Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Woodward Incorporated First Quarter Fiscal Year 2021 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 and Chief Financial Officer; and Mr. Don Guzzardo, Vice President of Investor Relations and Treasurer. I would now like to turn the call over to Mr. Guzzardo.

Thank you, operator. We welcome you to Woodward's first quarter fiscal year 2021 earnings call. Today, Tom will talk about our markets and strategies, while Bob will present our financial results as detailed in our earnings release. We will have a question-and-answer session at the end. If you haven't seen today's earnings release, you can find it on our website at woodward.com, along with presentation materials for this call. An audio replay will be available via phone or our website through February 15, 2021. The phone number for the audio replay can be found in the press release announcing this call and will be repeated at the end. I want to emphasize our cautionary statement presented on Slide 3. Keep in mind that elements of this presentation may be forward-looking and based on our current outlook and assumptions regarding the global economy and our specific businesses, including the ongoing COVID-19 pandemic, which can frequently change. Please consider our comments in light of the risks and uncertainties identified in our filings. Additionally, Woodward is providing certain non-U.S. GAAP financial measures. We encourage you to review the reconciliations of these measures included in today's slide presentation and our earnings release. We believe this financial information will aid in understanding our results. Now, for our first quarter results. Net sales for the first quarter of fiscal 2021 were $538 million, down from $720 million in the same quarter last year, a decrease of 25%. Both net earnings and adjusted net earnings for the first quarter of 2021 were $42 million, or $0.64 per share. In the first quarter of fiscal 2020, net earnings were $53 million, or $0.83 per share, and adjusted net earnings were $71 million, or $1.10 per share. Net cash from operating activities for the first quarter of 2021 was $147 million, compared to $27 million for the same quarter last year. For the first quarter of 2021, free cash flow and adjusted free cash flow were both $139 million, while in the first quarter of 2020, free cash flow was $10 million, and adjusted free cash flow was $29 million. Now, I will turn the call over to Tom for further comments on our results, strategies, and markets.

Thank you, Don, and good afternoon, everyone. The negative impact of COVID-19 continues to weigh heavily on the world's economy with resurgences and new viral variants contributing to significant uncertainty. While the first quarter of fiscal '21 showed signs of stabilization in many of our markets across the globe, we still anticipate quarterly volatility related to the pandemic. Importantly, we took swift action at the beginning of the pandemic to prioritize cash management in a lean operational structure. As a result of these actions, our balance sheet and cash flow have remained strong, and as we announced today, we have restored the first quarter dividend at the same level as the first quarter last year. We continue to closely monitor the situation and strategically adjust our business to align with customer expectations while maintaining our strong financial position and continuing to invest for the future. Moving to our markets. Aerospace continues to be challenged with commercial OEM and aftermarket seeing the most substantial declines year-over-year. We're anticipating future improvements in passenger traffic with the rollout of vaccines across the globe. Additionally, the Boeing 737 MAX is returning to service in many key markets with production rates expected to improve in '21. Defense OEM spending remains solid across fixed wing and rotorcraft applications. However, we continue to anticipate a softening of guided weapons production volumes. Defense aftermarket activity remains strong due to improved U.S. fleet readiness initiatives as well as global upgrade programs. Turning to our Industrial Market segment. In power generation, given the already depressed gas turbine market, low inventory levels, and pent-up demand for repair and overhaul, we do not expect this market to be as negatively impacted by the pandemic. Increased emissions regulations continue to drive the shift to natural gas powered and cleaner burning diesel engines. We also foresee continued growth in global energy demand moving forward with the bulk of this expansion coming from Asia's developing economies. In transportation, China natural gas truck demand was strong, though we anticipate seasonal pressure due to higher demand for natural gas during the winter months. The global marine market continues to be severely impacted by the pandemic. The oil and gas market remains weak globally due to lower oil prices and lack of investment, although rig counts are showing some signs of improvement in recent weeks. In summary, our markets are stabilizing. We are beginning to see the payoff of our aggressive actions to address the challenges of COVID-19. We are consistently engaging with our business partners to assess near-term market demand and capitalize upon emerging opportunities. While we'll still see a significant amount of uncertainty and volatility in our markets, we do anticipate improvement as we progress through the fiscal year. We remain focused on operational excellence, delivering value to our shareholders and positioning Woodward to capitalize on future market opportunities as they emerge. Now, I'd like to turn the call over to Bob to discuss our financials in detail.

Thank you, Tom. Aerospace segment sales for the first quarter of fiscal 2021 were $322 million, a decrease of 32% from the same quarter last year. Commercial OEM and aftermarket sales are still weak due to the pandemic. Commercial aftermarket sales dropped 47% in the first quarter of 2021 compared to the previous year due to reduced passenger traffic. On a positive note, there was a 13% sequential increase in commercial OEM driven by rising demand for narrowbody systems. Defense OEM experienced a slight decline compared to a strong performance in the first quarter of the previous year, mainly from lower guided weapons sales, but this was somewhat offset by increased sales in fixed wing and rotorcraft. Defense aftermarket sales remained flat compared to last year, although activity was solid. Overall, defense sales this quarter were negatively affected by COVID-related absenteeism and supply chain disruptions. However, our defense backlog is strong, and we expect defense spending to maintain healthy levels. Aerospace segment earnings for the first quarter of 2021 totaled $46 million, or 14.4% of segment sales, compared to $93 million, or 19.6% of segment sales, in the first quarter of 2020. The decrease in segment earnings from the previous year was mainly due to lower sales volume, which was partially mitigated by cost-cutting measures. The margin decline from the fourth quarter of fiscal 2020 was primarily attributed to lower defense aftermarket sales and the timing of research and development spending. Now, moving on to the industrial segment, sales for the first quarter of fiscal 2021 were $216 million, down from $246 million in the same period last year, a decrease of 12%. If we exclude renewable power systems and related businesses, which were divested on April 30, 2020, industrial segment sales for the first quarter of 2020 were $218 million. The decline in industrial sales was largely due to the RPS divestiture, the weak oil and gas market, and ongoing pandemic effects, although there was strong demand for natural gas trucks in China this quarter. Foreign currency exchange positively influenced industrial segment sales by about $9 million. Industrial segment earnings for the first quarter of 2021 were $33 million, or 15.2% of segment sales, compared to $28 million, or 11.5% of segment sales in the prior year. The increase in industrial earnings was primarily due to cost reduction initiatives. Excluding RPS, industrial segment earnings for the first quarter of 2020 were $26 million, or 11.9% of net sales. Non-segment expenses and adjusted non-segment expenses were $23 million for the first quarter of 2021, down from $51 million in non-segment expenses and $27 million in adjusted non-segment expenses for the same period last year. Non-segment expenses in the first quarter of 2021 benefited from cost reduction initiatives. At the Woodward level, research and development spending for the first quarter of 2021 was $32 million, or 6.0% of sales, compared to $37 million, or 5.1% of sales in the prior year. Selling, general, and administrative expenses for the first quarter of 2021 were $56 million, compared to $62 million in the same quarter last year. The reductions in both R&D and SG&A reflect our cost management measures in response to the pandemic. The effective tax rate and the adjusted effective tax rate were both 12.6% for the first quarter of 2021, compared to 13.3% and 17.1%, respectively, for the first quarter of 2020. Regarding cash flows, net cash from operating activities for the first three months of fiscal year 2021 was $147 million, compared to $27 million for the same period last year. Capital expenditures for this quarter were $7 million, down from $17 million last year. Both free cash flow and adjusted free cash flow for 2021 were $139 million, compared to $10 million and $29 million, respectively, for the previous year. The increase in free cash flow and adjusted free cash flow was primarily due to strict cost control, effective working capital management, and reduced capital expenditures. We are actively paying down debt and have reduced our leverage to 1.7 times EBITDA at the end of the first quarter, compared to 2.0 times EBITDA at the end of the previous year. We have a solid liquidity position with about $1.2 billion in cash and revolving credit capacity, which enables us to invest in new programs and growth opportunities, thereby enhancing shareholder value. Importantly, we've raised this quarter's dividend to pre-COVID levels, demonstrating our confidence in Woodward's financial stability. While we are experiencing significant declines in sales volume, the proactive measures we implemented at the pandemic's onset for cash management and streamlined operations are positively influencing our performance. Lastly, regarding our fiscal 2021 outlook, the ongoing nature of the COVID-19 pandemic continues to create uncertainty in our markets. Although the global vaccination rollout is underway, emerging variants and regional increases in cases complicate our ability to forecast business conditions in the near term. Due to this uncertainty and the prolonged nature of the crisis, we will not be providing financial guidance at this time, but we remain hopeful that stabilization efforts will promote global recovery.

Our first question comes from Robert Spingarn from Credit Suisse.

Bob, you mentioned the sequential increase in commercial OE from quarter to quarter. When can we expect to see the impact of the A320 rate increase, and how is the MAX rate progressing?

Maybe, Tom, I'll let you go ahead and comment on that.

Yes. We're aligned with the Airbus production schedule regarding the A320, tracking both direct sales and engine OEMs. We're generally ahead of those rates. As for the MAX, it's more complex due to significant inventory in the system, and we're adhering to Boeing's guidance for ramp-up preparation. We'll monitor that closely, and we're ready to meet the demand as they progress. However, I can't provide additional details on their current rate.

Okay. And then just on the aftermarket side, we've started hearing some of the airlines talking about loading up for heavy maintenance just because so little has been done over the past year. Are you starting to see any corresponding evidence of an increase in engine inductions for shop visits coming up here during '21?

Yes, Rob, we are noticing forecasts and discussions with our customers indicating that growth is on the horizon. However, our first fiscal quarter reflected a weak commercial aftermarket quarter, with a sequential decline. The future outlook appears positive, and as we mentioned in earlier calls, the aftermarket is likely to be the first segment to rebound. We expect to begin seeing this recovery as we transition into the second half of our fiscal year.

Okay. And then just the last one on the 777X schedule change, how does that affect you? I imagine you're on the engines, but possibly also elsewhere on the aircraft, are you involved at all in the actuation side? And is there anything you can tell us about what's happening with that airplane in terms of actuation issues?

Yes, I'm not aware of any actuation issues. So I can't comment on that. But we're on the aircraft, both on the direct to Boeing, but also on the GE9X to GE. We're in good shape in terms of certification and having the hardware ready, and we're just working with the customers on the extended entry into service timeline. But from a Woodward standpoint, we're in quite good shape on that program and…

There's no significant incremental cost for you from this push to the ride or anything like that?

Not significant, Rob. Obviously, when things move out, there's additional costs. There’s no doubt because we have to continue to support, but it's not significant cost to us. No.

Our next question or comment comes from the line of Gautam Khanna from Cowen.

Following up on Rob's question, I was curious about the implied aftermarket sales, which dropped to around $63 million this quarter, lower than the previous two quarters. General Electric mentioned a notable sequential increase in their spare parts sales, and Honeywell also experienced a significant uptick. I'm interested to know if you have noticed any irregularities or factors that could explain this situation and if you're seeing any signs of demand picking up since the quarter, especially in contrast to what some of the other companies are experiencing.

Sure. There is always variability in the aftermarket based on the products and timing. As I mentioned to Rob, we are seeing increased forecasts for engine shop visits. We are starting to see activity in terms of inquiries about spare parts. Additionally, with the MAX coming online, both in terms of production ramp and reintroducing parked aircraft, we anticipate and are noticing signs of increased initial provisioning sales. Therefore, we are confident that as we progress through our fiscal year, we will experience a ramp-up. The differences between what you observed from GE and Honeywell compared to us are aligned with the normal quarter-to-quarter variability. I don't see any disconnect between the companies and the markets, and I believe you will begin to see sequential improvements as we advance through the year.

Okay. So you think the December quarter sort of marks the trough based on what you're seeing today?

Definitely, we're down at the bottom. Now how fast you come out of that trough, there's no doubt about that, but that we're down at the bottom. But we do anticipate we're going to be increasing as we move forward.

I have another question that isn't directly related to operations, but I am trying to understand what the non-segment would look like when excluding one-time items. Additionally, the tax rate this quarter was fairly low. Bob, could you provide some guidance on this? I want to ensure our modeling is accurate in light of these factors. Can you give us a baseline for what we should use for the non-segment tax rate?

Yes. The first quarter tends to be heavier for us in non-segment compared to the entire year. We had some one-time items, which you will see detailed later in the release, including the gain from the sale of Duarte and the impairment of the RPS asset. We adjusted for these to arrive at a more typical run-rate. As the year progresses, you will notice a decline towards a more consistent level compared to the prior year.

Okay. And tax rate as well?

Yes. The tax rate will probably hover in this area a little bit higher in the 17%, 18% range overall as we go through the year.

Our next question or comment comes from the line of Christopher Glynn from Oppenheimer.

Great job on managing cash flow. I'm curious about the sequential incremental margins for Industrial, which are 65% and 70%. With RPS gaining some traction after the divestiture and restructuring, do you think the mid-teens margin level is sustainable now, or should we expect significant variability? If we could eliminate pandemic-related factors, how do you see this playing out in the coming months?

Yes. First, I want to emphasize our commitment and efforts to enhance our Industrial margins, as we've discussed over the past couple of years. Some improvements have resulted from cost reductions following divestitures, and we experienced a favorable margin mix on products during the quarter. While it might be overly optimistic to say we will maintain that level throughout the year, we certainly expect to see year-over-year improvement in Industrial margins. As the year progresses, we will need to assess how the margin mix evolves. Year-over-year, we will see improvements in Industrial, although aiming for mid-teens margins this year may be a bit ambitious; however, that is the trajectory we are pursuing.

Okay. And just defense, several quarters in a row where the supply chain issues and some absenteeism have seemingly impacted that end market with those kind of specific criteria more than your other end markets, I'm just curious about why there, what you're seeing? And as supply chain issues ease, does defense have a nice rebound just structurally kind of waiting for the start date type thing?

We have a strong backlog in defense, particularly from our Santa Clarita and Niles sites. However, California faced significant challenges during the pandemic, including high absenteeism and supplier issues, which affected our ability to fulfill sales. This resulted in lower sales than what our backlog could support. Moving forward, we expect to start addressing that backlog in the remainder of the fiscal year. The issues we experienced were specific to certain locations and suppliers, which had a greater impact on defense sales compared to our commercial side.

Our next question or comment comes from the line of Pete Skibitski from Alembic Global.

Switching back to Industrial, I guess, Bob, can you give us maybe a ballpark of how much China CNG was up in the quarter?

I couldn't give you a specific, but it was significant in the quarter. Yes. And Pete, you've followed us long enough, how volatile that could be, right? So that's one thing that's extremely difficult for us to peg any given quarter.

Yes. That was kind of my second question. The language on the slides, it seemed to indicate that you guys thought that maybe sequentially that China CNG could be down on revenue. Is that just, I guess, because of seasonality? Is that what you guys are expecting?

Well, one, you always have to look at is the Chinese New Year. And the Chinese New Year always slows down production. You kind of look at it as our holiday season, less working days slows down production. So in the first calendar quarter, you definitely have that. We do see variation depending on oil or diesel and gas pricing spread, there was some volatility in that. It's coming down. Gas has now dropped quite a bit and is in a good place moving in the right direction. We also see positives going forward. And you just have to expect some volatility in that market, but positives going forward is, there is still the regulations emissions compliance regulations coming up where we're going to see higher use of natural gas. The China VI regulations on diesel engines goes into effect in July, that's favorable to natural gas-powered trucks. So we see some positives going, but due to seasonality and some just normal variability in that market, we always have to be a little cautious, but the trends are in the right direction.

Tom, are you anticipating another buy ahead similar to what we saw in the June quarter with China VI? It appears you had some buy ahead in the previous instance.

There were some early purchases, but one of the differences now is that some restrictions will be implemented in several major cities, preventing non-China VI trucks from entering. So while there may be some early purchases, they could be more limited than before.

Our next question or comment comes from the line of Greg Konrad from Jefferies.

Just to follow-up on commercial Aerospace, I mean you mentioned some sequential improvement on narrow bodies, but what are you seeing on the widebody side given some commentary around destocking and some further rate cuts on the widebody side?

We have definitely observed the rate reductions on the widebody aircraft, and we acknowledge that the inventory destocking has taken place. We believe this has indeed occurred, but the rates are currently quite low. We are collaborating with our OEMs on these rates, but we do expect that recovery for widebodies will take considerably longer than for narrow bodies. This expectation is incorporated into our production plans and activities.

The decremental in Aerospace has remained relatively stable, slightly above 30%, despite some unfavorable mix with the aftermarket this quarter. Considering the productivity improvements and cost reductions, how are you approaching incremental margins when the market eventually recovers?

Yes, what you're pointing out is something we are looking forward to. We have the ability to manage much higher rates, and this has affected our operations as we are currently below capacity. Firstly, Bob, you might want to add your thoughts as well. Considering the margins in Aerospace, having a decremental rate of about 30% is quite reasonable, especially with the substantial drop in volume. We anticipate that this will improve as we ramp up. Bob, do you have anything to add?

Yes. Early on, when the pandemic began, I mentioned a 40%. We were uncertain about the outcome then, and we still are, but we initially anticipated a much higher impact. This reflects the various cost measures implemented to mitigate the downsides. We hope to leverage these same factors as we recover, but we still need to increase capacity first. As Tom noted, we have significant unused capacity and substantial capital not currently in use. Once we get that operating smoothly, we should see positive incremental growth moving forward.

Our next question or comment comes from the line of Chris Howe from Barrington Research.

Following up just on some of the questions we went through. As it pertains to the last one, the longer this is prolonged as it relates to an Aerospace recovery, can you talk about how this may change your outlook as far as this perhaps accelerating the rate at which we go into a recovery? And along that same path of thinking for the Industrial segment, you mentioned the gas turbine expectations not being so influenced by the pandemic, perhaps some additional insight into the positives you're seeing in the Industrial segment? Who knows how the current administration will help economic growth as far as infrastructure spending, but some more detail on the positives there that may offset some of the continuing pressures that you're seeing in the industrial markets?

Sure. On the turbomachinery side, the market has been down for a long time, but we’re now seeing inventory levels decrease and order books beginning to fill up. There is pent-up demand in the aftermarket, and we believe that the gas turbine and turbomachinery markets will only improve from here on out. We don’t foresee any decline moving forward. All indicators suggest we are on an upward trend as we progress through the year, with our order book filling and enhanced sales expected in this part of our business. That’s why we highlighted that things are moving in the right direction. Orders are starting to flow and RFQ activity is increasing globally, which gives us confidence in a recovery. Regarding commercial aerospace markets, we see substantial pent-up demand for travel, especially as vaccine distribution increases. This should lead to more people traveling, with leisure travel likely picking up first. Airlines have done a commendable job managing aircraft utilization during the pandemic while balancing heavier maintenance needs. It’s a matter of timing, but we are beginning to see positive signs. As vaccine distribution continues and confidence grows, we expect a quicker recovery in the commercial aftermarket, followed by ramp-ups from narrowbody aircraft and eventually some recovery in widebody production rates, though that will take longer.

Our next question or comment comes from the line of Michael Ciarmoli from Truist Securities.

Maybe you could provide some insight on the Industrial margins and what we should expect. In Aerospace, there seems to be a noticeable sequential decline. Considering the recovery, it looks like there's been some improvement in OEM. I'm curious if there's a mix issue since OEM margins are lower than aftermarket margins, and you mentioned that the guided weapons in that segment are down, which you've said historically have good margins. Should we assume that this 14.5% level could hold if aftermarket performance is weak this quarter and OEM sees an uplift? Does this create more pressure on margins? Any information you could share about the margin trajectory in aerospace would be helpful.

A lot of it is based on recovery, and we expect the commercial aftermarket to recover. We also foresee an increase in military aftermarket and original equipment sales for the rest of the year, which will improve our mix. As we consider the entire fiscal year, we anticipate our aerospace margins will improve. With the recovery in volumes and aftermarket activity, I am confident that we will see a rebound in the segment margins for aerospace, which have historically been over 20 percent. It might take until fiscal year '22 to reach those levels, but we will be increasing throughout the year if travel improves. However, there is still some volatility and uncertainty in the market, and this quarter has been challenging for both mix and volume. To address your question, our Aerospace model shows that the aftermarket has a higher margin compared to original equipment. Therefore, if we see higher original equipment sales without a corresponding increase in aftermarket sales, it will put pressure on our margins. This is an important point for our business, but we believe everything is heading in the right direction for the Aerospace segment as we move through the fiscal year.

Can you discuss the current utilization at the Rock Cut facility? I'd like to understand your capacity situation, especially as some of those OE lines return, even if they are less profitable compared to aftermarket, you might see improved absorption. Could you clarify where Rock Cut stands at the moment?

Yes, we are definitely going to see significant leverage as things improve. I would estimate that the Rock Cut facility is currently operating at about 40% of its capacity. This means we have considerable room to grow. It's important to note that we've already made the necessary investments. Throughout this downturn, we have been enhancing our production lines across all our facilities, including Rock Cut, by engaging in continuous improvement initiatives like Kaizen. This preparation positions us well for recovery when the market rebounds, as we are increasing efficiency. This will positively impact our working capital. We are actively enhancing productivity within our production processes. Therefore, during this pandemic, we haven't been idle; we've focused on improving our production lines so that we emerge from this period stronger. We have the capacity and solid investments in place, which will provide us with high leverage once volumes start to recover.

Got it. Just one last question for me. Regarding working capital, it appears that inventory has increased slightly. You had a strong free cash flow quarter, which is great. How should we consider inventory specifically in relation to planning for recovery and potentially rising OEM rates, as well as being prepared for the aftermarket? Do you anticipate that inventory investment might pose a challenge to cash flow?

It normally would be as we come back, but we've kind of talked from time to time about all the operational enhancements and improvements in True North work that we've been doing and so on. So we are fairly confident that we're going to be able to offset what would normally be the pattern. So working capital needs would be a headwind as we go forward, and we still anticipate that receivables will be as things improve, hopefully, throughout the year. But we're feeling much better about inventories in terms of the progress we're making to bring down our overall levels and counter some of that natural. Clearly, we'll have to increase inventories to cope with increasing sales. But hopefully, we have brought the base down, and we'll continue to bring the base down so that we won't see significant inventory movement as we recover.

What are your plans for the excess cash? Will you continue to use it to reduce debt now that you've adjusted the dividend, or do you intend to re-enter the repo market? Also, how are you currently viewing your M&A pipeline?

Yes, go ahead, Tom.

Go ahead, Bob.

Yes, we have restored the dividend to its pre-COVID level, which was our first priority. The next step will focus on growth. We see many opportunities for organic investments, as well as inorganic ones, and we will keep an eye out for new prospects as they emerge. Regarding the repo market, while we still believe it’s a good investment, I currently don't have any plans to re-enter that market. On the debt front, we have successfully paid off all our short-term prepayable debt, leaving nearly the entire revolver available. We do not have any long-term debt tranches coming due for several years. The recent L'Orange acquisition allowed us to extend our debt repayment period to about 13 or 12 years now, providing us with a strong financial position, minimal debt obligations, incoming cash, and many opportunities ahead.

Okay. And without obviously giving us all the moving pieces in terms of free cash flow and earnings, Bob, would you expect this to be another year where your cash conversion is over 100% of net income?

I would. We'll see how the year pans out. But obviously, this was a strong quarter. We don't anticipate that every quarter is going to be as strong as this quarter was. I've mentioned headwinds related to receivables if and as we recover, but we do believe it will probably be north of the 100%, yes.

Okay. And then last one for me. I know you guys aren't giving full year guidance, but in the past, you've talked about kind of what to expect sequentially for the next quarter. Would you expect Q2 to be up sequential quarter from an EPS standpoint or more in the flattish range?

I believe the first part of your comment was correct. We were not providing guidance. It is challenging because one moment everything appears to be positive regarding vaccines, and the next, we encounter various issues with distribution. I agree with Tom's observation that there is significant pent-up demand, which will ultimately drive passenger traffic again. However, the timing and speed of that recovery remain uncertain, especially considering the prolonged pandemic and its potential effects. Therefore, it's too early to predict what will occur for the rest of the year, let alone in the next quarter.

Our next question or comment comes from the line of Noah Poponak from Goldman Sachs.

Yes. Actually, following David's question there on the sequential kind of walk, for the Aerospace segment and looking at its revenues, we all look at year-over-year all the time for everything for a variety of reasons. But in this very unique environment, it's sort of helpful to look at the sequential, if you can sort of envision where the bottom is and then walk along the bottom and then decide when the recovery occurs, but your Aerospace segment is really unique. If I look at the last really kind of 5 to 10 years, it just has a lot of seasonality. There's several years where the 1Q to 4Q is something close to $100 million. Does that seasonality hold in your fiscal '21, even if there's literally no end market change through the year or is that out the window given the very unique environment?

I think we would say we'd still see seasonality. It’d just be the magnitude of it. But some of that's just due to working with our customers on fiscal year versus calendar year activity and the amount of working days in our first quarter, those all play into that and that type of seasonality is still out there.

Okay. So, the sort of low $300 million run rate that the segments had, you're going to move off of that not insignificantly just on seasonality alone and then if you get an actual end market pickup towards the end of the year, that would be on top of that?

I would say that's correct. We definitely will see the seasonality. The tougher part, we watch very closely. We're very conservative during the crisis on our outlooks. And I think that paid off, and we monitor everything daily. And as we see order activity, shop visit activity, those things picking up, we react quick to that. But our outlook is, as we move through the fiscal year that we will see OE volumes pick up, and we will see aftermarket volumes pick up. That's our outlook, but we're cautious about the volatility and the second dip happening. But outside of a second dip, yes, we're on a sequential quarterly improvement.

Okay. Defense business, do you expect that to end up with a positive year-over-year growth rate for the year?

Yes. We expect it to be slightly above flat year-over-year.

In the oil and gas business, you've mentioned a recent improvement in some of the leading indicators. What is the lag time we should consider between those leading indicators and the revenues in your business?

Yes. The first thing we're observing is the rig count, which indicates how many rigs are currently operational. We're beginning with the drilling activity. Next, we're analyzing how customers plan to bring equipment back into service. This situation is similar to what occurred in the commercial aerospace market, where a significant amount of equipment was either parked or put into storage. Now, these companies are starting to reconsider their options. We're beginning to notice some aftermarket activity, which includes requests for quotes and orders for parts. Our major OEM customers in these sectors are communicating with us about the potential opportunities they are identifying and the increases they foresee. While we have some encouraging signs, nothing is yet confirmed. These are the trends we are monitoring. If oil prices remain in the $50 to $60 per barrel range, we expect to see an increase in activity during the second half of our fiscal year.

That's helpful. I have one last question regarding free cash flow. If I assume the next three quarters remain flat year-over-year, that's not entirely fair for the March quarter since it isn't fully impacted by the end markets yet. However, given what happened in the first quarter, it might be reasonable. If I go with that assumption, the free cash for the year would increase by over 30%. Have you implemented additional cash flow savings measures beyond your usual practices that could lead to substantial double-digit growth in free cash flow this year, or is there a temporary boost in the first quarter?

Yes. The problem in that assumption is that last fiscal year was certainly not a normal year for us. It was essentially two distinct halves. The first half started off normally, but the second half was completely different from our usual expectations in terms of seasonality and other factors. The latter part, especially the fourth quarter, was quite atypical. This year, I hope it will be the reverse in terms of the two halves, but I’m uncertain about a strong recovery in the second half. Therefore, I don't think you can rely on that approach to arrive at a reasonable estimate, and while we have said we won't provide specific guidance, it makes it difficult to offer a clear outlook on that.

I was thinking that the second half of last year experienced significant headwinds in the major end market, but it seems like your point is that you have cash sources related to working capital and there are irregularities in areas outside of the business segments that wouldn't occur if conditions were improving.

Yes. Although sales were down, working capital was generating cash.

Thank you. Mr. Gendron, there are no further questions at this time. I will now turn the conference back over to you.

Thank you all for joining us today. The past year has certainly been a challenging one. I believe Woodward and our home membership have navigated the crisis effectively. We feel optimistic about emerging from it, and we look forward to sharing updates over the next few quarters. If we start to see improvement in the pandemic situation, we anticipate better results moving forward. Thank you again for being here, and we look forward to our next conversation. Good night to everyone.

Ladies and gentlemen, this 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 PM Eastern Standard time by dialing 1-855-859-2056 for U.S. calls, or 1-404-537-3406 for a non-U.S. call, and by entering the access code, 2419369. 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.