Welcome to the Woodward, Inc Second Quarter Fiscal Year 2022 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're 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. Mark Hartman, Chief Financial Officer, and Mr. Dan Provaznik, Director of Investor Relations. I would now like to turn the call over to Mr. Provaznik. Thank you, operator. We'd like to welcome all of you to Woodward's Second Quarter Fiscal Year 2022 Earnings Call. In today's call, Tom will comment on our markets and related strategies, and Mark 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 included some presentation materials to go along with today's call that are also accessible on our website. An audio replay of this call will be available by phone through May 16, 2022, or on our website. The phone number for the audio replay is on the press release announcing this call, as well as on our website and will be repeated by the operator at the end of the call. I'd like to refer to and highlight our cautionary statement as shown on slide 3. As always, elements of this presentation are forward-looking or based on our 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 and net inflationary pressures. These elements can and do frequently change. Please consider our comments in light of the risks and uncertainties surrounding those elements, including the risks we identify in our filings. In addition, Woodward is providing certain non-U.S. GAAP financial measures. We direct your attention to the reconciliations of non-U.S. GAAP financial measures, which are included in today's slide presentation and our earnings release and related schedules. We believe this additional information, financial information, will help in understanding our results. Also, all comparisons made during this call are to the same period of the prior year, unless otherwise stated. Turning to our results for the second quarter. Net sales for the second quarter of fiscal 2022 were $587 million compared to $581 million, an increase of 1%. Net earnings were $48 million or $0.74 per share, compared to $68 million or $1.04 per share. Adjusted net earnings for the second quarter of fiscal 2022 were $47 million or $0.72 per share. There were no adjustments to earnings in the prior fiscal year second quarter. Net cash provided by operating activities for the first half of fiscal 2022 was $50 million compared to $219 million. Free cash flow was $26 million for the first half of fiscal 2022 compared to $206 million, and adjusted free cash flow was $27 million for the first half of fiscal 2022. Before we turn the call over to Tom to comment further on our results, strategies, and markets, Mark would like to make a brief comment. Thanks, Dan. As you may have heard, Tom recently announced his retirement from Woodward after more than 31 years with the company. This will be his last earnings call as Chairman and CEO. Tom, on behalf of all members and the Woodward board of directors, I wanted to thank you for everything you have done for this company. For the past 17 years, your visionary leadership piloted Woodward towards the future, expanding our market capitalization from under $700 million back in 2005 to approximately $7 billion today. The strategies set in place in the early 2000s enabled us to achieve extraordinary growth and created significant value for our shareholders. These tremendous accomplishments will be remembered for many years to come. For that, we all thank you. We wish you and Tracy the best of luck in the next phase of your journey. Thank you, Mark. I appreciate the nice comments. It has been an honor and a privilege to lead this special company over the past 17 years. We have an outstanding team, a market-leading product portfolio, innovative technology, state-of-the-art facilities, and an exciting future full of opportunities. I'm confident in the board's selection of Chip Blankenship as my successor and know I'm leaving the company in very capable hands. I look forward to working with Chip as he transitions into his new role. Turning now to the second quarter. Orders are up in nearly all market segments, our backlog has grown, and we continue to see strong signs of recovery across the business. However, in the quarter and looking to the remainder of the fiscal year, we anticipate ongoing market volatility due to industry-wide COVID-19-related disruptions, including global supply chain challenges and labor shortages, as well as the lockdowns in China and the war in Ukraine. In addition, the second quarter was also negatively impacted by increasing inflationary pressures and labor inefficiencies from the onboarding of approximately 400 new direct members since the beginning of January. All of these factors weighed on our results in the second quarter and have impacted our full-year outlook. Although we expect these challenges to persist through this fiscal year, we are encouraged by the momentum we are seeing across the business. It is now my view that we will not be able to meet our previous guidance. We have the orders, they're not lost, but with the challenges I noted, we are reducing our outlook for the fiscal year. Our long-term outlook remains the same as we see our markets continuing to recover and our sole source positions are intact. Moving to our markets, Commercial Aerospace continues to recover, driven by rising passenger traffic and increased utilization of commercial aircraft fleets that includes significantly higher Woodward content. U.S. and European domestic passenger traffic is nearly at pre-COVID levels, while China domestic passenger traffic has recently collapsed as a result of further government-mandated lockdowns. International travel continues to improve and overall, we expect aircraft build rates to slowly rise throughout the year. Despite general market recovery, the 737 MAX return to service in China continues to be delayed, with new builds for China's airlines pushed to later this year. We continue to monitor the situation. In the defense market, geopolitical tensions have elevated the focus on defense spending around the world, and increased spending is anticipated. However, we continue to expect the JDAM program to remain at lower levels for the foreseeable future. Turning to our industrial market. In power generation, demand for gas turbines continues to drive strong growth in Asia. Aftermarket activity has been increasing, and we continue to see strong demand for backup power for data centers. In transportation, demand for China natural gas trucks has nearly evaporated for the fiscal year. Excuse me. We believe the market will be slow to recover as lockdowns and elevated natural gas prices are impacting demand. The global marine market is strong with increasing ship build rates, higher utilization, and elevated transport pricing, all of which drive current and future aftermarket activity. The oil and gas market is favorable as prices remain elevated. Utilization and aftermarket demand has increased, which we anticipate will drive higher rig counts and additional capital investment. For Woodward overall, we continue to expect further recovery and improved profitability in our aerospace business as OEM build rates increase and passenger traffic recovers. Similarly, in our industrial business, we anticipate improved profitability driven by continued growth in marine markets and increase in demand for industrial gas turbines and related services, as well as growing customer investments in oil and gas, supported by elevated prices. In summary, we believe our markets will continue to improve, enabling Woodward to achieve our long-term profitability goals. We are laser-focused on addressing the challenges of this market recovery while continuing to enhance operational excellence, delivering value to our shareholders and customers, and positioning Woodward to capitalize on future market opportunities. Mark will now review our quarterly results and our revised fiscal year outlook. Thank you, Tom. Net sales for the second quarter of fiscal 2022 were $587 million, an increase of 1%. Sales for the quarter were negatively impacted by approximately $100 million due to ongoing industry-wide COVID-19 related disruptions, including supply chain constraints and labor shortages. Aerospace segment sales for the second quarter of fiscal 2022 were $370 million, an increase of 2%. Segment sales were negatively impacted by approximately $60 million of industry-wide COVID-19 related disruptions, which resulted in shipment delays for some orders. Commercial OEM and commercial aftermarket sales were 21% and 40% higher respectively, driven by continued recovery in both domestic and international passenger traffic and increasing aircraft utilization. Defense OEM sales were down 28% in the quarter, primarily due to lower sales of guided weapons. Defense aftermarket sales were down 12%, primarily due to COVID-19 related disruptions. With the exception of guided weapons, our defense sales order backlog is increasing. Aerospace segment earnings for the second quarter of 2022 were $60 million, or 16.0% of segment sales, compared to $69 million, or 18.9% of segment sales. The decrease in segment earnings was a result of net inflationary impacts, including material and labor cost increases, as well as increases in manufacturing costs related to COVID-19 disruptions and inefficiencies related to hiring and training. We are taking pricing actions to offset inflationary pressures. However, timing can be delayed due to certain contractual arrangements. Turning to industrial. Industrial segment sales for the second quarter of fiscal 2022 were $214 million compared to $217 million, a decrease of 1%. Segment sales were negatively impacted by approximately $40 million of industry-wide COVID-19 related disruptions, weakness in China natural gas engines, and an $8 million unfavorable foreign currency impact, all partially offset by increased marine sales as we continue to see higher utilization of the in-service fleet. Industrial segment earnings for the second quarter of 2022 were $17 million, or 8.1% of segment sales compared to $28 million, or 12.9% of segment sales. Industrial segment earnings decreased primarily as a result of net inflationary impacts, including material and labor cost increases, as well as increases in manufacturing costs related to COVID-19 disruptions and inefficiencies related to hiring and training. Similar to our aerospace business, we are taking pricing actions to offset inflationary pressures. However, timing can be delayed due to certain contractual arrangements. Non-segment expenses were $15 million for the second quarter of 2022 compared to $10 million. Adjusted non-segment expenses for the second quarter of 2022 were $17 million. There were no adjustments to non-segment expenses for the second quarter of 2021. Adjusted non-segment expenses for the second quarter of 2022 included a reversal of a charge associated with a non-recurring matter unrelated to the ongoing operations of the business. The increase in non-segment expenses was the result of timing of certain expenses, as well as the return of annual variable incentive compensation costs. At the Woodward level, R&D costs for the second quarter of 2022 were $32 million, or 5.5% of sales, compared to $28 million, or 4.8% of sales. SG&A expenses for the second quarter of 2022 and 2021 were both $44 million. The effective tax rate was 11.4% for the second quarter of 2022 compared to 13.0%. The adjusted effective tax rate for the second quarter of 2022 was 11.0%. There were no adjustments to the effective tax rate for the second quarter of 2021. Looking at cash flows. Net cash provided by operating activities for the first half of fiscal year 2022 was $50 million compared to $219 million. Capital expenditures were $24 million for the first half of 2022 compared to $13 million. Free cash flow was $26 million for the first half of fiscal 2022 compared to free cash flow of $206 million. Adjusted free cash flow was $27 million for the first half of 2022. Adjustments to free cash flow for the first half of this year included payments related to business development activities and restructuring activities. There were no adjustments to free cash flow in the prior- year period. The decrease in free cash flow and adjusted free cash flow was primarily related to working capital increases to support the anticipated second half growth. Leverage was 1.8x EBITDA at the end of the second quarter. During the first half of fiscal 2022, $294 million was returned to stockholders in the form of $22 million of dividends and $272 million of repurchased shares. Year-to-date, through April 30th, 2022, approximately $400 million was returned to shareholders, $377 million in repurchased shares and $22 million in dividends. Lastly, turning to our fiscal 2022 outlook. COVID-related disruptions and net inflationary impacts during the second quarter of fiscal 2022 were greater than anticipated. Although improvement is expected through the remainder of the year, particularly related to the COVID-19 related supply chain disruptions, we have revised our fiscal year 2022 outlook. The revised outlook assumes the current inflationary environment does not significantly worsen. Total sales for 2022 are now expected to be between $2.40 billion and $2.55 billion. Aerospace sales growth percentage is still expected to be in the low- double digits to mid-teens. Industrial sales growth percentage is now expected to be between 5% and 10%. The decline in industrial sales growth from the previous outlook is primarily driven by expected ongoing weakness in China natural gas engines due to the lockdowns in China and elevated natural gas prices, as well as headwinds from foreign currency exchange rates. Aerospace segment earnings as a percent of segment net sales are now expected to be approximately 18%. Industrial segment earnings as a percent of segment net sales are now expected to be between 10% and 11%. The decline in both segments earnings as a percent of net sales from the previous outlook is primarily due to net inflationary impacts, including material and labor cost increases, as well as increases in the manufacturing costs related to COVID-19 disruptions. The adjusted effective tax rate is now expected to be approximately 20%. Adjusted free cash flow is now expected to be approximately $200 million-$230 million. Adjusted free cash flow conversion rate is still expected to be greater than 100%. Also, capital expenditures are now expected to be approximately $60 million. The decline in adjusted free cash flow from the previous outlook is related primarily to the delayed timing of our sales and the resulting impact on our working capital balances. As the COVID-19 disruptions decline, we expect our working capital requirements to improve, thereby recovering the cash flow delayed from fiscal 2022 in fiscal 2023. Adjusted earnings per share is now expected to be between $3.20 and $3.60, based on approximately 64 million of fully diluted weighted average shares outstanding. The previous outlook assumed approximately 66 million fully diluted weighted average shares outstanding, which would equate to adjusted earnings per share between $3.10 and $3.50. This concludes our comments on the business and results for the second quarter of 2022. Operator, we are now ready to open the call to questions. Thank you, sir. The question-and-answer session will begin at this time. If you're using a speakerphone, please pick up the handset before pressing any numbers. Should you have a question, please press star one on your push-button phone. Should you wish to withdraw your question, press the pound key. Your question will be taken in the order it is received. Please stand by for your first question, sir. Our first question comes from the line of Robert Spingarn with Melius. Please go ahead. Well, good afternoon. Tom, congratulations on your retirement and wish you the best. It's been great working with you. Thank you. I appreciate that. You know, just digging in here, unfortunately, a tough quarter. Wanted to ask you on your OE sales in you know, Commercial Aero. You've said in the past they've been profitable. Is that still the case with all these inflationary pressures and other factors? Yeah, Rob, I still see it as profitable. You know, as Mark highlighted in the prepared comments, we will be offsetting inflation with price increases. Some of that comes through our long-term agreements, which have escalation provisions. Those c ontracts will have once per year price adjustments. Those are primarily all OE- type agreements. The aftermarket, we are pushing through price increases. Some of that inflationary, as we said, were supply chain. If all of you guys remember, you know, at our Investor Day, we talked about having to hire quite a few people with the growth that was coming and, you know, some of the attrition we saw during COVID. To do that, we had to up our wage rates across the board. We will start to see recovery on that too, through escalation and through pricing. It's a delayed recovery that we're gonna see. We're still seeing a profitable OEM sales. Just another one on just on shipset content. You tend to have higher content on the Boeing platforms relative to Airbus, and I don't know if that's the GE relationship. Given what's been happening at Boeing and some of the unforced errors there, do you see maybe a different mix going forward between the two airframers for Woodward? Well, you know, definitely Airbus rates are going up. You know, one of the things that we show on content, you may be referring maybe to the A320neo versus the MAX. We do have more content on the LEAP, but it's, you know, it's pretty much equivalent, an A320neo with LEAP or a MAX with LEAP. We have slightly less content on the PurePower on the neo. So that's where maybe. I guess I was factoring in wide body too, because with the GE relationship and so on. Sure. That's correct. You know, we have better content on the wide bodies at Boeing, so no, that's a correct statement. Yeah, it's gonna be. Let me put it this way. I think over time, the 787, 777X are gonna be good selling aircraft. You know, as everybody knows, they have some issues right now, but those are two very good long-range aircraft, and they will pick up and be positive in the future, in my view. That was the last part of my question, Tom, which is d o the further delays on 787 and 777X, is that part of what changed here, for this year, or is that really nothing to do with it? Well, we saw a little, not on 777X, but we saw you know, the traditional 777, yeah, was down, and the 787 was down. That did impact a little bit. Overall, you know, we're seeing OEM rates, you know, in particular narrow bodies, you know, coming back up, and I think the 787 will come. It did have an impact on us, but yeah. It wasn't the major part of it. Got it. Thanks again. Best wishes. Thank you. Our next question comes from Sheila Kahyaoglu with Jefferies. Please state your question. Thank you. Tom, congratulations on your retirement. Thanks, Sheila. Yeah. I wanted to ask you several questions on Aerospace, if that's okay, 'cause you're always very forthcoming. You know, when we think about Aero, I think investors just kind of wanna understand what's going on with inflation. You know, how do we think about where inflation is the most risk? Is it on the OE side, or is it aftermarket? You know, how can we think about this abating? 'Cause I think Mark mentioned in his prepared remarks, it's not considered for the remainder of the year. Can you talk a little bit about that? Sure. Well, first, you know, I would highlight, like I just mentioned before, we had internal Woodward labor rate inflation, and that was required to be able to attract and fill, you know, the 400 positions that we've hired, you know, since the beginning of the year. Those are all direct labor positions. That hit. We have seen some pressure coming from suppliers. I'd say our supply chain group's been doing a good job trying to mitigate that. There is, you know, some there. It takes a little bit of time, you know, to recover that through our contracts and pricing, but we, you know, fully intend to recover that. The aftermarket, we have much more flexibility, as you know, and we will get those, you know, offsetting, price increases to inflation in place. We already have done some, and we're gonna be doing more. So I see that happening. The other one that kind of ties in, you know. It's not really inflation, but we're ahead of plan on hiring direct labor. If you recall, we said we were gonna need to hire 100 per month. We've been, you know. Our teams have been doing a good job getting people in. Some of that was required, you know, labor rate changes. When we bring in that many people, we did have inefficiencies. We don't put people directly on the manufacturing line. We put them through extensive training. That all goes into manufacturing overhead, which is a cost. Then the people aren't quite as efficient when they first get on the lines. We see that improving in the second half of the year. We expect labor efficiency to improve quite a bit. That'll be a natural part of what we're calling the inflationary and COVID disruptions. We do believe we'll be able to recover, you know, the inflation. It's just delayed, you know, and then we'll start to see it the second half of the year and on into 2023. A follow-up to that, I guess, how much of the inflation is labor force related versus like freight and materials? You know, my second question would be, you know, when we look at margins, they dropped almost 1,000 basis points from where they were in Q2 2020, granted, that was a great quarter at 24.8% margins. Like, how? What's that bridge in the margin drop? Well, you know, the margin drop, you know, definitely has some inflationary issues in there. You know, does have a mix issue, does have these labor efficiencies in there. You know, I think you guys could all do the math. If you look, you know, second half of the year, you know, we'll be increasing margins. You'll see that coming through. We anticipate that we will start to recover some of the past due we have due to these disruptions. You start seeing the margins on the volume increasing in the recovery and some of the COVID pressures. I think that's where it lies on that one, Sheila. It's a combination of all those. Okay. Thank you. Thanks a lot. Yeah, thank you. Thank you. Our next question comes from Peter Skibitski with Alembic Global. Please state your question. Yeah, good afternoon, guys. Tom, I'll echo Rob and Sheila, best of luck in your retirement. One clarification on aerospace, the $60 million COVID headwind. You talked about wide-bodies a little bit. Was that the pretty much all defense aftermarket? Just because it sounds like the defense OEM was down almost all because of a kind of fundamental guided weapon softness. Was it mostly the aftermarket? No, it's across. Mark, do you want to chime in? Yeah. It's across the, you know, all four subsegments of Aerospace. You know, that $60 million impact did impact them all, Commercial OEM market and Defense OEM Aftermarket. Okay. Are there any? We've talked the last few quarters about some of your suppliers having, I guess, capacity issues because of the cutbacks that they did previously. What's the update with those? Maybe what's the update in terms of, you know, chip shortages? Yeah. No, great question. You know, we've got a lot of suppliers, you know, with the legacy products we have, so we've got a big tail of suppliers. What we have is our high-risk suppliers, and we went through and we originally started with, I think it was about 20. We've mitigated the risk on those, but as we're mitigating the risk on those, I think the list of troubled suppliers that are still impacting us is like 28. That's out of a couple thousand suppliers. You know, those ones we're working. We've got, you know, recovery plans with them. We've got teams on site. You know, we're addressing that. The process and the approach we're using is, you know, yielding results. It's still in the type of supply base we have, if you're looking at castings, forgings, machine shops. They're all struggling with labor, you know, and capacity recovery in their facilities. You know, those are some of them. As we highlighted before, some of the supplier issues have been plant shutdowns, moving products during, you know, when the market was really shut down in 2020. They're still recovering from some of those. Now, on the semiconductors, that is still an issue for us, and it is impacting both aero and industrial, but I would say it's impacting industrial a fair amount more than in aero. One of the issues we have there, and I think we might have said this at Investor Day, we use a lot of components or chips that are used in automotive, and we're a low volume, high mix, you know, supplier. That has been challenging, you know, due to the problems the auto guys are having getting sourcing. So we are working hard to get, you know, to get the semiconductors, but that's still ongoing pressure. As we said before, full recovery we don't see until 2023, and it might be, you know, mid- to late- 2023 as we get that back on track. So that's still a big challenge. The other ones, we think we got good mitigation plans, but they, you know, take some time and, you know, we'll start seeing recovery second half of this year. As Mark said in his prepared remarks, some of that'll roll into fiscal year 2023. None of the sales are lost. I just wanna really emphasize that. They're on all these, you know, we're generally 100% across the board sole source. It's a matter of getting recovery, helping our customers make sure we keep their lines running and getting back on track. That's the positive. You know, it'll come, and those sales will recover, and the cash flow associated with those will come. Some of it's rolling into fiscal year 2023 just due to that. As we ship late in the fiscal year, that's gonna end up in AR, and that's gonna roll into 2023 to get the cash out. Okay. Okay, thanks for the color. Appreciate it. Thank you. Our next question comes from Christopher Glynn with Oppenheimer. Please state your question. Thank you. Good afternoon. Tom, thanks for all the insights, great insights on the Aero sector over the years. It was, you know, curious about the formulation of the sales push up $100 million. Is that kind of a rolling cumulative that built on the $70 million for the prior quarter, or have we aggregated now a couple hundred million of sales push-ups? No, it's a rolling cumulative. It's the equivalent of the $70 million at the end of Q1 is now $100 million, so it's grown $30 million since the end of Q1. Okay, great. Thank you. Since it sounds like the hiring and training was a reasonably big rub, and it's one of the nice swing factors in the second half as you described the process of, you know, new talent becoming efficient, I'm curious a couple things. Are those kind of proportional impacts of both segments or tilted to one? Is the hiring kind of winding down? Have you gotten the talent you need? Yeah, no, good question. It's a little bit tilted to aero, where we had, you know, faster line rate increases as well as aftermarket increases. We are actually ahead of our plan, which is good. We will start to see that hiring slowing down in the second half, and then going to more natural hiring practice of supporting the growth that we expect in 2023 and covering attrition. That'll be more normal than what we've experienced, you know, in this second quarter and, you know, a little bit moving here into third quarter. We really have done a good job getting ahead of it and, yeah, that'll start tapering off. Okay. As we think about the linearity of the back half and, you know, we've got your margin and revenue and EPS guidance, should we just kinda functionally stairstep those right through, kind of proportionally? Well, I would tell you, if you say stairstep or maybe you talk about it's gonna be higher in the fourth quarter than the third quarter, okay? 'Cause maybe that's the detailed guidance I'll give you. It is very, you know, back-end loaded. We, you know, I just reemphasize, it's not a lack of orders. We have all the orders. It's just getting the orders out. I anticipate it'll be higher in the fourth quarter than the third quarter. Okay, great. Thank you. You're welcome. Our next question comes from David Strauss with Barclays. Please state your question. Thank you, Echo. Congrats, Tom. Best of luck. Thank you. Wanted to ask, I guess, you know, you had your Investor Day, I think it was March 9th. You reiterated the guidance that, you know, appeared to be very back-end loaded at that point. I guess, you know, what changed over the course of the next couple weeks that you weren't anticipating at that point? Yeah. Well, if you really look, the lockdowns in China, the war in Ukraine broke out, you know, we didn't call out. We were definitely impacted by sales that were gonna go into Russia and Ukraine. Matter of fact, some of those were ready to go, and we couldn't ship because we no longer could ship to Russia. Ukraine couldn't take orders. That's not that was major, but, you know, every $10 million+ adds up. China lockdown is impacting not just, you know, the what we call the on-highway natural gas. That and we did use the term evaporated. I mean, that's down to near nothing right now. And then other China sales have been delayed. Those are all differences that occurred between that Investor Day and today. You know, just on top of still working through supplier issues, we haven't recovered as quickly as we were believing we were, but it's all those factors together. You know, the China lockdown is still, you know, again, we basically have removed a high percentage of our China sales from the forecast, you know, just with the problems there. You know, that is a big difference. You know, we're still watching what'll happen with Ukraine. Those are impactful things that occurred since our Investor Day. That's great color. Just in terms of a reference point, China natural gas sales in a, I guess, typical year, what were you anticipating out of, you know, out of that business this year versus what you're, I guess, now that you're digging into zero, what were you anticipating? Yeah. Just, you know, I'll just tell you know, approximately it would've run maybe, you know, $40 million-$50 million a quarter, and we're down to near zero. Okay. Last one for me on MAX, you know, MAX rates. Can you talk about where you are today? Are you in line with what Boeing stated or maybe below, you know, still below kind of those rates? Or are you actually seeing some bit of restocking there? No, you know, the rates are kind of flowing through, so we're on track with that. You know, we're preparing to continue, you know, the ramp, both what Boeing is looking at and what Airbus is looking at, so we're on track for and following their guidance there. Okay. Thanks very much. You're welcome. Thank you. Our next question comes from Michael Ciarmoli with Truist Securities. Please state your question. Hey, good evening, guys. Thanks for taking the questions. Tom, all the best. It's been great working with you over the years. I guess, Tom, well, maybe first, since David was asking about the MAX and rates, I mean, can you guys keep up with production? I mean, you know, if we fast-forward six months, 12 months, you know, Airbus obviously still talking about where they wanna get the narrow bodies, you know, up to. I mean, are you guys becoming the long pole in the tent here? I mean, is there any kind of risk on you guys being able to get product out the door that might threaten, you know, future deliveries? Yeah, no, we're not holding up any deliveries of Boeing or Airbus aircraft. Well, let me back up first. We have the capital equipment necessary to produce at the highest rates that we believe Boeing and Airbus are gonna go to. We've talked about that before. You know, before COVID, we had capitalized in anticipation of those higher rates. The issue we had was labor, and we are on track now with the labor to deliver on those programs. We have a very thorough what's called SIOP process, where we look out 18 months, we plan, you know, our capacity, our labor, and we're on track to meet all that. We know the growth rate, what we need in labor capacity, you know, that translates into Woodward, but we're also working all of our suppliers to ensure that they are ramping, and that work's in progress. You know, I'm highly confident we'll keep up with those, increase in ramp rates, and we're capitalized to do it. Got it. I mean, obviously, you know, all the suppliers here are getting impacted, you know, labor, inflation. You know, I get the China nat gas sales, so maybe setting that aside, I mean, is there anything in your business that's making you a little bit more unique here that you're seeing these kinda outsized headwinds or anything you can kinda glean just, you know, from seeing your business? Yeah. You know, I think one of the ones to think about, you know, we have a wide range, if you wanna call them, SKUs in the company. You know, we've always said we're high mix, low volume. You know, a few programs are mid volume, but we have a lot of different, you know, lines that we support. You know, when you have lower volume, you are impacted more when you have, you know, small number of lower volume suppliers, and I would say that's the case. Then the other part of that, which comes into play, and I mentioned that earlier here on the call is, you know, we use a lot of automotive-grade semiconductors, and the reason for that is they're high temperature, and they're reliable in our market. We have a wide range of products with electronics in them. You know, that broad portfolio, I think, is maybe different than a few, you know, than some other peer companies or the like. You know, with the volumes, you know, that's what we kinda believe is part of the impact that we saw. I guess that's what we believe is part of it, you know. Okay. No, that's helpful. Just last one for me on the aero aftermarket. It obviously sounds like you've got more pricing power there. Do you expect that you can pass through all of your costs and still get some, call it, real pricing, I guess? Or are you still? I'm just looking at that price cost dynamic. Are you still gonna, you know, maybe see some pressure there? In the aftermarket, we can. Yeah. On OEM contracts, as I highlighted before, the ones that are under long-term agreement, we have, you know, negotiated escalation clauses, so that usually, you know, helps us recover inflation, not to go above inflation. Where we don't have any contracts, we have more flexibility, but most of our OE sales are under, you know, long-term agreements. Got it. Perfect. Thanks a lot. As a reminder, if you have a question, please press star one on your push- button phone. Our next question comes from Matt Akers with Wells Fargo. Please state your question. Hi, thanks for the question and, Tom, congratulations. Best of luck to you. Thank you. I wanted to ask again on the China natural gas trucks. I don't know if this is possible to parse out, but you know, how much of that impact do you think was from the lockdowns versus just higher natural gas prices? You know, it sounds like you've taken that almost completely out of the guidance. Is there any potential upside there if the lockdowns do start to ease? Yeah. You know, it's a little hard to say. You know, actually elevated natural gas prices, you know, harm the truck sales. The lockdowns have reduced demand, you know. I truly think it's a combo, and it's a little hard to say which one was more than the other. I think that combo is what really dried up the market. Yeah, there would be upside if it recovers in the second half of the year to our forecast. That's a really hard one to predict. That's also why we really took it out. Yeah. No, it makes sense. Okay. I guess on the aftermarket growth, was there any provisioning in that number? Or maybe if you could just talk about how big provisioning is contributing at this point, how that should sort of trend there going forward. Yeah. Provisioning is increasing right now. You know, you can see 40% commercial aftermarket sales growth. That growth rate was really on top of delays in deliveries of MAXs in China, and that we anticipate that held up, or we do believe that held up some provisioning sales for those Chinese airlines. We expect that to come, you know, as those planes start to get delivered. Initial provisioning is doing well, as well as shop visits are up. Overall, you know, we see really positive trends in commercial aftermarket. Great. Thank you. You're welcome. Our next question comes from Gautam Khanna with Cowen. Please go ahead. Hey, thanks, and, congrats on a great career, Tom. Thank you. Hey, I have a couple questions. People have asked a bit about the second half, and you mentioned the Q4 weighting. You know, just the midpoint implies somewhere around 19%-20% second half versus first half improvement in sales. I wanted to get your sense now one month into the third quarter of your confidence in that, maybe the high end versus the low end versus, you know, the midpoint. I know it's a wide range, but, you know, have you made any progress on the past dues to whittle the $100 million down? How much of it are you kind of embedding your catch-up in the current fiscal year? Just, you know, how much maybe seasonality just naturally would give you a lift second half to first half? 'Cause it seems like a big number? Percentage-wise, but, you know, you put it out there, so. Just curious. It's there. You know, roughly, if you look at the bottom end of our range, that would imply no recovery or even worsening past due. The high end of the range would imply we've made up a lot of the past due. Midpoint would be, you know, closer to where we are with a little bit of improvement. If that helps you. No, that helps. In the third quarter, have you seen a step-up in monthly run rate of output such that— We just, you know, as you know, just got one month under our belt. I would say, you know, it was tracking. You know, we had a slight improvement in March and a slight in April, which is why I highlighted earlier we need a large fourth quarter to get into that, midpoint of our range and above. Okay. You know, you guys have called out the, I think this quarter was $1.7 million- $1.8 million of non-recurring expenses related to business development or something. In Q1, it was another number. By memory, $2.8, something like that. Are these related to the same category of items? Like what is it? Yeah, if you could just elaborate on what it is, why we're backing it out. Yeah. Well, let me try to clarify it for you, Gautam. In Q1, we took two separate adjustments that we called out. One was $2.9 million related to business development costs, and the other was $5 million related to non-recurring, non-operational impact that we had. Just to clarify, this quarter, we reduced the $5 million charge by $1.7 million. Now it's a net of $3.3 million. It was a favorable item in Q2 that we adjusted back out because we had the unfavorable item in Q1. Okay. Got it. Thank you. Maybe just on cash deployment, you have the $800 million buyback authorization, you know, minus what you've done. How quickly do you expect to execute that? Are you gonna, with the cash flow guide coming down a bit, are you gonna toggle down the pace of the buyback, or does it matter? Does that impact it at all in terms of pace? Yeah. You know, we believe in our long-range plan, and we also had cash on the balance sheet in a you know, fairly unlevered balance sheet. You know, the Board of Directors, Mark, and I all agreed, you know, to return capital to shareholders. You know, I think we're tracking very well to that $800 million we said we're gonna return, and we, you know, intend to return that over the two-year time period. You know, we don't have a rate at which we're gonna finish that out. You know, we do intend to return all that in the timeframe we allotted. Thank you, guys. Appreciate it. Yep. Thanks, Gautam Khanna. Thank you. Our next question comes from Noah Poponak with Goldman Sachs. Please state your question. Hi. Good afternoon, evening, everybody. Tom, congratulations on your retirement. Thank you. What did you take out of the full-year revenue guidance range? What makes up the $50 million-$100 million that came out? Well, you know, as I highlighted, a chunk of it came out of deliveries to China. You know, we have FX headwind that's impacting the top line with the strong dollar. We also reduced a little bit in all businesses based on, you know, deliveries. You know, and that's the past due that we've talked about due to, you know, supply chain disruptions and COVID-related disruptions. It's a little bit across the board, but those are the big ones. If the $30 million of supply chain COVID logistics that you cited for the quarter, there was $70 million last quarter. It sounds like that $30 million was a surprise and comes out, or I guess maybe that there was some assumption for that and the $30 million was larger than the assumption. Do you have to incrementally assume something less favorable for 3Q and 4Q than you had in the prior guidance for that as well? Well, it's just kind of what I highlighted a little bit earlier. You know, the $30 million was really primarily additional supply chain issues. In particular, we had some real impacts around our electronics. Yeah. I guess where I'm going with that, Tom, is if there was $30 million in the quarter, and now, you know, there's it sounds like you're thinking and others are thinking that supply chain issues that seem like they might resolve themselves sooner than later are now looking like they're gonna last through the end of the calendar year. If it's a $30 million a quarter run rate, maybe it's not $30 million 'cause maybe it gets a little better in the back half, and maybe you had some assumption in the old guidance. If it was $30 million, you know, times three quarters, and then China shut down on you, and then some of the deliveries are worse, and then there's FX, it just sounds like that adds up to more than $50 million-$100 million, is where I'm going. Well, a little bit. You know, I was just saying this a little bit earlier. You know, if you look at the range we gave, we do and believe we will make progress on recovering some of that $100 million in the second half. If you take t he goalposts on the range, you know, the bottom end is we're not gonna get any better and maybe even a little worse. Top of the range is, we really recover really well. I do believe we will recover. We're seeing progress in all areas except for electronics at this time, and we're working really hard on the electronics. We also anticipate a sizable improvement in labor efficiency from all the direct labor we've hired, and that will help efficiency and production rates go through. I do believe we'll make progress on that $100 million. Our previous belief was we were gonna be sooner on that recovery and obviously we're not. You know, that's why we decided the right thing to do was call down the year. We are making progress, and I do believe, you know, second half will improve. Will you be losing sales to, you know, new supply chain challenges in the third and fourth quarter that you didn't have in the guidance previously while making up the old ones? Yeah. No, actually, we anticipate really no lost sales. That's really. You know, you gotta go back. All of our, you know, I'm gonna say 98% of all of our business is sole source. Oh, no, I don't mean permanently lost sales. I just meant like, to the extent that supply chain challenges are lasting longer than expected. It would seem like fiscal 3Q and 4Q would have an incremental hit to them compared to the old guidance from supply chain. Even if you're making up some of the old stuffs. Yeah. That there is some that we have factored in, and I'll give you an example. This is across the industry, not just Woodward. A lot of times we have aftermarket, like say in our industrial business, a refinery or a power plant goes down for maintenance. They wanna know they have everything ready for that outage. Right now we see a few of them delaying the outage because they can't get all the hardware. That's been factored into our outlook. Now, that is not a lost sale, a delayed, I mean, 'cause they will do that outage and that maintenance, but they are pushing them out because not only Woodward, but other suppliers are late. That is maybe what you're asking about, Noah. That type of thing is happening, but once again, you know, it's a push-out, not a loss, not a permanent loss sale. Okay. Yeah, no. That makes sense. Yeah. I'm just trying to square up the new virtual world, but t hat's helpful. Then if I go to the aerospace margin guidance, you know, the 18% for the year, I think it implies basically just a clean spot on 40% incremental 3Q and 4Q. Maybe it won't be exactly that, but back half in aggregate. If the pricing increases take a little while to flow through, as you alluded to, and you still have that new labor inflation right away, is 40% achievable with that going on? I wanna make sure I have that right. Yeah. We believe that's achievable. Really, the one lever in addition to our normal incremental operating flow through that we see is really capturing that labor efficiency as we move forward from all of the direct labor that we have hired that impacted us here in Q2. As we become more efficient, the build rates go up, you know, members become more productive on the line, you know, those incrementals will flow right through on that increased volume. Okay. Got it. Just one last one. Why is the guidance for free cash flow revised so much more than EBITDA? Yeah. It all comes down to, and Tom mentioned this a little bit, and I mentioned a little bit in my prepared remarks, it all comes down to working capital. You know, as you see, we have a large second half, and as Tom mentioned, you know, a ramping second half, and Q4 will be, you know, larger than Q3. What we're anticipating in that is, you know, our receivables balance will be, you know, larger than anticipated previously. Now, the great thing about that is, again, it's not lost cash, it's just delayed cash into fiscal 2023. The other is inventory balances are a little higher today, given the COVID disruptions. You know, we do plan on working those down, but they may be higher than what we had originally anticipated given you know, where we're at today. Between those really, those two factors on the working capital AR and inventory, that's why the cash flow impact is significant. It is. Again, it's just a timing thing. It's just a delay to cash into fiscal 2023. Okay. All right. Thanks so much. I appreciate it. Yeah. Thanks, Noah. Mr. Gendron, there are no further questions at this time. I will now turn the conference back to you. Well, thanks for joining today, and you know, I appreciated working with all of you. I've always enjoyed our interactions, and I appreciate that you know our markets and have learned our business, and I've always found it enjoyable to interact with you guys. You know, keep doing a good job, and Mark and Chip will, I think, carry on with you. We do believe in trying to give you good information, be transparent, and we got a great company here. It's gonna come back from these disruptions. We'll be back on our long-range plan in no time. So appreciate that. I guess as a parting comment, you guys kinda took it easy on me today, so I appreciate that as my last call with all of you. Maybe I'll run into you in the future when I'm out in New York and the like. Thanks a lot and talk to you soon. Bye. Ladies and gentlemen, that concludes our conference call today. If you would like to listen to a rebroadcast of this conference call, it will be available today at 7:30 P.M. Eastern Daylight Time by dialing 1-855-859-2056 for a U.S. call or 1-404-537-3406 for a non-U.S. call and by entering the access code 657-7704. A rebroadcast will also be available at the company's website, www.woodward.com. 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