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Woodward Governor Co. (NASDAQ:WGOV)

F4Q07 Earnings Call

November 14, 2007 6:00 pm ET

Executives

Tom Gendron - President and Chief Executive Officer

Bob Weber - Chief Financial Officer and Treasurer

Analysts

John Haushalter - Robert W. Baird

Tyler Hojo - Sidoti & Company

Ned Armstrong - FBR Capital Markets

J.B. Groh - D.A. Davidson

Jim Huang - Gabelli

Operator

Ladies and gentlemen, thank you for standing by. Welcome tothe Woodward Governor Company Fourth Quarter And Fiscal Year 2007 EarningsConference Call. At this time, I would like to inform you that the conferenceis being recorded for rebroadcast and that all participants are in alisten-only mode.

Following the presentation, you will be invited toparticipate in a question-and-answer session. Joining us today from the companyare Mr. Tom Gendron, President and Chief Executive Officer and Mr. Bob Weber,Chief Financial Officer and Treasurer.

I would now like to turn the conference over to Mr. Weber.Sir, you may begin.

Bob Weber

Thank you, Operator. We’d like to welcome all of you toWoodward's fourth quarter and fiscal year 2007 conference call. In a minute,Tom will talk about our 2007 highlights and our markets. I will comment ontoday's earnings release. And at the end of our presentation, we'll open it upfor questions.

For those who have not seen the release, you can find it onour website at www.woodward.com. I would also like to point out that we'veincluded some visual presentation materials to go along with today's call thatare accessible on our website.

To access the presentation for today's webcast, go to ourwebsite www.woodward.com, select the investor information tab at the top of thepage, select presentation/conference calls from the left menu, select thewebcast link for today 's call, and you can view the slides on screen ordownload the materials.

An audio replay of this call will be available throughFriday, November 16th, 2007. The phone number for the audio replay was on thepress release announcing this call and will be repeated by the operator at theend of the call. In addition, a replay of this webcast will be accessible onour website for 30 days.

Before we begin, I would like to provide our cautionarystatement as shown on slide three. In the course of this call when we presentinformation and answer questions, any statements we make other than actualresults or historical business facts may contain forward-looking statements.

Such statements involve risks and uncertainties and actualresults may differ materially from those we currently anticipate. Factors thatmight cause a material difference include, but are not limited to future sales,earnings, business performance, and economic conditions that would impactdemand in the industrial, aerospace or electrical power markets.

We caution investors not to place undue reliance on theseforward-looking statements as predictive of future results. In addition, thecompany disclaims any obligation to update the forward-looking statements madeherein.

For more information about the risks and uncertaintiesfacing Woodward, we encourage you to consult the earnings release and ourpublic filings with the Securities and Exchange Commission including our 10-Kfor 2007, which we expect to file in early December.

Now, I will turn the call over to Tom to discuss our marketsand our progress toward achieving our strategic goals in the fourth quarter andthroughout 2007.

Tom Gendron

Thank you Bob, and thank you all for joining us today.Execution of our strategies and focus on cost control delivered strongfinancial performance in our fourth quarter. The execution of our businessinitiatives, supported by the strength of our markets we serve, allowed us toachieve the following full-year 2007 highlights.

Sales exceeded $1 billion for the first time in our historyand were up 22% over last year. Our net earnings were $2.79 per share. Segmentearnings were up 46%. Cash generated from operations was up 46% over the prioryear at $118 million. You probably read our new segment reporting press releaseissued last week.

Our new segments better align our businesses with themarkets we serve and our corresponding product offerings and technologies andreflect the way we now manage the business. We believe our new segmentstructure will establish more direct lines of reporting responsibility, speeddecision-making, and enhance our ability to pursue strategic growth opportunities.

In addition to establishment of our Electrical Power Systemssegment headquartered in Stuttgart Germany reflects our commitment toincreasing our global focus. Each of three group Vice Presidents brings strongleadership to their renewed roles and is an expert and a veteran in theirfield.

Moving to our markets and related strategies, it's importantto note that our financial performance reflects purposeful selection of marketsand applications where we believe our energy control strategy can be most successful.

Inside of these markets, we have focused our research anddevelopment activities on those platforms where we can provide the greatestvalue and drive the greatest return on that effort. We think it's working.Looking first at aerospace, all segments of our aerospace business were strongin 2007.

For example, combined Boeing and Airbus orders fordeliveries for commercial airliners will likely again hit new records.Similarly, we continue to see strong growth in the business and regional aviationmarkets, with order backlogs and deliveries having grown significantly over2006 levels.

Overall fleet growth and increased utilization aresupporting a 5% to 6% annual growth in passenger and freight traffic, which hasresulted in strong demand for repair and related after-market services. Wecontinue to seer our after-market sales approximate our long-term expectationof 50% of total aircraft sales.

Our significant development efforts on the GE&X fuelsystem for the Boeing 787, the GP7200 set of fuel components for the A380, andthe Pratt & Whitney Canada PW600 engine control system for the Mustang andthe Eclipse very light jet are making the transition from research toproduction and will drive our future growth.

Demand for power generation equipment, such as industrialturbines and large gas and diesel engines, continues to grow with thesignificant increase in global demand for electricity, particularly indistributed power applications. Development in China, India, and the MiddleEast is playing a key role in this growth.

We had identified inverter technology as a key growth factorin renewable power sources and, indeed, the wind turbine market continues togrow at rates exceeding 20%. We significantly enhanced our capabilities andofferings in this area through our acquisition of SEG and have an increase inour share and growing more rapidly than the market.

Moving from power generation to power distribution, weidentified global economic growth and the need for power and opportunity forour electrical power system products. Our existing product portfolio coupledwith the SEG acquisition expanded our offerings of AC measurement and digitalcontrol products and is increasing our market share.

Within the transportation market, marine, off-highway andalternative fuel segments continue to be robust. Looking to the future, whilewe expect to see our markets continue to grow through 2008, we expect Woodwardto grow at a faster pace than the overall market in aircraft engines, wind, andelectrical power.

In engine markets, we are partnered with strong players inthe industry and expect to grow with them at market rates. We are managing thisgrowth largely through our existing footprint and do not presently see a needto significantly expand our infrastructure costs. In fact, we continue toconsolidate manufacturing capabilities by following a strategy of corecompetencies, supply chain partnership and cost management.

While Bob will outline an increase in our expected capitalexpenditures for 2008, it will be worth noting that these expenditures arefocused on competitive opportunities, such as improving manufacturingtechnology and advance system test capabilities.

We're also concentrating on reducing cycle times, drivingimproved customer satisfaction, and more efficient fixed asset utilization tothe rollout of our build-to-order lean production program. Our priorities for2008 remain focused, to drive customer satisfaction, improve financialperformance, implement consistent processes across Woodward and develop andexecute strategies for future growth.

To summarize, our underlying markets continue to be strong.We're winning major commitments, meeting and in many cases exceeding ourcustomers' expectations and are on pace to deliver next generationtechnologies. These efforts will drive our success in the future.

Now I'll turn the call over to Bob to review our financialresults and provide our outlook for 2008.

Bob Weber

Thank you Tom, and good evening everyone. At the Woodwardconsolidated level, sales for the quarter were $291 million, a 25% increaseover last year's fourth quarter sales of $233 million organic growth was 11%.

Consolidated earnings before income taxes for the quarterincreased 38% to $36.8 million, compared with $26.6 million in the same perioda year ago. Net earnings for the quarter were $36 million or $1.02 per share,compared with $17.1 million or $0.49 per share for the same quarter a year ago.

Included in net earnings for the fourth quarter of 2007 werespecial tax adjustments with a net favorable impact of $10.3 million orapproximately $0.30 per share. For the full fiscal year 2007, consolidatedsales were a record high $1.040 billion, a 22% increase from $855 million forthe previous year.

Organic growth for the full year was also 11%. Consolidatedearnings before income taxes for the full fiscal year 2007 increased to 56% to$132 million from $84.5 million in the same period a year ago. Consolidated netearnings for fiscal 2007 were $98.2 million or $2.79 per diluted share,compared with $69.9 million or $1.99 per diluted share for the same period ayear ago.

Included in net earnings for 2007 were favorable adjustmentsof tax expense totaling $10.3 million or $0.30 per share and an after-taxexpense of $2.5 million or $0.07 per share related to an adverse arbitrationruling recorded in the second quarter of 2007.

The Earnings Release table also highlights the reduction intax expense from a 2006 deferred tax valuation adjustment of $13.7 million,partially offset by after-tax expense of $5.3 million or $0.15 per sharerelated to the legal matter mentioned in prior quarters.

Turning to our business segment performance, when I speak tosegment sales going forward they will include inter-segment sales as well as externalcustomer sales. Inter-segment sales largely represent contract manufacturingbetween our segments at margins approximating benchmark data reflective of suchactivity.

I would also like to point out that we now include certaininformation technology costs in the business segment results that werepreviously reported in non-segment expenses. For the Turbine Systems segment,which now includes both aircraft and industrial turbines, sales for the quarterwere $144 million compared to $128 million a year ago, an increase of 12%.

Segment earnings for the quarter increased 4% to $21 millioncompared to $20.3 million for the same quarter last year. Segment earnings as apercent of sales were 14.6% for the fourth quarter of 2007 and 15.8% for thesame quarter last year.

The fourth quarter results for this year include a chargerelated to our exit from a small non-core product line, as well as expensesrelated to member-wide variable compensation that exceeded the prior year basedon improved total Company performance.

Turbine Systems sales for the full fiscal year 2007 were$524 million compared to $459 million a year ago, an increase of 14%. Segmentearnings for the year increased 29% to $87.4 million compared to $67.6 millionfor the same period last year.

Segment earnings as a percent of sales were 16.7% in 2007compared to 14.7% a year ago. Sales for the Engine Systems segment, whichfocuses on reciprocating gas and diesel engines as well as steam turbines, were$125 million for the most recent quarter, an increase of 9% over last year'sfourth quarter sales of $114 million.

Engine Systems segment earnings in the fourth quarter offiscal 2007 were $17.2 million compared with $11.2 million for the same quartera year ago, an increase of 54%. This increase is primarily attributable toproductivity improvements beyond customer commitments and the positive impactof higher sales on our fixed cost base, offset by the higher member-widevariable compensation referred to earlier.

Engine Systems sales for fiscal year 2007 were $455 million,an increase of almost 6% over sales of $430 million a year ago. Engine Systemssegment earnings for fiscal year 2007 were $57 million compared with $40.8million for the same period a year ago, an increase of 40%.

Segment earnings as a percent of sales were 12.5% in 2007and 9.5% in the prior year. Electrical Power Systems segment sales for thequarter were $55 million compared to fourth quarter sales of $21 million a yearago. Organic sales growth for the fourth quarter 2007 was12%.

Electrical Power Systems segment earnings in the fourthquarter of fiscal 2007 were $5.1 million compared with $0.6 million for thesame quarter a year ago. Segment earnings as a percent of sales were 9.3% inthe fourth quarter of 2007 and 2.7% for the same period a year ago.

This improvement is primarily due to the acquisition of SEGand the higher relative percentage of inter-segment sales in the prior year atcontract manufacturing margins, offset by higher member-wide variablecompensation as previously noted. Electrical Power System sales for the fiscalyear 2007 were $181 million compared to $76 million a year ago.

Organic growth for the full year was 14%. Electrical PowerSystems segment earnings for fiscal 2007 were $20.3 million compared with $4.5million for the same period a year ago. Segment earnings as a percent of saleswere 11.2% in 2007 and 5.9% in the prior year.

This improvement relates to the SEG acquisition and thelarger percentage of contract manufacturing relative to total business activitylast year, offset by the increase in member-wide variable compensation.

Now I would like to focus on certain specific elements ofour consolidated financial statements. Gross margin as a percent of salesdecreased to 28.2% in the fourth quarter of 2007 from 29.5% in the fourthquarter of 2006. Full-year 2007 gross margin as a percent of sales improved to30.1% from 28.3% in 2006.

The quarterly decline reflects the earlier mentioned exitfrom a small non-core product line, as well as higher member-wide variablecompensation and expenses associated with the consolidation of certain productlines to other manufacturing locations. The full-year increase reflects highersales on our fixed overheads and the result of continued cost reduction initiatives,partially offset by the items mentioned above.

Selling, general and administrative expenses increased to$27 million or 9.3% of sales in the fourth quarter of 2007 from $22 million or9.6% in 2006. For the full year 2007, selling, general and administrativeexpenses increased to $111 million from $92 million in 2006, but remainedconstant as a percent of sales at about 10.7%.

Consolidated research and development expenses of $18million for the Fourth Quarter of 2007 were substantially consistent with thefourth quarter of 2006. For the full year of 2007, R&D expenses were $65million compared to $60 million a year ago.

For all of 2007, as a percent of sales, research anddevelopment expenses decreased slightly to 6.3% from 7% in the prior year,primarily on the increased sales volume. Total depreciation and amortizationexpense increased to $33 million in 2007 from $29 million in the prior year.

Our capital expenditures were $32 million for both 2007 and2006. Looking forward to 2008, we expect our capital expenditures toapproximate $100 million over a two-year period, ramping from approximately $40million in 2008 to $60 million in 2009.

As we make significant investments within our existingfacilities for equipment that will deliver operational improvements andadvanced test facilities to prevent us to more effectively test our developingtechnologies and systems to meet our customers needs in the future.

As mentioned previously, income tax expense for 2007included adjustments with a net favorable impact of $10.3 million or $0.30 pershare based on shares outstanding for the year. Specifically, we received afavorable outcome related to prior-year tax examinations of $13.3 million,offset by a decrease in our deferred tax assets resulting from the reduction inthe German statutory tax rate of $3 million.

Income taxes for 2006 included a benefit from changes in avaluation allowance related to deferred tax assets of $13.7 million or $0.39per share. Looking to 2008, we expect our effective tax rate to be between35%and 37%, taking into consideration the scheduled expiration of the U.S.research credit.

To turn briefly to our Balance Sheet, working capitalincreased to $276 million as of September 30, 2007, from $260 million as ofSeptember 30, 2006. Cash flow generated from operations was $118 million, anincrease of 46% over the prior year.

Our total debt was $67 million at September 30, 2007,compared to $74 million at September 30, 2006. The ratio of debt-to-debt plusequity was 11% at September 30, 2007, compared to 13% at September 30, 2006.

As announced in August, we executed an accelerated sharerepurchase agreement to purchase approximately $31 million of our outstandingshares, and in doing so, completed our $50 million stock repurchase programthat was announced in July of 2006.

In October of 2007, we announced the authorization of a newthree-year $200 million stock repurchase plan. Also last month, we entered intoan amended credit agreement with our bank group. The new agreement increasedthe initial commitment from $100 million to $225 million and increased ouroption to expand the commitment from $75 million to $125 million, giving us arevolving credit availability of $350 million to support our strategicinitiatives.

Turning now to our outlook. As we stated in our earningsrelease, we believe the strength in our end markets will continue through 2008and our efforts to improve our overall cost structure will deliver enhancedmargins and improved profitability.

As a result, we have targeted sales growth for Woodward inthe range of 8 to 10% and earnings of $3.05 to $3.15 per diluted share. Thatconcludes our comments on the business and results for the fourth quarter andfiscal year 2007 earnings conference call.

Operator, we're now ready to open the call to questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from PeterLisnic from Robert W. Baird.

John Haushalter - Robert W. Baird

Good evening, gentlemen. It's actually John Haushalter onfor Pete.

Bob Weber

Hi, John. How are you?

John Haushalter - Robert W. Baird

Pretty good. Just on the gross margin line, you kind ofquantified or qualitatively kind of described some things that hurt you in thequarter. Could you just put some numbers behind that or just give us a betterfeeling of how much that actually impacted you?

Bob Weber

Yes. As we stated at other times, John, we really don't wantto get into a practice of kind of calling out one-time items every quarter foryou, so given that these are operating items, the best way to describe theimpact would be without them our gross margin percentage would have beenequivalent to the prior quarters of 2007.

John Haushalter - Robert W. Baird

Okay. So to the prior quarters on a year-on-year basis,would it have gone down?

Bob Weber

No. Year on year, we're up, but the gross margin for thefourth quarter would have been approximately equal to the first, second, andthird of '07.

John Haushalter - Robert W. Baird

Okay.

Bob Weber

That should give you an order of magnitude type of…

John Haushalter - Robert W. Baird

Yes. That's helpful. Okay. And then the $100 million inCapEx, I think that's more than we had thought you guys would be spending. Whatapproximately is kind of the hurdle rate you guys approach for investments ofthat magnitude? I know it's spread over two years, but that's more than I'veheard you talk about in the past or you spent in the past couple of years.

Tom Gendron

Basically, we look at a hurdle rate of 15% on ourinvestments.

John Haushalter - Robert W. Baird

Okay.

Tom Gendron

I would highlight there though, some of the investments, asBob said, is with the business we've been winning in all of our markets on moresystems, we do have to advance our systems test facilities and we're going tobe installing new facilities and those are pricey, so that's a big part of thatinvestment as well.

John Haushalter - Robert W. Baird

Okay, so it's kind of backfilling or giving yourself theinfrastructure to handle already won business, so to speak?

Tom Gendron

Won and then also positioning us for future business aswell. It's a combination that we're going to use on the products and programsthat we have today, but we're also advancing our capability, which we thinkwill help secure new business going forward.

John Haushalter - Robert W. Baird

Okay. And then just more of a record keeping, I guess, butcould you guys just if you had kept the old segment reporting or just kind ofwhat your approximate aerospace sales mix was this quarter?

Bob Weber

Sales mix in terms of after market and…

John Haushalter - Robert W. Baird

Just like within turbine, for instance, if you were to breakturbine down and the kind of the 12% growth it had there, just what was saleskind of within the aerospace side and then what were sales kind of on the gasturbine side?

Bob Weber

So you're looking for the industrial turbine side versus theaircraft side? The industrial aircraft turbine, as you probably noticed inprior quarters is the lion's share of that total. It would be somewhere in theneighborhood of 13%, 14% of the total would be industrial turbine.

Tom Gendron

No, it would be aircraft. The aircraft side. He's asking thesales growth.

Bob Weber

I'm sorry, I didn't hear the sales growth. I was giving awrong number.

Tom Gendron

Yes.

Bob Weber

Does that answer your question?

John Haushalter - Robert W. Baird

So of the sales growth, so just…

Bob Weber

Sales growth in aircraft is 13 to 14%.

John Haushalter - Robert W. Baird

Okay. So that and then on the gas turbine side? Is that justbecause I mean you had a not a competitor but someone else who was involved inthe gas turbine space speak very favorably about it about two weeks ago.

I'm just curious if it's coming through your numbers yet orif that's something that's really not embedded and kind of or it's in yoursales outlook but not in your numbers so far.

Tom Gendron

Well, we've started to see improvement in the industrial gasturbine market and I think, as you see, if you looked at the big three on theindustrial turbine side, their sales are going up and we expect to do wellgoing forward.

On the industrial turbine side, based on the mix of turbinessold, whether it's going in with a low emission turbine or a standard emissiondepending on what region of the world, our content will vary based on that. Butin total, the market is up and we're moving up as well with it.

John Haushalter - Robert W. Baird

Okay. Thank you. I'll get back in queue.

Tom Gendron

Okay.

Operator

Our next question comes from Tyler Hojo from Sidoti &Company.

Tyler Hojo - Sidoti & Company

Hi, good evening, guys.

Bob Weber

Good evening.

Tyler Hojo - Sidoti & Company

I was wondering, I don't know if you're going to do this inyour public filing or not, but is it possible for you to provide us with alittle bit more historical data for the three new business segments?

It's just kind of tough to kind of compare things, compareand contrast I guess if you will, especially on the margin side.

Bob Weber

We have not at this point planned to go in any more detail,Tyler. I think probably the best way to describe it would be that, if you takethe information that we presented, 2006 would not be substantially different interms of the ratios and margin elements that you're looking at. So we didn'tfeel as we looked at it, that providing that information really added a lot.

As we go forward and for example, now you see fourth quarterof '07 versus fourth quarter of '06, we think that will really provide a goodview of the business.

Tyler Hojo - Sidoti & Company

So, basically just as we go forward, for instance, when youreport the first quarter of '08, you're going to provide the first quarter of'07 and that's it?

Bob Weber

The first quarter of '07?

Tyler Hojo - Sidoti & Company

You're just going to provide the year prior quarter?

Bob Weber

Yes.

Tyler Hojo - Sidoti & Company

Okay. All right. And just in terms of maybe, I know when youused to give guidance for aircraft engine and industrial control you kind ofbroke out the guidance between the business segments.

I've noticed that you just kind of threw out an 8 to 10%type growth rate and no real kind of segment margins forecast. I was wonderingif you could maybe provide us a little bit of detail just in terms of how youexpect that to go into 2008?

Bob Weber

Well, Tyler in terms of going forward, one, the segmentsobviously are fairly new and so we are concerned obviously that giving detailedguidance below the level that we have right now would open it up to kind of alot of variability for some period of time.

If as we get more comfortable in the trends inside of theseindividual segments, then we might expand the guidance.

Tyler Hojo - Sidoti & Company

Fair enough. Bob, I know you gave this but I missed it.What's the go forward tax rate that's embedded in for '08?

Bob Weber

35 to 37.

Tyler Hojo - Sidoti & Company

Okay.

Bob Weber

And that assumes the expiration of the R&D credit.

Tyler Hojo - Sidoti & Company

Okay, great. And one more for you and I'll hop back in, areyou guys seeing any push out? I know you got a pretty substantial position onGEnx, but with kind of the recent news out at Boeing just wondering if yoursupplier is holding you where you are or your customers holding you where youare?

Tom Gendron

Yes, right now, we're still delivering to our originaldates. Our program's on schedule, and GE's not backing down from their schedules,so we're still progress progressing well and the engine's working well, so weexpect minimal impact from the Boeing delay.

Tyler Hojo - Sidoti & Company

Okay, very good. Actually one more, if you don't mind. Iguess if you could maybe your best guess just in terms of these three businesssegments, where do you guys think that the most move in the margin is going tocome from?

Tom Gendron

What you have, if you come back and you look at the turbinesegment, you see that the industrial turbine margins, when you take thattogether and look at the history, they're pretty consistent with the aircraftmargins and how we always said before, we were driving towards a rate that wethought was which we think when we benchmark against competitors is anoutstanding rate.

We expect to hold that. We'll be driving hard to makecontinuous improvements in it but it's our it's at a high rate. We'll make alittle bit of improvement but you won't see substantial in that area.

The other two segments, we expect we still have marginimprovement opportunities. Our programs are designed to work on that and soboth those, the engine and the electrical power systems; we expect to continueto make margin improvements.

I think we've been pretty successful over the last couple ofyears, hitting the targets we highlighted during these calls.

Tyler Hojo - Sidoti & Company

Been very successful.

Tom Gendron

Yes, and we're still driving for more. It's going to gettougher as you get up higher in the margins, but we think there's moreopportunity. We're implementing improved processes in our business.

We're looking at how to optimize our supply chains, how tooptimize our factories and we think there's still more there. So you'll seethose two have the better on the margin opportunity.

Tyler Hojo - Sidoti & Company

Okay, thanks, thanks for that color, Tom.

Tom Gendron

Yes.

Operator

Our next question comes from Ned Armstrong, from FBR CapitalMarkets.

Ned Armstrong - FBR Capital Markets

Thank you, good evening.

Bob Weber

Good evening.

Ned Armstrong - FBR Capital Markets

My question really is an elaboration on the prior questionabout the margin targets for your three segments. I just want to make sure I understoodthings correctly in the numbers I'm translating that answer into, so turbinemargins can come close to 20% and I'm not talking about necessary next yearnext quarter but a good target over time, and then both the engine and theelectrical can approach mid teens. Is that a fair way to think about the answerto the prior question?

Tom Gendron

Yes, I think that's generally in the right direction.

Ned Armstrong - FBR Capital Markets

Okay and then I just wanted to go back again to the turbinebusiness and make sure that I heard you correctly. What was the reason for themargin decline in Q4 in the turbine systems business? Was it all that variablecompensation or were there other items in there as well?

Bob Weber

No, there were a couple items. One, we commented on the exitfrom a small non-core product line up, some charges we took related to that andthe variable compensation.

Ned Armstrong - FBR Capital Markets

Okay, so it was those two?

Bob Weber

Yes.

Tom Gendron

Yes.

Ned Armstrong - FBR Capital Markets

Great. Thank you very much.

Bob Weber

Sure.

Operator

Our next question comes from J.B. Groh, from D.A. Davidson.

J.B. Groh - D.A. Davidson

Afternoon, guys.

Tom Gendron

Afternoon.

J.B. Groh - D.A. Davidson

Maybe you could give us, I understand not wanting to givesome explicit guidance on the different segments, but how about a run rate kindof for the non-segment stuff, is that $7.5 million, that's obviously nudged upa little bit by year-end type stuff but what's kind of the appropriate levelthere?

Bob Weber

Yes, I would say, one, as a percentage we would expect it tocontinue coming down somewhat. We talked about some professional fee improvementsas we went forward. Those were somewhat offset this year by the larger thanoriginally planned variable compensation.

So assuming this as we do, we reset everything for the nextyear, so we kind of go back to zero and start again. We would expect that ournon-segment expenses would reduce somewhat.

J.B. Groh - D.A. Davidson

Okay, and then on the R&D side on the dollar amountsthere, obviously GEnx has caused a bit of a ramp up there since back in say '05or something. I'm assuming that's peaked at a dollar level and would obviouslycome down; it would come down as a dollar level as well as percentage of salesor just as percentage of sales?

Bob Weber

Probably more as a percentage of sales. We don't anticipatethat it will come down on a dollar basis. In fact we might see some smallerincreases. I mean, you're right to say that we already have a lot going on, butthat's not to say that we wouldn't see some increase in dollar from a dollarstandpoint.

J.B. Groh - D.A. Davidson

Okay, but is it safe to say that specifically the GEnxrelated spending is your past the peak of that?

Tom Gendron

Well, not really.

J.B. Groh - D.A. Davidson

Okay.

Tom Gendron

The reason you got to recognize is that the GEnx is lookingto be applied also on to the 747-8.

J.B. Groh - D.A. Davidson

Great.

Tom Gendron

And there's still an unknown in the market. It's anticipatedGE or GE and one of its partners will still provide an engine for the A350,which could continue some of that investment.

So we're looking at in total in our turbine business, ofwhich you know the aircraft is a larger portion, that dollar wise the R&Dthere is probably steady, but in a total company with the investments we haveand some of the new businesses and the like, as Bob said, we're going to go upslightly on dollars but down on percentage.

J.B. Groh - D.A. Davidson

Okay. So you baked in future potential projects that wouldcome on line, like incremental spending on the GEnx for dash 8?

Tom Gendron

Well that was planned and it's in there, but if you'reactually in incremental spending we're going to spend more on the wind market,more in our electrical power distribution market. Those are going to seeincreased R&D expenditures as we see substantial growth opportunities, butwe're well funded.

Our development efforts in the turbine market andparticularly in the aircraft turbine market. The programs are understood. We'reon them. We got the R&D. I guess the point I was trying to make is it's notgoing to fall off this year because we're going to roll it off to theseprograms that are already secured and going into development and they don'tenter service for a couple more years, so you can see why it's going to holdfor a little bit.

J.B. Groh - D.A. Davidson

Okay. Understood. And then maybe you could talk about yourlooking at your balance sheet you've got obviously pretty strong balance sheet,good cash flow, your acquisition appetite, you did a deal last year, but whatare you looking at? What are you seeing in the pipeline valuations, that sortof thing?

Tom Gendron

Yes. Right now, what we say is we're looking and workinghard on identifying and trying to secure acquisitions that really fit ourstrategy. I always caution we're not going to go astray from our strategy. Wethink it's the right place to be. We see opportunities out there. Thevaluations are still strong, but there's good opportunities we think out therestill. We're looking at them and if we can find the good fit with the Companyat the right value, we're going to position or secure those.

As Bob highlighted earlier, we're positioning ourselves, ourbalance sheet is strong but also with the new revolver, the idea behind all ofthat was to allow us to make very rapid acquisitions in small and mid-sizecompanies when we see the opportunity arise and that we're positioned to dothat. And we've got teams looking at it, but I think everybody on the callknows you can't time or give any guarantees on acquisitions.

J.B. Groh - D.A. Davidson

Absolutely. Okay. Thanks for your time.

Tom Gendron

Sure.

Operator

(Operator Instructions) Our next question comes from JimHuang from Gabelli.

Jim Huang - Gabelli

Hi, good evening, guys.

Bob Weber

Good evening, Jim.

Jim Huang - Gabelli

I was wondering, if you could you split out the growth inthe turbine business between aircraft and natural gas turbine business and inthe quarter and then what do you think the growth rate might be going forward?

Tom Gendron

Yes, looking at the, if you want to say on the aircraft sideof the turbine business, we expect to continue double-digit growth.

Jim Huang - Gabelli

Okay.

Tom Gendron

Going forward, that's for 08. The outlook is very strong. Wehaven't put an '09 forecast together, but if you just look in the last fewweeks the order books are still filling in.

Jim Huang - Gabelli

Right.

Tom Gendron

We feel very good. The market position we've secured overthe last five years captured some share. We see double-digit growth for a whilehere so it's still strong there.

Jim Huang - Gabelli

Right.

Tom Gendron

The industrial market won't be as high but it will varydepending on as I highlighted earlier the mix of the products being sold, andsometimes we don't know that mix early on. The total market's going up and weexpect to go up with it but, at what percentage will vary a little bit on theactual mix and delivery rates.

Jim Huang - Gabelli

Well, Tom I'm hearing that the IGT business is gettingstrong, both OE and replacement parts, and you're also growing double digitstoo from some other companies. I was just wondering, are you kind of in thelater stage to work with the IGT business or are you just don't …

Tom Gendron

No, I think what I'd highlight there is we are holding ourposition well there.

Jim Huang - Gabelli

Okay.

Tom Gendron

And as I said, the mix, we give a wide range, almost a2-to-1-value range difference, depending on the level of emission capability ofa turbine.

Jim Huang - Gabelli

Oh, okay.

Tom Gendron

And so that's what I'm highlighting. If you say the rawnumber turbine products we're shipping is going up probably close to doubledigit, it's the mix that will effect us, and so I don't want you to take mystatements as there's any negative there. We have to be a little cautious onthe mix of the emission capability.

Jim Huang - Gabelli

So I guess if I could rephrase that, so the units aregrowing double digits but the dollar amount may not be because of the varyingmix?

Tom Gendron

That's correct.

Jim Huang - Gabelli

Okay. Would that be in the area of acquisitions then, tokind of get more product into that area?

Tom Gendron

Well, obviously anything in turbines is adventurous to us.

Jim Huang - Gabelli

Okay.

Tom Gendron

As long as it's in the energy control and optimizationfield. We're not going to make buckets or cranes or things like that, but ifit's around fuel systems, combustion systems, controls, motion control, we'revery interested.

Jim Huang - Gabelli

Okay, and then just for you, Bob, did you buy any stock backfrom the accelerated stock repurchase plan?

Bob Weber

Yes, we did. During the year, we purchased some $40 millionworth of stock, through the accelerated we purchased approximately $ 31million.

Jim Huang - Gabelli

Okay. Was that in the fourth quarter or just for the …?

Bob Weber

Fourth quarter.

Jim Huang - Gabelli

In the fourth quarter. Okay, terrific. Thank you, guys.

Bob Weber

Thank you.

Operator

Mr. Gendron, there are no further questions at this time. Iwould now like to turn the conference back over to you for any closing remarks.

Tom Gendron

Well, I'd like to thank everybody for joining us today. Iappreciate the questions and we look forward to talking to you in January at theend of our first quarter. So, thank you.

Operator

Ladies and gentlemen, this concludes our conference call fortoday. If you would like to listen to a rebroadcast of this conference call, itwill be available after 9:00 p.m. Eastern Time by dialing 1-888-266-2081, or1-703-925-2533 and by entering the access code 1157382.

A rebroadcast will also be available at the Company'swebsite at www.woodward.com for 30 days. We thank you for your participation ontoday's conference call and ask that you may please disconnect your line atthis time, and have a wonderful day.

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Source: Woodward Governor F4Q07 (Qtr End 9/30/07) Earnings Call Transcript

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