imagine, we're going have really tough comps, but we see the market is still strong, initial provisioning for the next-generation aircrafts is still going well, it's really tied to new operators taking the aircraft as well as new routes. So, as you can imagine, with all the aircraft being delivered in Boeing, Airbus catching up on their schedules, that's a positive, MROof the legacy fleet. We've got really good dynamics, so that's positive. So, it's all factored into us achieving our segment margins of 20%. So, we see it, the strength holding, but against it was very strong year in '18.

Gautam Khanna -- Cowen Inc. -- Analyst

Is there any finer point on it, in terms of like high-single digit aftermarket growth or double-digit anything you can quantify?

Tom Gendron -- Chairman and Chief Executive Officer

Yes, it's going to be single digit, it's not double digit (Technical Difficulty) strength that we're coming from.

Gautam Khanna -- Cowen Inc. -- Analyst

Okay. I was wondering if you could comment on whether L'Orange or the legacy Woodward industrial business has any angle on the IMO 2020 regulations?

Tom Gendron -- Chairman and Chief Executive Officer

Yes, absolutely, because those require advanced common rail fuel systems and L'Orange and Woodward together are extremely well positioned on providing the fuel system, control system, air management and even part of the after-treatment. So, those are good regulations to drive higher Woodward content. So, we are actively engaged in that, and that's a positive going forward for the company.

Gautam Khanna -- Cowen Inc. -- Analyst

Okay. And just, I know you mentioned tariffs and sourcing and what have you were sort of manageable risks and contemplated in the guidance, but if you could also maybe quantify what is sort of the cost escalation anticipates of tariffs in fiscal '19?

Tom Gendron -- Chairman and Chief Executive Officer

(Technical Difficulty) Bob, take that one.

Robert Weber -- Vice Chairman of the Board, Chief Financial Officer, Treasurer

I'll jump in. As I've mentioned a couple of times, it's very difficult to quantify all the downstream impacts of what will you be able to pass through, what supply tariffs will be impacted and all the productivity that will go along with that, but we estimate that it is less than $10 million total impact that would probably medium significant as we go through the year.

Tom Gendron -- Chairman and Chief Executive Officer

As we intent to mitigate if, my contracts as well surprising.

Gautam Khanna -- Cowen Inc. -- Analyst

Okay. Thank you very much, guys.

Tom Gendron -- Chairman and Chief Executive Officer

Thank you (ph), Gautam.

Operator

Our next question comes from the line of Pete Skibitski.

Pete Skibitski -- Alembic Global -- Analyst

Good afternoon, guys.

Tom Gendron -- Chairman and Chief Executive Officer

Hi, Pete.

Robert Weber -- Vice Chairman of the Board, Chief Financial Officer, Treasurer

Hi, Pete.

Pete Skibitski -- Alembic Global -- Analyst

Hi, Bob, just want to clear the 14% industrial margins, is that $25 million backlog amortization, is that the only adjustment you're making?

Robert Weber -- Vice Chairman of the Board, Chief Financial Officer, Treasurer

It is. Yeah, that's the only one at this point in time, you've saw the types of items, we don't anticipate any additional tax legislation transition at this point in time. So, right now, that's the only adjustment we're making.

Pete Skibitski -- Alembic Global -- Analyst

Okay. And in the CapEx were up fiscal '19 kind of organically, is the organic CapEx down, but you've got the increment L'Orange CapEx, is that fair?

Robert Weber -- Vice Chairman of the Board, Chief Financial Officer, Treasurer

Yes, that's a good assessment. Yep.

Pete Skibitski -- Alembic Global -- Analyst

Okay. Got you. So, I guess you kind of at a run rate now that will be a full year, so maybe we could just extend that out roughly?

Robert Weber -- Vice Chairman of the Board, Chief Financial Officer, Treasurer

Yes.

Pete Skibitski -- Alembic Global -- Analyst

Okay. Let me ask one more on Duarte, how is the move coming along and when does that complete?

Robert Weber -- Vice Chairman of the Board, Chief Financial Officer, Treasurer

Well, the moves going well, lot of that is to get all our lines approved by our customers, as well as the FAA for our repair stations, we're anticipating first, second quarter of the calendar year.

Pete Skibitski -- Alembic Global -- Analyst

Calendar '19. Okay. I guess let me ask one more, Tom, renewables outwind for fiscal '19, is that I know you had some customer issues, you gained share, but there are some OEM share shifts I guess, how is that looking for in fiscal '19?

Tom Gendron -- Chairman and Chief Executive Officer

It'll be slightly up. Yes, as some of these new programs come online.

Pete Skibitski -- Alembic Global -- Analyst

Okay. Great. Thanks guys.

Tom Gendron -- Chairman and Chief Executive Officer

Thank you.

Operator

Thank you. Our next question comes from the line of Robert Spingarn. Your question please.

Robert Spingarn -- Credit Suisse -- Analyst

Hi, there.

Tom Gendron -- Chairman and Chief Executive Officer

Hi.

Robert Spingarn -- Credit Suisse -- Analyst

So, just starting with Aerospace, I was wondering if you could parse out for us the 10% sales growth, you just said that aftermarket would be single-digit, Tom, I think you said. So, how do we think about military or commercial OE in the context of the 10%?

Tom Gendron -- Chairman and Chief Executive Officer

We really have going to cross definitely the ramp in the new narrow bodies is a big part of this growth.

Robert Spingarn -- Credit Suisse -- Analyst

Sure.

Tom Gendron -- Chairman and Chief Executive Officer

We see 787 going up, this Jets are increasing for us -- the new programs coming online. Defense is also going up nicely with smart weapons increasing at a pretty good clip and traditional defense and we expect to commence aftermarket to pickup as well, I'm just waiting.

Robert Spingarn -- Credit Suisse -- Analyst

Can you rank order any of that in terms of growth, those four things you just said?

Tom Gendron -- Chairman and Chief Executive Officer

Narrow bodies, number one; (inaudible) defense OE; point number two, Defense aftermarket, biz jets and then commercial aftermarket.

Robert Spingarn -- Credit Suisse -- Analyst

Okay. And on the biz jet side, are you seeing anything organic there or is this just newer programs with higher content?

Tom Gendron -- Chairman and Chief Executive Officer

Well, it is, we are seeing increases and you are seeing always new programs coming online and every one of those new programs has higher Woodward content, so it's kind of a -- you know the tax -- I think you guys all aware the tax legislation that came through allows people to depreciate the plane and it's 100% in its first year, so it is grabbing interest and we are seeing more coming along in. The new generation aircraft are actually pretty spectacular and what they've come out with. And the good thing is we got more content on it. So, I see business jets turning up this year and next year -- it should be -- they should be accelerating.

Robert Spingarn -- Credit Suisse -- Analyst

Okay. I wanted to ask you on terms of the industrial or energy portfolio, just in general, you've talked about seeing the bottom, but GE is having a tough time -- in their latest quarter, power was under significant pressure you're reasonably well exposed there. So, how do we think about that?

Tom Gendron -- Chairman and Chief Executive Officer

Yes, well, the first is, we're definitely exposed to GE, we also sold all the manufacturers. So, just as a reminder everybody, and we've got increasing content with the other manufacturers and also in our turbomachinery is aero derivative and small industrial turbines. So, it's not just a large, but the largest is very significant to us. What I would also say a little bit on that -- is that we experienced the inventory dry up and the reduction sooner than maybe you would hear from our customers in that you got significant lead times. So, we took the brunt of the hit in '18 flattening in '19 that makes sense to it. And then we kind of see more recovery as we move into 2020.

Robert Spingarn -- Credit Suisse -- Analyst

Okay. And then, and Bob for you on the free cash. I guess, out of the five year $1.5 billion target, now that you've given us 19 'really only remaining year is 20. Might be thinking about this right that with the five years we're ending in '20?

Bob Weber -- Vice Chairman, Chief Financial Officer and Treasurer

You are, yup.

Robert Spingarn -- Credit Suisse -- Analyst

And while there's a little bit of adjustment you can --

Bob Weber -- Vice Chairman, Chief Financial Officer and Treasurer

Remember that -- comes out of that.

Robert Spingarn -- Credit Suisse -- Analyst

That's right. So, that looks like a pretty robust increase in year 20 although maybe, I don't have the right adjustments in my first few years, but am I thinking about that?

Bob Weber -- Vice Chairman, Chief Financial Officer and Treasurer

No, you are, I mean, remember we got off to a great start with the joint venture proceeds. And then we had some additional CapEx and things like that or whole in the down, we did say we needed to have a return to growth on the industrial business, and that's when we tempered it down to 1.3% to 1.5%. We said, we didn't want to back off to 1.5%, but we did tempered, because we weren't seeing the industrial increases, but it does leave a very hefty final year for us. So, it's a good target.

Tom Gendron -- Chairman and Chief Executive Officer

But as we look into 2020, it will be a very good cash generation year.

Robert Spingarn -- Credit Suisse -- Analyst

Okay. All right.

Tom Gendron -- Chairman and Chief Executive Officer

The full ramp up is going, industrial coming back, we're going to convert.

Robert Spingarn -- Credit Suisse -- Analyst

And just as of final question, I know we don't yet know what the outcome in the defense budget is going to be here after yesterday, but assuming they do temper things a little bit in the '20 and '21 budgets. Do you see any areas that we should focus on or you where things could start to revert, you could see a little pressure?

Tom Gendron -- Chairman and Chief Executive Officer

That's a really hard one to predict as I think they cut back with kind of a program and I wouldn't know which one that be the risk. And our big programs, big new programs out there obviously, the Joint Strike Fighter, the tanker, we've got the smart weapons if you saw significant impact on the funding to one of those -- the other have a impact to us, but at same time, we think those are the programs in the future and that those are probably hold. But when you factor in the political world, it's really hard to call on that one, but we think spending is going to stay pretty well. I'm not sure the election to mile extent margin is going to -- if dramatically changed to defense spending.

Robert Spingarn -- Credit Suisse -- Analyst

And just on that note, just with the Boeing win on the -- on TX, there's a GE Engine there, is that a nice opportunity?

Tom Gendron -- Chairman and Chief Executive Officer

The TX is a good opportunity for us, that's going to be more on the airframe side than the engine that's -- we have a whole lot of content on. So, it's really on the airframe side, but we do have content -- we did -- we do have content on that aircraft. And it -- it will be a nice program.

Robert Spingarn -- Credit Suisse -- Analyst

Okay. Thank you guys.

Tom Gendron -- Chairman and Chief Executive Officer

You bet.

Operator

Our next question comes from the line of Christopher Glynn.

Christopher Glynn -- Oppenheimer -- Analyst

Hi, good afternoon and nice outlook. So, you had some good comments on L'Orange process to diversify the customer base. Just considering the nature of the market dynamics, how long does it take that sort of liberated go-to-market strategy to take effect for you, do you think?

Tom Gendron -- Chairman and Chief Executive Officer

Yeah, that's a good question, because these larger diesel or gas reciprocating engines, it does take time for their development and it's pretty analogous to the aircraft, you got a few years. So, we've got some activity going, so it will take two, three years to start seeing that materialize and sales. But that activity is going full throttle right now, so we anticipate we're going to secure and start to see some new production coming.

Christopher Glynn -- Oppenheimer -- Analyst

Great. Look forward to hearing about that. And I think in your closing prepared comments, you talked about fiscal '19 a similar pattern. I didn't catch the context there, but could you kind of refresh on how you see the earnings and revenue linearity? I believe it pertain to that.

Tom Gendron -- Chairman and Chief Executive Officer

Sure. We were just pointing out historically, our first quarter, which is now as a lot of holidays plant shutdowns, things like that. So, historically, it is our lowest of the quarters and then fourth quarter is usually our strongest and we're just pointing out that we don't anticipate that pattern to be any different this year than it's been in the past.

Christopher Glynn -- Oppenheimer -- Analyst

Okay. And on the cumulative free cash flow range $1.3 billion to $1.5 billion, did I hear correctly that in fact you push that closer to $1.5 billion in your expectation?

Tom Gendron -- Chairman and Chief Executive Officer

No, Robert, kind of pointed out the $1.5 billion, but that's why I wanted to make it clear that it has been arranged from $1.3 billion to $1.5 billion, we haven't been any more specific inside that range.

Christopher Glynn -- Oppenheimer -- Analyst

Okay. Thanks. I'm slowing down (inaudible). Appreciate it.

Tom Gendron -- Chairman and Chief Executive Officer

No problem.

Operator

Thank you. (Operator Instructions) And our next question comes from the line of Chris Howe.

Chris Howe -- Barrington Research -- Analyst

Good afternoon, everyone.

Tom Gendron -- Chairman and Chief Executive Officer

Hi Chris.

Chris Howe -- Barrington Research -- Analyst

Hi, most of my questions have been taken, but I did have a few left on the list. And the first one here is just based on capacity utilization, where you currently stand with existing capacity and how much further could you drive sales without having to add capacity. And then my next question is just in regard to L'Orange. If you could perhaps break apart or add some more color into the different markets that you saw growth perhaps the existing versus the new installed base and what you saw there a big numbers?

Tom Gendron -- Chairman and Chief Executive Officer

Okay. First on capacity. In terms of actual build the physical factory buildings, we don't see that we need to add any significant investment there. As we go forward, sales grow we will add some machinery into that, but that's in the outlook, Bob highlighted, we are bringing our CapEx down, but that CapEx will be able to support our long-range plan and the capacity we think we need. So, we did have the large CapEx ramp up to add the new capacity to modernize our factories, that's primarily behind us and going forward we will be in that more normalized CapEx spend. With respect to L'Orange, where we see the two, well, let's say two biggest areas that are growing as we see a lot of activity, still in the oil and gas for them and lot of that's tied to the fracking market. We're also seeing they've got a nice business and data center power generation. And then the Marine markets recovering, in the Marine, we're seeing some good on the aftermarket side. So, those are the ones that are really driving it. The growth in L'Orange just to highlight is tracking above our forecast when we acquired them, not significantly, but it has been a little bit better than the original forecast. The markets are strong and we see that continuing through fiscal year '19.

Chris Howe -- Barrington Research -- Analyst

Thank you. That's all I have for now. I'll jump back in the queue.

Tom Gendron -- Chairman and Chief Executive Officer

Thanks.

Operator

Thank you. Our next question comes from the line of Michael Ciarmoli. Michael?

Michael Ciarmoli -- SunTrust -- Analyst

Hi, good evening guys, thanks for taking the questions here.

Tom Gendron -- Chairman and Chief Executive Officer

Sure.

Michael Ciarmoli -- SunTrust -- Analyst

Maybe, just to stay on -- stay on that topic of L'Orange, I think you guys were originally expecting $0.35 of accretion next year ex-accounting, sounds like that -- that might be coming in a little bit better than expected based on your comments, Tom?

Tom Gendron -- Chairman and Chief Executive Officer

It's tracking really close, yes -- maybe with some opportunity.

Michael Ciarmoli -- SunTrust -- Analyst

Okay. Just on aerospace obviously performing really well, the margin performance solid, and not to nitpick, but you're going to grow with 10% next year and guiding to 20% margins. Are you not getting -- I guess looking at the incremental margins, knowing that aftermarket is not going to grow as fast, but can you give any color, I mean, are you going to see a stepped up performance or improvement. I know that price and mix and productivity was a pretty big drag this year, but is there some room for upside to that margin next year, just given the volume growth or are there some -- some headwinds, you have to deal with?

Tom Gendron -- Chairman and Chief Executive Officer

What I'd like to say is, we first want to deliver the 20% segment margin that we've committed to for the last four years, I think it was and at least that we were going to hit it by this year and we're on track to do that. You did -- you did highlight some of the key things with the large OEM ramp up that we have, I think we're doing exceptionally well to keep growing the segment margin, while we're absorbing all that OE shipments. So, we feel we're tracking really well, we are also definitely improving or if you want to call it going up the learning curve that's happening. And as we finish this year there, we believe there's probably margin or opportunity for further margin enhancement. But we want to deliver on our commitment first and then we'll talk about it after that.

Michael Ciarmoli -- SunTrust -- Analyst

Got it. Absolutely, it makes sense. And then maybe just the last one, I guess. Lot of conversation and topic about tightness in the supply chain, I guess the engines and fuselages have made all the noise, but are you guys seeing anything at all out there that's giving you reason for pause in the aerospace supply chain?

Tom Gendron -- Chairman and Chief Executive Officer

No, you hit on -- the entire supply chain it's got to deliver on time to allow the ramp up to occur. What I would share is we're doing really well on getting the ramp-up. There is no reduction or if you want say in taking finished goods -- from these are the engine builders of the Boeing, Airbus, they all want the equipment as they're all trying to catch up. So, right now we're not seeing any drawback, obviously sustained performance by other suppliers could impact this lines, but I think as you guys all know Boeing Airbus are determined to deliver these aircraft. So, they don't want to slow anybody down, and that's what we're seeing, they are not slowing us down, they are driving us to the schedules and we're performing pretty darn well and we intend to stay ahead of the ramp-up. So, I think everything we produce, they'll take.

Michael Ciarmoli -- SunTrust -- Analyst

Got it. That's helpful. Thanks a lot guys, nice result.

Robert Weber -- Vice Chairman of the Board, Chief Financial Officer, Treasurer

Thank you.

Tom Gendron -- Chairman and Chief Executive Officer

Sure, thanks.

Operator

Thank you. Our next question comes from the line of George Godfrey.

George Godfrey -- CL King & Associates, Inc. -- Analyst

Good evening, Tom, Bob, and Don. Thank you for taking my question.

Tom Gendron -- Chairman and Chief Executive Officer

Hi George.

George Godfrey -- CL King & Associates, Inc. -- Analyst

Tom, you commented about the rising dollar content and specifically on the narrow-body aircraft, the 737, the A320. Could you maybe parse out one or two areas where you're getting a higher dollar priced today versus the prior generation period for the same content and maybe new areas we are getting additional content on those two platform. Thanks.

Tom Gendron -- Chairman and Chief Executive Officer

Hi, George, maybe -- might have misinterpreted. We have on the new narrow body programs, we basically have life of the program contracts and that all came with fixed pricing with pricing formulas. So, there is no -- that wasn't applied there to those programs, that pricing is all locked in. In terms of productivity we're still driving productivity on our end, so to expand the margins from where we are and that's kind of going up the learning curve. When we want these programs, depending on each model and the like, we really secured two times to three times of the content of previous generations.

So, that was huge content wins, long-term contracts with fixed -- kind of fixed pricing, then that puts it on us to operate our facilities and drive productivity and operational excellence, and that's why we kind of highlighted that during the prepared remarks. That's what we're driving to. Where we also (inaudible) I think some goes on the business jets where we also saw substantial content increases, that was the other one I was referring to. In terms of tariffs and things, that's also where we said there is opportunity for pricing, maybe more in industrial, but pricing work in supply chain, trying to mitigate any effects of those tariffs, which as Bob highlighted aren't dramatic, but that's what I was referring to on those ones, George.

George Godfrey -- CL King & Associates, Inc. -- Analyst

Understood. Thanks for taking the question.

Tom Gendron -- Chairman and Chief Executive Officer

Thanks, George.

Operator

Thank you. And we have a follow-up from the line of Gautam Khanna.

Gautam Khanna -- Cowen Inc. -- Analyst

Yes, thank you. Just quickly, I was hoping you could put a finer point on learning curve improvements on the new narrow-bodies. Are those on the OE side now profitable and sort of what's faked in, in terms of profitability left on those programs as we move into 2019?

Tom Gendron -- Chairman and Chief Executive Officer

The programs are profitable, but we're still going up the learning curve as I said, any how so there is still opportunity to get to what was our targeted margin. So, that's kind of what's the big challenge as we were moving forward and the earlier question on that can you keep expanding the segment margins. The first thing we had to do was not only hold the margin with this big OE ramp up, but to expand it during the ramp up. So, we feel good that we're accomplishing that as we committed to. So, there is room on the OE side to continue to go up the learning curve, and so that's built into our numbers and it's part of the outlook, yeah.

Gautam Khanna -- Cowen Inc. -- Analyst

And just regarding provisioning, maybe I'd asked earlier, maybe I didn't understand the answer, but on provisioning, do you expect that that's going to continue to grow next year based on the factors that drive that new routes, new operators or when do we start to see provisioning sales on the narrow-body start with airline. Is it a fiscal '20 you thing is it -- when do you see that?

Tom Gendron -- Chairman and Chief Executive Officer

Yeah, provisioning was quite strong in 2018, we see it as being strong in '19. As we look at the fleet and the operators taken on, I think we still have several strong years ahead of us. And then it will start to decline and that's the time period when you're going to start to see the repair and overhaul kick in. So, there is that ramp down and ramp up, ramp down of IP, and ramp up of MRO, I think we're managing it really well, right now it's strong. I do think we have a couple more years of good strength in IP sales.

Gautam Khanna -- Cowen Inc. -- Analyst

Okay. And just last one, you guys in the past you've talked about sometimes the OE mix in a given quarter is favorable or unfavorable for a variety of reasons. Was there anything like that in the quarter, unfavorable or was it more of an average kind of OE mix and is that what you're baking in for next year -- OE side?

Tom Gendron -- Chairman and Chief Executive Officer

Yeah, normally, just go back, I think normally when we talk about mix, it's the aftermarket mix and it's truly initial provisioning -- initial provisioning isn't uniform, if you want to say. So, you get some, and it could vary from quarter-to-quarter, and that does drive some volatility -- the margin mix. When we're looking going forward here we've got really good outlook on the OEM line rates, we know what they're going to produce. We know the margins on our products. So, that's all factored in. So, I don't see any OE risk. The risk is generally always tied to aftermarket mix and IP timing, initial provisioning timing.

Robert Weber -- Vice Chairman of the Board, Chief Financial Officer, Treasurer

And so, we do our best. Thanks a lot.

Tom Gendron -- Chairman and Chief Executive Officer

Forecasted and I think it's in there pretty well. But there will be -- and I'm glad you brought it up. There is quarter-to-quarter variability tied to that, but for the full 12 months, it will average out we're confident we'll deliver our margins.

Gautam Khanna -- Cowen Inc. -- Analyst

Great. Thank you very much, guys.

Tom Gendron -- Chairman and Chief Executive Officer

Thanks.

Operator

Our next question comes from the line of David Strauss. David?

David Strauss -- Barclays -- Analyst

Thanks. Good evening.

Tom Gendron -- Chairman and Chief Executive Officer

Good evening.

David Strauss -- Barclays -- Analyst

I joined a little late, so I apologize if any of these have been asked, but have you -- did you comment -- it looks like you delevered bid in Q4. Did you talk at all about -- if you're kind of continue to be on track to delever, I think you said to two times by the end of '19?

Tom Gendron -- Chairman and Chief Executive Officer

Yes, we are on track, we did delever slightly. And we're kind of right on the ramp. We should get to around 2-ish by the end of 2019.

David Strauss -- Barclays -- Analyst

Okay. And then, it looks like, in your cash flow guidance for '19, you're assuming pretty good working capital performance. Is that right? How are you thinking about working capital next year?

Robert Weber -- Vice Chairman of the Board, Chief Financial Officer, Treasurer

It's always an opportunity, as you guys know, because of our strong fourth quarter working capital can be a little bit of a drag, but Tom mentioned operational performance and leading out the operations, so we believe that we can counter a lot of that throughout the year as we improve in those areas. And so, we are not planning either a significant deterioration or significant improvement overall, but that always represents an opportunity.

David Strauss -- Barclays -- Analyst

Okay. And where are you at this point with the move costs are those maybe from a accounting standpoint and from a cash standpoint, are those mostly behind at this point?

Robert Weber -- Vice Chairman of the Board, Chief Financial Officer, Treasurer

We're probably in the middle of it right about now, we've incurred a fair amount this year you can see in the materials that we produced, and we'll have some more next year. Obviously, it will probably end up being close to slightly above where we originally anticipated the cost would be and but it is -- as Tom said earlier, it is on track, and we're looking to make a move on time.

David Strauss -- Barclays -- Analyst

Okay. So, similar cash costs in '19 as '18?

Tom Gendron -- Chairman and Chief Executive Officer

Yes.

David Strauss -- Barclays -- Analyst

Okay. And then, last one for me. Did you talk about R&D expectations next year as a percent of sales?

Tom Gendron -- Chairman and Chief Executive Officer

We did, we think it will be right around that 6% level.

David Strauss -- Barclays -- Analyst

Okay. All right. Thanks, guys.

Tom Gendron -- Chairman and Chief Executive Officer

Sure.

Robert Weber -- Vice Chairman of the Board, Chief Financial Officer, Treasurer

Thank you.

Operator

Mr. Gendron, there are no further questions in the queue at this time. I'd like to turn the call back to you.

Tom Gendron -- Chairman and Chief Executive Officer

Okay. Thank you. Well, again, I'd like to thank everybody for joining us today and for your questions. I'd like to remind everybody that we have scheduled our Investor and Analyst Day on December 7 in New York City, and I hope all of you can join us. And we're going to dive a little deeper than we do on these calls into our strategy, our outlook and where we're taking the Company. So, I hope you could join us there and, I look forward to that. Thanks again for joining. Good night.

Operator

Ladies and gentlemen, that concludes our conference call today. If you would like to listen to a rebroadcast of this conference, it will be available today at 7:30 p.m. Eastern Standard Time by dialing 1855-859-2056 for a U.S. call or 1404-537-3406 for a non-U.S. call and by entering the access code 84310224. A rebroadcast will also be available at the company's website, www.woodward.com for 14 days. We thank you for your participation on today's conference call and ask that you please disconnect your line.

Duration: 60 minutes

Call participants:

Don Guzzardo -- Vice President of Investor Relations and Treasury

Tom Gendron -- Chairman and Chief Executive Officer

Robert Weber -- Vice Chairman of the Board, Chief Financial Officer, Treasurer

Sheila Kahyaoglu -- Jefferies LLC -- Analyst

Gautam Khanna -- Cowen Inc. -- Analyst

Pete Skibitski -- Alembic Global -- Analyst

Robert Spingarn -- Credit Suisse -- Analyst

Bob Weber -- Vice Chairman, Chief Financial Officer and Treasurer

Christopher Glynn -- Oppenheimer -- Analyst

Chris Howe -- Barrington Research -- Analyst

Michael Ciarmoli -- SunTrust -- Analyst

George Godfrey -- CL King & Associates, Inc. -- Analyst

David Strauss -- Barclays -- Analyst

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This article appears in: Personal Finance , Stocks
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