Sheila Kahyaoglu: So I wanted to ask for that Industrial — hi. You gave great color there in the prepared remarks. You also mentioned $50 million of sales from China natural gas sales and normalized margins in the mid teens. So I guess two-part question on this Industrial margin. When you back that out, it implies about 50% drop through on the China business. I guess, is that fair to say? What are you assuming on China natural gas sales for 2024? And what do we think drives the core business to mid teens given you’ve averaged about 10% over the last decade?
Bill Lacey: Yes. Hey, Sheila, thanks for the question. Yes, into our prepared remarks, we did discuss that we did hit our historically quarterly peak of around $50 million. And so that’s kind of where we are willing to discuss. We also, as it relates to OH, continue to feel that it’s a very volatile business. And we discussed what we were willing to include in our 2024 guide. So we felt like we provided some, as you said, some increased detail on OH, and we are going to leave it at that for now.
Sheila Kahyaoglu: So I guess …
Chip Blankenship: Just to get to the rest of your question, Sheila, the underlying performance of the other product lines and components of the Industrial business, we are seeing good improvement on the operations. And we’ve had some strong pricing on long-term agreements come through over the past year that we believe will connect for us over the next term and provide that lift to margins in the Industrial business.
Sheila Kahyaoglu: Okay. And then just sticking to Industrial then, I guess, what drives the biggest deceleration year-over-year on the top line, in your view? Can you go through the bits of what you’ve kind of baked into those — that assumption?
Bill Lacey: Yes. Again, as we spoke, Sheila, about our — the way we are assuming China on-highway business in 2024 is near historical sales in the first quarter, minimum amount in the remainder of the year.
Sheila Kahyaoglu: Okay. Thank you.
Operator: Your next question comes from the line of Pete Skibitski from Alembic Global Advisors. Please state your question.
Pete Skibitski: Hey, good afternoon, guys. Nice quarter.
Chip Blankenship: Thanks, Pete.
Pete Skibitski: Just a follow-up on Sheila’s question again on — as it relates to China CNG. So should we — given that one quarter will have an ongoing kind of peak level of China CNG in it, is the first quarter going to be the high revenue and margin quarter for the year for Industrial?
Chip Blankenship: We don’t know the answer to that, Pete. I mean that’s just what we are honestly trying to say is that we have visibility to orders in the first quarter that we think we can count on shipping. Past that, it’s upside opportunity for us. We are positioning our supply chain to try and be able to deliver that on a sustainable way if that demand continues. But what we are forecasting and kind of committing to guidance wise is just what we can see. Does that make sense?
Pete Skibitski: Right. Yes. Yes, there’s no downside risk from China CNG in your guidance, it’s only kind of upside opportunity, I think is what you’re saying.
Chip Blankenship: That’s what we are trying to say. And also, really all of our end markets that we are serving, we believe we’ll have growth in sales. And so that’s …
Pete Skibitski: Okay.
Chip Blankenship: … kind of — it looks good to us, but we just don’t want to get out in front of ourselves with our experience on the China OH before.
Pete Skibitski: Okay. And just one follow-up for me on the marine market. It seems like China exports are slowing and Europe, especially Germany seems pretty weak in terms of growth. So I’m trying to understand what’s driving the strength in the marine market. Are we just sort of going through kind of a replacement cycle for aftermarket demand? Can you shed any color on that market and the visibility you have?
Chip Blankenship: Yes. I mean there are a lot of subsegments to that market. There’s cruise ships, there’s ferries and like you said, the container ships. And there’s auxiliary engines and there’s main engines. And so when you look at what Woodward’s scope of supply is, we’ve got a lot of places that can still be growing even if China freight drops off or the pricing changes and makes people have a little less utilization on that specific submarket.
Pete Skibitski: Okay. Okay, great. Thanks guys.
Chip Blankenship: Yes. Thank you.
Operator: Your next question comes from the line of Christopher Glynn from Oppenheimer. Please state your question.
Christopher Glynn: Hey. Good afternoon, Chip, Bill, Dan. I was curious if you could go a little bit deeper into what you’re seeing into the defense markets. I know you expect procurement to increase, that’s pretty straight. You also mentioned to expect R&D to increase. Does that refer to internal and external? And what are kind of the 2024 drivers and longer term next couple of years that you’re seeing as defense demand starts to take a little shape here?
