Woodward Inc  (NASDAQ: WWD) Q2 2020 Earnings Call Transcript

Woodward Inc  (WWD) Q2 2020 earnings call dated May 04, 2020

Corporate Participants:

Don Guzzardo — Vice President, Investor Relations and Treasurer

Thomas A. Gendron — Chairman of the Board, President and Chief Executive Officer

Robert F. Weber — Vice Chairman and Chief Financial Officer

Analysts:

Robert Spingarn — Credit Suisse — Analyst

Pete Skibitski — Alembic Global Advisors — Analyst

Sheila Kahyaoglu — Jefferies and Company — Analyst

Chris Howe — Barrington Research — Analyst

Christopher Glynn — Oppenheimer — Analyst

David Strauss — Barclays — Analyst

Michael Ciarmoli — Sun Trust — Analyst

Gautam Khanna — Cowen and Company — Analyst

Presentation:

Operator

Thank you for standing by, and welcome to the Woodward, Inc. Second Quarter Fiscal Year 2020 Earnings Call. [Operator Instructions] Following the presentation, you will be invited to participate in a question-and-answer session. Joining us today from the company are Mr. Tom Gendron, Chairman and Chief Executive Officer; Mr. Bob Weber, Vice Chairman and Chief Financial Officer; and Mr. Don Guzzardo, Vice President of Investor Relations and Treasurer.

I would now like to turn the call over to Mr. Guzzardo.

Don Guzzardo — Vice President, Investor Relations and Treasurer

Thank you, operator. We would like to welcome all of you to Woodward’s second quarter fiscal year 2020 earnings call. In today’s call, Tom will comment on our markets and related strategies; and Bob 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 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 on our website through May 18, 2020. The phone number for the audio replay is on the press release announcing this call as well as on our website and will be repeated by the operator at the end of the call.

I would like to refer to and highlight our cautionary statement, as shown on Slide 3. As always, elements of this presentation are forward-looking or based on our current outlook and assumptions for the global economy and our businesses more specifically, including the ongoing COVID-19 pandemic and related measures taken by individuals, governments and private industry. Those elements can and do frequently change. Please consider our comments in light of the risks and uncertainties surrounding those elements, including the risks we identify in our filings. In addition, Woodward is providing certain non-US GAAP financial measures. We direct your attention to the reconciliations of non-US 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 turning to our results for the second quarter. Net sales for the second quarter of fiscal 2020 were $720 million compared to $759 million for the prior year quarter, a decrease of 5%. Net earnings were $91 million or $1.41 per share compared to $78 million or $1.20 per share for the prior year quarter. Adjusted net earnings were $104 million or $1.61 per share compared to adjusted net earnings of $90 million or $1.40 per share for the prior year quarter. Net cash generated from operating activities for the first half of fiscal 2020 was $52 million compared to $141 million for the prior year. Free cash flow was $23 million and adjusted free cash flow was $55 million for the first half of 2020.

Now I will turn the call over to Tom to comment further on our results, strategies and markets.

Thomas A. Gendron — Chairman of the Board, President and Chief Executive Officer

Thank you, Don and good afternoon, everyone. Before jumping into our business performance, I’d first like to take a moment to thank our exceptional Woodward team for their hard work, flexibility and dedication over the past three months, as we collectively navigate through one of the most challenging times our company has seen over its 150-year history. Our team acted swiftly in the face of a growing global pandemic. We implemented rigorous health and safety protocols within our global facilities to ensure the highest protection for our employees to enable us to continue delivering essential products and services to our customers. We also transitioned the majority of our office team members to a remote work environment. On behalf of myself and the entire Woodward management team, thank you.

As with previous downturns Woodward has weathered, we have taken quick decisive actions to mitigate negative impacts on our business. These actions include communicating daily both internally and externally with suppliers and customers, proactively revising demand and supply plans in accordance with changing market conditions, and taking numerous cost-cutting and cash preservation steps, such as implementing layoffs and furloughs, reducing company directors’ retainers and officers salary through 2020, eliminating 2020 annual bonuses, decreasing our dividend, restricting capital expenditures and reducing non-essential costs and working capital, among other items.

Additionally, on April 6, we announced the mutual termination of our merger with Hexcel Corporation. While disappointing, the mutual decision by Hexcel CEO, Nick Stanage, myself and our respective boards was made in the spirit of doing what’s best for our individual businesses as well as our employees, customers and shareholders and in order to focus on managing through this unprecedented crisis. We also made the decision to shift Bob Weber back to the role of Vice Chairman and Chief Financial Officer. As an industry veteran with deep knowledge of our business and end markets, I’m confident that Bob will help us manage through these challenging conditions by taking these necessary steps, we’re able to focus on what matters most in these uncertain times which is protecting the health and safety of our team members and maintaining our financial strength.

Now moving to Woodward’s second quarter. Our performance was largely in line with expectation before beginning to experience impacts related to the global disruption caused by COVID-19. Over the past three months, however, we have seen increasing uncertainty as our markets react to frequent and significant disruptions, including global, shelter in place orders, worldwide air travel at a near standstill and historically weak oil prices, which are pressuring several of our end market.

In commercial aerospace, the largest impact in the second quarter continue to be the grounding of the 737 MAX which affected both OEM sales and initial provisioning. Legacy commercial aftermarket in the quarter remained strong. As we closed the quarter, we began to see passenger and cargo traffic decrease significantly as a result of restrictions associated with the global spread of COVID-19. In April, we saw build rates declined as a result of plant closures and the anticipated longer-term impacts of the ongoing pandemic. We expect commercial aerospace to be a challenging and uncertain environment in the coming quarters. In defense, OEM and aftermarket continued to be strong. Military demand remained healthy, particularly for fixed-wing platforms and defense aftermarket activity. Historically defense has remained strong during economic down cycle and we believe this will hold true through this crisis.

Turning to our industrial market. Industrial markets were mixed during the quarter. In power generation, industrial gas turbine market continued to recover as global power demand improved and end-user upgrade initiatives increased. On April 30, we closed on the previously announced divestiture of our renewable power systems and related businesses. In transportation, COVID-19 related plant shutdowns in China at the beginning of the calendar year negatively affected the production and demand for natural gas trucks in the second quarter. Marine was negatively impacted in the quarter by decreased crews and containership utilization and reduced global transportation of goods. Oil and gas markets continue to soften with weak customer demand and excess supply, resulting in a steep decline in oil prices and a corresponding reduction in capital expenditures.

For Industrial, we anticipate negative impacts in almost all of our markets due to the COVID-19 pandemic and the sharp decline in oil and gas prices. However, in China, the continued focus on emissions and related regulations remains favorable for natural gas truck. As a result, we are seeing a recovery in demand as economic activity in China improves. We will continue to closely monitor developments in this market as well as all of our other markets.

In summary, although performance in the second quarter of 2020 largely met our expectations. We anticipate significant weakness in the second half. As we continue to manage through this time of uncertainty. We are confident that we are taking the necessary steps to preserve Woodward’s long-term growth opportunities and our financial strength. We have a strong balance sheet, substantial available liquidity, disciplined cash management and a seasoned management team that has successfully navigated through previous downturns. We will continue to invest in world-class technologies operational excellence and strategic growth to deliver superior shareholder value and emerge even stronger than before.

Now I would like to welcome Bob back to the team and turn the call over to him to discuss the financials in detail.

Robert F. Weber — Vice Chairman and Chief Financial Officer

Thank you, Dan. I’m pleased to be back in the CFO role at Woodward and while I wish we’re in a better environment. I have the utmost confidence in our team’s ability to successfully navigate through this time of uncertainty. To do that, we are highly focused on maintaining the financial strength of the company throughout this downturn and have already taken prudent actions to realign our cost structure and maximize cash flow.

Now turning to our second quarter performance. I’d like to first point out, the earnings for the quarter benefited from our decision to eliminate annual bonus payments for 2020. This resulted in the reversal this quarter of the annual bonus expense recorded in the first quarter of 2020. Speaking to our segments. Aerospace segment sales for the second quarter of fiscal 2020 were $474 million, a 2% decrease from the prior year quarter. The lower segment sales were primarily the result of the prolonged 737 MAX production halt and related decline in initial provisioning. Commercial aftermarket sales were down 4% in the second quarter of 2020, as compared to the prior year quarter as a result of the decline in initial provisioning.

Legacy commercial aftermarket growth remained strong in the quarter. Defense OEM sales growth in the quarter was driven by solid demand, the guided weapons and fixed-wing aircraft. Defense aftermarket activity was strong due to ongoing military spending, supporting US Defense initiatives to improve the combat readiness of US fleet and Global Upgrade Programs. Aerospace segment earnings for the second quarter of 2020 were $118 million or 24.8% of segment sales compared to $102 million or 21.1% of segment sales for the second quarter of 2019. Segment earnings benefited from the impact of eliminating the annual bonus for 2020, which was partially offset by the lower sales volume.

Turning to Industrial. Industrial segment sales for the second quarter of fiscal 2020 were $246 million compared to $276 million in the prior year period, a decrease of 11%. Industrial segment sales declined, primarily as a result of expected ongoing weakness in oil and gas and the effect early in the quarter of COVID-19 on natural gas truck sales in China. The sales decline was partially offset by improved sales in industrial gas turbines and renewables. Industrial segment earnings and adjusted industrial segment earnings for the second quarter of 2020 were $26 million or 10.6% of segment sales. Industrial segment earnings were $27 million or 9.8% of segment sales for the second quarter of 2019. Adjusted industrial segment earnings for the second quarter of 2019 were $36 million or 13.1% segment sales. The decrease in adjusted industrial segment earnings was primarily due to the lower sales volume, partially offset by the impact of eliminating the annual bonus for 2020.

Non-segment expenses were $28 million for the second quarter of fiscal 2020 compared to $27 million for the same period of the prior year. Adjusted non-segment expenses for the second quarter of 2020 were $11 million compared to $18 million for the same quarter last year. Reported and adjusted non-segment expenses benefited from the impact of eliminating the annual bonus for 2020. Adjusted non-segment expenses for the second quarter of 2020 excluded transaction costs related primarily to the now terminated merger agreement with Hexcel Corporation. For the second quarter of 2019, adjusted non-segment expenses excluded Duarte move related costs.

At the Woodward level, R&D spending for the second quarter of 2020 was 5% of sales compared to 6% for the prior year quarter. The decline in R&D expense was primarily related to the impact of eliminating the annual bonus for 2020 in the current quarter. The effective tax rate for the second quarter of 2020 was 14.8% compared to 14% in the second quarter of 2019. The adjusted effective tax rate was 16.2% for the second quarter of 2020 compared to 16.7% for the second quarter of 2019.

Looking at cash flows. Net cash generated by operating activities for the first half of fiscal year 2020 was $52 million compared to $141 million for the prior year period. Capital expenditures were $29 million for the first half of 2020 compared to $54 million for the prior year period. Free cash flow for the first half of 2020 was $23 million compared to free cash flow of $87 million for the prior year period. For the first half of 2020, adjusted free cash flow which removes the M&A transaction expenses and includes the proceeds from the sale of the first parcel of the Duarte property was $55 million. The decrease in free cash flow was primarily the result of higher working capital.

With regard to our financial position going forward, our focus is clearly on cash flow as we manage through this challenging environment. We currently anticipate positive free cash flow in the second half of fiscal 2020 and throughout this downturn. We also have a strong balance sheet. At the end of the second quarter, our leverage 1.9 times EBITDA leaving significant headroom to our debt covenant of 3.5 times EBITDA. With almost $1 billion of available liquidity primarily through cash on hand and revolver capacity, we are confident that we will remain financially secure through the challenging environment ahead of us.

Lastly, turning to our fiscal 2020 outlook. As we announced in our April 6 press release, we have withdrawn our full-year 2020 guidance, due to the unpredictable nature of the evolving COVID-19 pandemic and it’s unknown impact on our customers and suppliers. While current conditions have made accurate forecasting extremely difficult at this time, we will continue to evaluate our ability to generate an outlook for 2020 as the broader economic and industry-specific impact of this pandemic become clear.

Operator, we are now open for questions.

Questions and Answers:

Operator

Thank you. The question-and-answer session begin at this time. [Operator Instructions] Your first question comes from the line of Robert Spingarn. Please state your question.

Robert Spingarn — Credit Suisse — Analyst

Good afternoon.

Thomas A. Gendron — Chairman of the Board, President and Chief Executive Officer

Hey.

Robert F. Weber — Vice Chairman and Chief Financial Officer

Good afternoon.

Robert Spingarn — Credit Suisse — Analyst

I wanted to ask about aftermarket, I think you said legacy aftermarket was pretty strong in the quarter, provisioning, not so much, but the traditional aftermarket, how has that — how did that trend through the quarter? And how has that trended so far through April, commercial aftermarket?

Thomas A. Gendron — Chairman of the Board, President and Chief Executive Officer

All right. Through the quarter, — yeah, the legacy aftermarket was strong. The thing that was down was initial provisioning primarily tied the MAX not coming back to service. As we moved into April, as I think everybody is well aware of with the parking of aircraft and the lack of flying, aftermarket have started to drop significantly. We did have work in progress, for example, for controls, for engines that were in the shop, and were being completed. But we are seeing every week a further drop in demand for aftermarket activities mainly just tied to the airlines aren’t flying.

Robert Spingarn — Credit Suisse — Analyst

Tom, is there a way algorithmically to tie what you expect your production cadence in aftermarket to be relative to either ASK or RPK decline?

Thomas A. Gendron — Chairman of the Board, President and Chief Executive Officer

Rob, right now, I think those statistics normally we would look at, and primarily we look at the fleet and the flying hours, on the aircraft that we have significant content on. Right now some of the traditional looks, I think just aren’t relevant today, not until we get — if we get through and start seeing the airlines going back in the service at a — yeah, with a reasonable number of the aircraft. So this is one of the reasons why we did suspend guidance so just incredibly difficult to make any correlations right now.

Robert Spingarn — Credit Suisse — Analyst

Right. Well, Bob, welcome back.

Robert F. Weber — Vice Chairman and Chief Financial Officer

Thank you.

Robert Spingarn — Credit Suisse — Analyst

If I could just ask a quick margin question, how should we think about decrementals margins at least once we get an idea of what the revenues going to do both in aerospace, or I guess incremental margins have trended in the low ’20s? Industrial, harder to see just because it’s moved around a lot, so as we’re looking forward, how should we think about decremental margins in the two businesses? Thanks.

Robert F. Weber — Vice Chairman and Chief Financial Officer

Sure. Mostly, I’ll talk to the aerospace side, first, and we’ve kind of used guideline and we’ve talked to you in the past about kind of a 30% up and down. And this will probably have more of an impact on the aftermarket, so the decrementals may be a little bit more on the downside as we go forward on the Aero. On the industrial, they’re very similar overall as I think we’ve mentioned in the past and we probably don’t see the same impact in terms of heaviness on the aftermarket side and aftermarket isn’t as pronounced in industrial. We have the impacts of transportation for COVID-19 and the impacts of oil and gas on an investment there and capex and those will be similar to that 30%.

Robert Spingarn — Credit Suisse — Analyst

Okay. Thank you, both.

Operator

Our next question comes from the line of Pete Skibitski. Please state your question.

Pete Skibitski — Alembic Global Advisors — Analyst

Hi, guys. I trust everyone is healthy and Bob, I’m sorry, your retirement was so short.

Robert F. Weber — Vice Chairman and Chief Financial Officer

Thanks, Pete.

Pete Skibitski — Alembic Global Advisors — Analyst

Just on working capital, it was obviously a pretty pronounced use of cash and in both the second quarter and the first half in general. I hear what you’re saying about free cash flow. Is that gist basically that you guys are just going to cut production pretty severely in the second half. And just kind of deliver from inventory so we’ll see a big, big spike in cash maybe by the fourth quarter. And I don’t know if that gets you to 1 times free cash conversion or not, but maybe you could speak to that?

Thomas A. Gendron — Chairman of the Board, President and Chief Executive Officer

Yeah. Maybe I’ll start off and let Bob jump in as well. The first thing, when you look at the working capital increase, we were ramping up in our aircraft market and we were also ramping up on the industrial side as we started the fiscal year. And then you got hit with the oil price collapse and then you got hit with COVID-19 on the aerospace side. We have — what I wanted to highlight is what we’ve done is as soon as we saw this happening, we’ve gone through and we’ve where we had customer input, we used their input, where we didn’t have customer input, we used our own projections of what the market was doing.

We reran all of our production schedules and significantly reduced the amount of inventory we’ll be taking in going into the second half of the year and also as we move into 2021. So that’s where we said we’re going to make — make up the working capital that we were over and I think we are in the line with the scenarios that we believe are going to happen in our markets. So we do expect second half to have improved cash flow, but we do have fair amount of uncertainty as to when we’ll start seeing some of our markets pick up and when we’ll start seeing airline fly. So there’s still a lot of uncertainty, but we have, I think effectively reduce the inventory that’s coming in and we’ve also been working hard on collecting receivables and managing payables with the reduced inventory. So Bob, I don’t know if you want to add to that.

Robert F. Weber — Vice Chairman and Chief Financial Officer

Yeah. No, I think you covered it, Tom.

Pete Skibitski — Alembic Global Advisors — Analyst

Appreciate guys. Just one last one for me, just Tom on, I know it’s soon kind of post Hexcel. But as you think about things and you’re going to have your hands full obviously operationally the next two or three quarters, but in the back of your mind, do you guys think about, at some point looking at M&A, again, just in general, or is there even a thought to maybe a year from now, if things are healthier, maybe you could revisit the Hexcel topic, again? I’m just wondering how you’re thinking about that overall.

Robert F. Weber — Vice Chairman and Chief Financial Officer

Yeah. Well, right now, first and foremost is, what I would say is, stabilize the business, ensure we maintained adequate liquidity. The reason I say that is, there is enormous uncertainty in the markets and we’ve run all sorts of scenarios and we’re on top of it. So we want to make sure that. Establish what the new normal is going to be, and that’s going to take probably the second half of the year to see actually where the markets go and what fleet dynamics are going to be in the aerospace side. The recovery in industrial, I think as all of you know we’re significantly tied to global industrial production growth so we’ll be watching that. And since we see that, I would just highlight Woodward is a very strong cash generating company. Once we work through that we have our cost in place. We’re continuing to invest during this down cycle in technology, R&D and then we’re going to turn our sites to growth again. And that growth will be first and primarily organic, and then we’ll re-visit with the excess cash flow that we’re starting to generate inorganic opportunities that fit our strategies and the long-term plans of the company. So I think it’s going be a little time before we could really put much attention to that, but we will — once we get to what I would call the new normal, which I think will take six months or more to really establish.

Pete Skibitski — Alembic Global Advisors — Analyst

Sure. I appreciate the color guys.

Robert F. Weber — Vice Chairman and Chief Financial Officer

Thanks.

Operator

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

Sheila Kahyaoglu — Jefferies and Company — Analyst

Hi. Good afternoon and thank you, guys. Tom, this one is for you to start. Now that Boeing and Airbus have guided and I understand visibility is limited, but they put out production rate. How do we think about production rates and delivery rates for your platforms, particularly on the MAX, if that entry into services mid this year and they are assuming they deplete their inventory within a year, kind of, how does that plant go into your planning process?

Thomas A. Gendron — Chairman of the Board, President and Chief Executive Officer

Yeah. So we’ve — obviously we take our customers’ input and as I think everybody is aware, Boeing talked about the rate they want to get too and they talked about a gradual increase to get to that rate on the MAX. We are still waiting for the details of that gradual increase so we could put our plans in. What I would say is that we are well positioned. We have long lead time parts in either in inventory or in the pipeline, we could flex quickly to respond to their ramp. So we’ll be monitoring that closely and obviously, they get up to the 31 aircraft a month that they talked about that. I mean that’s very positive for our company. So we’re just have to watch, what is that gradual ramp up that they referred to and the details, we have not received yet.

Sheila Kahyaoglu — Jefferies and Company — Analyst

Okay. Fine. I understand that. And then obviously margins in aero were really stellar this quarter. Appreciate the reduced annual bonuses had a part to play in that. I guess what else were the driving factors and to Rob’s question, how do we think about the decrementals give an aftermarket a higher margin business is going to decelerate faster or how do we think about that with your new facilities and the OE production?

Thomas A. Gendron — Chairman of the Board, President and Chief Executive Officer

Yeah. So in the quarter, as we said, legacy aftermarket was still strong. We started to see in second half of March, when we really started seeing some coming down. We have some tail going into the fiscal third quarter here, as we’re still processing that. One thing I’d like to highlight and it was in the prepared remarks, is our defense sales are doing very well, year-over-year up, they are strong. Year-to-date on the defense side were up in the 20% year-to-date on defense both OE and aftermarket, and we have a huge backlog in defense. So defense sales are — the backlog is strong, the growth is there, the margins are good. So that’s helping to offset.

There is no doubt that our commercial aero aftermarket margins are healthy and that will put pressure on overall Aerospace margins. We think we’ve taken proactive actions to get our cost down. Today, as we go in and we talk about the third quarter and fourth quarter being difficult. One of the reasons we have is a lot of you on the call know about our Rock Cut facility, I mean, it’s furloughed. Basically today we’ve had, we just had to shut down production in line with what our customers are doing. We are still running our aftermarket shop. We still have hardware going through there. We will feel that, but we’re kind of committed on managing costs and cash flow to keep margins still a healthy in the aerospace side, but they will, they will come down some from these strong margins that we had last year and in the first half of this year.

Sheila Kahyaoglu — Jefferies and Company — Analyst

Okay. And then Bob, one more for you since you’re a glutton for punishment you keep coming back for more. On the inventory you guys maintained a pretty fair level, it didn’t really blow up on new in the quarter. You expect H2 free cash flow positive, so we shouldn’t expect a tick up in that inventory line item?

Robert F. Weber — Vice Chairman and Chief Financial Officer

I sure hope not normally we will see both receivables and inventories come down quite a bit and that’s what we anticipate in the next half as well. So we see a lot of flow out of working capital in the cash and will probably come from both AR and inventory.

Sheila Kahyaoglu — Jefferies and Company — Analyst

Okay. Thanks.

Thomas A. Gendron — Chairman of the Board, President and Chief Executive Officer

I would just add too also capex coming down further.

Robert F. Weber — Vice Chairman and Chief Financial Officer

Sure.

Operator

Our next question comes from the line of Chris Howe. Please state your question.

Chris Howe — Barrington Research — Analyst

Good morning, everyone, and welcome back Bob.

Robert F. Weber — Vice Chairman and Chief Financial Officer

Thank you.

Chris Howe — Barrington Research — Analyst

Just to follow up on actually that last comment about capital expenditures, as we look at that in addition to your cost structure factoring in what a lot of us don’t know as far as the shape of this recovery that will eventually happen. How should we look at the cost structure in capital spending, once we start on the recovery? Will you keep it at relatively conservative levels or how should we think about that flexing up and down?

Robert F. Weber — Vice Chairman and Chief Financial Officer

Yeah. We definitely are going to take a much finer point to our pencil on capital spending and limit the investment. We will probably be below the first-half spending in the second half and then we’ll be very cautious probably going into 2021 because we see this extending into the coming year. So we’ll be very tight on overall spending.

Thomas A. Gendron — Chairman of the Board, President and Chief Executive Officer

Yeah. Just maybe to add, as you can recognize fee, we had put it in our new facilities and we have put in the capital equipment to support the line rates that were planned for this calendar year, which have stopped. So as we go to what I — we’re all talking about will be the new normal. I think we will have very adequate capacity to where we will not need to spend capex for that purpose. We will spend it on the need for R&D programs, any maintenance and required to keep things operating efficiently, but capacity wise we won’t need it. And we can go quite a ways before we’re going to need to have any significant increase with capex.

Chris Howe — Barrington Research — Analyst

Okay. That’s helpful. And a lot more questions here but just parsing through some of these. You talked about defense, the strong growth that you’re seeing in OE and also aftermarket, if we look at that from a positive perspective, is there a way to think about expectations in that side of the business given it’s relatively strong performance in this downturn environment as we look into the remainder of this calendar year and into next?

Thomas A. Gendron — Chairman of the Board, President and Chief Executive Officer

Yeah. I think you’re referring to defense. Is that correct?

Chris Howe — Barrington Research — Analyst

That’s right, defense.

Thomas A. Gendron — Chairman of the Board, President and Chief Executive Officer

Yeah. In the defense side, we have a pretty good time horizon, where we see orders and we have strong orders going through 2021. So from that standpoint, I think the outlook for defense over the next 18 months is very healthy. And on the aftermarket side, we’re looking at what can we pull in sooner and that’s with military aftermarket, that is a possibility. So that is going to be a tailwind for us, offsetting some of the negatives on the commercial side.

Chris Howe — Barrington Research — Analyst

Okay. Thank you. That’s all I have for now and I’ll hop back in the queue. Thanks.

Thomas A. Gendron — Chairman of the Board, President and Chief Executive Officer

Okay. Thank you.

Operator

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

Christopher Glynn — Oppenheimer — Analyst

Yeah. Thanks. I’m just curious, anything interesting towards receivables on the Commercial Aerospace side any. Any — what types of deferrals, or allowances are under consideration there?

Thomas A. Gendron — Chairman of the Board, President and Chief Executive Officer

Yeah. Well, right now our receivables and our collections are doing well. There is no doubt. There’s pressure from airlines to push out. We are being — if you want to say, very diligent on that and trying to ensure we pull our collections and we’re also being very cautious on reestablishing our credit limits and ensuring that we don’t end up with bad debt. So this is a practice we’ve been through in the past and our team is doing, I think, an excellent job on this right now. On the OE side, our OEMs are the big global players. Everybody in the industry has pressure on cash, but there is still paying and I anticipate that that will continue. So I think we’ll be fine on receivables, but we are being cautious. I anticipate that there will be airline bankruptcies, as I’m sure everybody is and so we’re being very cautious, we got a disciplined process and I think we’re going to do just fine on our receivables.

Christopher Glynn — Oppenheimer — Analyst

Okay. And then — thank you for that. I think you sort of explain the sort of baseline for thinking about decrementals is about 30% at both segments with maybe a mix kicker at Aerospace, if I heard you correctly. Could you quantify that the sort of cost reductions that you’re anticipating in the back half from the spectrum of your action?

Thomas A. Gendron — Chairman of the Board, President and Chief Executive Officer

No, we haven’t made an estimate of what those are, they will take place throughout the course of the half. There is so many different things going on across a very broad spectrum of types that kind of giving a number of the cost savings anticipated in the half would be getting a little bit too far out. So no, we haven’t, as you can see, we’ve taken a lot of actions and we believe that it will ultimately get our costs aligned. But in terms of where that top line is going to end up that still uncertain as well. So, but we have not attempted to disclose what we believe the cost savings are specifically related to those.

Christopher Glynn — Oppenheimer — Analyst

Okay. Thanks for the thoughts.

Thomas A. Gendron — Chairman of the Board, President and Chief Executive Officer

Thank you.

Operator

Our next question comes from David Strauss. Please state your question.

David Strauss — Barclays — Analyst

Thanks. Good afternoon.

Thomas A. Gendron — Chairman of the Board, President and Chief Executive Officer

Good afternoon.

David Strauss — Barclays — Analyst

On the aftermarket without making you quantify what you’re thinking in terms of peak-to-trough decline, would you, — I think for a while, you’ve been running your aftermarket business has been running well above ASM growth or capacity growth. Would you expect the aftermarket — your aftermarket revenues to decline more than the decline that we’re ultimately going to — ultimately, you are going to see in capacity?

Thomas A. Gendron — Chairman of the Board, President and Chief Executive Officer

No, and the reason, first, over — the third quarter and maybe rolling into fourth quarter are going to be very difficult. But the fleet that’s part and the like we’re not different than other people in the industry. We’re going to see dramatic reduction in commercial aftermarket because of that. As we recover — and I call it our fleet demographics are still very strong. We were on some great program. A lot of them as V2500, CFM56, GE90, GEnx, a lot of these haven’t come in even for their first engine shop visit. Some of them haven’t had their second visit. So as we come out of this and you are going to see, I think a significant amount of retirements. We’ve analyze that.

We will see some of our product on those retirements, but overall the fleet that we believe will be flying after we come out of the pandemic and the airlines reduced total capacity will be favorable to Woodward products in the field and that we will see strong aftermarket coming again at that point. So we’ve talked about that over the years and as you see, we’ve done better than the most players in the market and in our aftermarket growth and that’s really tied to those demographics at the time, the engine shop visit. We think that will carry forward after we get out of the crisis. And then, we will start seeing a recovery and the MAX will start shipping again. We see initial provisioning coming back. So overall, I think it’s a great business, great market position and once we get out of this, the next six months and things start to normalize that aftermarket will come back well.

David Strauss — Barclays — Analyst

Okay. I guess, a similar question thinking about Aerospace versus Industrial. I mean your Aerospace is pretty — a lot easier for us kind of visualize, how much that might decline but on Industrial given all the different end markets. Obviously I know, oil and gas is a big headwind. Would you expect the peak-to-trough drop for Industrial to be similar to what you think we’re going to see in Aerospace or will Industrial you think overall do better?

Thomas A. Gendron — Chairman of the Board, President and Chief Executive Officer

No, in Industrial, as you said, it’s — we have a lot more markets, a lot of different dynamics going on. So as an example, oil and gas has dried up. I would say our reduction there is in the 70% to 80% reduction right now, so huge. On the other hand, our China sales are growing. They’re not declining. So, second half of the year, we see that happening. Then we see power generation is going to decline. So overall the reduction — it’s hard to pinpoint, but it will be 20%, 30% so it’s — we can’t, that’s a little bit again, don’t take that it’s like fixed number, I’m highlighting is, why we suspended guidance at the moment, it’s very difficult to forecast that with the major disruptions we’re seeing. And it’s how quick global economy gets back, how quick manufacturing picks up, how quick industrial production picks up, which will drive power generation and the like. So we have a few bright spots in industrial, but we have some strong negatives and overall it’s going to be a fairly sizable overall, year-over-year reduction.

David Strauss — Barclays — Analyst

Okay. That’s helpful. I appreciate that. And then last one for me, Bob the decline in accrued liabilities, so far year-to-date, what does that relate to?

Robert F. Weber — Vice Chairman and Chief Financial Officer

A lot of that is the elimination of the moment.

David Strauss — Barclays — Analyst

Okay. Because I think it all — there also was a pretty big decline in Q1.

Robert F. Weber — Vice Chairman and Chief Financial Officer

Yes. But, — yeah. It’s also related of the bonus.

David Strauss — Barclays — Analyst

Okay. All right. Thanks.

Operator

Our next our next question comes from the line of Michael Ciarmoli. Please state your question.

Michael Ciarmoli — Sun Trust — Analyst

Hey. Good evening, guys. Thanks for taking the question. Glad to hear you guys are all healthy. Maybe Tom, just to maybe try and put a finer point on, you’re not going to give guidance I get that, aftermarket it seems like near term here, should we think about something in the neighborhood of capacity for aftermarket. I mean, if it — it seems like most of the peer companies out there are thinking potentially 50% declines in aftermarket some even greater than that. I mean, is that sort of realistically in the realm of possibilities as you guys are looking at sort of incoming orders, whether there’s even shop visits planned or whether what’s getting postponed and pushed out from a shop visit standpoint.

Thomas A. Gendron — Chairman of the Board, President and Chief Executive Officer

Yeah. There is no doubt. As you’ve seen, a lot of our customers have furloughed their shop. So they are taking us down to zero right now or near zero. So we are — to see something in commercial aftermarket over the next six months and the 50 plus range is realistic. We’ve modeled scenarios all the way to 80% reduction. Just so we can study what it means to cash and liquidity. I’m not saying that’s where it’s going, but we’ve modeled all across the board. The longer the fleets parked and they’re not flying the larger that decline is going to be in the next half year. It will start picking up as the fleet starts flying again, So that’s why, like you pointed out, you can’t pinpoint that. But the decline is significant.

Michael Ciarmoli — Sun Trust — Analyst

Got it. And then, on the commercial OEM side, we’ve seen the rate cuts. We can certainly think about the revenue exposure, but is there going to be — is that revenue decline on OE going to maybe be a bit more pronounced, if there is buffer stock in the supply chain, the entire supply chain needs to get realigned. I mean, how are you guys thinking about maybe some of those added headwinds on top of the rate reductions that we’re seeing out of Boeing and Airbus?

Thomas A. Gendron — Chairman of the Board, President and Chief Executive Officer

Yeah. So I mean that’s, that’s a good question. In terms of understanding the supply chain. There is no doubt there was a fair amount of inventory in the supply chain. We have analyzed and we have a good understanding of the inventory of our product all through the entire supply chain. And we have in our modeling factored that into how quickly you get to these new rates, how do they deplete. We don’t know for sure, our customers with deplete inventory, but we’ve taken several scenarios that, that we think we have a good understanding, we’ve modeled it. It’s played into our liquidity analysis and through all that we feel we’re in good shape and have a good understanding, but we have to see how that plays out, but there is a lot of inventory in the system today.

Michael Ciarmoli — Sun Trust — Analyst

Okay. Last one, just GE obviously still a big customer for you guys. I think they are announcing permanent workforce reductions 25%. Any implications on the JV for you guys with either what’s happening at GE, the magnitude of rate reductions or even programs still in the hopper like the 9X engine?

Thomas A. Gendron — Chairman of the Board, President and Chief Executive Officer

Well, the 9X is moving along well. Second flight vehicle went up and very successful at the engine. We will see on the JV side, the impact to reduce production volumes. We will continue to support and get the 9X — or the 9X in to service, but it won’t be immune either. It will have to adapt to the new rates as well as aftermarket revenue do the JV that is tied to the large engine program.

Michael Ciarmoli — Sun Trust — Analyst

Okay. Got it. All right. Thanks guys. Stay safe.

Thomas A. Gendron — Chairman of the Board, President and Chief Executive Officer

Thanks.

Operator

[Operator Instructions] Your next question comes from the line of Gautam Khanna. Please state your question.

Gautam Khanna — Cowen and Company — Analyst

Hi. Thanks. Good afternoon and [Speech Overlap] the color. So just to follow up on Mike’s question — his last question on destocking. Tom, could you talk about maybe the number, I don’t know how to frame it, but the number of customers do you sell to within the supply chain as opposed to just GE and Boeing and Airbus, I mean, is it hundreds of intermediary subcontract manufacturers to the OEMs? Is it 10? I’m just trying to understand still?

Thomas A. Gendron — Chairman of the Board, President and Chief Executive Officer

Yeah. It’s definitely in the 10. So what you have to look at is, we — obviously we sell to all the engine manufacturers and all the OEMs, whether commercial, regional or biz jet as well as rotorcraft. But we also sell through the Tier 1s, so all the major Tier 1s also by from Woodward, those are mainly in our, what we call our complements and sensors business. So there’s quite a few channels, I don’t know that I have on top of my head the exact count, but it’s, yeah, it’s 10s of Tier 1s as well as the engine in the OEM. So there’s — so we’ve analyzed the entire, when I said that, we’ve analyzed that entire supply chain that and we’re all the inventory is in those channels of Woodward hardware.

Gautam Khanna — Cowen and Company — Analyst

And do you think that you’ll go a quarter or two or three with substantially lower purchases. I mean, i.e. close to zero for some period of time. Just as folks work down their inventory, some of your customers or I’m just trying to get a sense for the magnitude of this sequentially in how bad it can get and then, what we snap back to?

Thomas A. Gendron — Chairman of the Board, President and Chief Executive Officer

Well, we’ve done scenarios, Gautam, throughout there and what would the inventory strategies be or inventory plans of our customers. I can’t tell you we’ve seen customers that are determined to keep the supply chain wet and producing, so having a proactive look at that and we’ve had some customers that have brought it to zero for a period of time. So, it’s kind of across the board. But I would say going to zero is very — so far has been the rarity, but we’ve seen a few of those that have taken out orders or pushed out orders for several months. Most of them are trying to keep the supply chain wet and are very concerned if you shut off supply chain, how do you bring back up, as you start up ramping production again.

So, I think it has been very helpful that Boeing coming out with their line rates, Airbus has come out with theirs. We’re also being sensitive to the fact that those may not be final line rates, but we’re watching that closely. But with that information everybody is — if you want to say replanning all their internal line rates, their inventory strategies, their planning — material planning. So just like we’re so — we have factored that in. On the OE side, it won’t be a very many of them bring this down to zero. I think that’s a long-winded answer to that question.

Gautam Khanna — Cowen and Company — Analyst

I appreciate that. One other one, we’ve heard anecdotal remarks from some suppliers further downstream that they’re seeking price reductions among their suppliers. And I’m wondering, if you’ve actually had it serious pressure yet from some of your key customers on rethinking the price agreements you already have in place, has it been that pressure. Do you expect that to grow? Is that factored into your thinking?

Thomas A. Gendron — Chairman of the Board, President and Chief Executive Officer

We’ve seen a few requests for that. But I’d just remind everybody on the call that, we’re almost all of our business done under long-term agreements with the pricing fixed. So, I don’t see that, that’s going to impact us.

Gautam Khanna — Cowen and Company — Analyst

Okay. Yeah. And last one just to revisit L’Orange. It’s been a while since we talked about it. I’m just curious where are we in terms of moving that technology into the US and has that happened? What sort of your — if you can just give us the state of the state on L’Orange.

Thomas A. Gendron — Chairman of the Board, President and Chief Executive Officer

Yeah. We’re still very pleased with the L’Orange acquisition and the business. We have been working with all of our global engine OEMs with bringing the combination of L’Orange technology and Woodward technology together for solutions. We’ve won quite a few programs in Asia with L’Orange now. We’ve US customers that are working with us and looking at it, so some of those programs may slow down a little bit, but we’re being successful getting new applications and we’re going to continue to be aggressive with that. But the combination of their technology with Woodward controls and actuation and valving technology is quite a comprehensive offering and customers are responding well to that.

Gautam Khanna — Cowen and Company — Analyst

Thanks, and welcome back, Bob.

Robert F. Weber — Vice Chairman and Chief Financial Officer

Thank you very much.

Operator

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

Thomas A. Gendron — Chairman of the Board, President and Chief Executive Officer

Well, thank you for — everybody for joining us today. We appreciate the questions and discussions. We are in very unique times. I would just highlight that, we’re addressing this crisis I think very proactively. We talked about a little bit in prepared remarks. I just want to highlight that we’re still investing for the future. Woodward is going to come out of this stronger than before and as we stabilize, we’ll be turning our focus back to growth. So, thanks for joining us, look forward to talking to you during the next quarter. Thank you.

Operator

Ladies and gentlemen, that’s concludes our conference call today. If you would like to listen to a rebroadcast of this conference call, it will be available today at 7:30 PM Eastern Daylight Time, by dialing 1-855-859-2056 for US call or 1-404-537-3406 for non-US calls and by entering the access code 3655204. A rebroadcast will also be available at the company’s website www.woodward.com for 14 days. We thank you for your participation on today’s conference call and ask that you please disconnect your line.