Woodward Inc

NASDAQ:WWD

Q4-2025 Earnings Call

[Operator]

Ladies and gentlemen, thank you for standing by. Welcome to the Woodward, Inc. Fourth Quarter and Fiscal Year 2025 Earnings Call. At this time, I would like to inform you that this call is being recorded for rebroadcast [Operator Instructions].

Joining us today from the company are Chip Blankenship, Chairman and Chief Executive Officer; Bill Lacey, Chief Financial Officer; and Dan Provaznik, Director of Investor Relations.

I would now like to turn the call over to Dan Provaznik.

[Daniel Provaznik, executive]

Thank you, operator. We would like to welcome all of you to Woodward's Fourth Quarter and Fiscal Year 2025 Earnings Call. In today's call, Chip will comment on our strategies and related markets. Bill will then 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 included some presentation materials to go along with today's call that are also accessible on the website.

Please note that based on changes in market dynamics, the company has refined its industrial end-to-market presentation to better align certain sales within power generation, transportation and oil and gas. Accordingly, sales for the quarters and years ended September 30, 2025 and 2024, have been reclassified for comparability. The reclassification had no impact on total industrial or the consolidated financial results.

A webcast of this call will be available on our website for 1 year. All references to years in this call are references to the company's fiscal year, unless otherwise stated. I would like to highlight our cautionary statement as shown on Slide 2 of the presentation materials. As always, elements of this presentation are forward looking, including our guidance and are based on our current outlook and assumptions for the global economy and our businesses more specifically. Those elements can and do frequently change.

Our forward-looking statements are subject to a number of risks and uncertainties surrounding those elements, including the risks we identify in our filings with the SEC. These statements are made as of today, and we do not intend to update them except as required by law.

In addition, we are providing certain non-U.S. GAAP financial measures. We direct your attention to the reconciliations of non-U.S. GAAP financial measures, which are included in today's slide presentation and our earnings release. We believe this additional financial information will help in understanding our results.

And now I'll turn the call over to Chip.

[Charles Blankenship, executive]

Thank you, Dan. 2025 was another remarkable year for Woodward. Our team continues to make significant progress, motivated by our purpose to design and deliver energy control systems that our partners count on to power a clean future. Our members' dedication to serving our customers and meeting our commitments to all stakeholders, drove record performance in a number of areas.

Our annual revenue exceeded $3.5 billion for the first time, which was the result of strong performance in both business segments. Aerospace sales increased 14% to record levels with margin expansion of 290 basis points. Industrial delivered healthy sales growth of approximately 10% and excluding China OH and core industrial margin expansion of 110 basis points.

As a result, we delivered all-time high adjusted earnings per share, up nearly 13% compared to the prior year. We achieved these results through a keen focus on our strategy, guided by our values, including integrity, respect and accountability and showing up as humble, yet driven industry leaders as we continue to improve how Woodward serves customers.

Next, I'd like to highlight some notable achievements that created value from last year driven by our pillars of growth, operational excellence and innovation. Starting with growth. Our aerospace team delivered strong growth in defense OEM as predicted and rose to the occasion to deliver on higher-than-expected commercial services demand.

Commercial aircraft delivery rates were lower than originally planned, including impacts of destocking of some Woodward components and systems. In commercial services, our team successfully captured volume growth and pricing opportunities. We experienced more legacy engine MRO volume than planned, coupled with the expected increase in LEAP and GTF demand, which is rising to levels of significant contribution to overall commercial services revenue and earnings. We expect LEAP and GTF repair revenue to surpass legacy repair revenue in late calendar 2026 or early 2027.

For this compare, I'm speaking specifically to the repair activity and excluding spare LRU sales associated with fleet spares provisioning as these sales can be lumpy over short periods of time, but generally correlate with total aircraft delivered over the long term. For example, this past quarter, we received more orders for spare end item than we anticipated with trade and tariff uncertainty contributing to the order surge.

Our Industrial segment delivered double-digit growth in oil and gas and power generation and high single-digit growth in marine transportation. Notably, our industrial services portfolio, ranging from component MRO to Powerplant controls upgrade projects, achieved substantial growth contributing to topline sales and improved mix.

Overall, our strong performance in the fourth quarter and full year 2025 reflects the strength of our strategy and our team's ability to execute. We have increased content on growing platforms in growing markets. We believe we are well positioned for future success. Over the past year, we achieved several key milestones supporting our long-term growth strategy. We completed a strategic transaction to add capability and pedigree to our electromechanical actuation business unit. The acquisition included state-of-the-art horizontal stabilizer trim actuator products on business jet, regional and wide-body commercial aircraft, including the Airbus A350.

This represents our first direct supply contract to Airbus. Integration of the acquired people and products is progressing on plan to capture the full value of the transaction. We won a competitive selection to design and deliver A350 wing spoiler actuators, further increasing our Airbus business portfolio and A350 shipset content. This organic growth project proves our position on a very successful wide-body program as well as prepares us for the next single aisle opportunity by demonstrating our technology, design and industrialization capability.

This win, coupled with our recent acquisition of electromechanical actuation capability, including the A350 HSTA, will raise our total A350 shipset value to approximately $550,000 once we start shipping the wings spoiler actuators, currently scheduled for late calendar 2028.

To that end, we broke ground on our Spartanburg, South Carolina facility construction project in November. This facility is intended to be another showcase advanced manufacturing site, building on our experience with our Rock Cut campus, highly automated and vertically integrated. We will produce the A350 spoiler plus additional aerospace products at this facility.

Within Industrial, our Glatten expansion is ahead of schedule and on track to become operational by mid-2026. This expansion will provide increased capacity to meet the growing demand for data center backup power with enhanced levels of automation, improved flow and higher inventory turns.

To support our growth, we're making increased strategic investments in our company with robust returns for projects that increase capacity and improve productivity with a specific focus on automation.

Turning to operational excellence. We continue to make steady progress. We are focused on improving the fundamentals, and I expect our teams to pick up the pace to improve flow and unlock more productivity in this coming year. Everything starts with safety at Woodward. We continue to roll out our human and organizational performance program to reduce injury risks and increased levels of protection, and we are on track to have HOP in place at all of our sites this calendar year. We're also investing in immersive training for our team leads and first-level supervisors. We are starting to see the benefits as they apply what they've learned, solving problems within cycle time, rebalancing work to optimize labor and create flow and coaching their teams more effectively. I'm excited by our progress so far.

We're also making strides in stabilizing our supply chain. Although we are still experiencing some supplier performance shortfalls, Woodward has made progress in optimizing our supplier network, while helping our strategic suppliers improve their own quality and delivery when required. Industry-wide efforts to stabilize demand signals are benefiting our planning and delivery performance. I'm pleased to see our investments in automation paying off by reducing our demand for labor. We're also realizing the expected benefits in safety, quality, delivery and cost as we refine our project execution and rebalance value streams.

Our automation focus is on jobs with high turnover repetitive or economically challenged tasks and high applied force requirements. Our workforce is embracing these projects and understands the benefit in their daily work. We will continue to invest in automation in 2026 and beyond.

Innovation is alive and well at Woodward, and we made prudent investments in technology development for new military programs, the next single aisle, alternative fuels, automation and services delivery. We continue partnering with our customers to shape how our technology solutions and elevate the value of their next-generation products.

As we look ahead, our priorities for 2026 are centered on strong execution, including capturing continued growth in our markets, driving operational excellence and meeting our customers' evolving expectations.

In Aerospace, we are prepared for increased OEM orders as the aircraft manufacturers stabilize and increase production rates and as defense customers continue to signal strong demand. In commercial services, we are prepared for MRO growth as legacy aircraft continue to fly longer and more LEAP and GTF engines enter their maintenance cycles. We do expect somewhat muted topline growth in commercial services compared to 2025, which benefited from outsized demand for spare end items and some advanced buying.

In Industrial, we are ready to meet sustained demand across our core markets of transportation, power generation and oil and gas and continue to expand our capabilities and global presence in industrial or regional repair, overhaul and upgrade offerings.

Our guidance for 2026 reflects our continued confidence in the growth trajectory across our segments and our continued operational discipline. We are on track to deliver the 3-year sales and earnings targets we set at December 2023 Investor Day. We do expect a modest adjustment to our cumulative free cash flow target as we make the strategic decision to allocate more capital toward organic, high-return growth investments, including automation at multiple sites and the Spartanburg facility.

2025 was a year of record performance and significant progress as we executed on our strategy and delivered on the commitments we've made to shareholders. We intend to build on the strong momentum in 2026 and beyond. And now I'll turn it over to Bill to share more detail around our financial performance in 2025 and our outlook for 2026. Ready Bill?

[William Lacey, executive]

I'm ready. Thank you, Chip, and good evening, everyone. As a reminder, all references to years are references to the company's fiscal year unless otherwise stated. And all comparisons are year-over-year unless otherwise stated.

Net sales for the fourth quarter of 2025 totaled $995 million, an increase of 16%. Net sales for 2025 were $3.6 billion, an increase of 7% and the highest on record. Earnings per share for the fourth quarter of 2025 were $2.23 compared to $1.36.

Adjusted earnings per share for the fourth quarter of 2025 were $2.09 compared to $1.41. For 2025, earnings per share were $7.19 compared to $6.01, and adjusted earnings per share were $6.89 compared to $6.11.

At the segment level, our Aerospace segment delivered double-digit sales growth in substantial earnings expansion for both the fourth quarter and full year, driven by strong performance in commercial services and defense OEM. Fourth quarter Aerospace segment sales were $661 million, up 20%. Commercial Services sales increased 40%, while commercial OEM sales were essentially flat.

Defense OEM sales increased 27%, and defense services were up 80%. Aerospace segment earnings for the fourth quarter were $162 million, with margins expanding 520 basis points to 24.4% of segment sales. The improvement was driven by strong price realization and higher volume, partially offset by strategic investments in our Aerospace Manufacturing capabilities as well as inflation.

For the full year, the Aerospace segment delivered record annual sales and earnings. Segment sales were $2.3 billion, up 14%. Commercial Services sales increased 29% reflecting both favorable pricing and higher volumes, supported by sustained high utilization of legacy aircraft and improved throughput by the MRO shops. LEAP and GTF activity also continues to increase, further contributing to commercial services growth.

I do want to note that toward the end of the fiscal year, while underlying commercial services demand remained strong we believe a portion of the growth was influenced by certain customers making advanced purchases to take advantage of a window of trade stability.

Defense OEM sales increased 38%, primarily driven by strong demand for smart Defense. In addition, new JDAM pricing took effect during the fourth quarter, which contributed to the strong year-end performance. Aerospace segment sales growth was partially offset by a 6% decrease in commercial OEM sales. The decrease was largely due to the Boeing work stoppage earlier in the year and our disciplined and measured production ramp that followed along with inventory normalization by air framers that occurred in the second half of the year.

Moving into 2026, we expect these headwinds to ease as air framer production rates increase. Defense services sales were down 2%. As a reminder, while the timing of this business can be lumpy, demand signals remain healthy. Aerospace earnings for 2025 were $507 million or 21.9% of segment sales compared to $385 million or 19% of segment sales. The 290 basis point improvement reflects solid price realization and higher sales volumes, partially offset by strategic investments in manufacturing capabilities unfavorable mix and inflation.

We're making these strategic investments to enable future growth by expanding manufacturing engineers to support our ongoing efforts to increase automation. In addition, we have been increasing and developing our production frontline and team leaders to improve supervision, training and problem solving to drive productivity, improved cycle times and increase output.

Turning to Industrial. As a reminder, my comments reflect the reclassification of certain sales between the end markets that Dan mentioned earlier. Industrial segment sales for the fourth quarter were $334 million, up 11% from $302 million. Our core industrial sales, which excluded the impact of China on-highway, grew 15% in the quarter.

Transportation sales increased 15% and oil and gas sales grew 13%, while power generation grew only 6% due to the impact of the divestiture of our combustion business in the second quarter of this year which had averaged approximately $15 million of quarterly sales. Excluding the impact of the divestiture, power generation sales grew in the mid-teens on a percentage basis.

Industrial segment earnings for the fourth quarter were $49 million or 14.6% of segment sales compared to $38 million or 12.6% of segment sales. Within our core industrial business, margins expanded 330 basis points to 15.2% of core industrial sales, driven by price realization, partially offset by expected inflation and planned strategic investments in manufacturing capabilities.

For 2025, Industrial segment sales were $1.25 billion compared to $1.3 billion, a decrease of 3%. Excluding the impact of China on-highway sales, core industrial sales increased 10% to $1.2 billion compared to $1.1 billion for the prior year. Marine transportation grew 9% driven by both price and volume. As elevated ship build rate supports strong OEM engine demand and lay the groundwork for future services opportunities.

Oil and gas sales grew by 14% as volume growth was driven by greater midstream and downstream gas investment. Power generation, excluding the impact from the divestiture of our combustion business grew 22% driven by our operational improvements and increased output to meet growing demand in various gas turbine systems value stream.

Industrial segment earnings for 2025 and were $183 million or 14.6% of segment sales compared to $230 million or 17.7% of segment sales. This decrease was largely a result of lower sales volume and unfavorable mix, both related to reduced China on-highway demand, partially offset by price realization.

Core industrial margins for 2025 were 15.2% of segment sales, an increase of 110 basis points. This expansion reflects strong operational execution, price realization across the portfolio and our ability to drive incremental margins from higher volumes, partly offset by expected inflation in planned manufacturing investments to further improve productivity.

Nonsegment expenses were $41 million for the fourth quarter of 2025 compared to $31 million. Adjusted nonsegment expenses were $35 million in the fourth quarter compared to $27 million. Nonsegment expenses were $126 million in 2025 compared to $120 million. Adjusted nonsegment expenses were $133 million in 2025 compared to $112 million.

At the consolidated Woodward level, net cash provided by operating activities for fiscal 2025 was $471 million compared to $439 million. Capital expenditures were $131 million for fiscal 2025 compared to $96 million. The increase in capital expenditure was driven by ongoing investment in automation and production to improve operations and prepare for growth.

In addition, in 2025, we purchased the land for our new facility in Spartanburg, South Carolina and this project is rapidly moving forward. Free cash flow was $340 million for fiscal 2025 compared to $343 million. The decline in free cash flow was primarily due to higher capital expenditures, partially offset by higher earnings.

As of September 30, 2025, debt leverage was 1x EBITDA. During fiscal 2025, as anticipated, we returned over $238 million to stockholders, including $173 million of share repurchases and $65 million in dividends.

In November 2025, we successfully completed our previous 3-year $600 million share repurchase authorization more than 1 year ahead of schedule, reflecting our ongoing commitment to return cash to shareholders. We recently announced a new 3-year sheer repurchase program, authorizing the repurchase of up to $1.8 billion of common stock. This significant expansion reflects the Board's confidence in Woodward's strategy, long-term growth outlook and ability to consistently generate strong free cash flow.

In fiscal year 2026, our guidance assumes returning between $650 million to $700 million to shareholders in the form of dividends and share repurchases. From a capital allocation perspective, we remain committed to a disciplined and balanced approach that fully leverages our strong balance sheet to drive growth. We are investing organically to advance automation and complete our new Spartanburg, South Carolina facility, while also actively evaluating selective returns-driven M&A opportunities. Our strong balance sheet positions us to act decisively when the right opportunities arise.

Now turning to our 2026 guidance. As we look ahead, we remain focused on our value drivers, growth, operational excellence and innovation. Our fiscal 2026 guidance assumes a sustained strong demand environment, supporting continued sales growth and further margin expansion. At the consolidated level, Woodward net sales growth is expected to be between 7% and 12%. Aerospace sales growth is expected to be between 9% and 15%. Industrial sales are expected to grow 5% to 9%. In Aerospace, we expect sales growth across the segment weighted towards OEM driven by a return to growth in commercial OEM and continued strength in defense OEM. Commercial Services growth is expected to moderate as 2025 include a high level of spare LRU purchases as well as the advanced purchases I mentioned earlier.

Defense Services are expected to show modest growth. Industrial sales are anticipated to grow across all of our primary markets. Note, we expect power generation growth to be muted in the first half due to the divestiture of our combustion product line. We anticipate China and highway sales in 2026 to be approximately $60 million, in line with 2025.

Woodward adjusted earnings per share are expected to be between $7.50 and $80 based on approximately 61 million fully diluted weighted average shares outstanding and an effective tax rate of approximately 22%.

Aerospace segment earnings are expected to be 22% to 23% in segment sales. Industrial segment earnings are expected to be 14.5% to 15.5% of segment sales. Adjusted free cash flow is expected to be between $300 million and $350 million. Capital expenditures are expected to be approximately $290 million, which includes continued investment in automation and approximately $130 million dedicated to the build-out of our new production facility in Spartanburg, South Carolina. The increased spend also includes investment in MRO readiness and the start of a multiyear ERP upgrade project.

Some additional items to help you with your modeling. We expect year-over-year price realization of approximately 5%. Nonsegment expenses should be approximately 3.5% of sales. Consistent with historical trends, we anticipate performance to strengthen across the quarters of fiscal year 2026. Our fiscal 2026 guidance positions us to meet or exceed the long-term sales and earnings commitments for 2024 through 2026 which were established at our last Investor Day.

Free cash flow is expected to be below our 3-year target, reflecting higher strategic investments to support sustained long-term growth. including our new Spartanburg facility. We plan to introduce our next 3-year outlook at our Investor Day in December of 2026.

This concludes our comments on the business and results for the fourth quarter and fiscal year 2025.

Operator, we are now ready to open the call to questions.

[Operator]

[Operator Instructions]

And our first question comes from the line of Scott Mikus with Melius Research.

[Scott Mikus, analyst]

Chip, I had a question kind of on the aftermarket dynamics, particularly in engines. So the LEAP MRO network is much more internal relative to the CFM56 network. So when you ship a fuel metering unit component on the LEAP engine. Just how are you sure whether it's going to the aftermarket or OE channel? Are you being paid at different price versus both? Just given that GE and CFM more broadly is trying to route as many component sales through the LEAP MRO premier network?

[Charles Blankenship, executive]

So we're -- thanks for the question, Scott. We're sure about the PO status that comes to us, whether it's an install or a spare end item in terms of what customer is ordering it. So we have clear line of sight to what type of unit that is.

[Scott Mikus, analyst]

Okay. And then given the investments that you're making in automation, when I was at the Rock Cut campus, it was very impressive there. Is there anything structurally that you see that would potentially prevent your LEAP or GTF aftermarket margins to where they couldn't potentially reach CFM56 or V2500 margin levels?

[Charles Blankenship, executive]

Well, Scott, there's nothing structurally in the way of that. It's kind of up to us to understand what the customers are seeing in the field with the units and developing the right repairs and overall procedures. And we're learning -- we've learned a lot with the first units that have come back, whether it be the pump or SCU or FMU on LEAP or it's the GTF fuel nozzles or actuation. So we're pretty confident that we have the right design for repairability and service solutions for our customers that we'll achieve the right profitability.

[Operator]

And our next question comes from the line of Scott Deuschle with Deutsche Bank.

[Scott Deuschle, analyst]

Bill, what growth are you assuming for legacy narrow body engine aftermarket in 2026?

[William Lacey, executive]

Scott, for you said legacy narrow body for...

[Scott Deuschle, analyst]

For narrow-body engines, yes.

[William Lacey, executive]

Yes. So we -- obviously, we saw a really good growth in '25. And based off of that, we would expect sort of single-digit growth rates coming through in 2026 on the legacy narrow-body. We expect to see some price obviously come through and volume at these levels will be tough. But the MRO shop surprised us last year, so we'll see if they get some more productivity. But I would say, single digit.

[Scott Deuschle, analyst]

Okay. And then, Bill, does the EPS guide include any benefit of the recent share repurchase authorization increase? Or do you not really assume that authorization or repurchases -- excuse me, the guide?

[William Lacey, executive]

Yes. We do expect and put that into the guide.

[Scott Deuschle, analyst]

Okay. And then last question, Chip. Can you give us any sense as to how much your current power generation revenue is tied to Caterpillar? And I'd be curious if you could talk a little bit about the growth outlook you expect from that customer in the years ahead.

[Charles Blankenship, executive]

Well, we've been receiving pretty healthy growth from all of our power gen customers. And Bill and Dan talked about a little bit of reclass that went on. And it was really by examining where all of our customers and products were being used some traditional oil and gas customers have been involved in more power gen type applications, maybe not utility-grade but behind the meter type applications and folks like Caterpillar and NEO and Baker Hughes are all kind of playing in that segment of the market. So it's a very interesting aspect of the power gen growth opportunity that we're capitalizing on.

But as far as carving out just a single customer like Caterpillar, we don't do that. But I think you can be satisfied that as they grow, we grow, we're on some of their gas engines with SOGAV and valves and actuation and we're on some of their liquid fuel engines with actuation and governor products. So we've got a good staple of products distributed on their products, and it varies by application.

[Operator]

And our next question comes from the line of Sheila Kahyaoglu with Jefferies.

[Unknown Analyst]

This is Kyle on for Sheila. I hope that -- can you kind of extend the question here on the commercial aftermarket because I think you said muted next year. So you gave -- the prepared remarks are pretty helpful. I think you said LEAP GTF by the end of calendar year '26, the same size or larger than legacy. So when I take that in connection with the single-digit comment you just gave to Scott, I mean, I guess it implies that maybe the pull forward that you saw in this quarter and prior quarters is significantly larger than maybe I expected.

So maybe if you can just kind of walk through those puts and takes to round out that comment. What are you thinking about LEAP GTF growth next year in light of what the OEMs are saying and the magnitude of the pull forward that you saw this year and whether you're sure that's not repeating or whether there's potential that was actually restocking?

[Charles Blankenship, executive]

Yes. Thanks for the question. We really do believe there will be strong repair growth for LEAP and GTF. We believe like Bill was saying there'll be either flat to a little bit of repair growth on V2500 and CFM-5, But the thing, the big variable is this lumpy order behavior that we saw last quarter on spare end items, but pretty substantial demand there. And those are quite high-priced individual items to be ordered compared to repair.

So when you think about the total top line, it has an outsized effect on that top line as well as the earnings. So we don't forecast that happening again. There could be additional activity. We don't rule that out, and we're prepared to capture that if it shows up. But we -- I don't think it's prudent to forecast that or put that in our plan because we don't have any line of sight to that at this time.

[Unknown Analyst]

And if I could just follow up on the price comment, Bill, you said 5% next year. I assume that's more weighted to aerospace and increasingly weighted to aftermarket. So maybe any additional color by segment and by subsegment within that.

[William Lacey, executive]

Yes. Correct. At the total Woodward level 5% in the comments we talked about, the JDAM price increase in the fourth quarter '25, we'll see that flow through the first 3 quarters of '26. And so with that and some catalog growth, we will -- aero will outpace industrial slightly, but we still also will see good price results from our industrial team as well.

[Operator]

And our next question comes from the line of Noah Poponak with Goldman Sachs.

[Noah Poponak, analyst]

Can you quantify in absolute dollars, whatever you're deeming to have been lumpy or pulled forward in the aerospace aftermarket in 2025 revenue?

[William Lacey, executive]

Yes. Noah, it's -- as you can imagine, it's hard to quantify because the customer isn't telling us exactly kind of their thought. But here, I'll give you a few numbers that will be in the footnotes of the 10-K. Back where we lay out by segment sales by region. And you'll see that from 20 -- from '24 to '25, sales grew $50 million. So some part of that $50 million is normal growth. And then some part of that is a part of this advanced purchases. It's just hard to quantify exactly.

[Noah Poponak, analyst]

Okay. That's helpful. And can you quantify where LEAP and GTF aftermarket came in for the year 2025 versus 2024?

[Charles Blankenship, executive]

So the LEAP and GTF are gaining on the legacy, let's put it that way. And like I said before, they're kind of in the same ZIP code, but not equal. So -- and we're just talking repair activity, not including spare end items. So we really do think that that's going to cross over in the late '26, early '27 time period. And that may sound like an earlier crossover compared to what we said at Investor Day back in 2023. But that original graph in 2023, the legacy items that included some widebody and regional component repair and then it also in the new included GEnx.

So we're trying to strip out some of that other information and make it cleaner for you. Like last quarter, I committed that we would clarify that. And when we do run our model out and look at kind of how fourth quarter ended, how inputs are coming in for both the legacy as well as the LEAP GTF. That's how we come up with that sort of crossover period, which I hope clarifies things for you.

[Noah Poponak, analyst]

Okay. Great. That's super helpful. And then just on the Aerospace segment margin, the guidance requires a pretty significant slowdown in the incrementals. I guess in the fourth quarter, you're seeing incremental benefits from the items we just discussed and therefore, it's sort of a leveling out over the 2 years? Or is there more to it?

[William Lacey, executive]

Yes. So the -- no, I think your question is about the incremental coming down from about 42.5 for aero and coming down in '26. And it's a few things. It's our OEM mix growing on the aero side, which is a mix down. And then, yes, the -- and so that's the main driver is just the amount of OEM that we expect to come through in '26.

[Charles Blankenship, executive]

And just a reminder about that is a good thing. So we're creating the installed base to get the services revenue and earnings on later.

[Operator]

And our next question comes from the line of Christopher Glynn with Oppenheimer.

[Christopher Glynn, analyst]

Curious on the defense side, a specific and a general question. Where are you with guided weapons clarity longer term, how those programs and lot orders are flowing through? Should we anticipate that growth is kind of leveling off on a sequential basis? Or is the volume still ramping? I know you have a big price aspect to growth in that category?

[Charles Blankenship, executive]

So our guided weapons programs, Pearl, JDAM, small diameter bomb SDB and the team 9X are all kind of having a little different behavior. JDAM is up substantially, but we feel like that will remain level for a good while. And then we don't have any orders for the other 2, but we have indications that customers are asking us to do capacity studies and work with our supply chain and capacity studies. So some of these things are leading indicators that these other product lines might experience some growth opportunities. But we don't have anything specific, Chris, on that right now.

[Christopher Glynn, analyst]

Okay. Great. And you mentioned global capacity investment for the industrial aftermarket. I'm guessing that's oriented towards the marine side, but just wondering if we could drilling to that investment element there.

[Charles Blankenship, executive]

Yes. So we've been doing a little bit of flag planting here and there on MRO shops. So when you think about a powerplant, and all of the scope of supply that we could provide to aeroderivative or heavy-duty frame power plant installations. Just like an aircraft engine, they undergo maintenance cycles, and we're finding that we have the ability to grow our service content with these customers when we're a little closer to that region.

So we've done some of that in the prior couple of years, and we anticipate doing a little bit more of it just to try and get closer to the customers. and grow the opportunity to service our fuel metering valves and other types of scope of supply like that, that are on our customers' gas turbines and as well, reaching out with the opportunity to do some repair and reciprocity engines.

[Operator]

And our next question comes from the line of Gavin Parsons with UBS.

[Gavin Parsons, analyst]

Guys, what are you assuming for OE destocking? And it would be helpful if you could parse that out kind of by airframe and engine.

[Charles Blankenship, executive]

Thanks for the question, Gavin. It's a little difficult to parse that out for you that detail of a way from a customer standpoint. But we feel like, broadly speaking, somewhere in our second quarter sort of time period. If airframe customers and engine customers hit the rates and pull like they've forecast for us. We could be destocked by some time in that second quarter towards the end of our first half fiscal year.

[Gavin Parsons, analyst]

Okay. That's helpful. And then on CapEx going forward, should we kind of assume that normalizes once you finish kind of the A350 buildout? Or by the end of the decade? Or are we starting to look at build out for maybe a new single aisle?

[William Lacey, executive]

Yes. For right now, Gavin, we'll say that the Spartanburg is investment is causing that peak. We're going to continue to kind of look through '27, '28, '29, and we'll give you a clearer view in December of what's out there. We're looking -- understanding our next single aisle investments. But right now, the Spartanburg is sort of what we see there on the near horizon.

[Operator]

And our next question comes from the line of Michael Ciarmoli with Truist Securities.

[Michael Ciarmoli, analyst]

Nice results. Just to stay on Gavin's question there. The CapEx for Spartanburg. Can you support or will that have enough capacity to support programs beyond the A350? I mean is there kind of does this build out contemplate next-gen single-aisle.

[Charles Blankenship, executive]

Thanks for the question. The investment in Spartanburg, that facility has additional capacity over and above the A350 for us to put select product lines in there that make sense and are synergistic. But we're betting on a successful campaign for next single aisle scope, so that facility would not by itself be able to support NSA volumes.

We have bought enough land there to build a sister facility for NSA support. So we are thinking ahead where it makes sense on small amounts of investment dollars, but we're not putting any big investment dollars on NSA capacity. We'll have to really take a look at what that horizon and life cycle looks like from the design phase through the build and flight test phase and lay that out in comparison to our facilities and what's going on with legacy programs before we decide kind of how much additional capacity we need.

So that's a thought exercise even like Bill was saying, we'll share more at Investor Day in December. But some of that NSA thought exercise will mature as we understand from the Airbuses and Boeings of this world about what that time frame looks like.

[Michael Ciarmoli, analyst]

Okay. Fair. And then just back to Noah's question actually. You were talking about incrementals, but I guess just absolute margins looking at the low end of the range, really no margin expansion. You're obviously hitting and exceeding the targets, and you talked about the OEM mix, which makes sense. But as you're seeing this ramp on LEAP and GTF, is there margin dilution there on services? I mean do you have to get over some learning curves? I mean, I'm assuming scrape spare sales would be highly accretive on those platforms. But is there anything else dilutive with the LEAP and the GTF ramp up there?

[William Lacey, executive]

Yes. I'll jump on that and Chip maybe cover me if I miss a part. But no, the LEAP GTF service margins are good. It really is the impact of the overall OE and how that impacts things. Obviously, on the low end of the range, it contemplates some other headwinds. But to the point about the LEAP GTF margins are good. Again, OE mix is a primary driver of our -- of the rate expansion that you're seeing in our guide.

[Charles Blankenship, executive]

Yes. I would just follow up and say that we intend to expand margins, and that's what you see a guide there that allows for some headwinds to get in the way of that intent. But we've got plans in place and programs and the automation benefit that we're planning some realization of for 2026. We intend to get productivity.

[Operator]

And our next question comes from the line of Gautam Khanna with TD Cowen.

[Gautam Khanna, analyst]

Just to elaborate on the first question, which we've written about before, which is this LTSA versus spot aftermarket dynamic on LEAP versus CFM. Is it -- do you guys -- I'm just curious like on CFM56, when you sell into -- a spare part into the GE network, I presume that's a lower price than what you would sell into if it's an MRO or airline outside the network? And does that same logic apply for LEAP when you're selling a spare part to a direct user like an airline versus when you sell it through the GE internal MRO network? And if that's true, why wouldn't there be structural differences in profitability between those 2 platforms in the aftermarket over time?

[Charles Blankenship, executive]

Well, the reason why there's no structural difference is because there's really no structural difference to the contracting, Gautam. And when we sell spare end items, it can be to an airline, it can be to an MRO shop that has a variety of people under different agreements. We have some asset management contracts with some of the bigger MROs just like us CFM or GE or Safran network. So the whole landscape is similar between the previous generation and this generation.

So when you think about repair, it's also the same thing. So whether it's the spare end item, spare parts or a repair, we have fairly similar contracting principles in the LEAP ecosystem that we do to the CFM-5. And so I think there's nothing really there to explore further except that we have a lot more LRUs to take care of.

[Gautam Khanna, analyst]

Got you. And then a follow-up on the mix dynamic within the aftermarket. I know you talked about repairs, and I think that's distinct from spares. So I just wanted to get a sense, is the overall aftermarket profitability next year a little bit softer than it was in '25, just based on kind of more repair, less spares? Or was there any nuance here that you were trying to convey?

[Charles Blankenship, executive]

Really no nuance to convey there. We have a good blended service earnings profile for 2026. We're pretty happy with that. We'll see if the spare end item, if more comes through than we forecast, like it did last year, I mean it's really hard to tell. We'll have some upside if that happens.

[Operator]

And our final question comes from the line of Louis Raffetto with Wolfe Research.

[Louis Raffetto, analyst]

Bill, how should we think about the return of capital to shareholders is going to be balanced across the year? Or is there any reason to think it will be skewed one way or the other?

[William Lacey, executive]

Yes. Louis, our point is to spread it out evenly through the year. We'll see how things go, but the plan is to stay in the market throughout the year.

[Louis Raffetto, analyst]

All right. And then I guess on FSG margins, the last several years, the first quarter has been, I would say, substantially below the rest of the year. Is that something we should sort of expect again here in fiscal '26?

[William Lacey, executive]

I'm sorry, Louis, the margins in Q1?

[Charles Blankenship, executive]

We missed your first words.

[Louis Raffetto, analyst]

Sorry, FSG margins in Q1 have been below sort of the second quarter, third quarter? Should we...

[William Lacey, executive]

I'm not quite sure we say FSU.

[Louis Raffetto, analyst]

I'm sorry. I mean aerospace process.

[William Lacey, executive]

Okay. Yes, correct. That is normal trend in Aerospace and in Industrial, that Q1 is usually our lowest margin quarter and it sort of grows sequentially throughout the rest of the year.

[Louis Raffetto, analyst]

And then just last one on tax rate. You've had some benefit from option exercises in the last few years. I assume with the 22% rate, you're not expecting anything like that, but certainly could have that benefit depending on how that plays out?

[William Lacey, executive]

That's exactly right, Louis. With the prices that we've seen over the last couple of years. And as we estimate out, we don't foresee that outsized tax benefit from option exercises. So that is what is behind that 22% effective tax rate.

[Operator]

That concludes our question-and-answer session. Mr. Blankenship, I will now turn the conference back to you.

[Charles Blankenship, executive]

Thanks, everyone, for joining today's call. We hope you all have a wonderful Thanksgiving holiday.

[Operator]

Ladies and gentlemen, that concludes our conference call today. A rebroadcast will be available at the company's website, www.woodward.com for 1 year. We thank you for your participation in today's conference call, and you may now disconnect.