Welcome to the Woodward, Inc. First Quarter Fiscal Year 2019 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. 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.

Thank you, operator. We would like to welcome all of you to Woodward's first quarter fiscal year 2019 earnings call. In today's call, Tom will comment on our markets and related strategies, and then Bob will 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 February 11, 2019. 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 outlook and assumptions for the global economy and our businesses more specifically. 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. This quarter, Woodward adopted the new accounting standard related to revenue from contracts with customers, commonly referred to as ASC 606. It was effective for October 1, 2018 and fiscal 2019 first quarter results are presented on that basis. We adopted ASC 606 using the modified retrospective method. Under this transition methodology, current year financial information, including adjusted and organic amounts, is presented under ASC 606, while prior year amounts are presented under the previously applicable accounting standard ASC 605. Overall, at this time,…

Thank you, Don. And good afternoon to those joining us today. Fiscal 2019 is off to a strong start. In the first quarter, we delivered solid operational performance in our Industrial segment, with ongoing strength from L’Orange, while the Aerospace segment continues to perform extremely well. Before moving into an overview of our first quarter results and market segments, I want to briefly comment on current macroeconomic factors as they relate to Woodward. While uncertainty in the broader economic landscape exists due to the current tariffs, ongoing international trade negotiations as well as government shutdowns, our view as we look through the remainder of fiscal year 2019 remains optimistic about our markets, performance, and outlook. That being said, we are closely monitoring our end markets and we will respond if circumstances change. Now, moving on to our market segments. Our Aerospace segment continues to deliver strong performance, driven by healthy global passenger and cargo growth. Low tractors are at an all-time high and a growing number of operators are bringing on new generation aircraft, driving initial provisioning. Defense budget continues to support increased military spending. Defense OEM and aftermarket activities saw stronger demand across all platforms with considerable strength in fixed wing and guided weapons. Now, to our Industrial markets. Within power generation, while the industrial turbine market remains uncertain, we appear to have bottomed with inventory stabilizing and our content on newer turbines increasing. In addition, we are seeing robust growth in distributed power for data center applications. In transportation, natural gas, truck orders, and deliveries were strong over the prior-year quarter. To date, the Chinese government’s blue sky initiatives on air quality are providing support for higher natural gas truck sales, which are increasing in total and as a percent of total truck sales sold. Oil and gas markets are showing sustained growth in rig counts, although there is heightened volatility in oil prices. Woodward L’Orange continues to enhance our Industrial segment with respect to both sales and earnings. L’Orange contributes positively and has strong offerings that enhance our market positions in power generation, marine transportation, and oil and gas. In summary, we continue to expect strong Aerospace momentum as the historically high backlogs in commercial aircraft support healthy production rate through the next decade. Woodward remains well-positioned to further capitalize on the near-term production ramp up, along with new opportunities ahead of us. In addition, as the Industrial segment continues to show signs of improvement, supported by strong performance from Woodward L’Orange, we remain confident in our ability to drive increased operational execution and continue delivering superior shareholder value. Now, I’ll turn the call over to Bob to discuss the financials.

Thank you, Tom. Before getting into our first quarter results, as Don mentioned earlier, we adopted ASC 606, and I'd like to comment on the more significant impacts. Most importantly, ASC 606 does not impact cash flow, neither cash from operations nor free cash flow. There will largely be two major components of the change impacting the basic financial statements that we will be pointing out on a regular basis. First, the timing of revenue recognition on certain products and systems will move forward approximately one quarter, but this will vary. Second, certain system components provided by our customers at no charge, which were previously recorded only as inventory transactions, will now be recorded as revenue with zero margin. This will slightly lower the margin rate, but not the nominal amount. Another important element of the new pronouncement relates to disclosures, such as categories of revenue by market segment which will now be included in our footnotes in the 10-Q beginning with this quarter. Note that, this quarter, the impacts of ASC 606 for both sales and earnings primarily relate to our Aerospace segment and are insignificant to our Industrial segment. As Don mentioned, although we expect some quarterly variability going forward, we do not currently anticipate a material impact over the full year from the adoption of ASC 606 as compared to ASC 605. Now, moving ahead to our first quarter performance. Aerospace segment net sales for the first quarter of fiscal 2019 were $393 million compared to $306 million for the first quarter a year ago, a 28% increase. The first quarter of 2019 included an additional $20 million of Aerospace segment net sales related to the adoption of ASC 606 largely due to the treatment of customer provided components. Segment sales were driven by solid growth across…

Thank you. [Operator Instructions]. Your first question comes from Sheila Kahyaoglu from Jefferies. Your line is open.

Good afternoon, guys. Thank you and congratulations on a great quarter.

Thanks. Hi, Sheila.

And to you, Bob, on your retirement.

Thank you, Sheila.

So, just the first question on – no problem. On commercial aftermarket, I think you guide – you said results were up 34% adjusting for the accounting change. I think you had guided to mid-single-digit growth for the year. What’s coming in better? Can you talk about the dynamics in that business?

Yeah. Sheila, on the commercial aftermarket, one of the things that we’re going to see as we move through the fiscal year is that we've got really strong comps from fiscal year 2018. When we look at that, as we highlighted last year, we had very strong initial provisioning sales. And so, as we move into the rest of the year, we still have good initial provisioning, but the growth rate won't be there as it was in the previous year. Our MRO activity is still going up pretty consistent with the fleet, and so that's how we get to the single digit. So, it’s really based on really strong comps from last year.

How much of the business is initial provisioning and sort of how should we think about it as selling goes up in rate in the middle of the year?

Look, the majority is still what I would call, I guess, legacy traditional aftermarket. There is a significant, but significantly less than half, related to initial provisioning.

Okay. And then, on L’Orange, I thought it came in better than expected. If you could talk about the business dynamics there a little bit please.

Yeah. Well, we’re very pleased with the integration and the activities going on in L’Orange. The markets are strong and where we’re seeing stronger than maybe anticipated sales when we acquired L’Orange is in the oil and gas market. There is really high utilization going on, and that's driving aftermarket. As well as in marine utilization. So, there’s not as many new ships being built, but we’re seeing a lot of utilization. So, a lot of this is driving increased aftermarket sales as well as new builds are increasing. So, right now, it’s good dynamics. We’re going to be watching as we go through the year to watch the oil and gas market closely. But, overall, it's tracking ahead of plan.

Great, thank you.

Our next question comes from the line of Gautam Khanna of Cowen and Co. Your line is open.

Hi. Thank you, guys, and congratulations Bob, on your pending retirement.

Thank you.

So, following up on Sheila's question, the year-ago comp, if I recall, on aftermarket Q1, was up 23%. And I’m just curious, internally, when you plan your guidance, were you expecting Q1 of 2019 to be as strong as it was in that or I'm just trying to gauge how much conservatism is in here. Like, what can you actually see for the rest of the year?

On the MRO side, I think we have fairly good forecasting tools. And we’ve discussed in the past, we look at the fleet, we look at engine shop visits, we look at the reliability of our products, the timing of it. So, the MRO activity is tracking well to that. So, that’s going well. The little more difficult item to track is initial provisioning and the timing of them. We’ve got a good idea of the quantity that will sell with new operators of new aircraft, but the time is always a little challenging. So, we only have maybe 2 to 4 months’ outlook where we’re real solid on that. We knew we were going to have a decent first quarter, maybe a little stronger than we planned. Going through the rest of the year, we’re looking at deliveries, which operators are taking them, and from that and the routes they’re going to fly, what we forecast for that. That's how we’re coming out saying, we had really strong IP sales last year. They will still be strong this year. It’s just that we won't have that large growth rate that we did previously.

And given your visibility, do you expect Q2 to -- I mean it’s plus 29 comp in the prior period. Is it going to be kind of flat to perhaps negative or I mean you have 2 to 4 months. So, presumably…

Usually, we don't really forecast on a quarter…

Yeah.

But if you go through the full remainder of the year, we expect to come down more into the single digits for the full year, right? Some of that is going to be timing. Right now, the aftermarket looks good. But like I said, those were really strong IP sale quarters last year, the second through the fourth.

Got it. You had commented on L’Orange. We had modeled it at something like $75 million of sales each quarter, thereabouts. It was $88 million in Q1, and you talked about some of the reasons. But are these sustainable reasons or do you – I mean should we just think that it's going to run rate a much higher level than the 300-ish million that we were thinking previously or how should we think about that?

Well, it will be higher than if you’ve modeled 300. But this quarter was a strong quarter for L’Orange. Part of it is, they are coming off where – that used to be the end of their financial year. So, it was always a strong quarter for them. So, we saw that here as we wrapped up our first quarter. They are tracking ahead of our projections, so we expect a full strong year coming from L’Orange.

Okay, thank you. I’ll get back in queue. Appreciate it.

Okay, thanks.

Your next question comes from the line of Pete Skibitski. Your line is open.

Hi, guys. Nice quarter. Hey, Tom, just a follow-up on that last point of sort of this first quarter traditionally being L’Orange’s best quarter. Can you give us a sense, timing wise, of what is typically the low quarter for L’Orange?

Well, we haven't owned them for a full-year. But we would look out that – that looks like a strong quarter and the remaining quarters in our outlook are fairly balanced. And like I said, a little stronger than what we had forecast. So, positive dynamics going on and strong execution and the integration is going very well. So, we’re positive. But I don’t think – there’s not going to be, like, a major drop or anything, but probably consistent through the remaining three quarters.

Okay. So, does it feel like, do you guys, that maybe with L’Orange, Industrial from a timing – is just going to have less seasonality maybe, the whole segment, because of L’Orange?

I think that it will help definitely. L’Orange has a very strong aftermarket and aftermarket helps temper ups and downs in an OEM cycle. So, yes, I agree with that, Pete.

Okay. And just, Tom, I didn’t look closely, but it sounded like Cat had a pretty bad number today. Across Industrial, were you seeing any kind of signs of weakening in reciprocating engines at all, maybe on the non-L’Orange side?

Now, if you look in – you have to dissect Cat a little bit. And in their – they call it the energy and transportation segment, take a look at that. I think that was up about 10%, 11%. That's the one that most closely correlates with Woodward.

Okay. Okay.

Another way to say it, our sales are mainly to that part of Caterpillar.

Okay, fair. So, right now, across Industrial, you’re not seeing any – like you said, you’re watching oil and gas, but as of right now, you're not really seeing any kind of building headwinds like the tentative macro kind of vibe out there would indicate?

No. And there’s, obviously, market risk as we highlighted in the prepared comments, but we – just kind of recap, our reciprocating engine business is doing well. We are actually doing well in China. Of course, there's risk with China, as everyone knows. Our turbomachinery business has bottomed and we see that it’s starting to turn slowly upwards. So, we feel good about that. The one area that’s still not performing real well is our renewable business. Outside of that, the segments or the activities within our Industrial business are all moving in a positive direction.

Okay, great. Thanks, guys.

Yeah, thanks.

Your next question comes from Robert Spingarn of Credit Suisse. Your line is open.

Hey, guys.

Hey.

Well, yeah. Very nice numbers here. I wanted to ask you, though, when we take L’Orange out of the 2019 guide, what is the organic growth for the rest of the business? You’ve just mentioned the renewables. There's pressure there. Looks like you were up 5% in the quarter organic industrial sales, but what’s contemplated in this full-year guide for the…?

Yeah. It’s approximately that. I think we said mid-single sort of at the beginning of the year. And your 5%, 6% is very close to what we expect for the full year.

Okay. And then, I guess, we’ve talked about this on the Aerospace side, timing. With all this volume that came through in Q1, and I want to make sure I'm thinking about the margins the right way, you're guiding to, I think, about 20% margin in aerospace for the year. Should I be looking, I assume, at the 606 margin of 18.5% for the quarter? You're guiding to 606 margins, right?

We are. We’re still holding – even under 606, we are holding to 20% for the full year.

So, what's the dynamic in Q1 with all of this heavy volume coming through on the aftermarket side that the margins were a little lower than the full-year guide, especially when the sales growth is going to drop off?

Well, it was actually the 20.1% on a comp basis. So, we’re going to have this quarterly variability depending upon, I end up as I mentioned, the customer prior to the inventory sort of stuff. So, it’s 18.5% under 606, but 20.1% under the comp to the prior-year. So, we still feel we are dead on target, if you will. And you’re just going to see that nonoperational impact of those increased revenues with no margin throughout the year. Now, as Tom said, we believe by the time we get – these things will flow throughout the quarters. By the time we get to the end of the year, we’re confident in being at the 20% under either methodology. And we think a lot of it will flow quarterly and end up being a nonevent by the time we get to the end of the year.

Okay. Apologies getting wrapped up in the two different accounting approaches, but I just want to make sure, when I look at slide 12 in red, the red numbers are the guidance numbers.

Hold on.

Or the red numbers conform to the guidance numbers, is what I'm trying to say.

So, guidance is the same under 606 or 605. The requirement is that we report the current year under 606. So, the red numbers are the reported. They are not the guidance. They are the reported numbers under 606. But there is no difference in guidance between the two accounting methodologies. Probably the best slide to take a look at is page 11. And there you can see kind of whether you look at Aerospace segment earnings as a percent or consolidated earnings per share, you can see the deltas between the various methodologies. And it's unfortunate we have report under these two methods, but that's the rule.

Right. And I can see there is the difference in sales, but I just figured that the guidance would go with the reported. Now, I'm trying to understand if somehow the profitability in Q1 is below what's expected for the year despite the fact that Q1 seems to have had the most robust aftermarket performance.

That is true. On a 606 basis, it’s a little bit below what we expect for the full year. Yes.

And just is there is a reason for that?

Nonoperational.

That’s it? So, as a percentage of sales, it's just that optics thing?

That's right. That's right. You look at the dollar amount of earnings and they are almost identical.

Okay.

So, it’s just the inclusion of the $20 million in the top line that causes the math to be a little bit lower under the new methodology.

Okay. And then, just on the margin increase in Industrial attributable to L’Orange, how do we think about the components of that? When we see that business performing, is that volume, mix, pricing?

Well, what I would say is that, on increased sales with the margins being pretty consistent and it’s more flow-through based on leverage on the volume.

So, it’s volume driven. Okay.

Yeah.

And, overall,` just how is pricing across the business?

Pricing is holding. Again, as we've highlighted in the past, most of our business is under long-term agreements. So, we don't have short-term pricing fluctuations. Aftermarket is where there is pricing opportunity, but on the OEM side it’s really fixed.

Okay, thank you. And congrats, Bob.

Thank you.

Your next question comes from the line of Christopher Glynn of Oppenheimer. Your line is open.

Thanks. Good afternoon. Good evening. So, I had a question about the Industrial margin there. Obviously, very strong first quarter. Above your full-year guide. And maybe some more restructuring benefits from your initiatives might flow-through during the year. Kind of begs the question, is the Industrial margin guidance, given the first quarter, maybe one of the more conservative components of your overall guide?

Well, right now, we’re tracking quite well. I think the thing that we’re watching for as we go through the remainder of the year is there is more uncertainty in our Industrial businesses than there is in our Aerospace business. So, as we go forward, if market – I'm going to say market dynamics, market issues stay positively, we probably have an opportunity on the upside, but we’re also very cautious about these trade issues, tariff issues, oil and gas prices. There’s a number of elements here that could impact our Industrial side. But we are off to a good start and we feel that the past work we did on restructuring the Industrial business, the addition of L’Orange, how well the integration is going that there could be opportunity. But we have to get through these market uncertainties first.

Okay. And then a question on 606, taking your comment that it's not material for the full year, as we think about – normally, your Aerospace margins ramp seasonally through the year along with the volume. So, if we think about whatever we think about normal seasonality, do we reduce the first quarter Aero revs by $20 million and then build the 2Q seasonality from that to get to neutral-ish impact for the year?

So, the $20 million increase, that will sort of continue throughout the year. The impact of moving things from a timing standpoint will basically kind of level themselves out as we go through the year. So, there won’t be much impact of this moving forward element. The piece of the puzzle that will continue will be this inclusion of customer inventories in sales. So, there will be this dampening of the margin rate from what we’ve called out as we go through the year, but we don't anticipate it to be significant and we do anticipate that by – as everyone's pointed out, there are upsides to some of our elements here that, hopefully, will come into play and make that point and a half delta a non-event by the time we get to the end of the year.

I don’t know if it’s helpful, but in the past, very traditional in our Aerospace business, is that you would have – it used to be called customer furnished equipment that would be provided to us and going to our systems. In the old accounting method, that was just an inventory transaction, so we didn't count it in sales, we didn't count it in margin. So, now it becomes a zero margin sale which dampens overall segment margin. It’s not that huge. That’ll smooth out along with, as Bob said, the timing of sale. So, that's why we have confidence we'll get back to the targeted margins under 606.

Okay, thanks. And then, you gave a lot of helpful color and complexion what drives the linearity and the different comps for the Aero aftermarket provisioning. Just wondering about, if we do something similar with natural gas bus over in China, how you see the shape of the regulatory regimes and the adoptions and how that kind of growth should phase?

Yeah. For all of you that were at our Investor Day or looked at our investor presentation, we highlight a little bit about this. The Chinese government has these, what they're calling, the clear blue sky initiatives. And one of those is, in some of the major Eastern cities, large cities that they're not going to allow diesel trucks into city centers. They will allow what they're calling clean energy vehicles and trucks. And so, those vehicles, that is either natural gas or EV. What we're seeing is that the enforcement of those regulations look like they're going to take hold. That was our biggest concern, is in the past, there's been regulations, but they haven't always been enforced. So, right now, we are seeing a high order book as we move into the year and these regulations kick in, in July. And so, at the moment, it's looking positive, but we will want to watch is what happens as that regulation hits in July and its enforcement and that will give us a real picture if the sales continue. And if they do, that's a very positive for Woodward, but we're cautious about that just due to history and timing. So, it's definitely a good opportunity for our Industrial business. So, right now, it's looking good. We’re going to have a better handle as we get through our second and third quarter.

Great. Thanks for that.

Thanks.

Your next question comes from the line of Michael Ciarmoli of SunTrust. Your line is open.

Hey. Good evening, guys. It's actually Wes [ph] in for Michael.

Hi, Wes.

Hi. Just to clarify, on the Investor Day, you did mention that you expect for the organic growth rate from Industrial to be 6% for the year. I believe in some earlier – your earlier remarks, you did mention closer to 5% to 6%. Is that the right way to look at it as we progress through the year?

No. And I think I referred to the 6% as well. The comparison that was used by the question was the 5-ish. And so, I've just – we still believe in the 6%. So, no change in that. Just I was equating it back to the comment that was made.

Got it. Thank you. On the turbo machinery, I believe, on the last quarter, you did mention that you expect the market is bottoming, you’re looking to be flat for the year, although you're seeing some signs of pickup there. Is that so?

Yeah, very slight. But we feel good about that because it's a change in the curve. And so, we're starting to see that.

Okay. Can you also just give a little bit more details on your facility moves, kind of any updates there. And then last, still expecting the $20 million in cost synergies from L'Orange integration by 2020?

So, I'll answer that one first. Yes, we're still expecting the synergy savings to come through on that and we're tracking well and the integration is going well. Our facility moves are moving forward. And I think you're referring to our Duarte facility for our thrust reverser actuation system business. That's progressing well. And we're standing up the new facility. The moves are all in play – are all going right now. We're really anticipating getting towards the end of the machine moves towards the end of March, April. So we're moving pretty well on that.

Got it. Thank you, guys.

Welcome.

Thank you.

Your next question comes from the line of Chris Howe of Barrington Research. Your line is open.

Good afternoon, everyone. Great quarter.

Thank you.

And congrats, Bob, on your pending retirement.

Thank you very much.

Just want to dig a little bit more into the macroeconomic environment we're seeing here in China. Just following up on the previous question, you had mentioned that a portion will take hold or has the potential to take hold in July. What's remaining as far as these initiatives and these standards to take place? And, hypothetically speaking, if this takes hold in July, how should we think about the acceleration or the cadence towards – I believe you mentioned before the long-term potential for this to hit 20% of Industrial sales under these new emission standards?

Well, I think the emission standards, first of all, we have been highlighting as the – around the natural gas trucks. And I think that – so that, like I said, is moving forward. What we are highlighting, just I think to be clear, was the 20% was to get from the percent of all trucks sold in a year. Natural gas used to sometimes be between 2%, 5% maybe up 7%. What we're looking at is that it could get up to 20%-plus of the total trucks sold in China. And, right now, the order book is kind of showing that that is happening and it's what we're – I was talking about earlier with the sustainability of that is really going to be on the enforcement side. And if it continues, the Chinese put in a huge natural gas infrastructure to support natural gas trucks and vehicles. So, they have the infrastructure. They're upping their gas reserves and their gas imports. So, it looks positive that way. It's really about enforcement. The second part of that will go into larger diesel engines and gas engines where they're going to have further emission requirements. And then, anytime you see a higher level of mission requirements, it usually requires more sophisticated fuel injection and control systems. And so, that's a positive for our company, and that's what we're talking about. And so, as those next emissions come on, it should drive further more sophisticated equipment into the larger engine market. So, we play in these niche markets and those emission regulations are a positive long-term effect as long as the enforcement is there. And that's why – that's why we always put out a caution on that. But, so far, it's looking promising.

That's helpful. And I just had one more last question here. You had mentioned the goal for reducing leverage to 2.0 times by the end of next year, that's still the target. And I guess what I'm getting at is, if the right opportunity came about, would you reduce leverage first before exercising that opportunity, a potential acquisition?

Go ahead, Bob.

Just because – yes, the 2.0 is still a target for the end of fiscal 2019. Go ahead, Tom.

Yeah. And then, part of that target is without potential acquisitions, what we're showing is, the ability to pay down that debt quickly and that's what we will do. If something did come up that was very promising and attractive acquisition, we could change that target. But at the moment, we're tracking – the cash flow is going to be here. We're going to track to de-lever until we see something that will add shareholder value.

That's all I have for now. Thank you.

Thanks.

Thank you.

Your next question comes from the line of David Strauss of Barclays. Your line is open.

Thanks. Thanks for taking my questions. On the narrowbody side, have you moved up to the higher rates that Airbus and Boeing are talking about for the middle of this year, I guess, 57 and 60? Are you there already?

We're tracking to their ramp up. So, we are on track with that. And, yeah, it flows down to us. We usually have about six months ahead of their rate, we start to see it. So, right now, we're tracking to all their requirements.

Okay. On the business jet side of things, can you talk about what you're seeing there? Obviously, you have much higher content on like the Global 7500 and the G500 and G600. Can you talk about how those programs are progressing from your side?

Overall, we're seeing some improvement in the entire business jet landscape. And as you're highlighting, on the new large jets, we have more content. On any individual program right now, we're seeing them try and dig it into production. We're seeing the ramps coming through to us. So, they are progressing. I don't know that I can comment on any individual one of those in the exact ramps, but it is a positive for the company going forward and it's nice to see them getting on schedule and moving ahead.

The L'Orange accretion for this year, is it still $0.35. It seems like you're hinting that it might be higher than that?

Yeah. As Tom said, it's currently performing well above our expectations. So, it will be increased from that this year.

Okay. Any sort of number there?

It's a significant increase. As we've mentioned, we've got a lot of uncertainty going through the year, but it could be in the $0.60 range.

Okay. And it sounds like maybe more for me -- maybe more from the margin side from the top line side?

No. It's both.

Yeah. It will be both. As Tom said, we've got strong utilizations, so strong aftermarket. We're getting the leverage on the sales on the volume side. So, it's kind of across the board. It's hitting well on all cylinders.

Okay. Last one for me. The backlog amortization with L’Orange that's been excluded from the adjusted numbers, will that be finished as of the end of Q2?

No. Roughly the end of the year. So, it's almost tied perfectly with the fiscal year. So, that will drop off by the time we get into the fourth quarter.

Okay. All right. Thank you very much.

Sure.

Your next question comes from the line of George Godfrey of C.L. King. Your line is open.

Thank you. I'll add my congratulations on a very nice quarter. And, Bob, congratulations on your retirement very soon.

Thank you.

You're welcome. The L'Orange business, so it was kind of just touched on that last question. That's exactly what I want to talk about. And you said, their fiscal year, the December quarter was their year-end. So, probably a little bit of strength there. But I was thinking maybe you're underplaying your success and ownership, that the business is performing because of Woodward's direction and that this year comes in a little bit better. And I wanted to talk about the synergies maybe on the revenue and cost side that you identified prior to the acquisition being completed. And now that you've had ownership, could you talk about – doing this from memory – I think 30%-plus margins were targeted on L'Orange with the synergies on the cost side? And could you flesh out maybe some of the revenue and cost synergies that you're seeing? Thanks.

Yeah. Well, George, on L'Orange, appreciate the comment being under Woodward. The real attractiveness to L'Orange for Woodward was it’s a perfect fit for our company and became an independent fuel injection supplier. So, wasn't tied to an engine company anymore. That has opened the doors. We have a lot of discussion, dialogue going with potential customers to expand that. Because it's fuel injection, it has a longer new product introduction cycle, but we are seeing great response. We do anticipate that we will drive significant sales synergies over the upcoming years as we get into new programs that I think you're going to see us bring a lot more business in. On the cost side, we already are rapidly integrating. As you guys remember, we did have a fuel injection business. So, we're rapidly integrating the two business together. We are seeing cost synergies. We're seeing opportunities to optimize on our capital equipment. The volumes are going up which is beyond what we had planned in our business model when we acquired them. So, we're able to leverage our asset base. So, that's positive for margins. So, that's happening. We've got a great management team and great workforce that came with L'Orange, complementing our team. So, that's coming across. And, overall, market reception is good. So, it's moving all in the right direction. We're confident in delivering the numbers. And as Bob highlighted earlier, we're actually doing better than what was in our financial model for the acquisition. So, tracking really well. So, I guess, that's why I believe it's all on track. I think synergies will come through and you'll continue to see good results from that.

Great. Thanks for taking the question, Tom.

Yeah. I had a question back for you, George. Do you root for the Rams this week?

Not this guy. Patriots all the way.

Okay. I just wanted to clarify. Thanks.

[Operator Instructions]. Your next question comes from line of Pete Skibitski. Your line is open.

You there, Pete?

Caller, please ensure that your line is not on mute. Your line is open.

Sorry about that. Bob, I'd neglected to congratulate you on my first time through. So, congratulations on helping to build a great company here.

Thank you.

Tom, I wanted to ask you on the new CFO. At least my perception, looking at the bio was, he somewhat seemed to kind of really complement you in terms of the background. I kind of think of you as having more of an Aerospace background and engineering background, and Jack seems to be heavy on the energy side in particular as well as on the M&A side. Was that kind of deliberate in choosing someone like that or maybe there was different strategic reasons that you could share with us?

Well, we were looking for somebody that could fill Bob's shoes, which is a challenge, and Bob – as you highlighted, Bob has contributed greatly to our company. And so, when we're looking, we're looking for a proven financial leader that has driven large company. And, obviously, what you saw from Jack is he's had a decade of experience doing that. We're also looking for somebody to help lead strategy, be the – our M&A activity. And so, we were looking for somebody that had those skills in their background. We're also looking for somebody that was operationally oriented that can help drive company operations from a financial perspective, as well as strategic perspective. And Jack had all those. We also had the real benefit that Jack was on our board for three years and he has solid understanding of Woodward. He was an excellent board member. His last meeting will be tomorrow, on Wednesday, as we have our board meeting. But he has proven himself on the board, and so we were fortunate to bring Jack on and I think he will be a big contributor and help fill that void Bob is leaving.

Great. Thank you.

Your next question comes from line of Gautam Khanna of Cowen & Co. Your line is open.

Yeah. Thanks for the follow-up. I just wanted to make sure I heard this right that L'Orange could actually now contribute $0.60, up from $0.35, assuming the trends that you're seeing now hold through the end of the year? And within that $0.60, I just want to make sure, were there any changes to amortization or non-operating kind of stuff or is that just operationally driven?

No. There is an impact of the portion that we back out. So, as we've said, operationally, it is clearly above, and there is also a partial impact related to the amortization. If you recall when we called out the $0.35, we said we had not had that finalized yet. So, when we did, it's a little more favorable in the current year. It doesn't really impact anything over the long haul. But in the current year, it's a little more favorable.

Okay. And just to be clear, the change was from what to what on amortization?

I wouldn't want to break out the total, but the piece that we are adjusting out went down when we got the final numbers related to that. So, current year impact is more favorable. I'll leave it at that.

But more it's driven operationally.

Yeah.

Sales, top line, operational performance is the larger portion of the reason it’s going to exceed our original guidance on accretion.

Okay. And can you comment on the underlying margins today at L'Orange, like what they were in Q1, sort of excluding amortization and the like, just the core margins at L'Orange?

Well, they are as anticipated. And we kind of called out – yeah, you can kind of work out the math. You'll be able to get from the Q, that is approximately $20 million on $88 million in sales. So…

Okay. Quite Strong?

Yeah.

Fair enough. Thank you. That saves us from doing it. And then, just I'm curious, the approach to guidance, just to keep it where it is, I know it's the first quarter of the year, but at what point – you just need another quarter under your belt with L'Orange or with the aftermarket or what sort of prevented you from taking numbers up on strong earnings being the quarter, and what looks like a sustainable trend at L’Orange to drive more upside than what we've embedded in the guide?

Yeah. So, mainly, you just have to look at the various items that we highlighted. We feel like we're off to a great start. There is some uncertainty that could impact us on the Industrial markets. If we have solid market dynamics, we'll revisit it after the second quarter. But, right now, we had a lot of this factored in in sort of our guidance. We think it's strong guidance and we're extremely confident that we will deliver our numbers this year. And as we move forward and we see things solidify, we'll provide more of an updated outlook. I guess that’s where we are. So, things are going good, but we still have these uncertainties that we have to be cautious about.

And one last one. Maybe, Tom, in the past, you've talked about getting down the learning curve on the new single aisle programs. I'm just curious, how are those doing? Are they actually profitable now on the new OE shipments that you're making? And you don't have to give us a number, but I'm just curious, in terms of order of magnitude, how far off the segment average margin are they? And what's the ultimate goal and maturity, like where could they get in terms of margin rate?

Always our intention is to be profitable on OEM sales. So, that's what we always strive for. And in that industry, it's a challenge with the way the market is structured. But we think with – that we provide more innovative solutions, simpler designs that we're able to achieve that. Right now, that learning curve we've been – I just want to say [ph], we've been coming down it very rapidly. And I would say, as we finish out this year, that the new narrowbody programs will be running probably at the average of all of our OEM sales in Aerospace. And moving into next year, I'd expect to improve on that. So, we made great progress last year. This year is the big year. And then, we'll start smoothing out as we get into fiscal year 2020, but it's progressed well. And that's also how we've been bringing up the segment margins. Yeah, that was one of the things we highlighted. Good aftermarket, but also improving the margins on our OE side to the ramp up.

Thank you. Appreciate it.

Okay. You're welcome.

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

Okay. Well, I appreciate everybody joining us today and thank you for your questions. And we look forward to talking to you through the next quarter and at the end of our second quarter conference call. So, thanks again. Good night.

Ladies and gentlemen, that concludes today's conference call. If you would like to listen to a rebroadcast of this conference call, it will be available today at 7:30 PM Eastern Standard Time by dialing 1-855-859-2056 for US caller or 1-404-537-3406 for non-US callers and by entering the access code 3299222. A rebroadcast will also be available at the company's website at www.woodward.com for 14 days. We thank you for your participation on today's conference call and we ask that you please disconnect your line.