Earnings Call Transcript - WWD Q2 2025

Operator, Operator

Thank you for standing by. Welcome to the Woodward, Inc. Second Quarter Fiscal Year 2025 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 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.

Dan Provaznik, Director of Investor Relations

Thank you, operator. We'd like to welcome all of you to Woodward's second quarter fiscal year 2025 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 our 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've included some presentation materials to go along with today's call that are also accessible on our website and a webcast of this call will be available on our website for one year. All references to years in this call are references to the company's fiscal year unless otherwise stated. I would like to highlight our cautionary statement as shown on Slide 2 of the presentation materials. As always, elements of this presentation are forward-looking, including our guidance and are 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 risks related to potential changes in the macroeconomic environment and risks related to tariffs, retaliatory trade actions in addition to the risks we identify in our filings with the SEC. These statements are made as of today, and we do not intend to update them except as required by law. In addition, we're providing certain non-US GAAP financial measures. We direct your attention to reconciliations of non-US GAAP financial measures, which are included in today's slide presentation and our earnings release. We believe this additional financial information will help in understanding our results. Now, I'll turn the call over to Chip.

Chip Blankenship, Chairman and CEO

Thank you, Dan. Good evening, everyone, and thank you for joining us. We are pleased to report strong performance in the second quarter with results in line with our expectations. Woodward's net sales were up 6% year-over-year and adjusted earnings per share were up 4%, reflecting steady growth, despite headwinds from China on-highway volume and mix. Excluding China on-highway, our company posted revenue up 12% and operating earnings up 22%. These results are a testament to the outstanding efforts of our Woodward team members worldwide, even as we operate in a challenging and uncertain environment. As we enter the second half of the year, we remain on a steady growth trajectory, with our lean transformation continuing to pay dividends. Our aerospace plants continue to gain ground. During the quarter, we achieved new highs with significant month-over-month sales growth at some of our facilities. For example, the combination of our two plants in Rockford, Loves Park and Rock Cut achieved record sales to OE and services customers combined, facilitated by accelerated onboarding of new frontline members and model line transformations reaching new levels of performance. Additionally, our Zealand plant also reached new levels of output in the quarter on total fuel nozzle shipments, thanks to continued growth in GTF, OE and service volumes. The leap in GTF maintenance cycle continues to develop and LRU inputs and return shipments to customers doubled again year-over-year in the second quarter. In smart defense, we made significant progress on our challenges with supplier quality, which enabled us to align production rates to customer demand. Our lean transformation has created the capacity and the forward momentum to deliver on aerospace volume commitments in the second half of the year. Our outlook for the aerospace market remains bullish even in the face of uncertainty. Despite concerns around soft forward bookings in the US and some international routes, passenger traffic continues to grow and OEM build rates continue to increase. We are keeping an eye on inputs to MRO shops and fleet capacity reductions. Like others, we see a slower commercial services growth rate in the second half. We expect to see substantial growth continue in defense OE, driven mainly by smart defense. In industrial, we also achieved operations improvements that translated into financial performance. We increased output by 20% to 50% in various gas turbine systems value streams to support our customers' power generation growth plans through leading transformation efforts on our model lines and with select equipment additions for capacity and efficiency improvements. Moving from operational excellence to innovation, we are proud to announce a key milestone reached in the quarter with our MicroNet platform, an advanced turbine control system for critical industrial and marine applications. Woodward delivered the first production MicroNet XT Advanced Gas Turbine Control System for US Navy DDG-51 class destroyer shipboard gas turbine generators. These warships provide a wide range of defense capabilities and the Navy production contract covers 30 system deliveries through 2027, scaling to 135 systems over 10 to 15 years. This collaboration with the Naval Service Warfare Center resulted in a significant upgrade in controller technology and capabilities. The next phase of the DDG-51 gas turbine control upgrade consists of the same MicroNet XT platform using additional features and capability such as a fully redundant architecture to serve as a propulsion system control for GE LM2500 gas turbines. Low rate production is preliminarily scheduled for 2026 through 2029 with 70 systems planned. Woodward has also been selected as the preferred propulsion control system supplier on the Korean Navy KDDX program. While the industrial end market outlook is mixed, Woodward opportunity remains strong. Increasing demand for global power generation capacity continues, including data center power requirements, which represents opportunity for Woodward content to both baseload and standby applications. The global marine market remains healthy with strong ship build rates creating OEM engine demand and laying the groundwork for future aftermarket activity. While the fleet utilization remains strong, there is risk that utilization could decrease if trade tensions persist. Demand for heavy duty trucks in China remains subdued. The recent government stimulus could have a positive impact on demand, although we have not received customer signals to support this connection yet. Looking ahead, a word about tariffs and how they may affect our second half operations and results. Woodward's production footprint is largely in region-for-region. Moreover, our supply base that serves each production site is largely in region as well. This production footprint and supply base strategy results in less exposure to tariffs for Woodward compared to some other aerospace and industrial companies. However, increased cost pressure on any portion of our operations is worthy of attention. We are proactively working to mitigate the pressure on cost and any supply chain disruptions. Woodward is closely tracking early indicators from our end markets and customer forecasts. We are putting actions in place to mitigate tariff impacts as well as manage impacts from a slight economic downturn. We are also monitoring whether trade tensions could increase sales risks. We have already experienced sales order quantity reductions for spare parts from Chinese airlines this month, and we are watching China on-highway, marine transportation and oil and gas market dynamics closely. Based on our strong first half performance and a better understanding of downside risk for the remainder of the year, we are reaffirming the top end of our guidance and pulling up the bottom end of the revenue and adjusted EPS ranges. The low end of the aerospace sales range assumes current level headwinds in supplier performance, Boeing rate break delays or moderate Woodward inventory destocking in the supply chain and slightly lower commercial aerospace services revenue, most likely from lower sales of spare end items. The low end of the Industrial segment sales ranges assumes a sequentially flat core industrial performance. Our guidance ranges for segment margins remain unchanged due to conservative estimates of potential tariff impacts and potential lower commercial aerospace services mix. Our outlook does not assume a further escalation of announced tariff levels or a global recession, both of which could significantly impact demand. If extreme scenarios like these develop, we will re-examine our guidance and communicate any revisions. We remain confident in our long-term prospects as well as our ability to meet the medium-term commitments we shared with you at Investor Day in December 2023. And now, I'll turn it over to Bill for more detail on our second quarter financial performance and the specifics of our refined guidance. Positive news cutting through the noise and uncertainty. Over to you, Bill.

Bill Lacey, Chief Financial Officer

Thank you, Chip and good evening to everyone. As a reminder, all references to years are references to the company's fiscal year unless otherwise stated, and all comparisons are year-over-year unless otherwise stated. As Chip highlighted earlier, we had a strong second quarter in line with our expectations. Net sales for the second quarter of 2025 were $884 million, an increase of 6%. Earnings per share for the second quarter of 2025 were $1.78 compared to $1.56. Adjusted earnings per share were $1.69 compared to $1.62. Net cash provided by operating activities for the first half of 2025 was $112 million compared to $144 million. Capital expenditures were $52 million for the first half compared to $56 million. Free cash flow was $60 million for the first half of 2025 in line with our expectations compared to $88 million. The decrease in free cash flow was primarily due to an increase in working capital caused by a slow start to the quarter. As Chip mentioned, we exited the second quarter with strong sales, which will be collected in the third quarter. As of March 31st 2025, debt leverage was 1.5 times EBITDA. Regarding capital allocation, our strategy is unchanged. We continue to prioritize investing in organic growth, returning cash to stockholders and pursuing strategic M&A. During the second quarter, we returned over $61 million to stockholders, including $44 million in share repurchases and $17 million in dividends. Through the first half of 2025, we've returned $111 million to stockholders, including $79 million in share repurchases and $31 million in dividends. We are on track to achieve our goal of returning approximately $215 million to stockholders in 2025, $150 million of share repurchases and $65 million in dividends. We will continue to manage this with flexibility as conditions evolve. We have $130 million remaining on our $600 million stock repurchase authorization. Returning capital to stockholders is a key component of our capital allocation strategy, reflecting our confidence in the business and our ability to generate strong cash flow. Turning to Aerospace. Aerospace segment sales for the second quarter of 2025 were $562 million compared to $498 million, an increase of 13%. Defense OEM sales were strong in the quarter, up 52%, primarily due to increased demand for our smart defense programs. Commercial aftermarket sales were up 23% in the quarter due to both price and higher volume. As Chip mentioned, we anticipate that commercial aftermarket sales growth will moderate in the second half of the year. Commercial OEM sales were down 9%, primarily due to a measured production ramp to customers' demand following the Boeing work stoppage. We anticipate that commercial OEM sales will return to growth in the second half. Defense aftermarket sales were down 8%. Earnings in the second quarter for the Aerospace segment were the highest on record at $125 million. Margins expanded 240 basis points over the previous year to 22.2% of segment sales. The increase in segment earnings was primarily a result of price realization and higher volume, partially offset by inflation and unfavorable mix. Turning to Industrial. Industrial segment sales for the second quarter of 2025 were $322 million compared to $338 million, a decrease of 5%. Transportation was down 18% due to the expected decline of China on-highway sales. China on-highway sales were $21 million in the second quarter, a $45 million decrease from the prior year. Our core industrial sales, which exclude China on-highway, were up a healthy 11% with Oil & Gas up 21%, Marine Transportation up 13% and Power-Gen up 4%. Industrial segment earnings for the second quarter of 2025 were $46 million or 14.3% of segment sales compared to $65 million or 19.3% of segment sales. Industrial segment earnings decreased primarily due to lower China on-highway volumes and unfavorable mix, partially offset by price realization. Margins for our core industrial business were 14.8% in the second quarter, in line with our expectations. We continue to expect core industrial margins of 14% to 15% of sales for the year. Non-segment expenses were $27 million for the second quarter of 2025 compared to $33 million. Adjusted non-segment expenses were $34 million for the second quarter of 2025 compared to $29 million. Turning to our 2025 guidance. We are raising the low end of our sales and adjusted EPS guidance while reaffirming the other elements of our full year outlook. This updated guidance reflects our strong year-to-date performance and the expected impact of announced tariffs. Our revised guidance does not incorporate potential effects from further escalation of announced tariff levels, significant changes in customer demand or a recession in the US or globally. For fiscal year 2025, we now expect consolidated sales of $3.375 billion to $3.5 billion, which includes aerospace sales growth between 8% and 13% and a decrease in industrial sales from 7% to 9%. We now expect adjusted EPS between $5.95 and $6.25. All other aspects of our guidance remain unchanged. This concludes our comments on the business and results for the second quarter of fiscal year 2025. Operator, we are now ready to open the call to questions.

Operator, Operator

Thank you. The question-and-answer session will begin now. Our first question comes from Scott Deuschle with Deutsche Bank. Please proceed with your question.

Scott Deuschle, Analyst

Hey, good evening. Nice results.

Chip Blankenship, Chairman and CEO

Hey, Scott. Thanks.

Scott Deuschle, Analyst

Chip, can you further decompose the commercial aftermarket growth in the quarter a bit further in terms of the platforms or customer geographies that drove that strength?

Chip Blankenship, Chairman and CEO

It was really across the board growth there. If the jump that we saw late in the quarter were some drop in spare parts orders from MRO facilities. So we had some quick ship opportunities for spare parts to service the MRO network. The rest of the ways we serve customers, whether it's spare end items or our own repair and overhaul was fairly strong, but I think that something that contributed to that 23% was the spare parts at the end.

Scott Deuschle, Analyst

Okay. Was that mostly shipments to China?

Chip Blankenship, Chairman and CEO

No, in fact, China is looking a little bit slower there. I think moderating with the quantities that they're purchasing; at least that's what we see in their activity with us.

Scott Deuschle, Analyst

Okay. And Chip, how far does the backlog run in marine transportation at this point? Just trying to get a sense for what your visibility looks like in that market if we see a reduction in global shipping and trade activity?

Chip Blankenship, Chairman and CEO

The OE is quite extended as you might imagine. It's out into the 2029 type ship build slot from an order standpoint right now. But as far as utilization of the fleet, it still has looked strong up to this point. But I would point out that extended trade tension between the US and China would see some of that drop-off, and that's probably the biggest risk in the marine aftermarket that we face right now. There have been some calls that you've seen in the news about the West Coast port activity may be getting to be softer. So these are the types of signals we're looking at.

Scott Deuschle, Analyst

Okay. Thank you.

Chip Blankenship, Chairman and CEO

You bet.

Operator, Operator

The next question comes from the line of Scott Mikus with Melius Research. Please state your question.

Scott Mikus, Analyst

Good afternoon.

Chip Blankenship, Chairman and CEO

Good afternoon.

Scott Mikus, Analyst

Chip, Bill, the past couple of years a larger portion of the earnings call and the Woodward story is kind of focused on the outlook for the China on-highway natural gas truck market. It also created a lot of volatility in the financial results. Just given that Woodward is an aerospace company and the broader trade tensions between the US and China. Does it make sense to maybe find a different owner for that product line?

Chip Blankenship, Chairman and CEO

We're always examining our portfolio, Scott, and trying to decide exactly what makes sense for us and our shareholders and our customers going forward. So I don't have any comments at this time about any actions that we might consider. I can assure you we continue to look at the portfolio as we go forward. Like I've said in prior earnings calls, what we're focused on operationally is trying to make sure that we're in the best position to serve our customers there with the best technology. When that market is good, we generate a lot of cash and a lot of earnings and we want to be in a position to do that on an uptick. And right now, we're focused on managing through this downturn as efficiently as we can with them.

Scott Mikus, Analyst

Okay. And then on the commercial OE side, when Hexcel reported, they noted some changes in planned shipset deliveries on the 787. In contrast, RTX said heat exchangers on that program are now where they need to be. But can you just give us color on what rate you were shipping on the 787 in this most recent quarter? And are you receiving orders from Boeing to support the production rate hike to seven per month later this year?

Chip Blankenship, Chairman and CEO

So we're in close contact with Boeing because we provide a number of chipset materials directly to them on certain programs. On the 787, largely we're supplying through GE on the GEnx powered 787. So we have a lot less direct visibility to our order book correlates to their build rate. But I can tell you that we are satisfying the GE order rate on the GEnx and the outlook looks good. I'm bullish on that program, getting to those kinds of seven rates that you're talking about and where we have the capacity and the ability to deliver that.

Scott Mikus, Analyst

All right. Thanks for taking the questions.

Chip Blankenship, Chairman and CEO

You bet. Thank you.

Operator, Operator

Your next question comes from the line of David Strauss with Barclays. Please state your question.

David Strauss, Analyst

Thanks, good afternoon.

Chip Blankenship, Chairman and CEO

Good afternoon, David.

David Strauss, Analyst

Chip, could you maybe touch on the aftermarket in terms of what's come through? I mean, I think going back to your initial guidance call for this year, you downplayed the aftermarket growth you might see this year and it's obviously come through really strongly, particularly in Q2 when you had a really tough comp. Can you maybe just talk at a high level what's come through better than what you were anticipating?

Chip Blankenship, Chairman and CEO

Yes, David, you are correct in noting that we anticipated a softer performance in the second quarter due to challenging comparisons. However, we exceeded our expectations with spare parts orders driven by MRO facilities that appear to be experiencing improved throughput and higher volume in their operations, resulting in increased short cycle demand for spare parts from us. This contributed to a strong second quarter. It's important to mention that such occurrences are not typically consistent. I would like to adjust our forecast to predict a slightly softer trend going forward, considering the difficult comparisons we expect as well as potential softness in spare end items. Regarding the situation in China, we now predict fewer LRU orders for fleet provisioning, and we may also see US customers reduce their orders for LRU spare end items, as these are usually the easiest to defer. If an engine is in the shop and LRUs are awaiting repair, they will likely complete that work first. Therefore, with the issues related to spare end items and the situation in China, we could see some softness in the second half of the year, along with the tough comparisons.

David Strauss, Analyst

Got it. Thanks. And Bill, on currency, the weakening in the dollar that we've seen here, how could that impact you guys going forward given I think a decent footprint in Europe?

Bill Lacey, Chief Financial Officer

Yes. We have observed some increased fluctuations in translation, which will affect our top line but will be balanced out in costs. Typically, this results in minimal impact on our operating earnings. We also need to monitor cash in non-US areas concerning the transactional aspect. However, it will not significantly affect our overall results.

David Strauss, Analyst

All right. Thanks very much.

Chip Blankenship, Chairman and CEO

You're welcome.

Operator, Operator

Our next question comes from Noah Poponak with Goldman Sachs. Please state your question.

Noah Poponak, Analyst

Hey, everyone.

Chip Blankenship, Chairman and CEO

Good evening, Noah.

Noah Poponak, Analyst

Bill, I'm surprised you left the Aerospace segment margin guidance unchanged. It looks like that would require closer to a 25% incremental in the back-half versus the over 40% you did in each of the first and second quarters. Can you talk about what drives the Aerospace segment margin in the second half?

Bill Lacey, Chief Financial Officer

Sure. Yes, we're really great and happy that we got over 40% incremental in the second quarter, Noah. As we look to the back half, we do expect defense OE to be a much greater share of the volume. So that will moderate the incremental that we saw in the second quarter. We've always stated that we like to see our incrementals around 30% to 35%, and so we would expect that to moderate in the second half. Additionally, we talked about tariffs, and it's not a major issue, but we are cautious in that it may impact us some. So we felt it was prudent, Noah, to keep that margin guide where it is currently.

Noah Poponak, Analyst

Okay. What have you seen for LEAP aftermarket through the first half? And what are you expecting in the back half and into 2026?

Chip Blankenship, Chairman and CEO

So as I said in the remarks, we've been a few quarters in a row of seeing that volume double year-over-year. So, as we look at what our model was for the performance of the LEAP fleet, we're very pleased with the progress on that. So new so far, and we feel like that trend will continue for a bit this year; the rest of this fiscal year for us. Of course, that curve may turn over a little bit as the compares get bigger because it's doubling off a fairly small base. But we feel like we're on track for the outlook that we gave at the Investor Day where in the 2027 to 2028 timeframe, we keep seeing similar volumes of aftermarket activity from the LEAP GTF compared to the legacy narrowbody fleets.

Noah Poponak, Analyst

What was the unit growth in the Aerospace segment for the quarter?

Bill Lacey, Chief Financial Officer

Yes, we experienced solid growth in both pricing and volume. Overall, the price increase was about 7% at the Woodward level. The aerospace sector's price growth was slightly stronger than that of the industrial sector, but both had a positive impact. Additionally, we observed good volume performance from aerospace, which delivered a 13% increase.

Noah Poponak, Analyst

Okay, great. Thank you so much.

Chip Blankenship, Chairman and CEO

You’re welcome.

Operator, Operator

Our next question comes from Matthew Akers with Wells Fargo. Please state your question.

Matthew Akers, Analyst

Yes. Hi, good afternoon guys. Thanks for the question. Chip, I think you had talked last quarter within aerospace, I think commercial OE versus aftermarket kind of similar growth for the year. Could you kind of update on where those stack up or has one of those changed relative to the other for the year?

Chip Blankenship, Chairman and CEO

Thank you for the question. The second quarter was somewhat unusual as we experienced higher growth in the commercial aftermarket than we anticipated, while original equipment (OE) was slightly down due to our response to the Boeing return-to-work challenge. These factors made the second quarter appear atypical. However, for the fiscal year 2025, we expect the growth rates for OE and aftermarket in the commercial sector to remain relatively stable. On the other hand, we believe defense OE will continue to show strong growth in the second half of the year.

Matthew Akers, Analyst

Yes. Okay, thanks. And I may have missed this, but what's the latest full year China on-highway expectation? Has that changed at all?

Bill Lacey, Chief Financial Officer

Yes. We came out with around $40 million, and with the Q2 performance being roughly $2 million more than we expected, we're moving it up to around $50 million.

Matthew Akers, Analyst

Okay, great. Thank you.

Bill Lacey, Chief Financial Officer

You're welcome.

Operator, Operator

Your next question comes from Christopher Glynn with Oppenheimer. Please state your question.

Christopher Glynn, Analyst

Thank you. Good afternoon.

Chip Blankenship, Chairman and CEO

Good afternoon, Glynn.

Christopher Glynn, Analyst

Good afternoon. I have a question regarding the Industrial segment. Oil & Gas performed very well, and I am curious if there were any one-time volume advantages or if there has been a pull forward across the Industrial segment, especially considering that even at the highest end of the full year guidance, you are about $20 million a quarter below the second quarter. I understand that China accounts for approximately a $10 million reduction in the run rate.

Chip Blankenship, Chairman and CEO

I'll kick it off and maybe hand it over to Bill on the last part of your question. But as far as Oil & Gas goes, I think we've said this before, it's a bit lumpy for us because quite a bit of what we do in Oil & Gas is project related. And so it was a strong quarter. A lot of the delivery material that we provide to Oil & Gas is also power-gen related, whether it's powering pumping stations or it's part of power generation for a platform or for an LNG site. So the 21% is a big increase, but I think it moderates through the year and the fact is, like I said, quite lumpy.

Christopher Glynn, Analyst

Okay, that makes sense. And...

Bill Lacey, Chief Financial Officer

Christopher, I'm sorry. The second part of your question?

Christopher Glynn, Analyst

I think that sums it up, Bill. I believe China would be the other aspect for the industrial segment connecting the second quarter absolute revenue with the projected back half. If I could move to the commercial aftermarket, there was a significant spike in the quarter. So, based on the guidance, if I'm understanding correctly, the second half run rate for the commercial aftermarket is likely to be a bit lower sequentially, but still shows moderate growth year-over-year. Am I correct in that?

Chip Blankenship, Chairman and CEO

Yes, we still believe it will grow, but it's expected to be in the high single-digit range compared to the 20% growth you saw in the second quarter.

Christopher Glynn, Analyst

Okay. Just a bit of bookkeeping, the corporate expense is slightly higher. We're still discussing 3.3%, which I believe you mentioned last year for the full year.

Bill Lacey, Chief Financial Officer

Yes, Chris, we are still calling that level. We'll have slightly higher sales in the back half. And so, we do expect for us to hit that in the full year that we guided on earlier in the year.

Christopher Glynn, Analyst

Thanks. And if I could sneak one more in, I think pricing outperformed in the second quarter probably what you implied previously for the year. Is that just a learning curve on value pricing toolkit across the organization?

Chip Blankenship, Chairman and CEO

Yes, we've had two solid quarters of pricing this year. And I think it is us continuing to get a better understanding of our value pricing and we had some volumes come through in the right place that also helped to push up the price that we achieved.

Christopher Glynn, Analyst

Understood. Thanks, guys.

Chip Blankenship, Chairman and CEO

You're welcome.

Operator, Operator

Our next question comes from Michael Ciarmoli with Truist Securities. Please state your questions.

Michael Ciarmoli, Analyst

Hey, good evening, guys. Thanks for taking the questions. Chip, could we just dig into that? I just want to make sure I understand that Aero, the commercial OE and aftermarket. So aftermarket track into maybe high single-digits for that second half; that implies something like 14% to 15% growth. Did I hear you earlier say that OE and aftermarket should grow at the same rate? I mean those would be pretty heroic growth rates to get commercial OE up on par with the same growth as aftermarket?

Chip Blankenship, Chairman and CEO

No, I don't think they'll come back to this. What I meant was that over the year, we will return to what we discussed at the beginning of the year, where we laid out our expectations, indicating that defense OE would be the largest area of growth.

Michael Ciarmoli, Analyst

Okay.

Chip Blankenship, Chairman and CEO

Followed by commercial aftermarket, followed by commercial OE. But I don't expect commercial OE to be down, which it was this quarter. Sorry about the confusion, but that's just sort of the work.

Michael Ciarmoli, Analyst

That's helpful. And then maybe just back to the incrementals. I mean, you did that 40% plus like Noah was talking about. I mean, you did that in the face of really strong OE. You're going to get the commercial OE ramping, which has never really been truly dilutive to your margins. Is it really just a function of aftermarket kind of normalizing in the second half that's giving you some pause on those high incrementals?

Bill Lacey, Chief Financial Officer

Again, on our commercial OE, we do make money, but to the 40% incremental in them is 240%. As we talked about, we look to have 30% to 35% in Aero. And so what happens in the second half is again, in Q2, we didn't have as much commercial OE, which help incrementals. We will have more commercial OE in the second half and we'll have greater defense OE. And that will translate into still really good incrementals in our 30% to 35%, but it will not sustain at 40% level.

Michael Ciarmoli, Analyst

Got it. That's fair. Perfect. Thanks, guys. I'll jump back in the queue.

Chip Blankenship, Chairman and CEO

Thank you. You're welcome.

Operator, Operator

Our next question comes from Sheila Kahyaoglu with Jefferies. Please state your questions. Sheila, your line is open.

Sheila Kahyaoglu, Analyst

Sorry, good afternoon, guys. How are you?

Chip Blankenship, Chairman and CEO

Afternoon, Sheila. Good. Thank you.

Sheila Kahyaoglu, Analyst

Maybe just first half versus second half, $3 at essentially both midpoints when you look at the first half and the second half. How are you thinking about the tariff impact? I know you mentioned in the prepared remarks, localized production largely. How is that embedded into your guidance?

Bill Lacey, Chief Financial Officer

I will start, Sheila, and then pass it to Chip. Regarding our tariff situation, as Chip highlighted, our manufacturing strategy significantly helps reduce the overall tariff impact on Woodward. We have thoroughly assessed the business and identified the flows that may pose some challenges. For fiscal year 2025, we anticipate facing a pressure of about $10 million to $15 million, before implementing our strategies to address these issues. Therefore, we have included this estimate in our updated guidance, assuming there are no escalations in the announced tariffs, and we expect to meet this guidance.

Sheila Kahyaoglu, Analyst

Got it. Okay. And if I could ask one on aerospace specifically, outside of aftermarket, defense OE growth was pretty phenomenal. What drove that 52% increase? And why is aftermarket and defense down?

Chip Blankenship, Chairman and CEO

So the increase is largely smart defense, but also good health and good growth in the rest of the programs too. So not taking anything away from them, but the large number shows up really due to smart defense and it's across the entire smart defense portfolio as well. So that's the defense OE story. On defense aftermarket, largely it can be a little bit lumpy in defense aftermarket. Working with our customers, they tend to batch some of their inputs for overall based on how they run the fleet. So we don't see any difference in op tempo or anything fundamental that would drive defense aftermarket down. This quarter just looks like we are experiencing some delayed inputs. We don't really think that it will be that different the rest of this year with some of the logistics and friction in the system, if you will. So we're thinking that defense aftermarket might stay in that type of volume region for the rest of fiscal 2025.

Sheila Kahyaoglu, Analyst

Got it. Thank you.

Chip Blankenship, Chairman and CEO

Welcome.

Operator, Operator

Our next question comes from Spencer Breitzke with TD Cowen. Please state your question.

Spencer Breitzke, Analyst

Hey, thank you. I was wondering if you could provide an update on JDAM and where we are with the higher pricing from the new contract rolling through as well as volumes? Thank you.

Bill Lacey, Chief Financial Officer

We have seen strong demand for JDAM. Additionally, our supply chain has been functioning well, allowing us to ship at a good pace. If this trend continues, we anticipate moving through the older JDAM lots and reaching the higher-priced lots at some point in Q4. I believe that addresses your question.

Dan Provaznik, Director of Investor Relations

Operator, can you move on to the next question?

Operator, Operator

Our next question comes from Louis Raffetto with Wolfe Research. Please state your question.

Louis Raffetto, Analyst

Hey, good evening, Chip, Bill.

Chip Blankenship, Chairman and CEO

Hi, Louis.

Bill Lacey, Chief Financial Officer

Hi, Louis.

Louis Raffetto, Analyst

Could you clarify if there's any specific aspect regarding the corporate segment? I'm interested to know if the industrial benefits are reflected in the industrial segment and whether you are excluding them at the corporate level. Additionally, has there been any impact on sales from these initiatives?

Bill Lacey, Chief Financial Officer

No, Louis, we're not. Is the simple answer.

Louis Raffetto, Analyst

Okay, I remember last quarter you mentioned that you were excluding the benefits from product line sales. I'm curious if that's the case again this quarter.

Bill Lacey, Chief Financial Officer

Yes. So we did back out those benefits, in adjustment out last quarter and that doesn't repeat.

Chip Blankenship, Chairman and CEO

It's a one-time gain.

Louis Raffetto, Analyst

Is there a sales benefit running through somewhere as well?

Bill Lacey, Chief Financial Officer

No. We moved it out to non-segment and then we adjusted it out of non-segments. So Aero is clean, Industrial is clean.

Louis Raffetto, Analyst

And so what caused the step-up in non-segment? It's just a big number that we haven't really seen before.

Bill Lacey, Chief Financial Officer

Non-segment, some of it is the timing of us doing with our equity, our long-term incentive program, that gets done in the second quarter. Historically, the switch happened last year and from first quarter to second quarter, but other than that, that's it.

Louis Raffetto, Analyst

All right. No, that's helpful. Thank you, Bill. And then I guess, one more, I just want to make sure I heard you right. Was China Industrial $20 million in the second quarter or $29 million in the second quarter?

Bill Lacey, Chief Financial Officer

Yes. $21 million to be exactly, to be exact $21 million.

Louis Raffetto, Analyst

All right, great. Thank you very much.

Bill Lacey, Chief Financial Officer

You're welcome.

Operator, Operator

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

Chip Blankenship, Chairman and CEO

We'd like to thank everyone for joining today's call.

Operator, Operator

Ladies and gentlemen, that concludes our conference call today. A rebroadcast will be available at the company's website, www.woodward.com, for one year. We thank you for your participation on today's conference call and ask that you please disconnect your lines.