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Woodward Inc (WWD 0.46%)
Q2Â 2019 Earnings Call
April 29, 2019, 4:30 p.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Thank you for standing by. Welcome to the Woodward, Inc. Second 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, Chief Financial Officer and Mr. Don Guzzardo, Vice President of Investor Relations and Treasurer.
I would now like to turn the call over to Mr. Guzzardo.
Don Guzzardo -- Vice President, Investor Relations and Treasurer
Thank you, operator. We would like to welcome all of you to Woodward's Second Quarter Fiscal Year 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 May 13, 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.
Woodward adopted the FASB Accounting Standards Update No. 2014-09. Revenue from Contracts with Customers or ASC 606, effective October 1, 2018, and results for the second quarter and first half of fiscal 2019, including adjusted and organic amounts are presented on that basis. Except as specifically stated otherwise.
Prior period amounts are presented under the previous accounting standard ASC 605. We believe the impact of adoption of the new standard will not be material for the full fiscal year 2019. However, we believe there will be ongoing quarterly variability of the impacts of ASC 606 for both sales and net earnings.
The primary impact of ASC 606 is anticipated to be the inclusion of customer provided inventory and net sales with no related earnings. In our first fiscal quarter of 2019, we provided sales and earnings under ASC 606 and 605 in both the narrative and tables of our press release, as it was the first period of adoption. In this release, and going forward, please refer to the tables included in the press release and our quarterly reports on Form 10-Q filed for 2018.
Our prepared remarks today will include both 606 and 605 amounts. In addition, Woodward is providing financial information as reported under US GAAP and on an adjusted and an organic basis. Please refer to our press release and related tables, as well as the appendix of today's presentation for the definition of adjusted, organic and other non-GAAP financial measures.
We believe this will help in understanding both historical results and future outlooks. We also direct your attention to the reconciliations of non-US GAAP financial measures, which are included in today's slide presentation, and our earnings release and related schedules.
Now turning to our results for the second quarter. Net sales were $759 million for the second quarter of fiscal 2019, compared to $548 million for the prior year quarter. Organic net sales, which exclude sales attributable to the L'Orange business were $671 million, an increase of 22% from the prior year quarter. Net earnings were $70 million or $1.20 per share compared to $38 million or $0.60 per share for the prior year quarter.
Adjusted net earnings were $90 million or $1.40 per share compared to adjusted net earnings of $52 million or $0.82 per share for the prior year quarter.
Net cash generated from operating activities for the first half of 2019 was $141 million compared to cash generated of $57 million for the same period of the prior year. Free cash flow was $87 million for the first half of 2019 compared to a free cash outflow of $2 million for the same period of the prior year. Now, I will turn the call over to Tom to comment further on our results, strategies and markets.
Thomas A. Gendron -- Chairman of the Board, Chief Executive Officer and President
Thank you, Don, and good afternoon everyone. In the second quarter of 2019, we delivered strong results in both our aerospace and industrial segments, marking a record first half of the year. Aerospace markets continued to be very robust while previously pressured industrial markets are improving as expected, particularly in both natural gas and diesel engines.
We are encouraged by recent economic data that provides more confidence in the strength of the second half although some uncertainty still remains. As a result, we are increasing our outlook for the year.
Turning to recent events, we are saddened by the tragedy leading to the ground into the Boeing 737 Max. We are closely monitoring the situation as the investigation continues to unfold. At this time, we do not anticipate any significant impact in our planned production rates. We will continue to assess potential impacts related to commercial aftermarket for both initial provisioning and legacy aircraft.
Moving to our aerospace markets, aerospace segment again delivered superior results driven by demand for new fuel-efficient aircraft and continued strength in global passenger and cargo traffic. Load factors remain at an all-time high, which continues to drive aftermarket volumes. Defense demand remained strong particularly for Woodward programs with budgets anticipated to further support incremental military spending. We are seeing healthy activity across most of our defense markets.
Turning to our industrial markets and power generation, the globalization and related shift to natural gas, both power generation and the process industries is accelerating. Significant infrastructure investments and pipelines, processing plants LNG tankers and terminals are substantially increase in the availability and utilization of natural gas as an emissions friendly source of energy. We believe this will lead to return to growth for industrial gas turbines.
The tremendous growth in Internet traffic and data storage is also driving demand for data center power generation. Within transportation natural gas truck orders have been exceptionally strong as the Chinese government's air quality initiatives drive natural gas truck demand.
While we anticipate this overall trend will continue, quarterly variability as possible. Global trade continues to drive strong cargo shipped utilization related aftermarket activity. Additionally, recent emission regulations with respect to marine market's are also supporting new equipment sales.
In oil and gas, rise in oil prices are driving increased investment. Growth in rig counts, distribution infrastructure and processing is leading to increased market demand. Woodward L'Orange continues to perform very well, as a result of healthy markets and solid execution across our end markets.
In summary, our Aerospace segment momentum continues, lead by the narrowbody ramp and growing pass -- global passenger traffic. Our industrial markets are seeing ongoing improvement as anticipated.
Our strategic investments in aerospace technology have resulted in significant market share gains. While our investments in world-class manufacturing capability and improved productivity are supporting, increased profitability. Our strategic initiatives with respect to our industrial businesses and our acquisition of Woodward L'Orange a visit -- a position of the capitalize on improving markets through both sales and earnings growth.
Now, I'll turn it to Bob to discuss our financials in more detail.
Robert F. Weber Jr. -- Vice Chairman, Chief Financial Officer
Thank you, Tom. We posted another great quarter. Aerospace segment net sales for the second quarter of fiscal 2019 were $483 million compared to $386 million from the second quarter a year ago, a 25% increase. Aerospace segment net sales were driven by continued strength across commercial and defense OEM and aftermarket programs. The second quarter of 2019 included $33 million of aerospace segment net sales related to the adoption of ASC 606, primarily due to customer provided components. Commercial aftermarket sales were up 32% compared to the prior year quarter, or up 21% on a consistent ASC 605 basis. Woodward commercial aftermarket sales were exceptionally strong for both legacy aircraft and initial provisioning. For the reminder of the year, we anticipate commercial aftermarket growth to moderate versus the prior year based on the strength of the second half last year and the potential for lower initial provisioning due to the grounding of the Boeing 737 MAX.
Aerospace segment earnings for the second quarter of 2019 were $102 million compared to $75 million for the same quarter in the prior year. Segment earnings for the second quarter of 2019 were increased by $9 million related to the adoption of ASC 606. The increase in aerospace segment earnings was predominantly driven by higher sales volume across all market categories, partially offset by increased variable compensation related to our strong financial performance in this first half.
Segment earnings as a percent of segment net sales were 21.1% for the second quarter of 2019, compared to 19.3% in the same quarter of the prior year. Under consistent application of ASC 605, segment earnings as a percent of segment net sales would have been 20.5%. Turning to industrial, Industrial segment net sales for the second quarter of fiscal 2019 were $276 million, compared to $162 million in the prior year period. Organic industrial segment net sales for the second quarter of 2019 were $188 million, which excludes sales of $88 million attributable to Woodward L'Orange. Foreign currency exchange rates had an unfavorable impact on sales of approximately $8 million for the second quarter of 2019.
On a constant currency basis, sales would have increased approximately 21%. Segment sales were powered by the ongoing improvements in reciprocating engines, stability in industrial turbines and the addition of Woodward L'Orange. Industrial segment earnings for the second quarter of 2019 were $27 million, or 9.8% of segment net sales. Adjusted Industrial segment earnings were $36 million for the second quarter of 2019 or 13.1% of segment net sales, compared to $11 million or 6.6% in the prior year period.
Industrial segment earnings growth was driven by the higher organic sales volume and the addition of Woodward L'Orange, partly offset by increased variable compensation related to improved financial performance in the first half of the year. At the Woodward level, R&D and selling, general and administrative expenses were largely in line with our expectations and are increased primarily due to the inclusion of Woodward L'Orange. The effective tax rate for the second quarter of 2019 was 14% compared to 20.9% in the second quarter of 2018. The adjusted effective tax rate for the second quarter of 2019 was 16.7% compared to 22.1% in the second quarter of 2018.
For the first six-months of 2019, the effective tax rate was 16.5% compared to 34.1% for the same period of the prior year, which included transition impacts of the change in US tax legislation. Removing the transition impacts, the tax rate for the first six-months of 2018 was 18.4%. We now expect our 2019 effective tax rate to be approximately 20%.
Looking at cash flows, net cash generated from operating activities for the first six-months of 2019 was $141 million, compared to $57 million for the prior year period. Capital expenditures were $54 million for the first half 2019 compared to $58 million for the first half of 2018.
For the full-year we still expect capital expenditures to be approximately $120 million. Free cash flow for the first six-months of the year was $87 million compared to an outflow of $2 million for the same period of the prior year. The increase in free cash flow was primarily driven by higher earnings. We continue to anticipate fiscal year 2019 free cash flow to be approximately 300 million.
During the first half of 2019, $62 million was returned to stockholders in the form of repurchase shares and dividends. We accelerated our share repurchase gains, excuse me, we accelerated our share repurchase plan slightly based on improved performance in the first half and related cash flow.
Lastly, I'd like to turn to our fiscal 2019 outlook. As we look ahead to the balance of fiscal year 2019, economic uncertainty remains. However, we are encouraged by the strong start to the year and the positive developments we are seeing in our markets, which gives us more confidence going into the second half. As a result, we are raising our guidance for the full year.
Total net sales are now expected to be between $2.8 billion and $2.9 billion for fiscal 2019, with Aerospace sales up approximately 15% and industrial sales up approximately 35%, both as compared to the prior year. This reflects that strengthen our markets and the impact of ASC 606 with respect to customer provided inventory. Aerospace segment earnings as a percent of segment net sales remain unchanged, and are expected to be approximately 20%. Adjusted industrial segment earnings as a percent of segment net sales are still expected to be approximately 14%.
Adjusted earnings per share is now expected to be between $4.60 and $4.80 based on approximately 65 million fully diluted weighted average shares outstanding. This concludes our comments on the business and results for the second quarter of fiscal 2019.
Operator, we're now ready to open the call to questions.
Questions and Answers:
Operator
(Operator Instructions) And our first question comes from the line of Sheila Kahyaoglu from Jefferies. Your line is open.
Sheila Kahyaoglu -- Jefferies LLC -- Analyst
Thank you. Good afternoon, guys.
Thomas A. Gendron -- Chairman of the Board, Chief Executive Officer and President
Good afternoon.
Robert F. Weber Jr. -- Vice Chairman, Chief Financial Officer
Hi Sheila.
Sheila Kahyaoglu -- Jefferies LLC -- Analyst
Hi. I guess the first question, the commercial aftermarket business was up 21% in the quarter. Can you talk, can you parse that demand a little bit, what was the initial provisioning driven versus the legacy business, and how are you? Just thinking about MAX production and going throughout the year.
Robert F. Weber Jr. -- Vice Chairman, Chief Financial Officer
I'll give you the split and then Tom can comment maybe on the match. Initial provisioning while up, obviously, significantly is still a relatively small percentage of the overall total. So the larger element of growth is related to legacy aftermarket which really represents those fleet dynamics and increased air time on the aircraft that we've got more content on and but initial provisioning is strong and remains so.
Thomas A. Gendron -- Chairman of the Board, Chief Executive Officer and President
Yes. And I think, Sheila, as we're looking at the MAX. I think as many of you know the production lines are staying wet. We're still producing at the 52 per month rate and for the foreseeable future, we think that will hold obviously why we said there is some risk or uncertainty in the second half is if the MAX doesn't come online. There, I suppose there is a risk to those production rates, but at the moment we would say initial provisioning is probably the larger of the uncertainty tied to the MAX versus OEM production. That's least our view at this time.
Sheila Kahyaoglu -- Jefferies LLC -- Analyst
Thanks for that color. And then just on L'Orange. It continues to perform well. Can you maybe give a little bit more commentary around where you're seeing the biggest benefit from a revenue synergy perspective or from an end market perspective there?
Thomas A. Gendron -- Chairman of the Board, Chief Executive Officer and President
Yes, well, first, the integration of L'Orange has gone extremely well, we're ahead of schedule. We are getting to the synergies we were identifying. On top of that the end markets are still doing well. We're seeing good utilization in the marine market, which is driving aftermarket sales. Oil and gas is still performing well, and so those are the primary drivers both OE and aftermarket and the outlook for the remainder of the year is still -- it's really solid and it's been performing as anticipated, maybe slightly better than anticipated.
Sheila Kahyaoglu -- Jefferies LLC -- Analyst
Great. Thank you.
Thomas A. Gendron -- Chairman of the Board, Chief Executive Officer and President
Thanks, Sheila.
Operator
Our next question comes from the line of David Strauss from Barclays. Your line is open.
David Strauss -- Barclays Capital Inc. -- Analyst
Thanks, good afternoon. The 16% organic industrial growth in the quarter, could you break that out by end market Power Gen versus transportation versus oil and gas, what that looks like?
Robert F. Weber Jr. -- Vice Chairman, Chief Financial Officer
Yes, quantitatively, you will see some more detail in the footnote, that's probably the best place to get it. But overall -- it was almost all areas, we saw a lot of strength, large gas, we saw strength in small gas, diesels have been very strong, wind is probably the renewables are the only soft spot really across the board for the industrial business, so it's kind of, as we said in the past year we expected to start turning around. And that's exactly what we're seeing.
David Strauss -- Barclays Capital Inc. -- Analyst
Okay. And then in terms of the guidance, I think the guidance is up $0.10, $0.20 from the beginning of the year and I think at the beginning of the year. Just taking L'Orange specifically you had said, L'Orange was going to be $0.35 and I think last quarter you said it was going to be roughly double that amount in terms of accretion, is that still right and so, what's -- kind of what's the offset within that overall guidance increase?
Robert F. Weber Jr. -- Vice Chairman, Chief Financial Officer
Yeah, I mean the offset is largely still uncertainty. So, second half, we still see some -- we've got lots of things going on obviously, as Tom mentioned, on the MAX and so forth impact that may have, you have the overall breakdown of kind of the various pieces of the puzzle pretty much accurate. Last quarter, we said that we thought it would probably jump up L'Orange would go to $0.60 from $0.35. Now we think we see that plus a little bit from there. So overall it's more the uncertainty than anything.
David Strauss -- Barclays Capital Inc. -- Analyst
Okay. Thanks guys.
Great. Thank you.
Operator
Our next question comes from the line of Gautam Khanna from Cowen. Your line is open.
Gautam Khanna -- Cowan and Company -- Analyst
Yes, thank you guys. I wanted to first of all, just within the guidance now for the fiscal year, what is the aftermarkets growth rate assumption?
Thomas A. Gendron -- Chairman of the Board, Chief Executive Officer and President
Yes. The aftermarket -- you talked Commercial Aftermarket, right?
Gautam Khanna -- Cowan and Company -- Analyst
Yes.
Thomas A. Gendron -- Chairman of the Board, Chief Executive Officer and President
Yes. For commercial aftermarket, we're looking at high-single to low double-digits for the full year. As you get the second half of the year, we have really high, high comps versus last year and we have some uncertainty around the initial provisioning. As we discussed earlier.
Gautam Khanna -- Cowan and Company -- Analyst
Right. And just to be clear on the provisioning, it sounds like it's a, it's fairly small relative to the overall commercial aero aftermarket. Business, is the only way to quantify with a 10% of -- 15% of the total customers --
Robert F. Weber Jr. -- Vice Chairman, Chief Financial Officer
Your number is correct. It's accurate and overall directionally that accurate for 10% of the total. So it's not necessarily small, I mean 10% not, yeah, it's a good part, but you have not the majority.
Gautam Khanna -- Cowan and Company -- Analyst
Okay. On the OE shipments related to the new single-aisle programs? Are you guys still, you talked about the learning curve. Last quarter, just curious that they both profitable A320 Neo shipments and 37 MAX segments on the engine side and the airframe and are you, are you planning are you tracking to the plan of being kind of at we average margin at this point we in by the end of the fiscal year.
Thomas A. Gendron -- Chairman of the Board, Chief Executive Officer and President
We are, we will, but just for reference were continue to see margin enhancement as we move into 2020 though. So we're not at our target, but we are getting to where we anticipated for fiscal year '19 and we continued drive improved margin as we go into fiscal year 2020.
Gautam Khanna -- Cowan and Company -- Analyst
Okay and then just lastly, I mean, is there anything you can speak to about any sort of supply chain response that you've seen and I'm just curious, I don't know how many customers you serve and the MAX but how many different intermediaries are shipped to. But have you seen any change in behavior among any of your customers downstream related to the right delivery -- delivery hiatus?
Thomas A. Gendron -- Chairman of the Board, Chief Executive Officer and President
Yeah, right now there has been no change in our OEM deliveries. So everybody still driving to rate. I think as you, most people are aware of. I think the supply chain in total for the MAX is trying to catch up get onto plan and so today we have not had any backs from many of the yeah. From either Boeing, the engine manufacturers or the Tier ones that we sell to so, so far we're still driving that rate.
Gautam Khanna -- Cowan and Company -- Analyst
And what contractual protections, do you guys have in place if any if there is some sort of I don't know what destock or I mean is there any took to, is there any provision within their contracts accounts for this scenario. It's in fact. You know stage it's quality it for an extended period.
Thomas A. Gendron -- Chairman of the Board, Chief Executive Officer and President
No, we are contracted to flex with them.
Gautam Khanna -- Cowan and Company -- Analyst
Okay. Let's say, there are no change to cash turns or anything of the sort?
Thomas A. Gendron -- Chairman of the Board, Chief Executive Officer and President
No, there is none.
Robert F. Weber Jr. -- Vice Chairman, Chief Financial Officer
No.
Thomas A. Gendron -- Chairman of the Board, Chief Executive Officer and President
Okay. Like I said, at the moment. Appreciate, we are tracking to the production rates, we're watching like everybody, but we're optimistic it will come online in the near future and this time period have been used to catch up on the supply chains past due. So that's current outlook, but that's why we call it uncertainty and some risk in the second half since we never know what will exactly happen, but at the moment, our outlook is consistent.
Gautam Khanna -- Cowan and Company -- Analyst
Okay. Thank you. I appreciate it.
Thomas A. Gendron -- Chairman of the Board, Chief Executive Officer and President
You bet.
Operator
Our next question comes from the line of Christopher Glynn from Oppenheimer. Your line is open.
Christopher Glynn -- Oppenheimer & Co Inc. -- Analyst
Thanks. Good afternoon.
Thomas A. Gendron -- Chairman of the Board, Chief Executive Officer and President
Good afternoon.
Christopher Glynn -- Oppenheimer & Co Inc. -- Analyst
So -- 100 million of revenue beaten in the quarter. Congratulations. On the guidance, implies really for both segment second half revenues, notably a little less than the second quarter rates, that's contrary to normal seasonality. So just wondering if there are any particular pronounced bolus of revenue that was recognized in the quarter that kind of spikes out from your estimation of the underlying markets or your participation there in?
Thomas A. Gendron -- Chairman of the Board, Chief Executive Officer and President
No, what I would say is, we're tracking well. We had a real solid first half. We're looking at second half and we're just factoring in some uncertainty, but there really is nothing else pulled in, or changed, so we'll be continuing to address the markets and just reflects some uncertainty as we always look at whether it's the MAX, the renewable market or volatility or -- that we always see in China. Those are things that could affect the second half but nothing was pulled in.
Christopher Glynn -- Oppenheimer & Co Inc. -- Analyst
Okay. And maybe say -- asking that in a little different way, was there something in the quarter that developed within the market trends that -- what was the biggest upside from your perspective?
Thomas A. Gendron -- Chairman of the Board, Chief Executive Officer and President
We saw -- I would say it's continuing and strong aftermarket in particular in aerospace, but we all saw good aftermarket in industrial. China is -- our China end markets, it's covering transportation oil and gas and power were healthy and actually quite strong. So, those led on the positive as Bob highlighted earlier the renewable was kind of pressured, but the most are other end markets and activity came in strong possibly little stronger than we really we're anticipating upfront. Looking forward, we see the markets continuing strong just with the uncertainty that we've been highlighting that we're watching carefully.
Christopher Glynn -- Oppenheimer & Co Inc. -- Analyst
Okay. And in terms of the comment that, the shift to natural gas for power gen and processing is accelerating, one of you could just kind of clarify the term processing there. I'm not sure what that refers to, and then just a little more color on the characterization of acceleration.
Thomas A. Gendron -- Chairman of the Board, Chief Executive Officer and President
Yes. So, what we're really looking at there is one, you know with natural gas as we highlight for you, it's a very eco-friendly energy source. So from an emission standpoint very positive. The cost or the pricing on natural gas is quite good today, quite low, so that's driving demand. So, the fundamentals are very strong. What we mean by processing would be pipelines LNG particularly LNG plants both, on both ends of -- the supply of LNG and the use of LNG. We're also seeing natural gas being used more because of the price as a feedstock in the petrochemical activities. So that's where we're seeing the demand increase for natural gas and we see that continuing with the abundant supply in the pricing. So, and then we're also seeing higher use in transportation and in particular in Asia. So that's driving further demand. So that combination is where we're seeing the growth.
Christopher Glynn -- Oppenheimer & Co Inc. -- Analyst
Great, thanks for the color.
Thomas A. Gendron -- Chairman of the Board, Chief Executive Officer and President
You're welcome.
Operator
(Operator Instructions) And our next question comes from the line of Pete Skibitski from Alembic. Your line is open.
Pete Skibitski -- Alembic Global Advisors -- Analyst
Hi guys.
Thomas A. Gendron -- Chairman of the Board, Chief Executive Officer and President
Hi Pete.
Pete Skibitski -- Alembic Global Advisors -- Analyst
So is providing revenue guidance more difficult or more unpredictable under ASC 606 versus 605. I'm trying to get to. I'm not sure if you've answered this or not, whether the revenue guidance boost was more due to your markets or more due to maybe kind of unpredictable this customer inventory area?
Robert F. Weber Jr. -- Vice Chairman, Chief Financial Officer
The overall guidance is related to both. So there is an element of the customer provided inventory now that we have a number of quarters under our belt and we have better visibility to that, I would say it's, it's similar to any other forecastable item. In terms of how we see that going forward. But the other piece of it is largely the performance overall. And so the combination of those two things are what's causing us to raise the sales guidance.
Pete Skibitski -- Alembic Global Advisors -- Analyst
Okay.
Thomas A. Gendron -- Chairman of the Board, Chief Executive Officer and President
I don't think it's gotten any more difficult.
Pete Skibitski -- Alembic Global Advisors -- Analyst
Okay, got it. Okay. And so -- you've been confident enough to raise your revenue guidance even with the aid to uncertainty, but you didn't raise your free cash flow guidance, can you tell us why that was?
Robert F. Weber Jr. -- Vice Chairman, Chief Financial Officer
Well, I think it's because it's a robust free cash flow -- so I think at the moment we just think it's really a solid number and -- yeah at this point, we think that's a good number still.
Pete Skibitski -- Alembic Global Advisors -- Analyst
Okay, OK. Last question -- in your, in your first quarter 10-Q, the cash flow savings. You guys didn't disclose all the working capital changes in your cash flow statement, like you normally do. Is that also, a 606 issue, or is that going to be kind of the norm going forward?
Thomas A. Gendron -- Chairman of the Board, Chief Executive Officer and President
It will be the norm going forward. It's not necessarily related to 606. But just a summarization in the queue.
Pete Skibitski -- Alembic Global Advisors -- Analyst
Okay, OK. Thanks guys.
Operator
Our next question comes from the line of Chris Howe from Barrington Research. Your line is open.
Christopher Howe -- Barrington Research Associates, Inc. -- Analyst
Yes, this Chris Howe, Barrington Research. Good afternoon and great quarter.
Thomas A. Gendron -- Chairman of the Board, Chief Executive Officer and President
Thank you. Thank you.
Christopher Howe -- Barrington Research Associates, Inc. -- Analyst
Had a few questions here. The first, previously this just for bookkeeping. You had mentioned the enforcement of the regulations in China occurring around July, has that already occurred or July is still the expectation?
Thomas A. Gendron -- Chairman of the Board, Chief Executive Officer and President
July is when they adopt -- what they called China VI emission regulations.
Christopher Howe -- Barrington Research Associates, Inc. -- Analyst
Okay.
Thomas A. Gendron -- Chairman of the Board, Chief Executive Officer and President
So that's actual firm date and they're driving toward that and we expect that this time that those regulations will be adopted in the summer time.
Christopher Howe -- Barrington Research Associates, Inc. -- Analyst
Okay. And then in terms of L'Orange, you mentioned the integration is going to plan. As we look at full year guidance and perhaps even longer term toward the 23 targets that you provided at Investor Day. How should we look at the upside here in terms of margins and what potential there is to go beyond where they are now?
Thomas A. Gendron -- Chairman of the Board, Chief Executive Officer and President
Yeah, we already highlighted for industrial margins. The -- is to be at 16 plus. This year, we said we would hit 14. So I think we're tracking well and as we move forward, we see line of sight to get into that 16 plus. So I think that's still holding. And that does include the L'Orange business being a part of Woodward to them.
Christopher Howe -- Barrington Research Associates, Inc. -- Analyst
Okay, great. And then my last question, just our remained stable content is -- I assume is increasing and renewables, there's still some weakness in that area of the market, is that still the expectation for renewables and also turbines to inflect more positive as we approach 2020.
Thomas A. Gendron -- Chairman of the Board, Chief Executive Officer and President
We fully expect the gas turbine part of it and, and we look at our turbo machinery. We have gas turbine and steam turbine compressors, we definitely see that picking up and moving forward. So we've seen it stabilize and slightly growing in total. The renewable side or our wind business. It's a little more pressured and we've highlighted this in the past it's more based on our customers market share and that we have versus looking at the whole market.
And so we have some pressure there. And just, just happens to be the programs around in our customer success rate. So that's really what's driving the renewable side, but on the Turbo machinery side it's turned the corner and we anticipate to start turning up as we move into 2020.
Christopher Howe -- Barrington Research Associates, Inc. -- Analyst
Okay, great and then one last thing. We're still looking at 6% organic growth within industrial, if we exclude the for the year.
Thomas A. Gendron -- Chairman of the Board, Chief Executive Officer and President
Who were -- were higher than that.
Robert F. Weber Jr. -- Vice Chairman, Chief Financial Officer
Yeah. We believe it will be above the six closer to high-single.
Christopher Howe -- Barrington Research Associates, Inc. -- Analyst
Okay. Thank you.
Thomas A. Gendron -- Chairman of the Board, Chief Executive Officer and President
Yeah.
Operator
(Operator Instructions) And our next question comes from the line of Michael Ciarmoli from SunTrust. Your line is open.
Michael Ciarmoli -- SunTrust Robinson Humphrey -- Analyst
Hey, good evening guys. Thanks for taking the questions. Nice. Nice results.
Thomas A. Gendron -- Chairman of the Board, Chief Executive Officer and President
Okay.
Michael Ciarmoli -- SunTrust Robinson Humphrey -- Analyst
Maybe just to stay on that line of questioning, I mean the Industrial organic growth doing a little bit better than expected sounds like the L'Orange is doing better than expected. What about on the aerospace side? What's driving the bulk of the upward revision there. I mean, was it just the aftermarket since that update or that outlook is now been updated?
Thomas A. Gendron -- Chairman of the Board, Chief Executive Officer and President
Aftermarket and then the other thing that highlight, which we did a little bit of in the prepared remarks. Is our military defense activity is very robust at the moment and we've seen enhanced sales in our order book is strong and the, what I would call the RFP, the proposal activity is very strong. So we're seeing a good tailwind from defense spending and strong commercial as well.
So, basically the aerospace market is very healthy. The only big uncertainty out there is the MAX, and like we said, right now it's tracking to production rates and we're very hopeful to see it get back online soon.
Michael Ciarmoli -- SunTrust Robinson Humphrey -- Analyst
Got it. And what about just the operating margin aspect of the guidance, I mean you're clearly getting better organic performance. Why aren't you getting any additional operating leverage there. I would have thought even with the -- on the industrial side with that organic piece performing much better the costs, you've taken out over the years and even with Aerospace, it sounds like you're still hitting on those learning curves, hinting that you're going to get margin enhancement as these OEM programs -- comments, so it seems like -- to get to that 20% Aero margins are just going to be flattish. Again a lot of uncertainty in industrial. But it seems like there should be some more leverage in the model given the volume growth you guys are getting.
Thomas A. Gendron -- Chairman of the Board, Chief Executive Officer and President
I think right now. Yeah. I appreciate the comment, I think they're very healthy margins in aerospace and it's a combination of -- aftermarket defense and commercial OE mix. So, right now, we're looking at full-year, 20% possibly a little stronger, but that -- I think it's very healthy. On the industrial side, we're tracking to the margin improvements as the volume improves. L'Orange is delivering. So right now, that's our best outlook. But things are on the right track and as we continue to move forward, kind of our model is always to enhance productivity and improve margins and as we go into 2020 we would expect to see improvement as we get at that time period.
Michael Ciarmoli -- SunTrust Robinson Humphrey -- Analyst
Got it.
Robert F. Weber Jr. -- Vice Chairman, Chief Financial Officer
One thing is going to be a -- the accounting of techno side of 606, remember we do have increased sales with no margin related to the customer inventory, so that's another headwind to that, increase from 2020.
Michael Ciarmoli -- SunTrust Robinson Humphrey -- Analyst
Right, right. Got it. And then just one more, accounts receivable looked like they were up pretty significantly sequentially up about $100 million. Anything to read into there or anything going on?
Robert F. Weber Jr. -- Vice Chairman, Chief Financial Officer
Well -- in our Asian natural gas business, if you recall, we have more extensive terms -- extended terms, if you will, and that was very strong in this first half. So we saw some receivables increase related to that. We anticipate that, that may moderate a little bit in the second half and that's where some of that incremental second half cash flow comes from, as that comes off.
Michael Ciarmoli -- SunTrust Robinson Humphrey -- Analyst
Got it. Perfect. Thanks a lot guys. Appreciate it.
Robert F. Weber Jr. -- Vice Chairman, Chief Financial Officer
Welcome.
Operator
And we do have a question from Pete Skibitski from Alembic. Your line is open.
Pete Skibitski -- Alembic Global Advisors -- Analyst
Yeah. Just a couple of follow-ups, guys. On Duarte, is the Duarte relocation completed? I'm just trying to understand if we should expect any more EPS adjustments related to Duarte or not?
Robert F. Weber Jr. -- Vice Chairman, Chief Financial Officer
Duarte will be for the most part completed by the end of May.
Pete Skibitski -- Alembic Global Advisors -- Analyst
End of May. Okay, got it. So maybe one more quarter. Okay.
Thomas A. Gendron -- Chairman of the Board, Chief Executive Officer and President
Right. We still have some in -- we still have some in this quarter -- the upcoming quarter.
Pete Skibitski -- Alembic Global Advisors -- Analyst
Got you. And then -- Hey Tom, I think in the past you've talked about tougher comps in the precision weapons area. Is that something that maybe you've been surprised about the demand just continues to be kind of torrid?
Thomas A. Gendron -- Chairman of the Board, Chief Executive Officer and President
In our smart weapons area, the demand has been strong. The outlook right now it's, if I, it can vary as you guys know with defense procurement, but I'm looking out probably another two years of strong demand, maybe more, but right now, it's been very healthy and continuing.
Pete Skibitski -- Alembic Global Advisors -- Analyst
Okay. And I appreciate the color. Thanks guys.
Thomas A. Gendron -- Chairman of the Board, Chief Executive Officer and President
Okay.
Robert F. Weber Jr. -- Vice Chairman, Chief Financial Officer
Thank you.
Operator
Mr. Gendron, there are no further questions at this time. I will now turn the conference back to you.
Thomas A. Gendron -- Chairman of the Board, Chief Executive Officer and President
Okay. Well, thanks everybody for joining us today and I appreciate the questions and we look forward to seeing many of you during the next quarter. Before our next call. So, thanks again for joining. Bye.
Operator
Ladies and gentlemen, that concludes our conference call today. If you would like to listen to a rebroadcast of this conference call, it will be available today at 7:30 PM Eastern Daylight Time by dialing 1-855-859-2056 for US or 1-404-537-3406 for non-US and by entering the access code 3186128. A rebroadcast will also be available at the Company's website www.woodward.com for 14 days. We thank you for your participation on today's conference call and ask that you please disconnect your lines.
Duration: 42 minutes
Call participants:
Don Guzzardo -- Vice President, Investor Relations and Treasurer
Thomas A. Gendron -- Chairman of the Board, Chief Executive Officer and President
Robert F. Weber Jr. -- Vice Chairman, Chief Financial Officer
Sheila Kahyaoglu -- Jefferies LLC -- Analyst
David Strauss -- Barclays Capital Inc. -- Analyst
Gautam Khanna -- Cowan and Company -- Analyst
Christopher Glynn -- Oppenheimer & Co Inc. -- Analyst
Pete Skibitski -- Alembic Global Advisors -- Analyst
Christopher Howe -- Barrington Research Associates, Inc. -- Analyst
Michael Ciarmoli -- SunTrust Robinson Humphrey -- Analyst
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