Curtiss-Wright Corporation (CW) Earnings Call Transcript & Summary

Okay. Got it. Maybe shifting to defense. Got the debt ceiling, which is sort of right in front of us as it relates to your expectations for budgetary outcomes, but more importantly, what you have in the backlog, what you're seeing in the order pipeline from prior budgets. What is the growth rate that you're thinking about for the next couple of years within your defense portfolio?

So we're still very optimistic about our defense business and feel confident we will be able to grow it even if there is some tumultuousness that obviously, '23, I'm sure everyone is aware, it was a really significant 10% increase in the defense budget. And 13% of that was in the investment accounts, which is RDT&E and procurement, which is really where we drive the business that Curtiss-Wright delivers on. So in good growth across all 3 branches of the military. So very solid baseline for us to have and very well aligned with our technologies, the C5ISR capabilities continue to be spattered throughout the Air Force really all 3 branches, very strong support for naval ship buildings, 11 ships with continued support for Columbia and an additional DDG-51. So a very good strong base. Obviously, the President's put forward his FY '24 budget, a lower increase, but coming off of that big increase. I think general wisdom is it will probably increase a bit as it goes through markups. But even within the budget he put forward and again, in those investments accounts, there's roughly 5% increase in both naval and aerospace. So again, really strong business there. And within the Army, the areas where -- that are important to Curtiss-Wright still have very strong support and are in early days. So you mentioned our backlog. We do feel that the really strong order book we had last year, we're out to a great start this year. That backlog will give us some protection for sure. That doesn't carry on forever. But if we fall into a CR and it's at 2023 levels, that's a pretty healthy level of spending and spending in places where we want because it's not just spending cap, but you can't move money around and reprogram it. And so with good line of sight of where the '23 money is spent. So not to say it won't impact us. We talked in '22 that when the CR went on for 180 days, we did feel the effect, the R&D type portion of that, that where we do derive a reasonable amount of business got frozen. So no impact, but I think we're pretty well whether to grow the storm. And just to the other -- we're not all U.S.-based. We have a pretty good international footprint. The NATO has been slowly moving towards spending the incremental amounts they've been talking about that, where they will spend that money. We either come to the U.S. to buy existing systems where we have pretty broad coverage or to do build out capabilities in Europe and largely thinking as much of that will be ground vehicles, where we have a very strong presence in Europe on ground vehicles and international shipbuilding. So there's other pockets that we can really emphasize for growth that are not just tied to the U.S. DoD.

Okay. And just to put some numbers around that. I mean, 8% of our business today is what we would call foreign direct military spending. So we're selling directly to the foreign prime or directly to the foreign customer. That doesn't include the strong content that we have on many other programs like the F-35 or Black Hawk or Seahawks or C-130Js that are sold to the primes and then go international. So as we're looking at that and we see the spending increasing going forward, we see that as an opportunity. We don't think it's really started to take a stronghold yet, but maybe more towards the end of the year and into 2024, you'll start to see some of that uplift. For the announcements that have taken place to date, whether it's F-35, F-15, F-16, C-130Js all these Pumas, the various platforms were on all of these. And so we're really positioned well, I think, to benefit from that increase in international spending as well.

Okay. And any questions, feel free to raise your hand, I'll try and call on you. There was a question that sort of came to me and someone asked me about was your pricing within the portfolio. And obviously, you're working on highly engineered parts across the portfolio, commercial defense. And what has been your success rate in terms of passing on price net of inflation? Is there a strategy? And is this a good environment or a bad environment for sort of pricing in your products?

Maybe I'll kick this one off and then let you, Chris, talk to some of the numbers specifically. So when I became CEO, one of the early initiatives I put into place really before we saw how dramatic the inflationary pressures was going to be was the commercial excellence program to really consider how we took contracts within Curtiss-Wright, build in escalation clauses, the length of long-term agreements we would sign up from that whole process. And it was fortuitous, lucky, call it what you will, but it really -- we got the ball rolling early on with really training ourselves as an organization to take the best practices that existed in the industry, but -- and within pockets of Curtiss-Wright, and implement those across the teams. And this has been an ongoing journey that continues to the day. We rolled up our sleeves. We've tackled long-term agreements that we had many, many years left in them that were not in favorable positions for Curtiss-Wright and work with our customer base to convince them that they needed to work with us as a supplier. We are committed to being a quality supplier that services our customers, but that sometimes they have to work with us. And so I'm really proud of the work the team has done across the board to really systematically go across our businesses and address those things. Maybe, Chris, will actually talk to some of the numbers.

Sure. Yes. I think as we look at the margin expansion this year that we have for Curtiss-Wright, it's 10 to 30 basis points, and that includes roughly $7 million of incremental R&D investments. And then beyond that, we've got a lot of development contracts that are taking place. We recently had that press release regarding the subsea pump contract that we won, and that's going to be a temporary margin drain. But overall, our margins are up on the full year. I would say with the successes that we're having, the greatest successes we're seeing within the Aerospace and Industrial segment. And as you look maybe across the full portfolio, I would say 10 basis points of the 30 this year is going to come back through pricing and just being able to stay ahead of inflation.

Okay. That's a good transition into the industrial business. So your sales growth in 1Q is actually above your full year outlook as the guidance run rate. Any reason -- and you mentioned it sort of on the call that you're watchful of any softening conditions, but is it you're seeing any? Or you're just mindful of the backdrop?

Yes. Before I get into that, I just want to say that our total Curtiss-Wright sales guide for the year is 4% to 6%, of which 3% to 5% is organic. We have record backlog. We're having historical highs in orders. We had another great first quarter from an order perspective. So we have a lot of confidence right now as we go through the full year and our sales guidance and all of our guidance. I think as you look specifically at the industrial business, they have had a great Q1, to your point. They were up, I think, 9% or so in revenues, and that was evenly split between industrial vehicles and then also kind of the automation and services that we provide. When you peel back the onion a little bit on the order book, the orders were actually down in Q1, 20% year-over-year, but still above pre-pandemic healthy 2019 levels. And that business itself has a very, very strong backlog. The order book doubled in '21. So I think there's still some of that going on. I think what we're seeing right now is as the supply chain is improving in commercial industrial, lead times are shortening and customers are starting to adjust their order book. So we're expecting to see a little bit of that normalize here in the first half of the year and then pick up as we get into the second half of the year. But overall, our sales guidance within general industrial is 2% to 4%. That includes a 1% FX headwind. So it's 3% to 5% on the full year. We're certainly approaching the situation cautiously. And I think we have been -- I don't think I know, we have been in contact with our customers. Many of them are experiencing similar strong starts to the year. They're optimistic as to where we're going. I think, between the communication that we're receiving and then also some other things that we're doing to launch new products in the power electronic management space to caretake advantage of secular trends in vehicle electrification. We're optimistic that, that order book is going to pick up as we get deeper into the year and into 2024.

Is it mostly on the -- which part of the portfolio are you seeing the most normalization of the order trends?

I'd say it's mostly within the industrial vehicles. I think as you take a look at some more of our shorter-cycle businesses, the surface tech business, which people call the canary in the coal mine, it's really more of an indication of what's happening now in production activity across general industrial or it can be a very good indicator as to whether there's a problem coming because it shuts down very, very fast. But that business itself has been running in the high single digits to low double digits for orders, and we're not seeing any signs of weakness there. So I think, again, it's just really just being more cautious as we approach this and letting some of that slack work its way out.

Okay. Good. Nuclear. Just to shift gears on the commercial nuclear side of the house, maybe the aftermarket to start us off. I know during COVID, you had certain restrictions, service maintenance, upgrades weren't able to be filled as maybe as fast as they would otherwise have been. And I think you're working through some of that backlog. What's the outlook for this year and maybe going forward within the commercial aftermarket?

We've seen really nice order patterns in our commercial aftermarket business. And I think some of it initially was a catch back up. But I think way more across the board, we're seeing this as just increased activity due to commitments to keep the current nuclear fleet here in the U.S., specifically online and go for that 60-day to year license transitions. '23 will be the first year that we're not facing the shutdown of a reactor during the year. So stable at the current 92 reactors. Of those 92, just over half, 47 to be specific, just over half, have committed and are either applied already or processing their applications for that 60- to 80-year license extension. And most of the other ones are expected too. They're just not old enough yet that they're at the juncture to do that. So that's really -- we've been asked many times, how much work we think those -- that license extension will drive. And it's very hard because it does very much vary plant by plant. And even when we're doing the maintenance work, the orders that we're seeing, it's not necessarily like, oh, this is aftermarket, and this is subsequent license renewal. But clearly, we're hearing from our customers, they're beginning to implement the things, maintenance work that they wouldn't have done if they weren't doing that, those extensions. And I think it's very early days, but we're beginning to feel the influence of the government dollars that have been made available through first, the Infrastructure Bill with some tax credits and then in The Inflation Reduction Act, some additional credits available out of the government. Those monies are really driving confidence in the utilities to spend the money and maintain these plants. And that is the predominance of our business is here in the U.S. But we're doing that in Canada and over in Europe. And we've never had much of a presence with a footprint in the aftermarket in France, and that has been a big focus for us starting last year, and we're making inroads in France that could be a significant growth vector. So that business has historically been low single-digit growth even in a difficult market. We're definitely seeing it go move into a mid-single-digit growth market for the foreseeable future.

Do you have a sense as to penetration rates of what is addressable within the commercial aftermarket nuclear side of the house, what Curtiss-Wright currently does, what they could do in the future? Is that something that you think about?

We -- one of our programs is -- one of our business units, I should say, continually looks to bring in new products that a lot of people went out of their nuclear business. It's small enough and it's not easy to be a nuclear supplier. You have to maintain a lot of quality standards, go through NUPIC, a whole variety of things. And so we actively engage the broader market that if they would like, we'll take over, sometimes paying the royalty, sometimes pay just to buy a product line and do it. So I mean, we're always looking to expand the footprint of what we have. I mean, we are a very significant supplier into this market. And I had the luxury of being invited to an NEI dinner last week and a variety of the manufacturers of the new next-generation advanced reactors were at the table along with a variety of government officials. And Curtiss-Wright was there as one of the few or only Tier 2 supplier in that network. And I think it really demonstrates where we sit in importance in that market.

Well, that's a good transition. So what is the outlook for small modular reactors and advanced nuclear reactors over the next 5 years? Because obviously, that's a greenfield opportunity for Curtiss-Wright. Great position for it if it happens, it's awesome. If it doesn't, it's not in the numbers, but what was the outcome of the dinner?

Well, the outcome of the dinner was a very strong sense of commitment that the government needs to play a role today to help drive the commitment to an order base that will drive the supply chain and the manufacturers to get moving with being ready to scale for this. And obviously, ARDP money was put in place back in 2020. X Energy, who we're very proud of our content with them, is moving forward rapidly. TerraPower was the other receiver of the ARDP money. We're very much engaged with them. There's nothing to talk about publicly with content there yet. But we're engaged across all the SMR reactors. And I mean the potential for this, if they build out reactors at the rates they're talking, they very much are focused on bringing 13 gigawatts of power a year on board is what the DOE is trying to lay the groundwork with industry to deliver on. I mean that's just massive for Curtiss-Wright. But in the next 5 years, what you specifically asked about for all these small module reactors and we are working hard to be engaged with GE Hitachi and Holtec and Rolls-Royce, right -- NuScale right down the board. They've got a build test facilities, put equipment in the test facilities, build out their prototype reactors. That's significant business for Curtiss-Wright in getting through the next 5 years. And we're recognizing revenue as we do design and development work across some of these reactor developers today. It's not significant to the organization but we're going to be moving into prototyping and test facility development here in the next year or 2 years, and that's really going to be quite a catalyst for us. Probably something we'll be talking about at our next Investor Day.

All right. Good teaser. All right. Well with that, I appreciate your time. Thank you.

Thank you.