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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

Woodward Governor Co. (WGOV) F4Q07 Earnings Call November 14, 2007 6:00 PM ET

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Woodward Governor Company Fourth Quarter And Fiscal Year 2007 Earnings Conference Call. At this time, I would like to inform you that the conference 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, 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 to Woodward'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 on today's earnings release. And at the end of our presentation, we'll open it up for questions.

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

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

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

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

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

We caution investors not to place undue reliance on these forward-looking statements as predictive of future results. In addition, the company disclaims any obligation to update the forward-looking statements made herein.

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

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

Tom Gendron

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

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

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

In addition to establishment of our Electrical Power Systems segment headquartered in Stuttgart Germany reflects our commitment to increasing our global focus. Each of three group Vice Presidents brings strong leadership to their renewed roles and is an expert and a veteran in their field.

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

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

For example, combined Boeing and Airbus orders for deliveries for commercial airliners will likely again hit new records. Similarly, we continue to see strong growth in the business and regional aviation markets, with order backlogs and deliveries having grown significantly over 2006 levels.

Overall fleet growth and increased utilization are supporting a 5% to 6% annual growth in passenger and freight traffic, which has resulted in strong demand for repair and related after-market services. We continue to seer our after-market sales approximate our long-term expectation of 50% of total aircraft sales.

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

Demand for power generation equipment, such as industrial turbines and large gas and diesel engines, continues to grow with the significant increase in global demand for electricity, particularly in distributed power applications. Development in China, India, and the Middle East is playing a key role in this growth.

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

Moving from power generation to power distribution, we identified global economic growth and the need for power and opportunity for our electrical power system products. Our existing product portfolio coupled with the SEG acquisition expanded our offerings of AC measurement and digital control products and is increasing our market share.

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

In engine markets, we are partnered with strong players in the industry and expect to grow with them at market rates. We are managing this growth largely through our existing footprint and do not presently see a need to significantly expand our infrastructure costs. In fact, we continue to consolidate manufacturing capabilities by following a strategy of core competencies, supply chain partnership and cost management.

While Bob will outline an increase in our expected capital expenditures for 2008, it will be worth noting that these expenditures are focused on competitive opportunities, such as improving manufacturing technology and advance system test capabilities.

We're also concentrating on reducing cycle times, driving improved customer satisfaction, and more efficient fixed asset utilization to the rollout of our build-to-order lean production program. Our priorities for 2008 remain focused, to drive customer satisfaction, improve financial performance, implement consistent processes across Woodward and develop and execute strategies for future growth.

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

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

Bob Weber

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

Consolidated earnings before income taxes for the quarter increased 38% to $36.8 million, compared with $26.6 million in the same period a 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 were special tax adjustments with a net favorable impact of $10.3 million or approximately $0.30 per share. For the full fiscal year 2007, consolidated sales were a record high $1.040 billion, a 22% increase from $855 million for the previous year.

Organic growth for the full year was also 11%. Consolidated earnings 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 net earnings 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 a year ago.

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

The Earnings Release table also highlights the reduction in tax 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 share related to the legal matter mentioned in prior quarters.

Turning to our business segment performance, when I speak to segment sales going forward they will include inter-segment sales as well as external customer sales. Inter-segment sales largely represent contract manufacturing between our segments at margins approximating benchmark data reflective of such activity.

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

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

The fourth quarter results for this year include a charge related to our exit from a small non-core product line, as well as expenses related to member-wide variable compensation that exceeded the prior year based on 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%. Segment earnings for the year increased 29% to $87.4 million compared to $67.6 million for the same period last year.

Segment earnings as a percent of sales were 16.7% in 2007 compared to 14.7% a year ago. Sales for the Engine Systems segment, which focuses 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's fourth quarter sales of $114 million.

Engine Systems segment earnings in the fourth quarter of fiscal 2007 were $17.2 million compared with $11.2 million for the same quarter a year ago, an increase of 54%. This increase is primarily attributable to productivity improvements beyond customer commitments and the positive impact of higher sales on our fixed cost base, offset by the higher member-wide variable 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 Systems segment earnings for fiscal year 2007 were $57 million compared with $40.8 million for the same period a year ago, an increase of 40%.

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

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

This improvement is primarily due to the acquisition of SEG and the higher relative percentage of inter-segment sales in the prior year at contract manufacturing margins, offset by higher member-wide variable compensation as previously noted. Electrical Power System sales for the fiscal year 2007 were $181 million compared to $76 million a year ago.

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

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

Now I would like to focus on certain specific elements of our consolidated financial statements. Gross margin as a percent of sales decreased to 28.2% in the fourth quarter of 2007 from 29.5% in the fourth quarter of 2006. Full-year 2007 gross margin as a percent of sales improved to 30.1% from 28.3% in 2006.

The quarterly decline reflects the earlier mentioned exit from a small non-core product line, as well as higher member-wide variable compensation and expenses associated with the consolidation of certain product lines to other manufacturing locations. The full-year increase reflects higher sales 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 or 9.6% in 2006. For the full year 2007, selling, general and administrative expenses increased to $111 million from $92 million in 2006, but remained constant as a percent of sales at about 10.7%.

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

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

Our capital expenditures were $32 million for both 2007 and 2006. Looking forward to 2008, we expect our capital expenditures to approximate $100 million over a two-year period, ramping from approximately $40 million in 2008 to $60 million in 2009.

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

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

Income taxes for 2006 included a benefit from changes in a valuation allowance related to deferred tax assets of $13.7 million or $0.39 per share. Looking to 2008, we expect our effective tax rate to be between 35%and 37%, taking into consideration the scheduled expiration of the U.S. research credit.

To turn briefly to our Balance Sheet, working capital increased to $276 million as of September 30, 2007, from $260 million as of September 30, 2006. Cash flow generated from operations was $118 million, an increase 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 plus equity was 11% at September 30, 2007, compared to 13% at September 30, 2006.

As announced in August, we executed an accelerated share repurchase agreement to purchase approximately $31 million of our outstanding shares, and in doing so, completed our $50 million stock repurchase program that was announced in July of 2006.

In October of 2007, we announced the authorization of a new three-year $200 million stock repurchase plan. Also last month, we entered into an amended credit agreement with our bank group. The new agreement increased the initial commitment from $100 million to $225 million and increased our option to expand the commitment from $75 million to $125 million, giving us a revolving credit availability of $350 million to support our strategic initiatives.

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

As a result, we have targeted sales growth for Woodward in the range of 8 to 10% and earnings of $3.05 to $3.15 per diluted share. That concludes our comments on the business and results for the fourth quarter and fiscal 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 Peter Lisnic from Robert W. Baird.

John Haushalter - Robert W. Baird

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

Bob Weber

Hi, John. How are you?

John Haushalter - Robert W. Baird

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

Bob Weber

Yes. As we stated at other times, John, we really don't want to get into a practice of kind of calling out one-time items every quarter for you, so given that these are operating items, the best way to describe the impact would be without them our gross margin percentage would have been equivalent 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 the fourth quarter would have been approximately equal to the first, second, and third 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 in CapEx, I think that's more than we had thought you guys would be spending. What approximately is kind of the hurdle rate you guys approach for investments of that magnitude? I know it's spread over two years, but that's more than I've heard 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 our investments.

John Haushalter - Robert W. Baird

Okay.

Tom Gendron

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

John Haushalter - Robert W. Baird

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

Tom Gendron

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

John Haushalter - Robert W. Baird

Okay. And then just more of a record keeping, I guess, but could you guys just if you had kept the old segment reporting or just kind of what 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 break turbine down and the kind of the 12% growth it had there, just what was sales kind of within the aerospace side and then what were sales kind of on the gas turbine side?

Bob Weber

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

Tom Gendron

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

Bob Weber

I'm sorry, I didn't hear the sales growth. I was giving a wrong 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 just because I mean you had a not a competitor but someone else who was involved in the gas turbine space speak very favorably about it about two weeks ago.

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

Tom Gendron

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

On the industrial turbine side, based on the mix of turbines sold, whether it's going in with a low emission turbine or a standard emission depending on what region of the world, our content will vary based on that. But in 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 in your public filing or not, but is it possible for you to provide us with a little bit more historical data for the three new business segments?

It's just kind of tough to kind of compare things, compare and 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 take the information that we presented, 2006 would not be substantially different in terms of the ratios and margin elements that you're looking at. So we didn't feel as we looked at it, that providing that information really added a lot.

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

Tyler Hojo - Sidoti & Company

So, basically just as we go forward, for instance, when you report 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 you used to give guidance for aircraft engine and industrial control you kind of broke 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 wondering if you could maybe provide us a little bit of detail just in terms of how you expect that to go into 2008?

Bob Weber

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

If as we get more comfortable in the trends inside of these individual 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, are you guys seeing any push out? I know you got a pretty substantial position on GEnx, but with kind of the recent news out at Boeing just wondering if your supplier is holding you where you are or your customers holding you where you are?

Tom Gendron

Yes, right now, we're still delivering to our original dates. 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 we expect minimal impact from the Boeing delay.

Tyler Hojo - Sidoti & Company

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

Tom Gendron

What you have, if you come back and you look at the turbine segment, you see that the industrial turbine margins, when you take that together and look at the history, they're pretty consistent with the aircraft margins and how we always said before, we were driving towards a rate that we thought was which we think when we benchmark against competitors is an outstanding rate.

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

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

I think we've been pretty successful over the last couple of years, 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 get tougher as you get up higher in the margins, but we think there's more opportunity. We're implementing improved processes in our business.

We're looking at how to optimize our supply chains, how to optimize our factories and we think there's still more there. So you'll see those 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 Capital Markets.

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 question about the margin targets for your three segments. I just want to make sure I understood things correctly in the numbers I'm translating that answer into, so turbine margins can come close to 20% and I'm not talking about necessary next year next quarter but a good target over time, and then both the engine and the electrical can approach mid teens. Is that a fair way to think about the answer to 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 turbine business and make sure that I heard you correctly. What was the reason for the margin decline in Q4 in the turbine systems business? Was it all that variable compensation or were there other items in there as well?

Bob Weber

No, there were a couple items. One, we commented on the exit from a small non-core product line up, some charges we took related to that and the 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 give some explicit guidance on the different segments, but how about a run rate kind of for the non-segment stuff, is that $7.5 million, that's obviously nudged up a little bit by year-end type stuff but what's kind of the appropriate level there?

Bob Weber

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

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

J.B. Groh - D.A. Davidson

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

Bob Weber

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

J.B. Groh - D.A. Davidson

Okay, but is it safe to say that specifically the GEnx related 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 looking to 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 anticipated GE 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, of which you know the aircraft is a larger portion, that dollar wise the R&D there is probably steady, but in a total company with the investments we have and some of the new businesses and the like, as Bob said, we're going to go up slightly on dollars but down on percentage.

J.B. Groh - D.A. Davidson

Okay. So you baked in future potential projects that would come 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're actually in incremental spending we're going to spend more on the wind market, more in our electrical power distribution market. Those are going to see increased R&D expenditures as we see substantial growth opportunities, but we're well funded.

Our development efforts in the turbine market and particularly in the aircraft turbine market. The programs are understood. We're on them. We got the R&D. I guess the point I was trying to make is it's not going to fall off this year because we're going to roll it off to these programs that are already secured and going into development and they don't enter service for a couple more years, so you can see why it's going to hold for a little bit.

J.B. Groh - D.A. Davidson

Okay. Understood. And then maybe you could talk about your looking 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 what are you looking at? What are you seeing in the pipeline valuations, that sort of thing?

Tom Gendron

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

As Bob highlighted earlier, we're positioning ourselves, our balance sheet is strong but also with the new revolver, the idea behind all of that was to allow us to make very rapid acquisitions in small and mid-size companies when we see the opportunity arise and that we're positioned to do that. And we've got teams looking at it, but I think everybody on the call knows 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 Jim Huang 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 in the turbine business between aircraft and natural gas turbine business and in the 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 side of 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. We haven't put an '09 forecast together, but if you just look in the last few weeks the order books are still filling in.

Jim Huang - Gabelli

Right.

Tom Gendron

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

Jim Huang - Gabelli

Right.

Tom Gendron

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

Jim Huang - Gabelli

Well, Tom I'm hearing that the IGT business is getting strong, both OE and replacement parts, and you're also growing double digits too from some other companies. I was just wondering, are you kind of in the later 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 our position well there.

Jim Huang - Gabelli

Okay.

Tom Gendron

And as I said, the mix, we give a wide range, almost a 2-to-1-value range difference, depending on the level of emission capability of a turbine.

Jim Huang - Gabelli

Oh, okay.

Tom Gendron

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

Jim Huang - Gabelli

So I guess if I could rephrase that, so the units are growing double digits but the dollar amount may not be because of the varying mix?

Tom Gendron

That's correct.

Jim Huang - Gabelli

Okay. Would that be in the area of acquisitions then, to kind 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 optimization field. We're not going to make buckets or cranes or things like that, but if it's around fuel systems, combustion systems, controls, motion control, we're very interested.

Jim Huang - Gabelli

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

Bob Weber

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

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. I would 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. I appreciate the questions and we look forward to talking to you in January at the end of our first quarter. So, thank you.

Operator

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

A rebroadcast will also be available at the Company's website at www.woodward.com for 30 days. We thank you for your participation on today's conference call and ask that you may please disconnect your line at this 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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