Thank you for standing by. Welcome to the Woodward, Inc. Fourth Quarter Fiscal Year 2022 Earnings Call. At this time, I'd like to inform you that this call is being recorded for rebroadcast and then all participants are in a listen-only mode. Following the presentation, you are invited to participate in a question-and-answer session. Joining us today from the company are Mr. Chip Blankenship, Chairman and Chief Executive Officer; Mr. Mark Hartman, Chief Financial Officer; and Mr. Dan Provaznik, Director of Investor Relations. I'd now like to turn the call over to Mr. Provaznik.

Thank you, operator. We would like to welcome all of you to Woodward's fourth quarter fiscal year 2022 earnings call. In today's call, Chip will comment on our strategies and related markets. Mark will then 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 December 1, 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 would 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 events, effects of the ongoing supply chain and labor disruptions and net inflationary pressures. Those elements can and do frequently change. Our forward-looking statements are subject to a number of risks and uncertainties surrounding those elements, including the risks we identify in our filings. In addition, Woodward is providing certain non-U.S. GAAP financial measures. We direct your attention to the reconciliations of non-U.S. GAAP financial measures, which are included in today's slide presentation and our earnings release and related schedules. We believe this additional financial information will help in understanding our results. Also, all comparisons made during this call are to the same period of the prior year, unless otherwise stated. Now I'll turn the call over to Chip.

Thank you, Dan, and good afternoon, everyone. During fiscal 2022, our market strengthened and demand was solid with the exception of China. Challenges from supply chain and labor disruptions, record high inflation and unfavorable foreign currency exchange rates negatively impacted our performance. We expect some improvements in fiscal 2023 and we are taking specific actions to manage key constraints that are within our control. We remain focused on operational excellence, talent development, and innovation to help drive the company's performance and create value for our shareholders. Orders are up in nearly all market segments, and we finished the year with a strong backlog. Moreover, our past due commitments to customers remain elevated as a result of part shortages and labor inefficiencies. On our last call, we discussed our strategy to mitigate supply chain risk and better position Woodward for long-term success. I'd like to update you on three actions we've taken. We have redeployed talent and added indirect resources to factories to stabilize the production environment. This support includes material planning resources, operations specialists, leadership support and engineers. Secondly, we reinforced the global sourcing team to secure additional supplier capacity and allocated experienced resources to help suppliers resolve issues. We have also found and qualified a number of new quick-turn suppliers that we're using to augment specific supplier shortages. Third, our advanced manufacturing engineers across the company are working to transfer selected machine components into our own plants. This in-sourcing activity leverages our substantial machining capabilities and capacity, which we expect will deliver improvements in quality, delivery and cost and reduce our lead times. To date, more than 2,000 parts have been transitioned to alternative sources, either in-house or to a more capable third-party supplier. While significant work remains, we believe these investments will help stabilize our supply chain and improve output. To support the in-sourcing initiatives, we're more effectively utilizing existing equipment to relieve capacity constraints at suppliers. While we have the capital largely in place, we're investing $10 million of new capital to create rapid response machining centers at four of our sites. These machining centers include flexible CNC machines that will have a portion of their capacity available for rapid response when a supplier has unforeseen problems. That capital will begin arriving in our plants in the second quarter, and our target is to produce parts in less than 10 days from the time we identify a supplier shortage. I'd like to take this opportunity to thank our members for their efforts and commitment to Woodward and our customers. They have stepped up in the face of adversity to help us serve customers better and deliver for our shareholders. From members meeting elevated build rate targets, to engineers we deploy to assist problem-solving at suppliers and advanced manufacturing engineers bringing automation and in-sourcing initiatives online, just to name a few examples. Like others in the industry, we continue to grapple with the increasingly competitive labor market, challenging attrition rates and skills gaps. Hiring, developing and retaining talent are critical components to our long-term sustainable success and remain a top priority. We have initiatives underway to improve training and development. Our new machinists and technicians undergo a rigorous, multi-month training and skills development process that enables them to perform to Woodward's high standards. We're focused on compressing the training cycle time to develop our members quickly and efficiently without compromising safety or quality. We're partnering with select technical schools to help augment our training bandwidth. We're also increasing our focus on automation with multiple technology paths, including expanded use of cobots or collaborative robots. We're encouraged by the results and believe the increased use of automation will deliver productivity and mitigate risk in a difficult labor market. Turning to innovation. Woodward is committed to solving our customers' fuel and motion control challenges, enabling improved fuel efficiency and reduced emissions in both aerospace and industrial applications. While we are investing in and developing innovative technologies that reduce fuel consumption and associated emissions, we're seeing rising interest in the use of alternative fuels across both industrial and aerospace industries. Together with our customers, we are developing solutions that enable a wide variety of clean fuels to power the engines of tomorrow. Our focus on innovation enables multiple paths to a cleaner decarbonized world, which we believe represents a significant opportunity for our company in the future. Woodward has been selected as a partner to provide substantial content on a very large breakthrough aerospace project involving carbon emissions reduction that will be announced in the next few weeks. This is a significant project for Woodward involving resources and test facilities across both our Aerospace and Industrial businesses. Additionally, our Industrial segment is working on projects with eight different customers on a variety of clean fuels, including ethanol, hydrogen, methanol, ammonia, and bio-derived natural gas. These projects are for a wide variety of applications, including power generation, marine, agriculture, and mining, targeting both new engines as well as conversion and upgrade opportunities for engines currently in service. Now moving to our markets, demand from both aerospace and industrial customers remain strong. In aerospace, utilization rates for commercial airline fleet continued to rise, driven by increasing global passenger traffic. U.S. and European domestic passenger traffic has returned to near 2019 levels. International travel continues to improve, yet China domestic passenger traffic remains volatile. In the defense market, we anticipate near-term U.S. procurement to increase slightly and geopolitical tensions may lead to increased international defense spending. In industrial markets, we are seeing robust demand in power generation, driven by strong growth in Asia, continued increases in global aftermarket activity and ongoing demand for backup power at data centers. In transportation, the global marine market remains healthy with higher ship utilization which drives increases in current and future aftermarket activity. Cruise and ferry operations are back at near 2019 levels, which should result in increased spare parts demand. In addition, the global marine market interest for alternative fuels is increasing as more projects are announced and under development. Demand for China natural gas trucks remains at depressed levels. The oil and gas market is favorable as equipment utilization remains elevated. These factors should result in increased aftermarket demand. In summary, we believe our markets will remain strong as heightened demand signals for fiscal year 2023 continue to propagate throughout our markets as customers continue to increase orders. We remain focused on improving operations to catch up on past due orders and deliver on future customer demand. We are committed to operational excellence initiatives, talent development and innovation, which we believe will deliver value to our customers and shareholders and will position Woodward to capitalize on future market opportunities. I will now turn the call over to Mark to review our quarterly and full-year results and our fiscal year 2023 outlook.

Thank you, Chip. Net sales for the fourth quarter of fiscal 2022 were $640 million, an increase of 12%. In the quarter, we realized $29 million in price gains or an increase of approximately 5%. Sales for the quarter were negatively impacted by approximately $85 million due to ongoing global supply chain and labor disruptions. Sales were also impacted by approximately $24 million from unfavorable foreign currency exchange rates. Turning to our segments, starting with Aerospace, segment sales for the fourth quarter of fiscal 2022 were $408 million, an increase of 8%. Commercial aftermarket and OEM sales were up 34% and 24%, respectively, driven by continued recovery in both domestic and international passenger traffic and increasing aircraft utilization as well as higher OEM build rates. The increase in segment sales was partially offset by delayed shipments of approximately $40 million caused by global supply chain and labor disruptions. Defense OEM sales were down 18%, primarily due to lower guided weapons demand. Defense aftermarket sales were down 7% due to global supply chain and labor disruptions. Aerospace segment earnings for the fourth quarter of 2022 were $63 million or 15.5% of segment sales compared to $66 million or 17.4% of segment sales. The decrease in segment earnings was a result of net inflationary impacts on material and labor costs as well as increases in manufacturing costs related to supply chain disruptions and inefficiencies related to training recent hires, partially offset by higher sales volume. For fiscal year 2022, Aerospace segment sales were $1.52 billion compared to $1.40 billion for the prior year, an increase of 8%. The Aerospace segment earnings for fiscal year 2022 were $231 million or 15.2% of segment sales compared to $234 million or 16.7% of segment sales for the prior year. Turning to Industrial, Industrial segment sales for the fourth quarter of fiscal 2022 were $232 million compared to $193 million, an increase of 20%. The increase was driven by higher marine sales from continued utilization of the in-service fleet and strong industrial turbomachinery sales due to the growing demand for power generation and process industries. This increase was partially offset by delayed shipments of approximately $45 million due to global supply chain and labor disruptions and unfavorable currency exchange rate impacts of approximately $22 million. Industrial segment earnings for the fourth quarter of 2022 were $21 million or 9.0% of segment sales compared to $21 million or 10.7% of segment sales. The favorable impact from higher sales was offset by increases in manufacturing costs related to supply chain and labor disruptions, costs associated with training recent hires, net inflationary impacts on material and labor costs as well as unfavorable foreign currency impacts. Fiscal 2022 Industrial sales were $863 million compared to $842 million for the prior year, an increase of 3%. Industrial segment earnings for fiscal 2022 were $83 million or 9.6% of segment sales. Industrial segment earnings for 2021 were $109 million or 12.9% of segment sales. Non-segment expenses remained consistent at $17 million for the fourth quarter of 2022 and 2021. Adjusted non-segment expenses for the fourth quarter of 2022 were $21 million compared to $12 million in fiscal 2021. Non-segment expenses were $81 million for fiscal 2022 compared to $64 million for 2021. Adjusted non-segment expenses were $78 million in fiscal 2022 compared to $59 million. At the Woodward level, R&D costs for the fourth quarter of 2021 were $30 million or 4.7% of sales compared to $28 million or 4.9% of sales. For fiscal year 2022, R&D costs were $120 million or 5.0% of sales compared to $117 million or 5.2% of sales. SG&A expenses for the fourth quarter of 2022 were $50 million compared to $38 million. For fiscal year 2022, SG&A expenses were $203 million compared to $187 million. The effective tax rate was 6.5% for the fourth quarter of 2022 compared to 18.2%. The adjusted effective tax rate was 5.3% for the fourth quarter of 2022 compared to 18.8%. The full-year effective tax rate was 14.1% for fiscal 2022 compared to 15.1%. The adjusted effective tax rate was 14.3% for fiscal 2022 compared to 15.3%. Looking at cash flows. Net cash provided by operating activities for fiscal 2022 was $194 million compared to $465 million. Capital expenditures were $53 million for 2022 compared to $38 million. Free cash flow was $141 million for fiscal 2022 compared to free cash flow of $427 million. The decrease in free cash flow for 2022 was primarily related to working capital increases as a result of production delays from supply chain disruptions as well as lower earnings. Leverage was 2.1x EBITDA at the end of the fourth quarter. We also have significant liquidity consisting of $1.1 billion of combined cash on hand and revolver capacity. During fiscal 2022, $518 million was returned to stockholders in the form of $473 million of repurchased shares and $45 million in dividends. Lastly, turning to our 2023 outlook. Our fiscal 2023 outlook assumes improving operational and financial performance throughout the year while navigating a challenging industry-wide environment. The supply chain and labor disruptions are anticipated to begin to subside during fiscal 2023, with the expected pace of improvement increasing in the second half of the year. However, the pace of improvement is uncertain and the results could be negatively impacted if supply chain and labor disruptions do not improve as anticipated. The strong demand environment is expected to continue with price realization ramping over the course of the year. We expect the full-year price realization to be in the range of 5%, consistent with the fourth quarter of fiscal 2022. We anticipate total net sales for fiscal 2023 to be between $2.60 billion and $2.75 billion. Aerospace sales growth is expected to be between 14% and 19%. Industrial sales growth is expected to be flat to up 5%. Our Aerospace outlook assumes increases in OEM build rates and overall global passenger traffic as well as higher aircraft utilization rates. Military sales are expected to increase slightly as global military budgets begin to rise. Industrial sales are expected to be supported by demand for power generation equipment, rising oil and gas investments and a stable global marine market, partially offset by continuing unfavorable foreign currency exchange rates. China natural gas truck sales are expected to remain at depressed levels. Aerospace segment earnings as a percent of segment net sales are expected to increase by approximately 150 to 200 basis points driven by increased sales volume and price realization in both commercial OEM and aftermarket, partially offset by the return of annual variable incentive compensation costs. Industrial segment earnings as a percent of segment net sales are expected to be flat year-over-year due to increased sales volume and price realization offset by the return of annual variable incentive compensation costs. EBIT is expected to include approximately $60 million of annual variable incentive compensation costs, an increase of approximately $50 million over the prior year. We anticipate our interest expense will increase by approximately $10 million primarily due to rising interest rates. The effective tax rate is expected to be approximately 19%. Free cash flow is expected to be between $200 million to $250 million. Capital expenditures are expected to be approximately $80 million. Earnings per share is expected to be between $3.15 and $3.60 based on approximately 61 million of fully diluted weighted average shares outstanding. The favorable earnings impact of anticipated sales growth and price realization improvements, in addition to our ongoing efforts to improve operational performance are expected to be partially offset by the anticipated return of full annual variable compensation costs. Finally, to assist in your modeling, a few reminders. First, our fiscal first quarter contains fewer working days than the preceding and subsequent quarters due to the holidays. Therefore, we anticipate fiscal Q1 results will be lower sequentially and lower than the other three quarters in fiscal 2023. Second, many of our OEM contracts have price escalation clauses that go into effect on January 1. And third, we anticipate the pace of improvement across the supply chain will increase in the second half of the year. This concludes our comments on the business and the results for the fourth quarter of 2022. Before we move into questions, I would like to announce that we will be holding our Investor and Analyst Day in early June 2023 and we will hopefully see many of you there.

Thank you. Our first question is from Sheila Kahyaoglu with Jefferies. Your line is open.

Hi, good afternoon, guys, and thank you for the time. Maybe if you could talk about your guidance for Aerospace of 14% to 19% growth and how you think about the different pieces and your expectations within that? And what – how you’re thinking about price? Is that consistent with in Aerospace 5 points in 2022 and into 2023?

Yes. Thanks, Sheila. I’ll answer your last question first. The price increase I mentioned in the range of 5% is both across Aerospace and Industrial, generally consistent across both of those. Related to the Aerospace growth of 14% to 19%, we do anticipate continued growth on the commercial both the OEM and the aftermarket side. On the commercial OEM side, with some increasing build rates from the aircraft manufacturers. On the aftermarket side, we’re anticipating the aftermarket continues to have strength related to the utilization of the aircraft and the passenger mileage – or passenger miles increase that we continue to see. So as we look across the – as we’ve talked in the past, we look across the aircraft that are flying that is favorable to Woodward based on the content on the dynamics of the aircraft that are flying and so that has a positive effect for us also.

How can we – and just maybe specifically on the commercial aftermarket, how do we think about that into 2023? And maybe can you talk about the aftermarket in the context of like supply chain issues, LEAP reliability and just delayed deliveries, how that kind of combines into your aftermarket forecast?

So Sheila, this is Chip. Good afternoon. How are you doing?

Good, thank you.

Good to talk to you. So we see strong inputs to our overhaul facilities right now from the commercial aircraft and the content that we have on them, both narrow-body and wide-body. So we feel strong about that continued strong inputs and our ability to deliver. So we have some supply chain challenges from part shortages, and that’s created some past dues to customers. We’re bringing more of the machine parts inside our own facilities. So we’re able to support our overhaul with spare parts a little bit better as we forecast that into the future. We’ve had some of the same impacts in our defense aftermarket production and return to customers as well. And we’re going after that problem-solving in the same way by insourcing and alleviating some of the supply chain challenges by moving the parts.

Okay. Great. Thanks so much, Chip. Thank you, Mark.

Yes. Thank you.

The next question is from Chris Glynn with Oppenheimer. Your line is open.

Thanks. Good afternoon, and appreciate the extensive detail on the guidance up and down the P&L. So the guidance came with some caveats, talk about relative to your expected pace of steady improvements in some of the supply chain and labor things going on. But what might be your ability on those efforts to kind of break through and beyond the guidance assumptions? It doesn’t seem like you’re claiming any victory, but you have real deliberate efforts going on. So just curious about the sense that some of those things could really kind of break through and normalize your operations a little more aggressively than you’re indicating.

Okay. I understand where you’re going from that question, Chris. Thanks for that. What we see right now, like you said, is we’re taking very specific actions going after the problems that we see. And we’ve been able to show some progress in certain areas, whereas we’re reducing the number of suppliers that are having problems and behind on their deliveries to our input, and we’re reducing the number of parts that we’re chasing. But we continue to be surprised by other suppliers that fall down in the process. And so we’re – we don’t feel strong enough and incredible enough that we can claim a sustained ability to support the customer demand just yet. We would like to bring more parts inside. We’d like to have our machinists come up the learning curve a little bit more and have it demonstrated sustainability to see that increased output before we would start to claim any victories on that front. We are taking the actions we think that are necessary and prudent and we’re even redeploying resources that would, on normal days, look like excessive to go after supplier improvements and internal factory optimization. But we believe that sort of resource over deployment is what’s required right now.

Great. And then – on the industrial margin profile, I understand a lot of what we just talked about is germane to both segments. I am curious, one thing you didn’t – I haven’t heard you talk about. Is there any issue with SKU complexity and breadth or excess customization? Maybe what the front end is feeding into the factories could be optimized a little more. I’m just curious, brainstorming if that is an article of discussion in your offices?

Yes. Your curiosity is justified, Chris. Me being in the role now a number of months, not – still learning and coming up the learning curve, but that is one observation that I make is that we have a lot of complexity. We have some aged components and systems that don’t get a very steady stream of orders and our ability to look across the product line portfolios and potentially optimize that going forward. Simplification can drive velocity and focus, and that’s one of the things that we’ll be taking a look at in 2023.

Thank you.

The next question is from Pete Skibitski with Alembic Global. Your line is open.

Hey, good afternoon, guys.

Hey, Pete.

Hey, guys. If I heard you right in terms of the COVID disruption, the way you quantified it for the fourth quarter, I think you said $40 million for Aerospace. I think that was $55 million in the third quarter. So are things at least trending somewhat in the right direction in Aerospace, but you’re kind of in the same ballpark of $45 million in arrears and industrial? Is that right?

That’s correct. We have seen some improvement. But as far as how sustainable that is and if that’s a trend, we can keep connecting the dots on. We haven’t demonstrated that in a way that I could say with confidence that our first quarter is going to be better than the fourth quarter of last year. We certainly have the momentum of resources in place but being able to realize that and say we’re going to continue to march that down right away here would be probably too optimistic saying that we’re going to make progress throughout the entire fiscal year, we are making that commitment.

Okay. And then just what are you guys assuming for FX headwind in fiscal 2023? Because it seems like you’re talking about a pretty good demand environment for industrial. But obviously, kind of a low single-digit type of average guidance there for industrial. So I’m just trying to figure out if it’s more so supply chain or more so FX? Or I don’t know if you can bifurcate a little bit for us.

Yes. Thanks, Pete. Let me give you a little clarity on that. So first, just to remind everybody, our FX is really what I call more just translation FX. Our exposure to the euro is naturally hedged. We have revenues in euros. We have costs in euros. So really, it’s just the translation effect of those euros translating into dollars that we continue to see, which does have, as you’re pointing out, that top line effect on the industrial side of the business. With where the euro is currently at about parity to the dollar, it is a significant effect for us of about, I’ll say, mid-single digits, 5%-ish of FX headwind if the euro stayed at parity to the dollar just from that translation effect.

Okay. That’s great. Very helpful. I guess just last one for me on the incentive comp costs in fiscal 2023, the $50 million increase. That’s pretty steep. It’s more than 20% of your EBIT this year, right? So a pretty big jump there. Can you – similar question, can you kind of bifurcate that for us? Is it kind of linear between – if I look at the size of Aerospace versus the size of Industrial? And is that just kind of based on your expected results in 2023?

Yes. So just to do a little reminder for everybody. During the pandemic, I think we were pretty clear on – we didn’t have bonus – the variable compensation part of our membership. Incentive was not in our cost structure in 2020 and 2021. We did have a slight improvement, and variable compensation was paid out at a very low level in 2022. So this is returning us back to the normal variable incentive compensation picture. If you look at the incremental of $50 million, the other piece, you could break it down like you’re talking, but the one other piece you have to remember is we do have variable compensation that would be in the non-segment also. And so it’s really across those three, Aerospace would be the largest as you’re kind of thinking about there.

Okay. Thanks, guys.

You’re welcome, Pete.

The next question is from Matt Akers with Wells Fargo. Your line is open.

Hey, guys. Good afternoon. I wanted to ask about share count and how you’re thinking about repurchase. It looks like you’re assuming 61 million shares for next year, I guess, kind of flat off of Q4. So just how you’re thinking about using what’s left of the authorization there?

Yes. So what we’re thinking is at this point, we would be at the 61 million, which is generally flat off of Q4, like you’re talking about. We’d have to offset some dilution if we end up taking further opportunity to increase that over the offset of dilution, that would be something that we would talk about in future quarters related to what the share count effect might be of any further repurchases over the dilution effect.

Okay. Got it. Thanks. And can you give us any more help on just the pacing of kind of EPS as we go through the year? I know there’s the pricing step up early next year. But I guess, how much lower is kind of Q1 compared to the other quarters?

Yes. So some of this is – just a reminder, our Q1 has always been lower than the other quarters. It’s a working day-type approach and you look at our customer. Their customer working days also are lower. And so as we mentioned, that is kind of always there. Now on top of that, you hit on a few of those – the pace of improvement that Chip was talking about related to our supply chain and labor disruption effect, we’re anticipating that to – the rate of improvement to really increase in the second half of the year. So again, not being overly optimistic as to what we could do here in Q1. You mentioned the price, the OEM indices that the customers that are indices-based increases typically go into effect on January 1. So those won’t come into effect here in our Q1 also. And so that’s kind of what we look at when we look at Q1. The other piece of my prepared remarks was really talking about, I mean we do anticipate it being lower than – lower sequentially than our Q4. And so that’s kind of the ballpark that we’re thinking about.

Okay, that’s all.

The next question is from David Strauss with Barclays. Your line is open.

Thanks, good afternoon.

Good afternoon, Dave.

Good afternoon, Dave.

The – so the $60 million in variable incentive comp, can you – Mark, can you just level set what was that number the last time you paid it in full in 2019?

Yes. It was in that same general ballpark.

Okay. And then on cash flow, you had a fair amount of working capital headwind this year – a pretty big headwind this year. It doesn’t look like in the guidance for free cash flow, you’re assuming any sort of working cap – it looks like working capital is fairly neutral. Is that right?

Yes. That would be fair. Now there are some pieces that are going on underneath the working capital overall. One, with the sales growth that we are anticipating for the year, obviously, that will have an effect on the receivables balance as we go throughout the year. We are anticipating some improvement in inventory, but also with some of the timing of payments to our suppliers and where – the timing within the year and kind of where our payables balance was at year-end, that would offset some of that inventory improvement that we see. And so really, it’s – those three factors generally are kind of what’s driving some of the working capital that we have. The other one that I do want to point out for everyone is with the current U.S. legislation around the ability to deduct the R&D expenses for U.S. tax purposes. And this isn’t just a Woodward thing. This is for everyone. We will have higher tax cash payments in this year than we had in prior years because we have to, in essence, capitalize that R&D cost for tax purposes, and you can only deduct it over a four-year timeframe. So that also has a headwind in our free cash flow for 2023.

How much is that, Mark? R&D piece?

We spent $120 million-ish this year on R&D. And so you think about a U.S. tax rate 25%-ish and you’re only getting a quarter of that. So it’s going to be $30 million, somewhere in that ballpark.

Okay. Thank you very much.

You’re welcome.

The next question is from Rob Spingarn with Melius Research. Your line is open.

Hi, good afternoon.

Good afternoon, Rob.

Mark, going back to this price realization of 5% in 2023, aside from the higher incentive comp, what’s the cost inflation that you’re anticipating in 2023? Does it match the price? Or is it worse or better?

Yes. So the price realization we’re assuming and obviously, the inflation effect that we had in 2022 was pretty significant, both on material and labor. We’re not anticipating that inflation goes away in 2023. But we are anticipating that price realization would more than offset some of the material and labor inflation that we’re seeing. So it should be a tailwind to us.

Okay. And then going back to Pete’s question, just the decrease – from $55 million to $40 million on the delayed shipments, if you will. It sounds like you could recover all of that in 2023, if that kind of quarterly progress holds up. Is that fair?

We’re not counting on reducing all of our past dues to zero in the fiscal year 2023. We’re focused on making progress, but that would be overly optimistic in my opinion.

Okay. And then, Chip, just in terms of commercial OE, can you talk about what kind of rates you’ve embedded in your Aerospace guide for the major programs, the MAX, the 87, the neo?

We’ve just taken what the airframers are publicly talking about as their rates were capacitized to deliver at those OEM rates and we don’t see a big challenge in front of us to achieve those. We’ve been doing pretty well on those programs as far as delivery goes.

And what’s your rough lead time to when an aircraft gets delivered to the customer?

Well, it’s hard to say that in these days where our – especially our engine OEM customers have the same problems that we do in terms of they have engines that have most of the hardware on them. So we don’t have a great visibility to win the serial number of, say, our fuel metering unit is put on an engine serial number and then it gets attached to an engine at an airplane at Boeing or Airbus. Back in the day, we would’ve said it’s a six-month or so cycle time. But as of now, it’s hard to see how that’s been going.

Okay. And just the last thing, just given your background, Chip, is it fair to assume that structural – large structural castings, well, there may be a major problem here, there are a lot of other issues. Is it unfair to pin this whole thing on that the OE delays?

So for us, the castings isn’t our biggest issue. I know you’re asking that broadly. I just want to make sure I can clear about Woodward versus industry. From a Woodward standpoint, electronic components and machine parts are really our big two that we’re tackling. There are – we have a few casting issues that are the smaller type castings, but really machine parts and electronic components are our biggest issues at Woodward. Across the industry, there are – there are labor issues and materials issues at every step of the supply chain. So, I think that the large structural and other investment casting is just one of the many issues out there. And some may be hiding in the shadow of those as those take center stage. And when you pull those constraints off, you’ll find the others struggling. So I think it’s a – my experience so far says this is an industry-wide multi-level tier issue in the supply chain.

Okay. Thanks very much.

You bet.

The next question is from Gautam Khanna with Cowen. Your line is open.

Hey guys. This is Jack on for Gautam today.

Hello, Jack.

I guess just kind of piggybacking. Hi there. Yes, so kind of just piggybacking off Rob’s question there, digging deeper into the aerospace guide for next year, wondering if you can square, just quantify maybe some of the puts and takes of the 14% and 19% revenue growth by end of market like commercial OEM versus aftermarket. And I think your customer called out at one point last year, 2,000 LEAP deliveries at one point. It’s probably stale given the recent castings issues, but wondering if you could provide some perspective there with maybe initial provisioning starting to ramp and then further off of commercial aftermarket. I think is it safe to assume that we get close to a pre COVID sort of run rate revenue profile there?

Yes, so I’ll take the last one. Yes, I will take the last one first and then we’ll work back through the other pieces. So the revenue profile, pre COVID for us, in our guidance that’s not the levels that we’re actually at. So no, I guess would be the answer to that based on the sales guidance that we have as we’re kind of moving through the year like Chip mentioned, we’ll be aligned to Airbus and Boeing build rates as we kind of move throughout the year. And that’s what we’re anticipating as I mentioned, we’ll be fully capacitized for that to hit those levels. On the commercial aftermarket side of the business, as Chip mentioned, the inputs in for repair and as I mentioned a little earlier, the aircraft that are flying have higher Woodward content now that they did pre pandemic. So that’s a positive for us. And helps us on the aftermarket side. Initial provisioning continues on the LEAP engine side of the business. We aren’t anticipating significant initial provision in China as part of our guide. And so, that’s we’ve talked previously over the last year or two that was a watch item for us and with where the situation is, we’re not anticipating a significant initial provision in China. But we still have other airlines taking initial provisioning units, either because they’re expanding their route structure or because it’s a new airline increasing their MAX or 320neo aircraft. So that’s what’s really driving a lot of the aftermarket side of it is really just the usage in the flying aircraft today have a lot more Woodward content on than they had pre pandemic. On the other side of the aerospace is the defense side. We’ve talked about stability there other than the guided weapons, we have seen on the guided weapons the last couple years, some decreases primarily related to the JDAM program that’s generally stabilized now. So generally on the defense side, we’re generally stable. The defense aftermarket side, we’ve been impacted by the supply chain and labor disruption there. The demand has been strong and we have not been able to get the product out. As we were mentioning, we would anticipate that some of that would be improving as we go into the second half of the year. And that’s what we’d look for on the defense aftermarket side to have a little bit of growth there based on our improving operational capability.

Yes, just to add that, I think, some of that range there on growth, the 14% and 19% depends on how well we do burning down the past dues. So it may not link exactly to demand. The demand is strong and it’s kind of on us and our ability to deliver the output.

Understood. Thank you. And then, if I could just sneak one more in here, Chip, kind of just bringing your new perspective to Woodward here. I guess, what’s your view of the current portfolio today? Do you see anything non-core at the moment, or are you pretty content with the portfolio kind of as you see it today? Thank you.

I think from the macro perspective, I really like the portfolio of products that we have, the current set of products as well as those in the new product development pipeline. So very pleased with the overall product strategy and the execution and the vision of the commercial team to get these products on the right platforms on both the industrial and the aerospace side of the house. And frankly, there's work to do at the lower granular level of the product portfolio that I was referring to earlier in terms of looking at the health and profitability as well as demand for certain SKUs that we carry and maybe moving customers along to the newer generation of products and things of that nature. There's a – there's some good work to be done there that will improve our ability to support customers and our profitability. So work to be done at the granular level, but overall, the macro, really like what I see.

That's great. Thanks, Chip.

You're welcome.

Your line is open.

Hello, everyone.

Good afternoon, Noah.

Hi, all. Just following up on the defense business. You mentioned the guided weapons in the aftermarket. What rate of decline did those end up having for full year 2022? And what are you assuming for those in the 2023 assumption that the defense business grows?

Yes. So the rate of decline on the defense OE side for the year was about 17% and defense aftermarket was about 12%, two different reasons there as we've discussed. There is still a little softness on the guided weapons side, just on the JDAMs, a little bit more softness yet in 2023 compared to 2022. But otherwise, as Chip was just saying, the demand is strong. It's really a matter of us being able to get that past due down to be able to show growth there.

Okay. What are the drivers behind the lumpy to the upside growth rate at industrial in the fourth quarter versus the trailing several quarters and how you're guiding it for next year?

Yes. So we have strong growth across all of our end markets and across all of our businesses on the industrial side in the fourth quarter. And really, the – other than the China natural gas business, which remains at these depressed levels. And so it was a strong fourth quarter on the Industrial side. And then even on top of that, we had the headwind of the FX, which would even had industrial looking even stronger on the top line. And so the demand has been there. We've been, I think, saying that for a while now across all of our business, but specifically with industrial, we continue to call it out, the demand for power generation across Asia power demand, replacing coal power plants here in North America, backup data – or backup power for data centers has been strong and continues to be strong. The marine side, we've talked about the continuing strength of both the OEM build rate has been at elevated levels and maintains at that level. The marine aftermarket side, we've talked historically that it was very depressed during the pandemic that there was going to be this bullwhip effect of everyone needing to restock their shelves with spare parts and then also do repairs when the vessel is import, getting loaded and unloaded and we continue to see that and strength there in the fourth quarter. And then the oil and gas side with commodity prices, kind of at the levels that they are, both the utilization of the equipment that's out there and then even driving some new investment has really been what drove the industrial side. I would say it's just a continuation of what we saw on the demand side as we continued throughout the year.

So Mark covered the external demand side nicely there. And then additionally, we had strong performance from our Woodward L'Orange facilities in Germany, serving those marine and industrial markets. And we had some outages from chip shortages and some other components that came in and we redesigned some circuit boards to accept different types of components that we could find availability on. And so we had a strong finish there to – with lines that were wetted and ready to receive those components in September.

The next question is from Chris Glynn with Oppenheimer. Your line is open.

Thanks. I think my follow-ups have been asked, but I just wanted to clarify, did I hear a 5% FX headwinds, which you have baked in if the currency stays at euro parity?

On the industrial side, yes.

You're welcome.

This concludes today's conference call. Thank you for participating, and you may now disconnect.