Earnings Call
Woodward, Inc. (WWD)
Earnings Call Transcript - WWD Q1 2022
Operator, Operator
Thank you for standing by. Welcome to the Woodward Inc., First Quarter Fiscal Year 2022 Earnings Call. At this time, I would like to inform you that this call is being recorded for rebroadcast and that all participants are in a listen-only mode. Following the presentation, you 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. Mark Hartman, Chief Financial Officer; and Mr. Dan Provaznik, Director of Investor Relations. I would now like to turn the call over to Mr. Provaznik.
Dan Provaznik, Director of Investor Relations
Thank you, operator. We welcome you to Woodward's first quarter fiscal year 2022 earnings call. During the call, Tom will discuss our markets and strategies, while Mark will cover our financial results as detailed in our earnings release. We will take questions at the end of the presentation. If you have not reviewed today's earnings release, it is available on our website at woodward.com. We have also provided some presentation materials for today's call that can be accessed on our website. An audio replay of this call will be available by phone or on our website until February 14, 2022. The phone number for the audio replay is included in the press release and will be repeated by the operator at the end of the call. I would like to emphasize our cautionary statement as mentioned on Slide 3. As always, parts of this presentation are forward-looking or based on our current outlook and assumptions regarding the global economy and our business, including the anticipated effects of the ongoing COVID-19 pandemic. These elements can often change. Please consider our comments in light of the associated risks and uncertainties, including those outlined 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 information will assist you in understanding our results. Now, turning to our results for the first quarter, net sales totaled $542 million compared to $538 million in the same quarter last year, marking a 1% increase. Net earnings were $30 million or $0.47 per share compared to $42 million or $0.64 per share in the prior year. Adjusted net earnings for the first quarter were $36 million or $0.56 per share. Adjustments for the quarter included costs linked to business development and a charge for a nonrecurring matter unrelated to ongoing operations. No adjustments were made to earnings in the first quarter of the previous fiscal year. Net cash from operating activities for the quarter was $39 million compared to $147 million the prior year. Free cash flow was $26 million compared to $139 million last year, with adjusted free cash flow at $27 million. I will now hand the call over to Tom for further insights on our results, strategies, and markets.
Tom Gendron, CEO
Thank you, Dan. Good afternoon, everyone. We continue to see positive signs of recovery across the business despite market volatility. Ongoing COVID-19-related disruptions, including global supply chain challenges, labor shortages and customer-initiated shipment delays impacted the industry and our revenue in the quarter. Although, we expect an uneven market recovery throughout 2022, orders' proven resiliency underscores our confidence in our continuing recovery and ability to deliver a solid year. Moving to our markets. The commercial aerospace market continues to improve. We are pleased to see the 737 MAX recertification in China and expect overall build rates to continue to ramp slowly throughout the year. Commercial aftermarket recovery is being fueled by rising passenger traffic and utilization of commercial aircraft fleets that include significantly higher Woodward content. U.S. domestic passenger traffic is nearly at pre-COVID levels while international travel continues to improve, primarily due to the easing of travel restrictions between the U.S. and Europe in November. Overall, defense markets remained stable, but as expected, demand for guided weapons is down and is anticipated to remain at lower levels for the foreseeable future. Turning to our industrial market. In power generation, demand for gas turbines remains strong, driven primarily by growth in Asia and the replacement of coal-powered plants. Aftermarket activity has been increasing, and we continue to see strong demand for backup power for data centers. In transportation, the global marine market continues to see increasing orders for new ships and higher utilization, driven primarily by a robust freight market, which will drive future aftermarket activity. Demand for natural gas trucks in China remains challenging, even though global natural gas prices have trended downward after peaking late last calendar year. The oil and gas market has improved with pricing above pre-2020 levels, driving increased levels of capital spending. In summary, while we see a significant amount of uncertainty in our markets, we anticipate improvements as we progress through the fiscal year and we remain confident in our ability to deliver on our previously stated 2022 outlook. As a reminder, for the full fiscal year '22, we expect further recovery and improved profitability in our Aerospace business as OEM build rates increase and passenger traffic recovers despite the headwinds from softened guided weapon sales. In our Industrial business, we anticipate increased demand for industrial gas turbines and related services, continued improvement in marine markets and stabilization of oil and gas prices, all of which should drive customer investment in this segment. We will continue to navigate the challenges of this market recovery with a focus on operational excellence, delivering value to our shareholders and customers, and positioning Woodward to capitalize on future market opportunities. Now, I'll turn the call over to Mark to discuss the financials in detail.
Mark Hartman, CFO
Thanks, Tom. Net sales for the first quarter of fiscal 2022 were $542 million, an increase of 1% as compared to the prior year period. Sales for the quarter were negatively impacted by $70 million due to ongoing industry-wide COVID-19-related disruptions, including supply chain constraints, labor shortages and some customer-initiated shipment delays. Aerospace segment sales for the first quarter of fiscal 2022 were $336 million, an increase of 5% from the prior year quarter. Segment sales were negatively impacted by approximately $42 million of industry-wide COVID-19-related disruptions, which resulted in shipment delays for some orders. Commercial OEM and aftermarket sales were up 38% and 31%, respectively, driven by continued recovery in both domestic and international passenger traffic and increasing aircraft utilization. Defense OEM sales were down 20% in the quarter primarily due to lower sales of guided weapons. Defense aftermarket sales were down 18% compared to the prior year quarter, primarily due to supply chain disruptions. Aerospace segment earnings for the first quarter of 2022 were $51 million or 15.2% of segment sales compared to $46 million or 14.4% of segment sales for the first quarter of 2021. The increase in segment earnings was primarily a result of significantly higher commercial OEM and aftermarket sales volume. Turning to Industrial. Industrial segment sales for the first quarter of fiscal 2022 were $205 million compared to $216 million in the prior year period, a decrease of 5%. Segment sales were negatively impacted by approximately $28 million of industry-wide COVID-19-related disruptions as well as weakness in China's natural gas engines, partially offset by higher marine sales. Industrial segment earnings for the first quarter of 2022 were $24 million or 11.5% of segment sales compared to $33 million or 15.2% of segment sales in the prior year. Industrial segment earnings decreased primarily as a result of lower sales volume as well as product mix and net inflationary impacts. Nonsegment expenses were $29 million for the first quarter of 2022 compared to nonsegment expenses of $23 million in the prior year. Adjusted nonsegment expenses for the first quarter of 2022 were $21 million. There were no adjustments to nonsegment expenses for the first quarter of 2021. Adjusted nonsegment expenses for the first quarter of 2022 exclude costs related to business development activities and a charge associated with a nonrecurring matter unrelated to the ongoing operations of the business. At the Woodward level, R&D for the first quarter of 2022 was $25 million or 4.7% of sales compared to $32 million or 6.0% of sales for the prior year quarter. SG&A for the first quarter of 2022 was $62 million compared to $56 million for the prior year quarter. The effective tax rate was 19.7% for the first quarter of 2022 compared to 12.6% for the prior year quarter. The adjusted effective tax rate for the first quarter of 2022 was 20.6%. Looking at cash flows. Net cash provided by operating activities for the first three months of fiscal year 2022 was $39 million compared to $147 million for the prior year period. Capital expenditures were $13 million for the first quarter of 2022 compared to $7 million for the prior year quarter. Free cash flow was $26 million for the first three months of fiscal 2022 compared to free cash flow of $139 million for the prior year period. Adjusted free cash flow was $27 million for the first three months of fiscal 2022. Adjustments to free cash flow for the quarter included payments related to business development activities and restructuring activities. There were no adjustments to free cash flow in the prior year first quarter. The decrease in free cash flow and adjusted free cash flow was primarily related to working capital increases to support this year's anticipated growth. Leverage was 1.7x EBITDA at the end of the first quarter. During the first quarter of fiscal 2022, $37 million was returned to stockholders in the form of $10 million of dividends and $27 million of repurchased shares under our Board-authorized share repurchase program. In addition, today, we announced a dividend of $0.19 per share, up from the prior quarter's dividend of $0.1625 per share, an increase of approximately 17%. Further, today, we announced that our Board of Directors authorized a two-year stock repurchase program under which up to $800 million in stock may be purchased in the open market and private transactions. This authorization replaces the previously authorized stock repurchase program. Our stock repurchase program is an important part of our balanced capital deployment strategy. Given our strong financial position and positive financial outlook, including our ability to generate robust cash flow, we remain committed to returning capital to stockholders via stock repurchases and cash dividends while concurrently investing in our business to support future growth. Lastly, turning to our fiscal 2022 outlook. COVID-19-related disruptions persisted in the quarter, although improvement is anticipated in the remainder of fiscal year 2022. Net sales for fiscal 2022 are expected to be between $2.45 billion and $2.65 billion. Aerospace and industrial sales growth percentages are each expected to be in the low double digits to mid-teens. Aerospace segment earnings as a percent of segment net sales are expected to increase over last fiscal year by approximately 200 to 300 basis points primarily due to increased sales volume in both commercial OEM and aftermarket, partially offset by lower guided weapon sales and the anticipated return of annual variable incentive compensation costs. Industrial segment earnings as a percent of segment net sales are expected to be approximately flat to up 150 basis points over last fiscal year, primarily due to the increased sales volume, partially offset by the anticipated return of annual variable incentive compensation costs. Growth and profitability in both segments could be negatively affected if COVID-19 and supply chain disruptions do not improve or if the pace of inflation puts additional pressure on labor and material costs. The adjusted effective tax rate is expected to be approximately 21%. Adjusted free cash flow is expected to be approximately $315 million, generating an adjusted free cash flow conversion rate of greater than 100%. As the anticipated sales growth returns, we expect higher working capital requirements, primarily driven by accounts receivable. Also, capital expenditures are expected to increase over last fiscal year by approximately $30 million. Adjusted earnings per share is expected to be between $3.55 and $3.95 based on approximately $66 million of fully diluted weighted average shares outstanding. The favorable impact of sales growth and productivity improvements in both segments are being partially offset by the expected return of annual variable compensation costs, inflationary pressures, and a higher tax rate. This concludes our comments on the business and the results for the first quarter of 2022. Operator, we are now ready to open the call to questions.
Operator, Operator
Thank you. The question-and-answer session will begin at this time. Our first question is from Sheila Kahyaoglu with Jefferies. Please state your question.
Sheila Kahyaoglu, Analyst
Hi, good afternoon guys, and thank you for the time. Maybe we'll blame this quarter on Don. In terms of Aerospace margins, can we maybe talk about some of the moving pieces as we progress through the year and the improvement? Mark, you mentioned a few things like incentive comp and military was down quite a bit, double digits, if you could talk about the moving pieces there?
Mark Hartman, CFO
Yes. Sheila, as you heard us in our prepared remarks, we did talk about strength in both commercial OEM and aftermarket. We're anticipating that sales volume strength to continue. You also heard us mention the COVID-related disruptions that impacted Aerospace, $42 million in the quarter as those abate, and we're able to pick up on that sales volume, that will flow through, which will then, as you mentioned, will be offset partially by the annual incentive compensation coming back into the business.
Sheila Kahyaoglu, Analyst
Okay. And then, I just wanted to maybe ask Tom a bigger picture question on the Industrial segment. I've seen it ebb and flow over the years. So kind of what are your thoughts there on the bigger picture?
Tom Gendron, CEO
I believe we are currently entering an upcycle, as we've mentioned. There is a noticeable increase in demand for power generation. The industrial turbo machinery market is showing signs of recovery, with more orders coming in and upgrades taking place. We are seeing growth in both new sales and service. Additionally, the marine market is rebounding, and aftermarket activity is improving. In the oil and gas sector, with current price levels, we anticipate increased capital investment. While oil majors are being cautious, there are signs of higher aftermarket activity, which is encouraging. A significant factor for us is the situation in China, particularly in the natural gas engine truck market. We expect a recovery in that sector during the latter half of the year. Overall, market trends indicate a shift towards recovery. As we progress through the fiscal year, the industrial market is looking to strengthen, which aligns with our guidance. With the expected increase in volume, we should be able to translate that growth into improved bottom line results.
Operator, Operator
Our next question is from Robert Spingarn with Melius Research.
Robert Spingarn, Analyst
Hi, everyone. Tom, unless your initial guidance was extremely cautious, I'm having a hard time understanding how you can provide guidance given the weak quarter, especially since nothing positive has occurred since the last quarter. The supply chain has worsened, Omicron has emerged, and all the issues you've mentioned, so are there any positive factors you can point to that could truly balance this out? Or do you believe the timing of the recovery will just fall into place?
Tom Gendron, CEO
Yes. COVID definitely affected Woodward in our markets, but we are observing an increase in demand. Specifically in the Aerospace segment, the aftermarket is improving with China recertifying the MAX, and we're receiving initial orders. I don't expect this trend to decline. There is significant travel demand on the horizon, and while we have experienced disruptions due to COVID, we are starting to notice positive changes. We have a considerable amount of work ahead to deal with the recovery, but we are observing some improvement opportunities. Production rates are rising, and the demand is present, so we are confident in our order book. We have challenges to address, but we are managing through the disruptions. I believe we have moved past the worst of the COVID impact, especially concerning absenteeism related to illnesses, which should decrease in the coming months, allowing for better utilization of our factories with full staffing. Additionally, given our outlook and the demand, we need to hire many direct members, and we have implemented enhanced hiring and training processes. We anticipate adding about 100 direct members each month throughout the fiscal year. We are committed to working hard to meet this demand.
Robert Spingarn, Analyst
Can you provide more details about this charge related to the nonrecurring issue that was not connected to the business operations?
Tom Gendron, CEO
Yes, it's a nonoperational matter that we're mentioning, but we can't provide details about it at this time.
Robert Spingarn, Analyst
Okay. And then the only other thing, the shipment delays you talked about in the opening remarks, that were customer initiated, anything else there?
Tom Gendron, CEO
Yes. A lot of you that have been following us for a while, you know that we have the lean production systems at our customers, which equates to pull systems that as they have been disrupted, they haven't pulled material. Same reason that we've had some disruptions, other suppliers, labor shortages. So, it's a combination that we saw where if you want to say, labor disruptions, meaning other people don't have the workforce or COVID-related absenteeism and the like has disrupted our suppliers, has disrupted our customers, has disrupted order operation. So, that's where those numbers come from. We're anticipating that everybody will start to recover on that, and that will make up those shipments and that revenue as we move through the fiscal year.
Operator, Operator
Our next question is from Christopher Glynn with Oppenheimer.
Christopher Glynn, Analyst
Thank you. Good afternoon. I wanted to ask about the marine market. From your comments, it seems to be starting to ramp up. Can you share your thoughts on how that trajectory will develop and when we might see a significant increase in aftermarket strength?
Tom Gendron, CEO
Yes, utilization rates are up. We're seeing the biggest part that's increasing is our aftermarket in the marine market. And that's highly type of utilization, also what I would say, bringing back during the worst part of the pandemic, bringing the freighters back online, making up for previous maintenance that was pushed out. So that's happening, and we have a robust forecast going in the fiscal year. And then behind that, we see new ship builds increasing. We also see quite a bit on LNG carriers come in. We see the increase in what we call dual fuel ships, which is a real positive for the Company because that means we have multiple fuel systems per engine and higher content. So, all of those are positive signs. Again, with the lead times in the industry, that's really looking out. The aftermarket will build out this year and provide good growth. As we move into the next several years, the new builds and the like will also add to growth. So I think it's on a good upcycle, and we see that carrying forward here.
Christopher Glynn, Analyst
Great. And just a little bookkeeping on that, I believe you said the aftermarket piece is a little bit bigger within L'Orange and you see the OE timing starting to kick in, in fiscal '23?
Tom Gendron, CEO
Yes, it really will start with new builds coming in and what's on the order book. The order book is strong and that with the long lead time is going to be kicking in fiscal '23, '24 time frames.
Christopher Glynn, Analyst
Great. There has been a lot of positive commentary regarding your IGT markets. I understand there are various segments within that, including aeroderivative and utility scale across different markets. It seems like everything is progressing uniformly. I just wanted to confirm that I didn't overlook any additional insights you may have regarding the IGT markets.
Tom Gendron, CEO
No, we're seeing IGT. So I'll segment those that are increasing. And I would like to still refer to turbo machinery in total, so that adds gas turbines, steam turbines, compressors, and we're seeing all those picking up as we move through '22 and into '23. There's also good aftermarket activity tied to those service activity where we're seeing upgrades, movement to cleaner fuels. So we're seeing activity for some people upgrading their turbines, especially in the Middle East, from running on burning oil to going to natural gas. We're also seeing customers wanting to prepare for hydrogen and Woodward is one of the few out there that have hydrogen-ready fuel systems. So, we're helping our customers with that. So we're seeing activity around those types of initiatives, and we think that will carry through for the next several years. Again, a long lead time, a long type of business credit moving in a real positive direction.
Christopher Glynn, Analyst
Great. I have one more question. Regarding the customer-initiated shipment delays, was that the area that expanded the most in the quarter, or was it more consistent throughout the explanation?
Tom Gendron, CEO
No, I would say the largest still was what we would call supplier disruptions. And then supplier disruptions, you can look at it in two ways. One would be capacity constraints. The other would be labor disruption. And I can give you an example, capacity is really around our electronics and integrated circuits. And I think everybody is a little aware of the capacity and the difficulty we have in that area as we use several of the critical chips that are used by the automotive industry and by the cellphone industry. And as you know, there's pent-up demand there. So that adds capacity. And the labor disruptions, I think, is a combination of people coming out of the pandemic, adding enough resources and then also this high absenteeism that we've seen in the supply base. And also, we've seen at Woodward. And as I mentioned previously here, we see that starting to drop for a period there, we were seeing some really high absenteeism numbers, and that's beginning to come down.
Operator, Operator
Our next question is from Michael Ciarmoli with Truist Securities.
Michael Ciarmoli, Analyst
Hey, good evening guys. Thanks for taking the questions. Maybe, Tom, just to go back to Rob's question on the guidance, I mean, this $70 million. How should we be thinking slowing back into results? I mean, we're obviously still dealing with a kind of currently challenged quarter, your second quarter. So, I imagine a sequential ramp-up in the March quarter is probably going to be fairly tepid. I mean, do you guys have good line of sight on how you recoup this $70 million in revenue?
Tom Gendron, CEO
I'm glad you asked that question. It’s a good one. The recovery is expected to be more prominent in the second half of our fiscal year, specifically in the third and fourth quarters. We are making efforts to improve in the second quarter, but we are still facing challenges with absenteeism, labor disruptions, and supply constraints. We are addressing these issues and have seen some progress; however, we will not recover that $70 million in the second quarter. While we expect some recovery in the second quarter, the bulk of it will be in the later part of the year. We are confident we can achieve this, but there are risks and uncertainties, which is why we emphasized this in our prepared remarks.
Michael Ciarmoli, Analyst
Got it. Regarding the aerospace component of $42 million, can you clarify if that was more related to the commercial sector, the defense sector, or if it was evenly distributed?
Mark Hartman, CFO
Yes. It's generally equally split. It's across the whole Aerospace industry.
Michael Ciarmoli, Analyst
What are you seeing regarding inflation-related headwinds, and how is the pricing situation for you? Can you discuss your ability to implement price increases in both industrial and aerospace sectors and your level of confidence in that?
Tom Gendron, CEO
Yes, it's always a relevant question. In certain areas of our business, particularly in aftermarket services, we have better control over pricing. Therefore, we can adjust prices there. On the OEM side, most of our sales are tied to long-term contracts, which usually include escalation clauses that typically lead to annual price increases. We expect some recovery in that area, although it's a matter of timing. In the aftermarket segment, we have slightly more flexibility, so we anticipate some price realization. However, we may not recover all of the inflation impact this year due to the timing of the agreements.
Operator, Operator
Our next question is from Matt Akers with Wells Fargo.
Matt Akers, Analyst
Hi, good afternoon guys. Thanks for the question. Could you touch on international military demand? Is it something that you guys had mentioned a little bit last quarter? You're starting to see a little bit of activity. Has that translated into orders at all yet?
Tom Gendron, CEO
Yes. We do see some of that coming through again in our foreign military sales. Some of that's in military aftermarket where we see some upgrades in the activity. There have been some recent orders for guided weapons coming from military. So we've seen a little bit there. We anticipate more of that coming, but it's hard to forecast exact timing on that. So there is some. It's not huge numbers, but we are seeing some positive orders coming from the port militaries.
Matt Akers, Analyst
Okay. Got it. And then I guess if you could just touch quickly on provisioning and sort of what impact you're seeing there and maybe with some of the rate increases essentially from Boeing this year, is there room for that to move higher?
Mark Hartman, CFO
We have previously mentioned the provisioning opportunities. The primary chance lies in the recertification of the MAX in China and the airlines beginning to take those planes. We are starting to see some orders come in, as Tom noted earlier. When it comes to narrow-body deliveries, the key factor is which airlines are receiving the planes and the routes they are operating. If an airline is maintaining the same route, there may not be an immediate provisioning sale. However, if an airline that already operates a MAX starts flying new routes, that creates initial provisioning opportunities. We are witnessing some initial provisioning and an overall uptick. In the past, particularly in 2018 and 2019, we experienced substantial initial provisioning. While we do not expect to reach those levels this year, we anticipate a nice increase compared to last year.
Operator, Operator
Our next question is from Pete Skibitski with Alembic Global.
Pete Skibitski, Analyst
Good afternoon, guys. I just want to dig back into the supply chain issue. I know you're expecting it to impact the first quarter. Is it fair to say it came in a good deal more negative than you thought? And I think you were kind of the last of it and maybe de minimis, but are we talking maybe continued kind of chunky negative impacts in 2Q and maybe it trails off in the third quarter?
Tom Gendron, CEO
Certainly. Reflecting on the first quarter, the impacts of COVID and the resulting disruptions were greater than we initially expected. Most of these disruptions were related to labor issues at Woodward and among our suppliers, including shortages and absenteeism. We have observed some of these challenges continuing into January. However, we expect a decrease as we enter February, as Omicron has passed through many of our locations. We are noticing some improvements in the supply disruptions we faced, but we anticipate that it will take until the third and fourth quarters to fully recover.
Pete Skibitski, Analyst
Are you experiencing any effects on the defense side from the ongoing continuing resolution for defense? It might be difficult to separate that from the COVID and supply chain issues. Do you believe there has been any noticeable negative impact from the ongoing CR?
Tom Gendron, CEO
We're not really seeing what we said stable to flat. But there are opportunities in the defense budget. And we're definitely going to highlight more of this at our upcoming Investor Day, but we are securing programs in hypersonics and some of the other areas where we're seeing increasing activity. So depends what programs you're on and what activity you're in. But overall, we see picking up some new business throughout there. And we'll go over that more in March with the Investor Day.
Pete Skibitski, Analyst
Okay. And regarding the $800 million share repurchase authority, do you plan to utilize all of that within the next two years, or will you take a more opportunistic approach?
Tom Gendron, CEO
Well, we'll be opportunistic in the market, but we put a two-year horizon on that as that's our intention.
Operator, Operator
Next question is from David Strauss with Barclays.
David Strauss, Analyst
Thanks. Good afternoon. To follow up on that, it seems you are shifting from a 50% cash flow return to shareholders to something over 100%, based on the share repurchase authorization.
Tom Gendron, CEO
That's correct.
David Strauss, Analyst
Okay. And on defense, you guys called out double-digit. It looks like it was down close to 20% in the quarter. I don't know the split OE versus aftermarket yet. But does that decline improve as we go throughout the year? Or is that kind of the right level for the full year, something down close to 20% for your total defense business?
Mark Hartman, CFO
Yes. That's not our anticipation for the year. As we've talked about, the COVID disruptions hit the defense side of our business hard. Our outlook for the defense side is still the same as it was previously. We've talked about softness in the guided weapons side of the business, which will be a headwind, but the rest of the defense business, we're anticipating to be pretty stable.
David Strauss, Analyst
And could you size the total cost savings level you think you've been able to pull out of the business during the pandemic here? And what proportion of that do you see coming back over time?
Mark Hartman, CFO
Yes. So we've mentioned the early stages of the pandemic that we did take out over $100 million of cost. Now some of that was related to the variable compensation cost incentive plans that we've had that we haven't had in 2020 or 2021 and that we're talking about some of that coming back in 2022. But generally, what we've said is about half of over $100 million wouldn't return after we got out of the pandemic based on a lot of the cost savings initiatives that we've put into place related to site facility rationalization initiatives that we have. So that's what we're still anticipating as we move forward.
Operator, Operator
Our next question is from Gautam Khanna with Cowen.
Gautam Khanna, Analyst
Can you provide a quantified EBIT impact from the $70 million in sales that fell short and from the COVID disruptions you mentioned? Specifically, what is the EBIT decrement associated with the $70 million loss?
Mark Hartman, CFO
Yes. We haven't quantified it specifically. We've talked over the years that our flow-through is around 30%. So I think you could do the math from there. If you think of generally, all right, if we were to have that $70 million and getting 30% flow through, we've been approximately $20 million, but we didn't really quantify it or calculate it specifically. It's obviously across all of our businesses with the impact that Tom has spoken about, both from supplier disruption and then labor shortages for us and our suppliers. So that would be the ballpark that I would be thinking.
Gautam Khanna, Analyst
Okay. And just as you catch that up later in the year, do you capture all of that 30% increment back? Or some of the costs just fixed and if you will, not recoverable even through volume? I'm just wondering if we can have an outsized impact in that drag in Q1 that doesn't get made up through the year?
Tom Gendron, CEO
A lot of that received flow through where we could potentially have some impacts to the normal flow-through would be expediting over time freight costs, expedited freight costs, we still think flow through of the level that Mark highlighted is pretty normal for we're coming back to our sales on the capacity for our facility. So, we anticipate most of that will still flow through.
Operator, Operator
Our next question is from Chris Howe with Barrington research.
Chris Howe, Analyst
Good afternoon. And thanks for the question. I would like to ask another question on the guidance. You've reaffirmed the revenue range. There are a lot of questions surrounding the $70 million, in fact, which is expected to recover in the second half some level of cadence. As we think about this environment from a conservative outlook or view, can you talk about the conservative scenario more specifically, what level of ongoing disruptions can you continue to absorb and still feel relatively confident in your guidance range? And at this juncture, it seems too early to tell with one quarter in the books, but perhaps the back half of the year points to that commercial aftermarket acceleration and the acceleration of some of the aftermarket business, offsetting some of the impacts we're seeing here.
Tom Gendron, CEO
Sure. There could be risks ahead. If an unexpected new COVID variant emerges that severely impacts air travel, it’s not something we foresee in our current forecast. We're focused on recovery and expect a decrease in absenteeism, alongside improvements in our supplier disruptions. If our assumptions turn out to be incorrect, then our guidance may seem overly optimistic. We believe we have a prudent outlook and anticipate recovering delayed shipments. In commercial aerospace, for instance, we are noting an increase in line rates as our customers are factoring this into their demand, which is becoming evident. Utilization rates for both legacy aircraft and new narrow-body planes are improving, and shop visits are increasing. We expect the aftermarket not only to perform throughout 2022 but to accelerate into 2023. As mentioned before, we expect to return to 2019 levels in 2023, and we are seeing positive signs towards that. The trends in our industrial market are also favorable. Although these are long-cycle businesses, we’re receiving encouraging demand forecasts from our customers. However, there is uncertainty surrounding the potential emergence of a severe new COVID variant that could disrupt everything, but we are not anticipating such an outcome in our outlook.
Chris Howe, Analyst
Okay. That's helpful. And we've been waiting on, and now it's here the recertification of the 737 MAX in China, and it looks like we're also envisioning route developments as we move through this calendar year. Can you comment on the 737 MAX, kind of what your expectations are for the near-term outlook and when it could come back to what it was type of levels?
Tom Gendron, CEO
Yes. What we're seeing is Boeing came out with their line rate numbers, and we are seeing that transition to Woodward through lead times, which we've highlighted before that we usually four to six months ahead of their production so that they can ramp up. So we're seeing those line rates increase, we're also seeing the Airbus line rates increase. All of that, along with the recertification in China are positive, obviously, for new OE sales, but they will drive increased initial provisioning sales. And our outlook this year is up over last year, and we anticipate as we go into 2023 and 2024, initial provisioning sales as well as higher aftermarket activity will be happening. So all those are in the works, and we're confident that our customers here are going to hit those new rates.
Chris Howe, Analyst
Okay. And then one last one, if I may squeeze it in, I think you mentioned 100 direct members a month as part of your hiring goals to satisfy the influx in demand. Can you comment on the labor environment on its direct impact with Woodward and your level of confidence in ramping up your hiring as we move through different phases of this recovery?
Tom Gendron, CEO
Yes. No, it's a good question. Definitely, labor markets are tight. We are seeing wage inflation and we need to stay competitive. And as Mark has highlighted in questions as well as in the prepared remarks, we needed to get our variable incentive plan back into existence to be competitive in the labor market. So we are, right now, being able to execute on our hiring plan. It's not without challenge, but it's got full effort. A lot of what we're doing is similar to other companies, is we're training people, so we're hiring for aptitude and attitude and we're training. And we've really upped our training capabilities and resources and it's a tight labor market. But in the locations where we have facilities, we are an employer of choice, and we're ensuring that we stay that way through competitive wages, competitive benefits, and a great place to work with exciting work. So, it's a challenge to bring on that many people, but we've put in all the resources and the processes to do it. So, we've got high confidence we can deliver on the hiring which is essential to making sure that we can deliver on the sales.
Operator, Operator
Our next question is from Michael Ciarmoli with Truist Securities.
Michael Ciarmoli, Analyst
I wanted to ask about the 100 employees mentioned earlier. Are you tracking a pool of employees that were previously laid off, or are you seeking entirely new talent? From your comments regarding training, it seems you are looking for individuals who have not previously worked with Woodward. Does this make achieving your full-year goals more challenging, or is it somewhat manageable? This could be a significant factor in reaching those goals.
Tom Gendron, CEO
Yes. We have re-hired many employees we had to let go during the pandemic, but we are also addressing attrition that has occurred since then. Like many other companies, we experienced significant retirements over the past two years, particularly as many Baby Boomers chose to retire now. Consequently, in addition to bringing back some of the staff we lost, we are actively working to expand in certain facilities, particularly those with higher growth rates, which requires us to train new people. Therefore, we have dedicated resources and training facilities in place, and we are making significant efforts to onboard new employees. While it presents a considerable challenge, I believe we are well-equipped to handle it.
Operator, Operator
Our next question is from Noah Poponak with Goldman Sachs.
Noah Poponak, Analyst
Good evening. What are you expecting the second quarter total company organic revenue growth rate and segment margin to look like compared to the first quarter?
Tom Gendron, CEO
Yes, we usually don't give detailed guidance that we expect it to be up over the first quarter and then look accelerating into the fourth quarter.
Noah Poponak, Analyst
Okay. Yes, there's a dynamic where the second quarter last year was actually a pretty strong quarter in the Aerospace business. It was up 10% to 12% sequentially, which makes for a tough comparison. Regarding the guidance, it seems like you'll need to exit the year with the back half growing 20% on the top line and the Aerospace margins well into the 20s, while the industrial margins should be in the mid-teens. Are these expectations accurate for the third and fourth quarters in order to meet the full year guidance, or am I misjudging the second quarter in this calculation?
Tom Gendron, CEO
Yes. So the first comment I'd make is the order book supports our growth. We have to get the shipments out. So, we're confident and particularly answering your question on Aero. And on the industrial side, we're seeing good recovery in the order book as well. So it's both sides. And you can tell it by the growth rate that we highlighted. There's no doubt that top line and bottom line accelerate as we hit third and fourth quarter with the numbers getting substantially higher. And without commenting too much, but you're directionally in the right ZIP code for sure is what we have to deliver on. And just as a reminder, and I know everybody on the call knows this, but I'm going to say it anyway, is we have the capacity. So once you get the volume through that capacity, you can get really good leverage on it. And we're still coming out of below fiscal year '19 sales. We are capacitized for higher than this. So as those sales come through, and we can deliver on them and overcome these COVID disruptions, we're going to get high leverage. And so, the numbers will improve someone like you're saying.
Noah Poponak, Analyst
Okay. With the supply chain-driven or just general disruption, I guess, driven revenue slippage. Is there a net number at this point? Because I think you've had that for a few quarters. I remember the quantification being closer to $30 million in the fourth and third quarter last year. I think it went back further than that. And I think that third quarter is going to kind of start. So, are you delivering on some of that revenue and then having other revenue disrupted? Or do you now have a pretty sizable balance of revenue to flow out? And related to that, I'm surprised there isn't more working capital disruption or sizable working capital related to all of that.
Tom Gendron, CEO
Yes. To provide more detail on the disruptions, this quarter we specifically noted the impact of delayed COVID shipments from customers along with labor disruptions at Woodward. In terms of supplier disruptions, we reported an increase from approximately $30 million in previous quarters to around $42 million this quarter. Additionally, the remaining issues were related to labor disruptions at Woodward.
Noah Poponak, Analyst
But have you delivered on the disrupted revenue from three too…
Tom Gendron, CEO
Yes, we have experienced some issues. There have been delays that have not been resolved yet. On our industrial side, we faced some electronics shortages, and we are still working to recover from those. This has caused some fluctuations from quarter to quarter. We have encountered new supplier disruptions but are actively managing the situation. We currently have representatives on-site with these suppliers. Initially, we mentioned a handful of disruptions, but now we are dealing with over twenty suppliers causing issues. We have action plans in place for each one, and we are starting to see some improvements. However, these are the main disruptions that are significantly impacting us.
Noah Poponak, Analyst
Okay. The guided weapons decline that you cited in the quarter, any ability to quantify how much of that rate of decline was just kind of what's happening in the core run rate in that business at this point versus how much of it was these disruptions?
Tom Gendron, CEO
Yes, we definitely experienced disruptions in the guided weapons sector. To clarify, one of our major programs in guided weapons is the JDAM, and the current lot purchase from the government has decreased. We have been communicating this to you, and it has indeed happened. Additionally, we have observed some supply disruptions.
Noah Poponak, Analyst
Is that the 18 that we cited, is it sort of 50-50 budget versus disruption? Or is it very different than that?
Mark Hartman, CFO
I would say primarily, it's going to be the lower lot disruptions would be something but it's primarily going to be the lower lots.
Tom Gendron, CEO
Yes, this is not the number provide. Sorry.
Operator, Operator
Next question is from Robert Spingarn with Melius Research.
Robert Spingarn, Analyst
Tom, I wanted to ask you about the 787 and your thoughts on the situation considering there hasn't been any activity. I would like to understand what your current efforts are. Additionally, could you elaborate on the mechanics related to the joint venture with GE? What do the inventories look like, especially with the recent news indicating that production will remain at low rates for a few years? I recognize that it may not be as profitable as the aftermarket, but how should we approach this?
Tom Gendron, CEO
Yes, I mean you've got it. That's in our outlook that we've brought it down, but they're still producing a little bit here and there. But what I would say is, yes, that OE side is going to be low for the whole fiscal year. Positive 787 utilization in the field is up, and we are seeing aftermarket from that, but now that that's a really unfortunate situation, but it is part of our outlook.
Robert Spingarn, Analyst
Okay. And then how about inventories on that or anywhere else that we should be thinking about? Are you pretty comfortable that inventories are not built up somewhere? With the engine OEMs, you never know.
Tom Gendron, CEO
Yes. We've got a pretty good handle. I don't think there's a lot of built-up inventory that is in the system that isn't already in built aircraft. I mean as you know, there's a lot of aircraft that build. So, I think once you get the line rates up, we'll be flowing pretty quickly with those. That's the best of our knowledge. We're not seeing huge piles of inventory out there. And we track what we build and reference that to the, what's OE rates are, what's part we can see that. So we're pretty in line with all of that. I don't believe there is a whole lot excess in the supply chain.
Robert Spingarn, Analyst
Okay. And I have a question more on the optimistic side longer term. I wanted to bring a positive question here. And look, you guys with this authorization, the dividend, you obviously have a lot of confidence in the business. You have very good positions and we're going to get this flow of shop visits on the newest narrow bodies, which you've touched on a little bit here. You're going to be buying back stock over the next couple of years. Is two years from now when the rubber hits the road on just the big flow of Neo and LEAP shop visits coming through? What's the year that you're dreaming about? When is the big bow wave of aftermarket? As soon as the recovery goes, where you think it's going to go?
Tom Gendron, CEO
Sure. Yes. This is a great question. First I want to highlight is we've got a lot of pent-up demand for the current generation, particularly for the current A320ceo, 777, 787, the units that are in the field. Those are going to generate some really nice aftermarket. And if you look at a lot of the engines, whether it's a CFM56 or -5 or the B2500, a lot of having and had their first shop visit, and they're all coming due. So that's going to propel us in the next few years. And then as we move, we'll talk about our long-range plan at the Investor Day. That's where we're going aftermarket really starting to pick up in that five-year period and then really use or explode in the 5- to 10-year period. And that's all concept we have, that's all coming. So that it's really interesting, but...
Robert Spingarn, Analyst
The hockey stick that we used to talk about?
Tom Gendron, CEO
Yes. The way I look at our business is that if you consider our trajectory and exclude the two-year pandemic pause, we will see something similar returning, which is what we've communicated. That's one perspective.
Robert Spingarn, Analyst
Yes. I think we shouldn't lose sight of that, and that's why I wanted to bring it up. I appreciate it. Thank you.
Operator, Operator
Mr. Gendron, there are no further questions at this time. I will now turn the conference back to you.
Tom Gendron, CEO
Okay. I really appreciate everybody joining us today. Thanks for the questions, and very informed questions. We always appreciate that. But I would like to invite all of you to join us at our Investor Day. It's going to be in New York City. We're planning to do it in person. We also have a virtual element to it. But it's going to be Wednesday, March 9, and I look forward to seeing you there and talking to all of you in person. So thanks for joining us today. Goodbye.
Operator, Operator
Ladies and gentlemen, that concludes our conference call today. If you would like to listen to a rebroadcast of this conference call, it will be available today at 7:30 p.m. Eastern Standard Time by dialing 1-855-859-2056 for a U.S. call or 1-404-537-3406 for a non-U.S. call, and by entering the access code 6258645. A rebroadcast will also be available at the Company's website, www.woodward.com, for 14 days. We thank you for your participation in today's conference call and ask that you please disconnect your line.