Thank you for standing by. Welcome to the Woodward Incorporated First Quarter Fiscal Year 2024 Earnings Call. At this time, I would like to inform you that this call is being recorded for broadcast, and that 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 Chip Blankenship, Chairman and Chief Executive Officer; Bill Lacey, Chief Financial Officer; and Dan Provaznik, Director of Investor Relations. I would now like to turn the call over to Dan Provaznik.

Thank you, operator. I would like to welcome all of you to Woodward's first quarter fiscal year 2024 earnings call. In today's call, Chip will comment on our strategies and related markets. Bill 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 again included some presentation materials to go along with today's call that are also accessible on our website. An audio replay of this call will be available by phone or our website through February 12, 2024. 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. 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. These statements are made as of today and we do not intend to update them except as required by law. 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. Now, I will turn the call over to Chip.

Thank you, Dan, and good afternoon, everyone. We delivered significant sales growth and margin expansion in the first quarter. The strong start to our fiscal year reflects our focus on operational excellence over the past 18 months, which enabled us to capitalize on continued strong end-market demand. We increased output due to improvements in our production planning, supplier performance, and internal execution. We also achieved our commercial objectives, securing key long-term agreements that were available in the quarter for both Industrial and Aerospace segments. We made good progress consolidating Industrial catalogs, which allowed us to clarify pricing with global channel partners and certain end-customers resulting in better control and visibility for action. Notably, net sales grew sequentially, which revealed successful implementation of our production system principle of consistent performance. Achieving and maintaining the flow of supplier materials, production of parts in-house, and feeding assembly tests at the rate of customer demand is essential to hit customer and business targets. Quarter-end heroics are not welcomed as they destroy flow and introduce inconsistency to every aspect of the production system. While we have not yet achieved the labor productivity we believe we're capable of, we are laying the foundation to achieve significant results. I want to thank all the analysts and shareholders who attended our Investor Day last month. For those who participated, you will remember that we laid out our three interconnected value drivers: profitable growth, operational excellence, and innovation. Our Q1 results show how the relentless pursuit of operational excellence can deliver both growth and margin expansion. Woodward's profitable growth is fueled by robust demand in both Aerospace and Industrial end markets. We have made progress aligning price to the value of our products. We are still experiencing material cost inflation from our supply base, and we forecast this to continue through calendar year 2024. Our price actions as well as our supplier simplification and in-sourcing efforts represent a two-pronged approach to mitigate some of the impacts of inflation. We are gaining momentum from our value stream transformation efforts, and I'm very pleased with the progress we've made so far. We are increasing the number of value streams under transformation, engaging more of the team in the process. Notably, a significant percentage of the Kaizen events associated with the transformations are being led by hourly members, which results in powerful and lasting talent development. We are expanding our automation project funnel with goals to improve quality and reduce future labor demand. We are putting our plans into action and you can see this in our guide for capital expenditures. We look forward to sharing more with you in the coming quarters. Our purpose is to design and deliver energy control solutions our partners count on to power a clean future. In both segments, we're working closely with our customers to develop new technologies that reduce fuel consumption and emissions and enable multiple paths for a cleaner future. I recently spent a day in Zeeland, Michigan at one of our aerospace sites. And this visit was focused on both GTF fuel nozzle repair and overhaul rate readiness as well as a deep dive into our ignition systems and combustion control product development process. Our ignition systems development is maturing in preparation for the next single aisle aircraft, but it is ready now for applications that need the efficiency and reliability improvements it has to offer. This team has a great track record with automation, and it is a key driver to GTF fuel nozzle overhaul capacity expansion, which may be needed sooner than expected. While we did share our refreshed purpose and values on Investor Day, we recently rolled it out to our nearly 9,000 members around the world. It has been gratifying to see their reactions and the pride they have in Woodward. After all, their aligned efforts enabled the performance improvements we delivered this quarter. The excitement is tangible. Our purpose video is on our website and I encourage you to take a look. It is an honor to lead the next chapter of Woodward building on the legacy set before us. Our entire leadership team is excited about our future and prepared for the challenge. Moving to our markets. In aerospace, commercial airline, domestic and international passenger traffic now exceeds 2019 levels, resulting in high aircraft utilization rates. Further increases in aircraft utilization are expected as international passenger traffic in Asia-Pacific still lags, yet offers opportunity as it recovers. Transatlantic traffic remains strong. In defense, geopolitical developments and government spending proposals indicate potential increased procurement and R&D spend, signaling potential opportunities for Woodward. In industrial, demand for power generation remains strong, driven by growth in Asia and the Middle East. Global aftermarket activity remains high as does demand for backup power. In transportation, the global marine market remains healthy with elevated ship rates driving OEM engine demand and high utilization rates driving current and future aftermarket activity. Demand for alternative fuels across the marine industry continues to increase. We are encouraged by the additional OEM and aftermarket opportunities as multi-fuel engines contain greater Woodward content. Demand for natural gas heavy-duty trucks in China increased significantly compared to last year. This current demand is being driven by a number of factors, including a favorable LNG to diesel price spread, a steady supply of natural gas, and carbon reduction initiatives across China. This market remains volatile and we continue to evaluate the durability of this demand. Last week, I would have said LNG infrastructure development continues to benefit from global investment, but some uncertainty has been injected into the investment equation with the recent U.S. government pause of further LNG export approvals. In summary, market signals indicate continued strong demand. The operational improvements we have made position us to capitalize on this demand. We remain focused on pursuing profitable growth, operational excellence, and innovating for the future to deliver on our purpose and drive enhanced shareholder value. I'll now turn it over to Bill to share our financial results.

Thank you, Chip, and good afternoon to everyone. Net sales for the first quarter of fiscal 2024 were $787 million, an increase of 27%. Earnings per share and adjusted earnings per share for the first quarter of fiscal 2024 were $1.46 and $1.45, respectively, compared to our earnings per share and adjusted earnings per share of $0.49. Aerospace segment sales for the first quarter of fiscal 2024 were $461 million compared to $396 million, an increase of 16%. Commercial OEM and aftermarket sales were up 23% and 9%, respectively, driven by higher OEM production rates, continued growth in both domestic and international passenger traffic, increasing aircraft utilization, and price realization. Defense OEM sales were up 4% in the quarter due to increases in ground vehicle components and guided weapons. Defense aftermarket sales were up 45%. Aerospace segment earnings for the first quarter of 2024 were $79 million or 17.2% of segment sales compared to $55 million or 14% of segment sales. The increase in segment earnings was primarily a result of higher volume and price realization. Turning to Industrial. Our Industrial segment had a record quarter for both sales and earnings. Industrial segment sales for the first quarter of fiscal 2024 were $326 million compared to $223 million, an increase of 46%. We saw growth in all markets from a combination of higher volume and price realization with an increase of 96% in transportation, 20% in power generation, and 2% in oil and gas. Sales for on-highway natural gas trucks in China totaled approximately $75 million in the first quarter, driven by significantly higher demand compared to the prior-year quarter. We do not expect this higher level of sales to continue in Q2 as demand signals indicate a return to previous peak levels of approximately $50 million. Industrial segment earnings for the first quarter of 2024 were $67 million or 20.5% of segment sales compared to $11 million or 5.1% of segment sales. The sharp increase in Industrial earnings was a result of operational improvements, including increased output and efficiency gains, favorable product mix, and significantly increased demand for on-highway natural gas trucks in China. Excluding the impact of the China on-highway natural gas truck business, Industrial segment margin increased approximately 900 basis points compared to the prior year. We do not expect the overall first quarter Industrial margin levels to continue in the remainder of the year. Moving forward, we expect margin pressure for the China on-highway natural gas truck business due to lower volume leverage and higher material costs, including spot buys and expedited freight. Outside of the on-highway natural gas truck business, we also expect margin pressure in the remainder of the year due to an anticipated shift in mix and cost increases. Nonsegment expenses were $26 million for the first quarter of 2024 compared to $24 million. Adjusted nonsegment expenses for fiscal year 2024 were $27 million. At the Woodward level, R&D for the first quarter of 2024 was $31 million or 3.9% of sales compared to $29 million or 4.6% of sales. SG&A for the first quarter of 2024 was $75 million compared to $63 million. Adjusted SG&A for the first quarter of 2024 was $70 million. The increase was primarily due to higher annual incentive compensation. The effective tax rate was 17.9% for the first quarter of 2024 compared to 6.7%. The adjusted effective tax rate was 17.7% for the first quarter of 2024. Looking at cash flows, net cash provided by operating activities for fiscal 2024 was $47 million compared to $5 million. Capital expenditures were $42 million for fiscal 2024 compared to $24 million. Free cash flow was $5 million for fiscal 2024 compared to negative $19 million. Adjusted free cash flow for fiscal 2024 was $3 million. The increase in free cash flow and adjusted free cash flow was primarily due to increased earnings, partially offset by the above target payout for fiscal year 2023 annual incentive compensation as well as higher capital expenditures. During the quarter, we repaid $75 million of long-term debt. Leverage was 1.3 times EBITDA at the end of the first quarter compared to 2.3 times EBITDA. $13 million was returned to stockholders in the form of dividends in the first quarter of fiscal 2024. Lastly, turning to our fiscal 2024 guidance, based on our strong first quarter performance and visibility into the second quarter demand for the China on-highway natural gas truck business, we are updating certain components of our fiscal 2024 guidance. Total net sales for fiscal 2024 are now expected to be $3.15 billion and $3.3 billion. Our Aerospace segment guidance is unchanged. For fiscal 2024, Aerospace sales growth is still expected to be 10% to 14% and segment earnings are still expected to be 18% to 19% of sales. Our Industrial segment guidance includes broad-based market strength and improving operational performance. Our guidance now assumes approximately $50 million for our China on-highway natural gas truck business in the second quarter. However, given the volatility and limited visibility into this market, our guidance continues to assume minimal activity in the second half of fiscal 2024. As a result, for fiscal 2024, we now expect Industrial sales growth to be 8% to 10% and segment earnings to be 14% to 15% of segment sales. At the Woodward level, the adjusted effective tax rate is still expected to be approximately 21%. We now expect free cash flow to be between $300 million and $350 million. Capital expenditures are still expected to be approximately $100 million. Adjusted earnings per share is now expected to be between $5 and $5.40 based on approximately 62 million fully diluted weighted average shares outstanding. This concludes our comments on the business and results for the first quarter 2024. Operator, we are now ready to open the call to questions.

Thank you. Our first question comes from Robert Spingarn from Melius Research. Please state your question.

Hi, good afternoon.

Good afternoon, Rob.

Some nice numbers. I wanted to talk a little bit about Aerospace sales growth. Your commercial OEM sales were up 23% year-on-year and up quarter-over-quarter despite lower working days in the quarter. And at a more granular level, Chip, did you see significantly higher growth on wide-body programs than on narrow-body? And then, I want to ask a follow-up on the 737.

The growth wide-body and narrow-body, they each grew according to their own kind. We saw growth in both, but at slightly different levels. I can't make it more granular for you than that.

I'm trying to gain some insight since the cycles are not perfectly aligned. Narrow-body at least seems to be slightly ahead of wide-body, but the wide-body appears to be more stable based on current conditions. This leads me to a follow-up question about the 737. How would you describe your original equipment rates in light of the situation in Seattle? Additionally, is there a difference in your shipment rates to the engine OEM compared to Boeing?

So yeah, there are differences there and it's hard to say because we go through a number of different folks in addition to straight to Boeing. So, we do some to Spirit, some to Boeing and some to the CFM. And the fact of the matter is we can't see the rates very clearly in our demand from our customers for various reasons on inventory and things of that nature. But you're pointing out probably the biggest volume risk that we're looking at as a company on the aerospace side. And it's an insightful question because we're in a position where we're making sure we have the capability to get to the advertised rates in terms of what we think the PO demand growth will be from each of those different customers associated with the 737. But we're also looking at what the financial impacts would be if they don't get where they've advertised they're going to go. And we believe we can manage that risk and we've looked very carefully at what we need to do to optimize if there are some signals that the rate is not going to go up as much as we thought it would. We've already seen some inventory maneuvers go on with other people's fourth quarter last quarter. So, we don't take those signals yet as a signal of slowdown, but we're watching it carefully and we have internal plans to adjust.

So Chip, just to clarify on that, does that mean that the lower end of your Aerospace guide contemplates this idea of a freeze at Boeing that we heard about last week? I know you've only had a week to think about this, if that.

It's been a long week thinking about that, but we do believe we can operate within our guidance, even with the freeze continuing.

Okay. Thanks so much.

You bet.

Your next question comes from the line of Scott Deuschle from Deutsche Bank. Please go ahead with your question.

Hey, good afternoon.

Good afternoon, Scott.

Good afternoon, Scott.

Hey, Chip, can you say what the price realizations were this quarter at Industrial?

Go ahead, Bill.

Overall, our price realization was $50 million, with Industrial accounting for a significant portion of that at $20 million. Both Aero and Industrial contributed to the total realization at the Woodward level.

Okay. Bill, can you clarify what led to the 8% increase in the free cash flow guidance at the midpoint?

Yes. Considering the increase in operating hours and the corresponding earnings, along with our observations in the latter half of our business, we determined that it was appropriate to raise our cash flow guidance.

Okay. And then, Chip, could this closure of the Red Sea create any discernible benefit from marine aftermarket just due to the longer transit times and utilization rates for marine vessels?

It's hard to say exactly how that's going to impact utilization, but the way I think about it is that longer routes, fewer transits and shorter routes, more transit. So, I think that there is enough demand out there to keep those ships moving. So, we're not forecasting any steeper increase in utilization, but we're comfortable with what we see.

Okay. And last quick question. Chip, the grounding on the V-22 fleet, does that create any opportunity for defense aftermarket? I think your shipset content there was pretty high. Thank you.

Yeah. The V-22 is a significant repair and overhaul program for us. And as you can see, the defense aftermarket as we talked about was significantly up. Some of that represents our ability to execute better at the facility that does the repair and overhaul on the V-22 and some of the other defense programs. So, there's plenty of demand. Our execution had been historically getting in the way of some of that realization of that demand. So, we're working as hard as we can with the defense logistics and other customers to support them.

Thanks, guys. Incredible quarter.

Yeah. Thanks.

Thank you.

Your next question comes from the line of Matt Akers from Wells Fargo. Please state your question.

Yeah. Hey, guys. Good afternoon. Thanks for the question.

Good afternoon, Matt.

Hey, Bill, you made a comment in the opening remarks about I think it was kind of pressure on margins from kind of mix of cost versus price increases to the rest of year. Could you just elaborate on that a little bit and maybe the timing? And I think in prior years, you've gotten kind of a January 1 pricing step up. Is that kind of still the right way to think about it for this year?

I was discussing our Q1 margin performance of 20.5% in Industrial. The pressure we've observed in Q1 aligns with our expectations, so it reflects our prior experiences. This year, we do not anticipate achieving a 20.5% overall margin rate in Industrial. In our non-operational health business, we previously noted a delivery of about 900 basis points due to a strong mix in Q1, but we do not expect that trend to persist. Additionally, we foresee some costs impacting us from Q2 to Q4, which will hinder our ability to replicate the 20.5% margin. We are committed to making investments and advancing our initiatives to reach our target non-operational health margin rate, but that is more likely to be achieved in the future rather than in fiscal year 2024.

Got it. Thank you. That's helpful. And then, I guess, if I could one more, just the timing you're thinking of this new repurchase authorization, is that kind of a two-year period like the last one was, or just how you're thinking about that?

Yeah. So, what we announced, Matt, was a three-year program, $600 million in total, and our philosophy on that is to manage dilution. And also, as we look at our cash flow and as we look for the highest return opportunity, we will continue to consider further purchases. But that's right, the plan that we submitted was a three-year $600 million program.

Great. Thank you.

You're welcome.

Your next question comes from the line of Sheila Kahyaoglu from Jefferies. Please state your question.

Thanks, guys. Good afternoon. I just wanted to follow on Industrial and check in on long-term margin. You talked about mixed pressures and when you look at Q1 margins ex CMG, it looks like 15% and then probably for the rest of the year 12%. So, is it right way to think about your longer-term margins come to 12% or 15% as your target state? Just thinking about beyond '24 into '25, is the 300 bps all cost pressure?

Yeah. Again, the original guidance that we gave on our business was 13% to 14% for that Industrial business and sort of the mid-15%s. And as we look longer-term, Sheila, we're still sort of in that mid-teen range for Industrial.

Okay. And then similarly on Aerospace, if we could talk about profitability there? Just up nicely year-on-year, but work to do to get to the guide. So, how do we think about that progressing through the year, especially in light of some of those early comments, the productivity you guys have in place and the price capture?

We experienced a significant improvement of 300 basis points compared to Q1 last year. As we discussed during Investor Day, the increase in the margin rate for Aero is primarily driven by volume in our OEM business. The growth in OEM exceeding the growth in the aftermarket will create some mix pressure at our CM level, but as that volume increases, we will gain leverage and see an increase. We are aware of the Boeing announcement and, based on our current understanding, our projection of an 18% to 19% margin for Aero remains intact. We will continue to monitor the situation and communicate any changes if necessary. Ultimately, the volume increase throughout the year will contribute to higher margin rates.

And is the defense aftermarket accretive or dilutive to segment Aero margins?

Yeah. Our defense aftermarket is good margins. We'll take it all day.

It's accretive, yes.

Okay. Thank you.

You're welcome.

Your next question comes from the line of Gavin Parsons from UBS. Please state your question.

Thanks. Good afternoon.

Good afternoon.

Hey, Gavin.

Guys, how much visibility do you have into the other industrial businesses besides OH in terms of revenue?

We engage in detailed long-term forecasting with our customers, focusing on areas where we can stabilize volumes and understand customer expectations, whether in gas turbines or reciprocating engines, across all three sub-segments of our Industrial segment. This provides us with strong visibility and stability, and we are also reducing overdue items internally. As a result, we are aligning more closely with customer demand, which is directly influencing our production plans in the factories.

Was Industrial backlog up for the quarter?

We don't really measure it that way and we talked about that on another conference call. We have a way of looking at that, but because we are building to a forecast as well as their actual orders, when the orders come in sometimes, that doesn't exactly represent what we've built.

Makes sense. And then maybe if I just go back to the Investor Day slide showing the engine service value 5 times higher on this generation of engine which is greater than your content gains. Can you just remind us when the majority of your engine aftermarket occurs and kind of how that's spread over regular service versus heavy checks?

We continue to forecast that the long-term outlook for 2026, which we presented at Investor Day, indicates that this year will come before we see a significant increase in aftermarket volume related to engines. Our guidance for Aerospace margins and all our cash flow is influenced by this expectation, as we anticipate a wave of engine aftermarket activity from the GTF and LEAP engines on the 737 MAX and the A320 Neos. Therefore, there are many positive factors beyond the forecast we've already outlined.

Thank you.

Your next question comes from the line of Pete Skibitski from Alembic Global. Please state your question.

Yeah, good afternoon, guys. Nice quarter.

Hey, Pete, thank you.

On the $75 million of China on-highway, I recall you guys were expecting closer to $50 million in the quarter. Could you maybe validate that? And then now you're expecting $50 million in the second quarter. And I just wanted to get maybe a little more fidelity on the back half of the year when you talk about minimal activity. Is that closer to zero or is that closer to kind of a $25 million to $50 million range? I just wanted to get more fidelity there.

We were indeed expecting around $50 million in the first quarter, as the customer aims to meet the demand for more natural gas trucks instead of diesel in their country. We did our best to respond to that increased demand. While we had some inventory available, we had to utilize our supply chain and assembly to deliver the needed materials, and the team did an outstanding job fulfilling that customer demand. As we enter the second quarter, we don’t have additional information, but we believe it will be around $50 million. As for the remainder of the year, I’m not sure how you would like to address that, Bill.

Yeah. Minimal amounts in the second half.

Okay. And then just want to follow on the oil and gas up 2% in the quarter, is the outlook there kind of slowing substantially? Is the rest of the year in Industrial kind of dependent on the power gen side?

A week ago, I might have mentioned that the natural gas sector, particularly related to oil and gas, appeared to be strong. I had discussions with several of our engine OEM partners, and they reported substantial investments in the oil sector and fracking, specifically where natural gas plays a role. Companies were looking to invest in new engines for better efficiency. However, with the recent announcement from the administration about a pause, it raises questions about how this will affect confidence in future investments and whether companies will proceed with the engine orders they supposedly have. It's still too early to gauge the impact on that front. While we have seen steady performance, the growth hasn't matched that of the transportation and power generation segments, so we'll need to see how things develop.

Understood. Thanks, guys.

Thanks, Pete.

Your next question comes from the line of Christopher Glynn from Oppenheimer. Please state your question.

Thank you. Good afternoon. I was curious to hear the comment about guided weapons showed some growth in the quarter. Were you surprised by that? And do you expect the trend there?

Thank you for your question, Christopher. I’m not surprised by the growth. We mentioned that JDAM was going to reach its lowest point. We also noted growth in other areas, though it was overshadowed by the decline in JDAM. We expect to see growth in that segment, and we’re pleased to report that it has occurred.

Okay. And is that looking fairly consistent dynamic there?

Currently, yes. We continue to be in conversations with our customers to see if there's any new plans around guided weapons in JDAM. But to date, we sort of expect to see moderate growth in this area.

Yeah, I would say the conversations with the customers are ongoing as Bill said, and we keep getting questions about our capacity and ability to respond, and we've worked with our suppliers as well to make sure they have capacity to respond, but there hasn't been any follow-up regarding anything in addition to that.

Great. Thanks for the additional color. I had a follow-up on Industrial. You called out the backup power demand. Just curious you're seeing more of a secular growth dynamic. Anything interesting by applications or regions, or is it very broad based on the backup power side?

It's fairly broad-based, but in North America with the data centers as well as 5G and some of the large language model stuff coming through, we believe as our customers believe that that's an opportunity for further growth and well into the future, and so we're prepared to respond to that.

Thank you very much.

Yeah, you're welcome.

Your next question comes from the line of Louis Raffetto from Wolfe Research. Please state your question.

Hey, good evening. Thank you very much. Maybe just a follow-up on Matt's earlier question, given the stronger 1Q, does the updated guide and some of that margin pressure you talked about, Bill, does that take into account higher variable comp now?

Yes, it does.

Okay. Thank you. And then also, Bill, just stick with you. The other income was $20 million this quarter versus $8 million. Is that mostly equity interest in JV within Aero or is there anything else going on in there that flowed into the segment?

Yeah. We are seeing some strong JV performance.

Okay. And then just last one, I think, Chip, you mentioned sort of the CapEx. Obviously, it spiked pretty high here in the quarter. Was anything to really note of and would you kind of settle down over the next few quarters given the reiteration?

We confirmed our $100 million guide. It was as we anticipated. And so, no, it's as we expected.

Okay, thank you.

You're welcome.

Your next question comes from the line of Gautam Khanna from TD Cowen. Please state your question.

Hey, good afternoon guys.

Good afternoon, Gautam.

Good afternoon.

First, I had a question on the guidance, just to be clear. Is the entirety of the raise related to the CNG stuff?

Yes, a simple answer. Like we said before, if that particular product line outperforms that will flow through and then we just pass that along from a very strong first quarter to the rest of the year, not signaling any other real pressure or problems. So, it's just flowed through.

Got you. And then one of the things that was a bit confounding was truck production in China in calendar Q4 came down quite a bit and the diesel and natural gas spreads compressed. What do you think is actually driving kind of the strength in that business? Why might it not have a longer tail to it since it seems to top the trend?

I wish I understood it better, as does everyone on our team. When we talk with our main customers, the feedback we receive focuses on the long-term growth and opportunities presented by natural gas, which is cleaner burning, readily available, and reasonably priced. Over the long term, this business should perform well, but our experience shows that it can be inconsistent and unpredictable. The performance largely depends on the time frame you consider regarding that growth curve and what you can reliably expect. For us, we haven't seen consistent, stable growth, which is why we believe it relates to the spread between natural gas and diesel costs. The availability of resources is a new positive factor, but it's difficult to assess its impact. Some of this is influenced by government policy, and I'll leave it at that.

Okay. I appreciate that. And then, switching to Aero to just follow up on Rob's initial questions, obviously, the FAA on the 737 is kind of restricting the rate hikes at Boeing for some period of time. We've seen some suppliers destocking of whether it be Hexcel or some others. I'm just curious, are you seeing any evidence among your many customers of schedule changes maybe asking for orders to be delivered later than was the case a couple of months ago? And just any perturbations we've seen in your order book on 737 in particular?

I'd say over the last 18 months, we've seen orders being pushed out and pulled in kind of, I won't say, regularly, but periodically. And we haven't seen an uptick in that as of recently, and I'm giving you as of today information. I don't know what could happen tomorrow, but we always see replanting, and end of quarter, end of the year, decisions to push things out or pull things in based on our customers' supply chain activity and their desired inventory positions. But we haven't seen anything that signals to us, see, gee, that's a big step change in rate across the board across the customers. Nothing consistent like that.

Okay. And last one, in the past, you guys have provided past dues or some sort of framework to think about those. Do you have an updated figure for that? Thanks.

I don't because I don't think it was really helpful to anyone, because those past dues weren't going to flush through the system in any lumpy kind of way just because right now what it is, is our capacity really limits our ability to ship at a certain rate to each customer based on the product line. And we've also seen some of those past dues evaporate due to folks over ordering when they don't have confidence in a supplier and a supply chain. They tend to put more orders in the system to try and get more priority, and we've seen some of those past dues evaporate. So, we're not sure that is really is helpful characterization of our ongoing businesses. It maybe once was early in the supply chain crisis.

I appreciate it. Thank you very much.

Yeah. You're welcome.

Your next question comes from the line of Michael Ciarmoli from Truist Securities. Please state your question.

Hey, good afternoon, guys. Real nice results.

Good afternoon, Mike. Thanks.

Thanks, Michael.

Just back to these industrial margins. I mean, I guess for the remainder of the year, could you help us out with the cadence? I guess you get some on-highway strength here in the second quarter, but then that will fall off and presumably you'll have down margins year-on-year. Just I mean, I guess maybe a little bit surprising with all the good stuff you've got going on from operational excellence, pricing. Is there any just additional drag in those Industrial margins or is it just really carrying the overhead and kind of as you guys said, not assuming any on-highway production in the second half?

I want to take you back to when Industrial margins were in the single digits and sometimes in the mid-single digits due to low on-highway volume. The fact that we are now indicating margins in the low to mid-teens shows significant improvement from both pricing and operational excellence in other areas of the business. I don't think it's unreasonable, especially considering our previous position. It's easy to question why we would drop from an 18% margin to a 20% and then possibly to 14% or 15%. However, we've made substantial progress from our past performance, although this level of improvement doesn't support a consistent 20% margin going forward. Does that make sense?

I see that the run rate for the rest of the year is just below 13%. This will bring you to the midpoint of your guidance. I expect a 13% margin in the upcoming quarter, which is still comfortably above the high single-digit range, though it represents a decrease.

If you consider on-highway as not contributing at all, which has happened in the past when volume is very low, then you might understand the numbers you're seeing.

Okay. That makes sense. Could you provide more details on the 45% growth in the defense aftermarket? I believe you mentioned vehicles, but are there any other factors to consider, and how should we think about the growth trajectory moving forward? I noticed in the slide you referred to supply chain and some other elements.

It really is a story about execution. We have experienced a high level of demand, but for an extended period, we have let down our customers due to long turnaround times in our defense, repair, and overhaul services. The good news is that our execution has significantly improved, and we have established a steady workflow. We are now planning repairs and overhauls with the same rigorous process as our OEM production, and we are giving it strong attention. Even better news is the growth we are seeing across all programs we are involved in; there are no particular programs we need to rely on or worry about. As we maintain our focus on operational excellence in defense, repair, and overhaul, I believe this will be a valuable growth and margin improvement opportunity for this segment of our business. I also mentioned our value stream transformation efforts, and the defense, repair, and overhaul value stream is scheduled for enhancement in 2024 to better serve these crucial customers.

Got it. Helpful. Thanks, guys.

You bet.

Your next question comes from the line of Sheila Kahyaoglu from Jefferies. Please state your question.

I wanted to follow up on your prepared remarks. You mentioned visiting Zeeland last week and discussing the GTF fuel nozzle and its unexpected market entry. Could you explain what this means? Will there be additional content related to this?

Yeah. So, our assumption and working with the engine OEM on this was that the early shaft business would be more like a clean, check and repair activity, which is fairly low content for us and sort of supporting a quick turn philosophy. But there is some indication that perhaps the build standard might want to focus on ensuring a longer next run of the engine, in which case, we might see more scope and more overhaul type procedures to ensure a longer second run. But a lot of that's going to be airline specific and customer specific and what they want for work scope. We're just trying to make sure we stay ahead of that demand and if that's the direction they want to go with their strategy that we're ready to support it.

Got it. Thank you.

You're welcome.

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

Okay. Thank you all for joining us. Have a great day.

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