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Woodward Inc (NASDAQ:WWD)
Q4 2019 Earnings Call
Nov 18, 2019, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Thank you for standing by and welcome to the Woodward Inc. Fourth Quarter and Fiscal Year 2019 Earnings Call. At this time, I would like to inform you that this call is being recorded for rebroadcast, and 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. Jack Thayer, Vice Chairman. Corporate Operations and Chief Financial Officer; Mr. Bob Weber, Vice Chairman; and Mr. Don Guzzardo, Vice President of Investor Relations and Treasurer.

I would now like to turn the call over to Mr. Guzzardo. Sir, you may begin.

Don Guzzardo -- Vice President, Investor Relations & Treasurer

Thank you, operator. We would like to welcome all of you to Woodward's fourth quarter and fiscal year 2019 earnings call. In today's call, Tom will comment on our markets and related strategies and then, Jack 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 December 2, 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 current 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 number 2014-09, Revenue From Contracts With Customers or ASC 606 effective October 1, 2018. Accordingly, results for the fourth quarter and fiscal year 2019, including adjusted and organic amounts, are presented under ASC 606. Prior period amounts are presented under prior accounting guidance for revenue.

To better understand the impacts of ASC 606 on Woodward, we have included additional materials in our press release, the presentation for this call and the Annual Report on Form 10-K to be filed on or before November 29, 2019. In addition, Woodward is providing certain non-US GAAP financial measures. We direct your attention to the reconciliations of non-US GAAP financial measures, which are included in today's slide presentation, and our earnings release and related schedules. We believe this additional information will help in understanding our results.

Now turning to our results for the fourth quarter. Net sales for the fourth quarter of fiscal 2019 were $737 million compared to $719 million for the prior year quarter, an increase of 2%. Net earnings were $67 million or $1.03 per share compared to $75 million or $1.16 per share for the prior year quarter. Adjusted net earnings were $79 million or $1.22 per share compared to adjusted net earnings of $89 million or $1.39 per share for the prior year quarter.

And for the full year, net sales were $2.9 billion compared to $2.33 billion for the prior year, an increase of 25%. Organic net sales were up $345 million or 16% year-over-year. Net earnings were $260 million or $4.02 per share compared to $180 million or $2.82 per share for the prior year. Adjusted net earnings were $314 million or $4.88 per share compared to adjusted net earnings of $246 million or $3.85 per share for the prior year. Net cash generated from operating activities for fiscal 2019 was $391 million compared to $299 million for the prior year. Free cash flow was $292 million compared to $172 million for 2018.

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

Thomas A. Gendron -- Chairman of the Board, President & Chief Executive Officer

Thank you, Don, and good afternoon everyone. Fiscal year 2019 was another strong year for Woodward. We continued driving solid sales, earnings and cash flow growth despite facing headwinds from the 737 MAX grounding and customer challenges within our renewables business. In terms of highlights, our Aerospace business continued to perform very well in both commercial and defense markets. Our industrial business also improved due to the addition of Woodward L'Orange as well as the returns of -- to growth of our organic industrial business, which was partially offset by headwinds from our renewables business.

Now moving to our markets in more detail. In commercial aerospace, increasing global wealth and a desire for air travel continues to drive strong demand for more fuel-efficient aircraft. The impact to Woodward of the 737 MAX grounding on our fiscal year 2019 was minimal from an OEM perspective, but we did see a more significant effect on initial provisioning sales. When the aircraft returns to service, we would expect to recover the initial provisioning that was delayed due to the grounding. Legacy commercial aftermarket continues to benefit from high aircraft utilization, solid global passenger traffic growth and a high volume of engine shop visits.

In defense, global budgets and spending remain favorable driving demand for fixed-wing aircraft, rotorcraft and guided weapons. Military aftermarket is robust in support of the US defense initiative to improve the combat readiness of the US fleet as well as global aircraft upgrade programs.

Turning to our industrial markets. In power generation, we continue to see stabilization with the industrial gas turbine market. In our content wins, our new turbine programs are providing some lift as well. The launch of the Mitsubishi J Class heavy frame combined cycle turbine represents a new program for Woodward and highlights our share gains and expanding content in this space. As we look forward, we remain confident in the long-term global fundamentals of natural gas power generation as well as our ability to drive share gains as we see continued recovery in the turbo machinery market.

Our renewables business remains uncertain, in part due to the ongoing bankruptcy proceedings of our customer Senvion. In September, Siemens Gamesa announced an agreement to acquire part of Senvion and we continue to closely monitor the situation. Senvion platforms remain an important source of aftermarket revenues for us. This has been a challenging market, and we are in the process of determining appropriate actions.

In transportation, consistent with our expectations, production of natural gas trucks were softer in the fourth quarter as the market absorbed the large pre-buy China 5-compliant trucks in our third quarter ahead of China 6 regulations that were implemented in July. We started to see a strong recovery in China-6 compliant truck sales at the end of September, and expect this positive trend to continue into the fiscal year. China's rigorous enforcement of the new regulations, including the restriction of diesel from certain cities, is promoting the rapid transition to the new engines. We are also seeing natural gas engines secure a growing share of the on-highway market with current share rising to approximately 20%. In addition to volumes recovery, we have a higher system content on the China-6 compliant engines.

In marine, we had a very strong year in 2019, mainly driven by aftermarket sales. We expect the strength in aftermarket to continue into fiscal year '20 as robust shipped utilization rates drive the need for replacement parts and service.

Oil and gas markets are pressured due to global economic uncertainty, access to capital, oil price fluctuations and weaker demand. Our products are prevalent in the entire value stream at the wellhead, as well as downstream applications such as pipelines, processing plants and import/export terminals where we have a large installed base that drives aftermarket activity. As the global economy has slowed, utilization expansion in these facilities has also slowed.

In summary, we delivered strong results in 2019, which included robust revenue and earnings growth, significant free cash flow generation, deleveraging of the balance sheet, the addition of new members to accelerate our True North operational excellence journey and good execution on new platform wins, which all translated into strong shareholder returns.

Looking ahead to 2020, we anticipate continued growth in our Aerospace business as the 737 MAX returns to service, defense is expected to remain strong in both OEM and aftermarket. And commercial aftermarket is expected to remain solid.

In our Industrial business, we expect improved profitability in 2020 despite modest to flat revenue growth. We see improving gas turbine market dynamics and accelerating natural gas truck sales in Asia, which will be partially offset by slowing economic growth, China trade headwinds and softening oil and gas investments.

We are optimistic about our ability to deliver another record year in 2020 and remain focused on driving long-term shareholder value through delivering on our financial targets. In particular, we expect a significant increase in free cash flow again delivering greater than 100% conversion rate. After a significant period of investment to support new program wins in Aerospace and Industrial, we are entering a period of lower capital expenditures and higher earnings growth, which positions Woodward to deliver significant free cash flow for the foreseeable future.

Now, before turning the call over, I want to thank Bob Weber who will be retiring in January for his dedication and valuable contributions during his more than 14-year tenure at Woodward. Bob has been a tremendous asset to our Company and has delivered exceptional value to our shareholders over his career. He has been a tremendous partner and friend to me. We are excited for him as he enters this next phase of his life. Bob, we wish you all the best.

I'd like to once again welcome Jack as our new CFO. And now, I'll turn the call over to him to discuss further financials.

Jack Thayer -- Vice Chairman, Chief Financial Officer

Thank you, Tom. Aerospace segment net sales for the fourth quarter of fiscal 2019 were $506 million compared to $461 million for the fourth quarter a year ago, a 10% increase. Aerospace segment sales benefited from strength in defense OEM and aftermarket, as well as commercial OEM. Commercial aftermarket sales were up 9% in the fourth quarter of 2019 as compared to the prior year quarter. As anticipated, initial provisioning was softer in the quarter due to the grounding of the Boeing 737 MAX.

Defense sales growth in the quarter was primarily driven by smart weapons fixed-wing aircraft in aftermarket, which we anticipate will continue to benefit from increased military spending. Aerospace segment earnings for the fourth quarter of 2019 were $111 million or 22% of segment sales compared to $105 million or 22.7% of segment sales for the fourth quarter of 2018.

Segment earnings were positively impacted by higher sales volumes partially offset by increased capacity expansion costs. For fiscal year 2019, Aerospace segment net sales were $1.88 billion compared to $1.56 billion for the prior year, a 21% increase. In 2019, commercial OEM sales grew 15%; commercial aftermarket sales were up 18%; defense OEM sales increased 33%; and defense aftermarket sales grew 22%, all as compared to 2018.

Aerospace segment earnings for fiscal year 2019 were $389 million or 20.7% of segment sales compared to $309 million or 19.8% of segment sales for the prior year.

Turning to Industrial. Industrial segment net sales for the fourth quarter of fiscal 2019 were $231 million compared to $258 million in the prior-year period, a decrease of 11%. Industrial segment sales declined primarily due to the reduced demand for natural gas trucks in Asia, resulting from the large pre-buy in previous quarters of China-5 compliant trucks ahead of the implementation of China-6 emissions regulations as well as the impacts to sales of the Senvion bankruptcy.

Industrial segment earnings for the fourth quarter of 2019 were $11 million or 4.8% of segment sales compared to $8 million or 3.3% of segment sales for the fourth quarter of 2018. Adjusted Industrial segment earnings were also $11 million and 4.8% of segment sales for the fourth quarter of 2019, compared to $35 million or 13.4% of segment sales for the fourth quarter of 2018. The decline in adjusted Industrial segment earnings was mainly due to lower sales volumes, higher manufacturing costs and an engine product warranty expense.

In the fourth quarter of 2019, we recorded a pre-tax charge of $13 million to write-off assets related to the Senvion bankruptcy. These charges were recorded in non-segment and excluded from adjusted results. As we mentioned last quarter, while the loss of this customer would have a substantial impact on our renewables business, it is not material to Woodward as a whole. On a prospective basis, we expect to continue to have aftermarket sales and support of the installed Senvion wind turbine fleet.

For fiscal year 2019, Industrial segment net sales were $1.02 billion compared to $768 million for the prior year, a 33% increase. Organic Industrial segment net sales for fiscal year 2019 were $688 million compared to $665 million for the prior year, a 3% increase. Foreign currency exchange rates had an unfavorable impact on segment net sales of approximately $21 million for 2019 and no significant impact on segment earnings. On a constant currency basis, organic sales would have increased approximately 7%. Industrial segment earnings for fiscal year 2019 were $94 million or 9.2% of segment sales compared to $50 million or 6.5% of segment sales for the prior year. Adjusted Industrial segment earnings for fiscal year 2019 were $115 million or 11.2% of segment sales compared to $84 million or 11% of segment sales for the prior year.

As Tom highlighted, 2019 was a particularly challenging year for our renewables business. Adjusted Industrial segment earnings excluding the renewable power systems business for 2019 were $127 million or 13.3% of Industrial segment net sales, excluding the renewable power systems business, compared to $81 million or 12% of Industrial segment net sales, excluding the renewable power systems business in the prior year. We are exploring other means of improving Industrial profitability. We will leverage our True North process in addition to reviewing other opportunities for improvement. This long-term effort should enable 16% or better sustainable Industrial margins.

At the Woodward level, selling, general and administrative expenses were $51 million for the fourth quarter of 2019, compared to $53 million for the fourth quarter of last year. For fiscal year 2019, SG&A expenses were $211 million compared to $194 million last year. The increase in SG&A expenses for the full year was primarily due to the addition of Woodward L'Orange and an asset impairment charge related to the Senvion bankruptcy.

R&D spending for the full year 2019 was largely in line with our expectations at approximately 5% of sales. The effective tax rate for the fourth quarter of 2019 was 12.8% compared to 5.7% in the fourth quarter of 2018. The adjusted effective tax rate was 15.5% for the quarter compared to 18.9% for the fourth quarter of 2018. For the fiscal year 2019, the effective tax rate was 19% compared to 17.9% for the same period of the prior year. The adjusted effective tax rate for the full year was 17.5% compared to 16.8% for 2018.

Looking at cash flows, net cash generated by operating activities for fiscal year 2019 was $391 million compared to $299 million for the prior year. Capital expenditures were $99 million for 2019, compared to $127 million for the prior year. For fiscal year 2020, we anticipate capital expenditures to be approximately $80 million. Free cash flow for 2019 was $292 million compared to $172 million in the prior year. Free cash flow for 2019 was positively impacted by increased earnings and moderating capital expenditures. During the fiscal year 2019, $150 million was returned to stockholders in the form of $40 million of dividends and $110 million of repurchased shares.

Lastly, turning to our fiscal 2020 outlook. Total net sales are expected to be between $3 billion and $3.1 billion. Aerospace sales are anticipated to be up approximately 6% compared to the prior year. While ASC 606 favorably impacted Aerospace sales growth in fiscal year 2019, it is expected to have an unfavorable impact on sales growth in fiscal year 2020, due to the timing of sales orders and inventory levels.

With regard to the assumptions for the Boeing 737 MAX in our 2020 projections, we are estimating a return to service in the second quarter of our fiscal year with production rates ramping in line with the Boeing build rates communicated at the end of September. We assume initial provisioning will not ramp up until the second half of the fiscal year. As a result, we anticipate a year-over-year headwind to commercial aftermarket in the first half of the fiscal year and a tailwind in the second half.

Industrial sales growth is expected to be flat to up in the low-single-digits compared to the prior year. We expect strong natural gas truck sales in Asia and an improving turbine market outlook to be somewhat offset by softening in our oil and gas markets as a result of economic uncertainty and reduced spending on equipment.

Aerospace segment earnings as a percent of net sales are expected to be approximately 21% and Industrial segment earnings as a percent of net sales are expected to be approximately 14%. The effective tax rate for the year is expected to be approximately 22%. Earnings per share are expected to be between $5.30 and $5.60 per share based on approximately 64 million of fully diluted weighted average shares outstanding. The higher projected effective tax rate for 2020 represents an approximately $0.30 headwind to earnings per share. Earnings before tax is expected to grow in the mid-to-high teens range as compared to 2019.

For 2020, we anticipate free cash flow to be approximately $400 million, in line with our long-term target of 100% or better free cash flow conversion. As you can see, we're expecting another strong year for Woodward as both our Aerospace and Industrial segments continue to improve operating performance, resulting in double-digit earnings growth and substantial free cash flow acceleration.

Before turning the call back over, I'd like to remind everyone that historically our fiscal first quarter is sequentially lower due to normal business trends and fewer working days as a result of the holiday schedule and plant shutdowns. For 2020, we anticipate this similar pattern. This concludes our comments on the business and results for the fiscal year and fourth quarter 2019.

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

Questions and Answers:

Operator

Thank you, sir. The question-and-answer session will begin at this time. [Operator Instructions] And our first question is going to come from Sheila Kahyaoglu with Jefferies. Your line is now open.

Sheila Kahyaoglu -- Jefferies and Company -- Analyst

Hi, good afternoon everyone and congratulations, Bob, and Jack.

Jack Thayer -- Vice Chairman, Chief Financial Officer

Thank you, Sheila.

Robert F. Weber -- Vice Chairman

Thank you.

Sheila Kahyaoglu -- Jefferies and Company -- Analyst

I guess the first question for you, Industrial earnings just below, you had some one-time items in there. How do you think about your guidance for 2020? And I think you talked about a 16% target. You're holding to that long term, just the puts and takes and what are the options for the renewables business from here?

Jack Thayer -- Vice Chairman, Chief Financial Officer

Right. So Sheila, as you'll know from our prepared remarks, we're expecting margins of about 14% in that business versus the 11.2% in 2019. And of that improvement, we would expect about half to be related to the renewables business; the other half to be True North improvements that will make to our operations. This really gets us back to the margins that we were experiencing in the first half of 2019. So absent these -- the headwinds related to Senvion and some of the other issues, we're really getting back to where we'd expect the business to be longer term. And then we see -- as Tom mentioned, we are accelerating our True North journey and that's where we really expect the longer-term improvement to 16% margins.

Sheila Kahyaoglu -- Jefferies and Company -- Analyst

And did you quantify the engine product warranty expense for the quarter?

Jack Thayer -- Vice Chairman, Chief Financial Officer

We did not, but it is a relatively speaking one-time item and we wouldn't expect to Turkey.

Sheila Kahyaoglu -- Jefferies and Company -- Analyst

Okay. And then Tom, you have -- you're guiding toward, I think, 33% free cash flow growth, a big number out there with $400 million versus low-double-digit EPS growth, so, very good. I guess, how do you think about what you do with all that cash? As you mentioned, you're coming off the major CapEx spend and investment period. Like, how do you think about cash deployment from here?

Thomas A. Gendron -- Chairman of the Board, President & Chief Executive Officer

Yeah. The first thing is, we've got a commitment of returning 50% of net income to shareholders. So that will be the first use of the cash. Then we'll be looking at both organic growth and then potential inorganic growth if we see things that make sense and that can deliver our -- in excess of our cost of capital. So we probably lean more toward the growth side, but if we don't have the growth opportunity Sheila, we're going to return more to shareholders.

Sheila Kahyaoglu -- Jefferies and Company -- Analyst

Great. Thank you.

Thomas A. Gendron -- Chairman of the Board, President & Chief Executive Officer

Thanks, Sheila.

Operator

Thank you. And our next question comes from Pete Skibitski from Alembic Global. Please state your question.

Pete Skibitski -- Alembic Global Advisors -- Analyst

Hi guys. If you have Bob, best of luck. It's been a pleasure.

Robert F. Weber -- Vice Chairman

Thank you.

Pete Skibitski -- Alembic Global Advisors -- Analyst

I mean, just getting back to the Industrial margins and the engine issue, if we exclude the warranty expense, did you still come in below your expectations. And if so, I just want to understand what the biggest surprise was for you guys, if it was kind of oil and gas or something else?

Thomas A. Gendron -- Chairman of the Board, President & Chief Executive Officer

Yeah, well, we definitely saw oil and gas drop. We did see some -- and we highlighted headwinds and China, both from trade, but also from the pre-buy China-5 or China-6 natural gas engines and then we had the Senvion issues in renewables and then we had the warranty. So that combined headwind did hit us in the fourth quarter. Going forward, we see China picking back up. The trade war is so uncertain in our minds, but the China-6 sales are growing nicely right now. We think we got the renewables under control. And as Jack already said, the warranty was a one-time thing that we won't see again in 2020. So that gives us confidence to get back on that 14% earnings on our path to 16%.

Pete Skibitski -- Alembic Global Advisors -- Analyst

Okay. Just one follow-up, just given the importance of wind right now, can you level set us what was wind revenue in fiscal '19? And are you expect to get down again in fiscal '20?

Thomas A. Gendron -- Chairman of the Board, President & Chief Executive Officer

No, we're actually expecting wind sales to move up in 2019 -- I mean, 2020. 2019, we had a loss and we're basically going to be breakeven in that business in 2020.

Pete Skibitski -- Alembic Global Advisors -- Analyst

Okay. Thank you.

Thomas A. Gendron -- Chairman of the Board, President & Chief Executive Officer

It's a drag on the overall Industrial.

Pete Skibitski -- Alembic Global Advisors -- Analyst

Got it. Thanks guys.

Operator

Thank you. And our next question comes from Chris Howe from Barrington Research. Please state your question.

Chris Howe -- Barrington Research -- Analyst

Good afternoon, Tom, Jack, Bod and Don.

Thomas A. Gendron -- Chairman of the Board, President & Chief Executive Officer

Hey, Chris.

Chris Howe -- Barrington Research -- Analyst

Just a few questions going off of some of your comments, in regard to these strong defense aftermarket that you're seeing the strong growth there, as we think about the delay or the push and the timing of the initial provisioning revenues related to the 737 MAX, how should we look at the mix of aftermarket as we move into 2020? And do you anticipate recapturing all of the initial provisioning in 2020 or will some push to the following year?

Thomas A. Gendron -- Chairman of the Board, President & Chief Executive Officer

Yeah, well, I'll address that last one first is none of the initial provisioning in our view is lost. It's delayed and how fast we gain that will really depend on how fast the aircraft are turned back into service in which operators, in which order. So it's little uncertain, but I would say, through 2020 and early 2021, we should gain back that initial provisioning. So we have to wait and see how Boeing returns the aircraft to get it firmer handle on that. The remaining what we call legacy commercial aircraft is actually very robust. Shop visits are high. The MRO activity is strong. And all the market dynamics point to continued strength in that market. So that's like getting in. And in defense as we highlighted, the defense budgets and the need to get aircraft back into service, we're seeing strong orders and our order book this year is healthy already. And we look at that continuing through 2020 and into 2021. That's our line of visibility at this moment.

Chris Howe -- Barrington Research -- Analyst

That's very helpful. And I have one follow-up question, as it relates to your 2020 outlook, and just as we move from the top line to the bottom line, how should we look at your outlook in terms of different opportunities that you see an increase in the operational efficiencies, whether it's through optimization of R&D spend versus SG&A? Just different leverage opportunities that may be on the horizon whether near term or long term for the Company?

Thomas A. Gendron -- Chairman of the Board, President & Chief Executive Officer

Yeah. So one of the points we've made over the last couple of years, we made the large investment in facilities. We've added a lot of members to our organization to handle the volume increases. I would say our indirect spend on people and then you'd also translate to CapEx, it's kind of flattening. And that means that sales leverage through our existing plants will lead to higher margins as we lever that investment. So we are in that phase of the cycle. So I think those are positive. As Jack highlighted R&D, it's come to a point where we're looking at

Jack Thayer -- Vice Chairman, Chief Financial Officer

5.5% of sales.

Thomas A. Gendron -- Chairman of the Board, President & Chief Executive Officer

Yeah, 5.5% of sales for 2020 and we've talked about that between 5% and 6% is where we would see R&D going. So you can start seeing as we increase sales, we will leverage through the income statement on those dynamics.

Jack Thayer -- Vice Chairman, Chief Financial Officer

And then, Chris, obviously, that's underpinning this, in part the significant growth in free cash flow. So we're delivering the double-digit earnings growth in terms of cash conversion, spending less on CapEx. And then we're improving our working cap primarily through our inventory levels.

Chris Howe -- Barrington Research -- Analyst

That's very helpful. Thanks for taking my questions.

Thomas A. Gendron -- Chairman of the Board, President & Chief Executive Officer

Welcome.

Operator

Thank you. And our next question comes from Robert Spingarn from Credit Suisse. Please state your question.

Robert Spingarn -- Credit Suisse -- Analyst

Hey, guys. I'll add my congrats to you Bob and welcome, Jack. I guess it's not really welcome, but I'll start with you anyway. Could you bridge the cash flow from '19 to '20, obviously the CapEx improves, the taxes go up, I guess the net earnings go up, but could you just walk us through the big pieces?

Jack Thayer -- Vice Chairman, Chief Financial Officer

Sure.

Robert Spingarn -- Credit Suisse -- Analyst

Going back to Sheila's question $300 million [Phonetic] to $400 million, [Phonetic] just...

Jack Thayer -- Vice Chairman, Chief Financial Officer

Right. So as we think about the $292 million growing to $400 million plus, primary driver is that double-digit earnings growth that I mentioned. In terms of CapEx, we'll spend roughly $20 million less this year, so $80 million versus $99 million in 2019. And then, you should expect to see our inventory levels improve even with the 6% top line growth. So improving both in as a percent of sales outright, but also in actual dollars as we leverage some of the True North improvements that we've made around build rates and operating efficiency within the plants that Tom has referenced earlier.

Robert Spingarn -- Credit Suisse -- Analyst

Okay. And then just moving back to Industrial, you talked about 14%. Obviously, we had the tough fourth quarter, 11% this past year, what's the cadence of improvement? Do you come out of the gate below that and then rise throughout the year, we think about that from a quarterly perspective?

Thomas A. Gendron -- Chairman of the Board, President & Chief Executive Officer

So from a quarterly cadence, we're back to making money again in the renewables business. We will -- we won't have that one-time item related to warranty expense as well as you're seeing roughly a return to the margins experienced in the first half of 2019. So feel good about our visibility on 14%.

Robert Spingarn -- Credit Suisse -- Analyst

Okay. And then 787, I assume that rate adjustment, how is that factored in, I know it's how we work , but...

Thomas A. Gendron -- Chairman of the Board, President & Chief Executive Officer

Yeah, it's in our outlook.

Robert Spingarn -- Credit Suisse -- Analyst

So -- and when do you actually expect that to start showing up in the factory, given that it's, I guess, a beginning of 2021 rate for Boeing?

Thomas A. Gendron -- Chairman of the Board, President & Chief Executive Officer

We usually see it about six months in advance Rob.

Robert Spingarn -- Credit Suisse -- Analyst

Okay. That's it. Thanks very much.

Thomas A. Gendron -- Chairman of the Board, President & Chief Executive Officer

Thanks.

Operator

Thank you. And our next question comes from Michael Ciarmoli from SunTrust. Please state your question.

Michael Ciarmoli -- SunTrust Robinson Humphrey -- Analyst

Hey, good evening guys. Thanks for taking the questions and congrats Bob and Jack. Hey guys, just on the MAX, have you sort of looked at any other sensitivities or I guess what's implied in the outlook? Is it sustaining at that 42% [Phonetic] a month, or are you actually baking in some pickup in the production rates, just maybe I missed it, but just for clarity there?

Thomas A. Gendron -- Chairman of the Board, President & Chief Executive Officer

Yeah. What we're highlighting is we're tracking what Boeing has released. So we are in line with that subject to our lead times and also units that we produce for initial provisioning. So, that's best we can tell you is we're tracking with volume.

Michael Ciarmoli -- SunTrust Robinson Humphrey -- Analyst

Okay, got it. And then just on the Aerospace margins guiding for the 21% next year, I know you guys have had the long-term 20%. I mean, can you give us a sense of maybe, is there a little bit of a disproportionate positive effect from the provisioning, or is this 21%, I mean, do you guys think you can sustain this on a go-forward basis, just trying to get a sense as to what's driving the continued margin expansion there?

Thomas A. Gendron -- Chairman of the Board, President & Chief Executive Officer

Yeah, I'd like to remind you, we always said 20% plus.

Michael Ciarmoli -- SunTrust Robinson Humphrey -- Analyst

20% plus, right?

Thomas A. Gendron -- Chairman of the Board, President & Chief Executive Officer

Yeah. And so, I think this is on the plus side. So we anticipate we can hold this margin.

Michael Ciarmoli -- SunTrust Robinson Humphrey -- Analyst

And even if the continued kind of ebb and flow in the aftermarket, you still think you'd be able to hold that level?

Thomas A. Gendron -- Chairman of the Board, President & Chief Executive Officer

Yeah, I'd say, because the legacy MRO, the fleet is huge, a lot of the fleet has only seen like 25% of the fleet is -- the current narrow bodies have only seen their first shop visit. So there's going to be some good MRO, and as you move further, the new programs we've won are going to start hitting the maintenance cycles. So we see consistent solid commercial aftermarket and aftermarket growth going forward.

Michael Ciarmoli -- SunTrust Robinson Humphrey -- Analyst

Got it. And then just the last one, I'll get out of the way. Just can you give us a little bit more color, as it relates to the Industrial segment, maybe what you're seeing in terms of some of the ordering trends in different geographies. It certainly seems like there is a lot of different crosscurrents out there, but I mean, are you seeing any particular strength in any geographies and product lines and maybe any color on bookings? Have you maybe seen a bottoming in certain areas, just maybe a general sense there?

Thomas A. Gendron -- Chairman of the Board, President & Chief Executive Officer

Sure. Well, I think in the prepared remarks, you heard from us that we actually were calling the bottom of the turbo machinery market in 2019 and we did see that. So we've been seen slight -- so we're seeing the turn up in that market. Now you may see from some of the OEMs that they're seeing 2020 as the bottom. The difference between their outlook and ours is the new machines have a lot more Woodward content. So we've turned the corner there. So we're seeing that on the uptick and that we expect that to grow slowly over the next few years. We don't expect a fee [Phonetic] type recovery, but we do see some steady growth in there.

China, in general, had some uncertainty to it like we are saying in particular where trade goes. However, when you narrow down to some of the things regarding the new emission regulations, we're seeing that really positive for our small on-highway natural gas engines. We're also seeing a positive for our larger fuel injection and diesel business and in particular to our L'Orange business. So those are positives tempered by the trade dispute. So that's why we're going to -- we have some uncertainty in the outlook or up and down. It could go either way, depending on how things materialize.

The other has been the renewables. We took big hits in 2019 as we described, actually 2020 sales with some new programs are turning up, but that's still a business that's under a lot of pressure and there is obviously uncertainty in that business as well. So that combination is a little bit why we said flat to up low-single-digits. The margin improvements will come as we're highlighting from improvements in our operations, improvements in product mix, improvements from these one-timers not being in there. So we have some good confidence in being able to achieve the margins.

Michael Ciarmoli -- SunTrust Robinson Humphrey -- Analyst

Got it. Helpful. Thanks guys.

Operator

Thank you. And our next question comes from Gautam Khanna from Cowen and Company. Please state your question.

Gautam Khanna -- Cowen and Company -- Analyst

Yeah. Thank you and congratulations to both Bob and Jack.

Robert F. Weber -- Vice Chairman

Thank you.

Gautam Khanna -- Cowen and Company -- Analyst

Best of luck. Hey, I was wondering if you could disaggregate the guidance for next year on Aero in terms of the aftermarket going to grow, kind of in line with the segment average above it. You've mentioned defense, just if you could give us some color on the other pieces within the segment?

Jack Thayer -- Vice Chairman, Chief Financial Officer

Right. So on the back of obviously the strong growth that we saw across the board in '19, we continue to expect growth within each of those constituent segments roughly in line with the 6% top line growth that we signaled for the year. So both across commercial aftermarket OEM as well as defense, aftermarket OEM, mid-to-upper single-digits, but obviously on top of very strong growth in 2019.

Gautam Khanna -- Cowen and Company -- Analyst

Is the mix within the OE business improving as you move forward given you've gotten down the learning curve on the single-aisle stuff or can you comment on that?

Jack Thayer -- Vice Chairman, Chief Financial Officer

Yeah, that's definitely part of the margin expansion that you're seeing, and if you -- and I know Gautam you've been tracking us for years. So if you watch, this is all part of bringing those programs online getting through the learning curve, getting the leverage on the facilities. So that's a part of getting above this 21% range. So feel good there. As we move forward, we're also -- with the volume we're seeing in the aftermarket, we also get leveraged on the facility investment for aftermarket. So that will also help with margins. So it's kind of working as we believed it would and is as planned and it is sustainable. So that's the other thing to take away. So we're getting to the numbers we said. The volumes are coming through. We get more volume ideally as the MAX comes back to service and gets to the higher rates at Boeing wants to achieve. So we're being good shape for that. And we are facilitized already to handle those rates. So we just need them to get back into service, get moving and we've got a lot of confidence in that aircraft and I think the market will as well once it's in service.

Gautam Khanna -- Cowen and Company -- Analyst

And just to be clear, were you guys at 42% [Phonetic] through the quarter and are you there now across the board on your products?

Jack Thayer -- Vice Chairman, Chief Financial Officer

Yeah, we are operating to the 42% [Phonetic] plus a little bit depending on the product based on -- there is some inventory builds that we're working on with our customers or providing for aftermarket. So it's right about that number and what we'll be doing is moving forward as they get back into service and then ramping as you've seen their ramp rate, we are ready, We are -- have our planning system in place to go to those volumes and we'll work hand-in-hand with them to ensure we support that ramp.

Gautam Khanna -- Cowen and Company -- Analyst

One last one, I apologize for the question. The two-year stack on the aftermarket is pretty challenging obviously. And could you just give us any comments on the state of the aftermarket currently? What is reported visibility on the commercial aerospace aftermarket, because you guys have blown away all the targets. I thought you guys are guiding for down 15% in Q4 to get to the full year, you did better than that. Have you seen any slowdown whatsoever yet?

Thomas A. Gendron -- Chairman of the Board, President & Chief Executive Officer

As I was highlighting, the shop visit rate is very strong and we did have good initial provisioning on programs other than the MAX. So those are still in there. The MAX was a headwind, but the other initial provisioning, that was strong. And so, it's something we've been highlighting for quite a few years. We've got a great presence in the commercial market with products that are just coming up to there, a lot of them for first shop visits and then some second. So our market dynamics are quite good. And as we move forward on those legacy, that's what I'm highlighting, we're going to have the new ones coming behind it. So those are some pretty big growth numbers as you're highlighting, but we see good aftermarket -- solid aftermarket and continuing growth going really for the long term just based on the products we've won, how many components you guys I think if I remember from our investor presentations, we have a significant amount of more our use per application than we did in the past, which means more aftermarket as they hit their repair cycle. So the dynamics are good. We're starting to see them and we think you can kind of count on good aftermarket for many, many years.

Gautam Khanna -- Cowen and Company -- Analyst

Thank you, guys.

Operator

Thank you. And our next question comes from David Strauss from Barclays. Please state your question.

Matthew McClintock -- Barclays -- Analyst

Hey guys, thanks for the question. This is Matt on for David actually. I may have missed this, but you guys called out that ASC 606 flips to a headwind for Aero, have you sized how big that is, the headwind?

Jack Thayer -- Vice Chairman, Chief Financial Officer

For the full year 2020, it's a $0.07 headwind on the back of a $0.10 tailwind in 2019.

David Strauss -- Barclays -- Analyst

Got it. Okay. And then I guess just Industrial margins, I mean, you guys in the past have talked about that business going to 16% and I know some things have changed since then, but that's still a target that's out there and how do you think about sort of what would have to happen to get the 16% on Industrial?

Jack Thayer -- Vice Chairman, Chief Financial Officer

It's very definitely a target that we're pursuing and I think given the areas where we're seeing growth, those are good margin businesses for us. We have had some of our lower margin businesses taper off and maybe to clarify something I said earlier, I think we'll see a ramping up margin from throughout 2020 within the Industrial segment as we've seen an improvement in that throughout the year.

David Strauss -- Barclays -- Analyst

Got it. Okay. Thanks.

Operator

Thank you. And our next question comes from Karl Poehls from Poehls Associates. Your line is now open.

Karl Poehls -- Poehls Associates -- Analyst

Hi guys. Great year. I'm just looking for some clarity on the commercial aftermarket, on a 605 basis, it appears that growth might have been negative. It looks like the adjustment to 606 added about $50 million in Aerospace sales this quarter. What -- I think 9% growth is on a 606 basis and in the first half of the year, you disclosed growth on a 605 basis. So if we're just trying to compare apples-to-apples, on a 605 basis, if you had $420 million of commercial aftermarket sales last year about $105 million per quarter, is it fair to assume that there is about a 1,000 basis points of delta between the 9% that you're reporting, I think on a 606 basis and what it would be under 605?

Jack Thayer -- Vice Chairman, Chief Financial Officer

Commercial aftermarket would have been roughly 9% year-over-year, I mean in the 605, sorry.

Thomas A. Gendron -- Chairman of the Board, President & Chief Executive Officer

Yeah, under 605.

Karl Poehls -- Poehls Associates -- Analyst

So would it be higher than on a 606 basis?

Jack Thayer -- Vice Chairman, Chief Financial Officer

On a 606 basis, 19%.

Karl Poehls -- Poehls Associates -- Analyst

Okay. And then for the full year, I think you guided to mid-to-high single-digits excluding the...

Jack Thayer -- Vice Chairman, Chief Financial Officer

Roughly in line with the top line growth.

Karl Poehls -- Poehls Associates -- Analyst

Accounting change, what would it have been on a full year basis?

Jack Thayer -- Vice Chairman, Chief Financial Officer

I'm sorry, repeat that please.

Analyst

Excluding the adjustment for 605 to 606, what would the commercial aftermarket growth been on a full year basis?

Jack Thayer -- Vice Chairman, Chief Financial Officer

We're not really forecasting in 605 anymore, because we've made the transition at the beginning of fiscal year 2019 to 606. So I don't -- I apologize we don't have that from a comparability standpoint.

Karl Poehls -- Poehls Associates -- Analyst

All right. Thank you.

Jack Thayer -- Vice Chairman, Chief Financial Officer

Yeah. Thank you.

Operator

Thank you. And we have a follow-up question from Pete Skibitski from Alembic Global. Your line is now open.

Pete Skibitski -- Alembic Global Advisors -- Analyst

Yeah, thanks. Just one housekeeping question. Do you guys have a full-year estimate for D&A for fiscal '20?

Jack Thayer -- Vice Chairman, Chief Financial Officer

D&A for...

Pete Skibitski -- Alembic Global Advisors -- Analyst

Yeah, depreciation and amortization for fiscal '20.

Thomas A. Gendron -- Chairman of the Board, President & Chief Executive Officer

We didn't provide it but -- yes.

Jack Thayer -- Vice Chairman, Chief Financial Officer

I think up modestly is probably the right way to think about it.

Pete Skibitski -- Alembic Global Advisors -- Analyst

Okay. Got it. Thanks guys.

Jack Thayer -- Vice Chairman, Chief Financial Officer

Yeah, thanks.

Operator

Thank you. [Operator Instructions] Our next question comes from George Godfrey from CL King. Please state your question. If your phone is on mute, please unmute it. George Godfrey.

George Godfrey -- C.L. King -- Analyst

Sorry about that. Thanks, Tom, you touched on is that you put the capacity in place to ramp up production as Boeing needs to take that higher. Are you anticipating or do you see any issues with the rest of the supply chain that could impact you that those production targets going from 42% [Phonetic] to 52% [Phonetic] to 57% [Phonetic] could perhaps be more challenging to meet in 2020?

Thomas A. Gendron -- Chairman of the Board, President & Chief Executive Officer

Well, it's definitely -- George as you probably know already, there's definitely pressure in the supply chain. If I was looking in some of the materials whether forgings, castings, bearings, all those are some pressure on capacity. So we're trying to work that. I think the whole industry is experiencing that. So everybody is working to make sure those capacity numbers are there for those type of commodities, but that's what I would say. There is some pressure. We're working it, but I hope that could become a constraint and could temper the ramp rate, but I think people are working really hard. And I think the ramps should be in line with what Boeing is projecting.

George Godfrey -- C.L. King -- Analyst

Great. Thanks for taking my question.

Thomas A. Gendron -- Chairman of the Board, President & Chief Executive Officer

Yeah. Thanks, George.

Operator

Thank you. And we have a follow-up question from Gautam Khanna from Cowen. Your line is now open.

Gautam Khanna -- Cowen and Company -- Analyst

I just wanted to ask where you are on L'Orange bringing their technology to the US, have you had any revenue synergies yet there?

Thomas A. Gendron -- Chairman of the Board, President & Chief Executive Officer

Yeah, we have. We've won program and we've won some in China. So we're starting to see that leverage, and we see more coming in. Just as a reminder, those do have a fair amount of development cycle times, not as long as Aerospace, but the synergies are happening and we're seeing also better support to customers. They like the fact that we're bringing, not just a fuel injection system or bring in the controls and actuation evolving as well. So that's progressing very well. We're really quite happy with the way L'Orange is moving forward with the Company.

Gautam Khanna -- Cowen and Company -- Analyst

What is L'Orange's growth rate implied next year?

Thomas A. Gendron -- Chairman of the Board, President & Chief Executive Officer

We haven't broken that out, so it's not a number we're providing separately at this time from the Industrial. So, it's embedded in the flat to slightly up. And mainly...

Gautam Khanna -- Cowen and Company -- Analyst

Is it fair to assume though it would be maybe up probably because of the share.

Thomas A. Gendron -- Chairman of the Board, President & Chief Executive Officer

Well, it's up a little bit. I mean, you can look at it being up, but we'd also have the headwinds. They have strong oil and gas sales that are being tempered. Some of the sales on the large diesel engine power gen have tempered a little bit. So it won't be up dramatically more than the whole Industrial group. It'll be in line.

Gautam Khanna -- Cowen and Company -- Analyst

Thank you. It's very helpful.

Thomas A. Gendron -- Chairman of the Board, President & Chief Executive Officer

All right. Thanks.

Operator

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

Thomas A. Gendron -- Chairman of the Board, President & Chief Executive Officer

Okay. Well, I'd like to thank everybody again for joining us today. I would like to invite all of you to join us at our Investor Day in New York City on December 6. We'll have a little more in-depth discussion on our markets, our strategies and our longer range outlook. So I hope to see you there and thanks again for joining us today. Bye.

Operator

Thank you. Ladies and gentlemen, that concludes our conference call today. If you would like to listen to our rebroadcast of this conference call, it would be available at 7:30 PM Eastern Standard Time by dialing 1-855-859-2056 or 1-404-537-3406 for our non-US calls and by entering the access code 4382689. A rebroadcast will be available at the Company's website, www.woodward.com for 14 days. [Operator Closing Remarks]

Duration: 55 minutes

Call participants:

Don Guzzardo -- Vice President, Investor Relations & Treasurer

Thomas A. Gendron -- Chairman of the Board, President & Chief Executive Officer

Jack Thayer -- Vice Chairman, Chief Financial Officer

Robert F. Weber -- Vice Chairman

Sheila Kahyaoglu -- Jefferies and Company -- Analyst

Pete Skibitski -- Alembic Global Advisors -- Analyst

Chris Howe -- Barrington Research -- Analyst

Robert Spingarn -- Credit Suisse -- Analyst

Michael Ciarmoli -- SunTrust Robinson Humphrey -- Analyst

Gautam Khanna -- Cowen and Company -- Analyst

Matthew McClintock -- Barclays -- Analyst

David Strauss -- Barclays -- Analyst

Karl Poehls -- Poehls Associates -- Analyst

Analyst

George Godfrey -- C.L. King -- Analyst

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