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

Okay. Yes. So thanks, everybody. Next session is Curtiss-Wright. We've got Lynn Bamford, CEO; and Chris Farkas, CFO. So thank you both for joining us.

Thank you.

Yes. Thank you.

So I think, Lynn, you had some remarks to lead us off?

Yes. So first, I just do want to mention our safe harbor. Today's comments will most likely contain some forward-looking statements and those are subject to uncertainties and risks, and those are published on our website with our SEC filings. So with that, I just really want to just take a moment and introduce the company at a very broad level for those, maybe here in the room or on the webcast, that don't know much about Curtiss-Wright. We've got a great history in the name goes back to the Wright Brothers, in case not everybody always knows that. So publicly traded company for 90 years with just a great track record of being first in many industries that we're still very active in and industry leader in those industries today. That goes from things, navy nuclear, commercial nuclear, COTS electronics and still very active in commercial aerospace. So some of our core competencies that really give the -- have allowed us to be a continuous operation for 90 years and we are very confident is, the picture is very bright for us going forward is really the intellectual property within the company, the strong technical talent and how we very much actively work to transfer that knowledge of being first in these industries through the workforce generation to generation. And I think that's something that we really have unique capability of doing. And with that, it really creates a culture of great pride in what we do as a company and commitment to our customers to absolutely deliver excellence in the products that we serve. In many cases -- most cases, the products that we produce for our customers are safety-critical and mission-critical for those applications and have a must-not-fail requirement to them. And with that, just steeped in our culture is an absolute commitment to quality and excellence. And that's really just creates a lot of engagement from the workforce that take great pride in working for the company. I'd say Curtiss-Wright right now is really, it's a very exciting time and if you're new to the company, you're getting acquainted with us at a period where I feel we are really on the cusp of driving some greatness that is just going to dramatically change the company in the years to come. And our history is, we spent much of the last 10 years driving financial excellence across the organization, creating great cash flow, getting top quartile margins and things, but the one thing we were not capable to do is really deliver on the top line growth. And so we're -- launched our Pivot to Growth strategy back in the beginning of 2021, which didn't take away those other focuses of cash generation and operating margin, but really put the focus and leadership attention on driving the growth across our various end markets. And just to really briefly touch on this and I'm sure we'll dive into some of this in the Q&A, is if you look at our end markets, we're 2/3 A&D. We're very well-aligned within the defense portfolio with the top priorities within our government and we have a very good presence overseas directly into the defense producers across Europe. Our commercial aerospace business is definitely feeling the tailwinds of the bounce back in that market. And in our commercial markets, we really specialize in places, again, they're very -- require that same level of quality and excellence of products across the power markets, process markets and some specialized industrial markets. And so again, places where excellence in operations really is essential and we excel at that. So I take those -- our footprint in commercial nuclear, which is very exciting and I think we'll come to that. So I'll save some of the details with that. But between that, the defense markets, our presence in electronic vehicles, just where we have the right technologies at the right time and hence, our focus on the growth and structuring the company, putting processes in place that are really going to make sure we maximize our ability to use our engineering force and absolutely drive the growth in those areas. And just along those lines, one another -- just to give you some flavor for the company, we have 8,100 employees and about 25% of them are engineering. So when we say we're a highly engineered focused company, we've reinforced by our workforce. So we're on track to have a great year, meet our commitments for the year, 4% to 6% growth, deliver on our Pivot to Growth targets, the 3-year targets we put out back in 2021 that we feel good about our ability to drive the execution on those and finish the year very strongly and look forward to having another Investor Day in May of next year and laying out the next chapter as we continue on in our Pivot to Growth because our commitment to that and our focus in that area is very firm.

Great. It's a great overview of the company. Could you touch on supply chain. So unfortunately, it's still been a big topic across all the companies, just what you're seeing? What areas are still issues that's getting better?

Yes. So clearly, something we talked a lot about last year, changed how we manage the company, put in a lot of new tools and systems and measures to be able to really get our hands around that. We talked in Q1 when we put our guidance out for the year that we -- the area that was still most significantly impacting Curtiss-Wright was the electronic components piece and more on the defense side than the industrial side. It impacted both, but I really give hats-off to our industrial team because they had the ability to redesign products a bit more and take out problematic components, that they did a great job of getting on that and really we're moving through the impact of that, but still feeling it in the Defense Electronics segment. But all the measures, on-time delivery, decommits, volatility, the various things that we measure, definitely, we're trending in the right direction in Q1 when we put out our guidance and they've continued to trend in the right direction in Q2. So we feel pretty good about where we are. It's not -- lead times are definitely not back to where they were. So we're needing to learn to manage in that environment and doing things to always drive working capital to where we want working capital to be, dealing with those longer lead times on the more complex components, but I think the team is doing a great job driving those strategies. And we put out fairly wide guidance at our Defense Electronics segment at the beginning of the year as we were wanting to see that the trends we were seeing were going to continue in the right direction and not just be something short term that would return. And -- so with that continued improvement in the supply chain, we feel confident that we're going to come in at the top end of our guidance. Definitely some questions around the margins in Q1 in our Defense Electronics segment. They were down slightly year-over-year. We mentioned that, that was coming off of a Q4 that was almost 30% op margins. We feel very good about our guidance for the margins in our Defense Electronics segment of 22.7% to 22.9%. And so I think that's very healthy. And I'd just comment that, that's -- with an increased $3 million of R&D being spent in that segment, then still driving that level of margin. So we're cautious about the supply chain situation and still very actively working it, working on our relationships and the ongoing conversations we have with our suppliers to make sure we stay top of mind for them as a priority in getting this component. It's definitely not back to 2019 where it wasn't something we had to put much attention units to, but I think the team has done a great job and I think we're headed in the right direction and just making it more business as normal.

Yes, sure. So I guess maybe to follow up on that. Can you touch on labor a little bit? So I mean -- one thing we've seen a lot with some of the other defense companies, a lot of attrition and turnover, new employees are less effective or less productive, and that's kind of impacted margins. Is that something you've seen? And has that sort of improved?

Labor is definitely a big focus across the organization and that's not just in Defense Electronics, really, but broadly across our teams and places where some of this dynamic growth that we're talking about is as much anticipatory for what's coming to Curtiss-Wright in this year and in the years to come. But I'm really pleased to say that we did see a higher level of voluntary turnover in 2022. That has really come down quite significantly in 2023 and we're -- to kind of typical levels we would have experienced years gone by, so that -- the great resignation or whatever seems to have subsided. We have definitely put heightened manpower and attention units on to recruiting and are definitely attracting new employees, but you do have to bring them up to speed in the workforce but there's -- if I look in -- some of the dynamic growth coming to Curtiss-Wright across our commercial nuclear spaces and such, we're doing really exciting work and able to talk about. We talked about our content with X-energy. It's a great platform for recruiting people on because they want to be part of doing that work and designing these systems. So we have a lot of good things that attract people to Curtiss-Wright but it is an area where I'm personally putting more time into and paying more attention to than maybe would have needed to in prior years.

Sure. Now that makes sense. And I guess kind of related to the supply chain, but just the commercial aerospace, kind of production ramp-up, higher rates later this year. I think you guys probably deliver a little bit ahead when the airplane actually goes to the customers. What are you seeing there? Any of the things like engine shortages, castings, any indication that do we have to slow down or is everything still on track?

No. I think, like most companies, we are experiencing some subtle delays in the supply chain and some pricing pressures. I think most of the pricing pressures in those commodities were taking place towards the end of '21, some into the beginning of '22, but it seems to have slowed down. I'm not saying that it's nonexistent today, but I think some of those pressures have slowed down. As far as the ramp in commercial aerospace is concerned, this last year, we had a 24% increase in our order book, starting off Q1 another 24% increase. Now we sell products, we sell sensors, actuation systems, electronics and also surface technology services into commercial aerospace. And the bulk of those orders that we're seeing are really in the longer cycle businesses. So that gives us confidence that this ramp is actually happening and that we're preparing to support what is coming forward. We have strong alignment to both Boeing and Airbus on their narrow-body and wide-body platforms. I think is -- people will often ask us how our surface technologies business is doing and the reason that is, sometimes it's referred to as the canary in the coal mine. When there's an economic downturn, it's the first business to shut off because of its short-cycle nature. But as the business is ramping up, it's more indicative of the customer's production activity than what's actually happening at that point in time. And that business has been growing more in the high single digits. So I think as you look at what's happening within production activity versus order activity, somewhere in between, I would say that -- or around that low double-digit range of growth is what we're experiencing for our OEM products and we see a good ramp as we move forward.

Got it. That's helpful. And I guess on the defense side, we kind of touched on this before the presentation, but debt ceiling deal, does that support kind of your long-term growth targets? And how do you think some of your programs fared in the budget this year?

So we like what we've seen so far in the budget and we like what has come through the house markup here just in the past handful of days that I think, when I look at where we're aligned in the future year forecast for where spending is going to be, I think it's important to note the top 25 programs in the defense from the DoD, you are still anticipated to grow at 5% even with the spending caps. And we're very well aligned to those top 25 programs. I mean we're on all the major naval platforms. We sell electronics content into many aircraft, really essentially all aircraft we have content in. And then in our ground-based business, we're very well aligned with where they want to continue the build out of the network modernization, that remains very well committed. And so really across the board, we're very comfortable with what we see coming. I mean we're coming off of a couple of years of pretty dramatic increases in the defense budget, over 10% this year, over 5% last year and so even if that plateaus a little bit, knowing where we're positioned and the ramp rates on things such as Colombia and some of the other key platforms for us, we feel we can definitely drive healthy growth in that environment. And then add to that, our foreign footprint, which is 8% of Curtiss-Wright overall sales is into direct spending into foreign defense programs. And shipbuilding is on the rise globally and we have nice content outside of what is most visible on the Virginia and Columbia and the CBN, but equipment on that we can sell into those foreign navies. And then we have a very solid footprint for ground vehicles in Europe. And as the NATO countries move to stepping up their defense spending, which has been a bit sluggish in getting there, a lot of beliefs is that money will be spent by and there has been clearly announcements about it coming in and buying aircraft. For example, a major system from the U.S., which will drive business to us, but then building out their own ground vehicle production capabilities and you might have seen about a year ago, we announced our content with BAE and Rheinmetall that we've built a very strong partnership with Rheinmetall who is the leading vehicle manufacturer in Europe. And as they make partnerships with countries and do their work, we will follow them and be partnered with them. So the NATO spending, the shipbuilding globally and our alignment with the key programs here in the U.S. make us feel very confident we're well positioned for our defense business.

Yes, sure. That was kind of going to be my next question is international demand. And could you maybe also touch on -- I think there's a tactical comms business and what you're seeing, as a result of Ukraine, radio has been a big part of that. Could that be another big demand area where we see growth?

So we bought the PacStar business back in 2020 and it has -- really was -- we believed it would be a very strategic fit for where our government, the Army and the Marine Corps, are going. They do have an international reach. And definitely, the absolute criticality of communications on the battlefield has been unfortunately made very apparent over the past 15 months. And so they're definitely beginning to see increased demand. I'm really pleased to say that, that acquisition, they'll finish their third year with Curtiss-Wright this year and has performed very well, was on track to meet all the financial targets we laid out for it. It's going to achieve its high single-digit growth rate as it continues to get great support within the U.S. government predominantly, but increasingly more overseas. It's at a point where it's accretive to Curtiss-Wright's overall margins, strong free cash flow and ROC is above the cost of capital. So it's really proven our diligence and our approach to bringing companies into Curtiss-Wright, that we really have refined the ability to evaluate companies and bring great companies into Curtiss-Wright. So we feel great about the acquisition.

Great. That makes sense. Could you touch on margins? I think it's a little bit of kind of margin growths you're embedded in the guidance. How much opportunity is there further out? And what's going to be kind of the biggest driver of that?

Yes. So this year, 10 to 30 basis points of operating margin expansion. We feel very confident in that and that's why we're increasing our annual run rate in total R&D investments this year by $20 million. So we're still able to accomplish that margin expansion while this is happening. At our Investor Day a few years back, we said that we were committed to growing operating income at a faster rate than sales, which implies continued margin expansion but if you step back through Curtiss-Wright's history and then touched a little bit upon this in the intro, we were both, prior to our current roles, part of the transformation at Curtiss-Wright where between 2013, 2014 and 2020, we expanded the operating margin of the organization by 800 basis points. So it went from about a 9% operating margin to 17% operating margin. And a lot of that was accomplished through operational excellence, portfolio pruning and much of what we did at that point in time is now ingrained into the culture of the organization. So people eventually say, "Hey, how does that look? What is the opportunity going forward?" And there's a tremendous amount of opportunity going forward in that way -- in that regard, digitalization of the shop floor. I mean it's just a number of opportunities. But beyond that and we started discussing the operational growth platform in our May of 2021 Investor Day. We introduced the concept of commercial excellence into the organization and greater focus on sales and business development and collaboration across the organization. And that commercial excellence has yielded better contract management, improving in pricing, strategic pricing initiatives across the organization that are starting to pay dividends for. So our objective, as we move forward, is really to take that commercial excellence, take that strong foundation and operational excellence, continue to drive the operating margin expansion but really take advantage of some of these great secular trends that our technology is exposed to right now and investing it back into the business. Again, $20 million increase in R&D year-over-year. We're trying to capture these markets. We're not going to be the type of organization that's just focused on the here and now. I mean If we wanted to be an 18% margin business, we could be an 18% margin business. We'll just go cut the -- what the growth engine is, but that's not who we are. We're thinking about today, providing that continuous operating margin expansion, but investing to ensure the long-term profitable growth and maximize the returns that we can provide to our shareholders.

Great. Maybe we could switch gears and talk the nuclear power side a little bit, different parts of that business. Could you talk about kind of the different growth engines there? I know there's been demand for new plants, demand for service life extensions. Just the different components of that business, how you kind of see them growing?

Okay. Yes. It's really an exciting part of our portfolio and something a couple of years ago barely came up in conversation and today tends to lead the conversation. So that really shows the change. And I think when you do think about it, over the past couple of years, some of the broader effects, just I think the overall commitment towards driving towards a carbon-free footprint is really taking roots across the globe and the demand for energy independence driven by the Russian invasion of Ukraine has also really -- those 2 forces have really just taken what was moving towards commitments to it and said, no, the time is now, we need to act. And with that, there's been quite a few bills passed in Congress between the Infrastructure Bill, the Inflation Reduction Act are the 2 main ones, but there was even things in the CHIPS Act around transitioning coal plants into new nuclear. But starting with the funding made available in those bills is really to give tax credits and investment money into the current operating fleet here in the U.S. to avoid shutting down plants. So people realize, we're doing all this work to try and build out carbon-free energy. Meanwhile, we're fully taking pieces off the table, it made no sense. And so it's great. It's early days, but we're already seeing that effect. There won't be any plant shut down in 2023. That's the first year that's happened in some time. And the majority -- the vast majority of our nuclear business today is in aftermarket support. So we work with the current operating fleet here in the U.S., up in Canada and a couple of international locations, but largely in the U.S. to do the work on those plants. And as those plants are committing to go forward and stay open from their 60 years to 80 years, it does drive a new licensing cycle with the NRC, which drives an increased amount of outage work and it's not the exact same thing from every plant, so it's not something we can completely quantify based on how much maintenance they had done. They'll have more or less to do, but that's a great tailwind. That business is -- saw mid-teens order book last year and is tracking to continue that into this year. And so that's the business that's here and now is expanding that aftermarket support. We're also doing things to try and break into some new markets and specifically into France, which has a very large operating fleet that has some maintenance issues. You can pick up any nuclear newspaper and read about that, and so we're very actively seeing what we can do to work in France and support them, keeping their operating fleet online. If you're familiar with Curtiss-Wright, you surely know about the AP1000 program, which has been such a big revenue driver for Curtiss-Wright, big order back in the mid-teens, that's tailed off and always felt we would get more orders out of China and potentially India. And for various reasons, those have just not moved forward at any rapid rate but clearly, again, the invasion of Russia into Ukraine has really galvanized, Eastern Europe and moving into Western Europe, desire to break the ties with energy dependence on Russia and has really led to a lot of significant statements of intent that they are going to build out the nuclear fleet. And that will be a combination of both AP1000 plants and small modular reactors and the Gen 4 new nuclear reactors. And Poland has declared they're going to build 6 plants and declared the first 3 of those will be the AP1000, the next 3 TBD still, but Ukraine has already taken steps to do things that if the war -- when the war does end, that they may be the first one actually to move out and get some of the first plants that are constructed. But we had -- a year ago, we renewed our partnership with Westinghouse and put behind ourselves some contractual disputes that had lingered for a few years and put forward that we thought the first order for the next round of AP1000 plants would come in 3 to 5 years. We now see that as 2 to 4. It always goes in my memory, our earnings day was February 24, which was the day Russia invaded Ukraine. And so kind of like thinking of those time frames in Poland is the one, the country that laid out the clearest time line, is laying out that time line before that event and thinking, wow, if Europe are going to try and be on the front end of something, wouldn't that surely be the cause for that? So we really see that being something that's going to be dramatic and impactful for Curtiss-Wright going forward. And then we are very active in this next generation of small modular reactors that -- we've been able to publicly talk about our content with NuScale at $40 million, our content with X-energy as being over $100 million. And that's for a 4 pack for them. And so if you think of replacing many coal power plants that are 800-ish megawatts, it'd be two 4 packs. So that's $200 million for each of these coal plants to get turned over to a small modular reactor if they picked X-energy. But we're also very actively working with TerraPower, GE Hitachi, Rolls-Royce. As those, Westinghouse has recently declared they're entering the small modular reactor market and very much their strategy is to leverage the design of the AP1000, so to try and accelerate their approval cycles through the NRC. And so each one of our reactor coolant pumps, the last commercial known pricing was $28 million, that's in 2015. So we'll see where that goes as we work through that, but -- so really meaningful content that we fully intend to have across those providers. And I think it's a great position for potential investors that if they want a way to invest in what's anticipated is some really dynamic growth in the nuclear industry that we're there to catch it on a whole host of front and you don't have to necessarily pick winners and losers per se that we intend to be relevant across all those platforms.

Yes. A lot going on there. Can you maybe -- sorry, go ahead.

Yes. I was just going to put a little bit of context around the numbers. Roughly $2.7 billion organization and with these orders coming out of Poland and then future opportunities in Ukraine for 9 plants. Poland alone is roughly $600 million of business at margins that are totally accretive to Curtiss-Wright. And then with what's happening right now and our support of X-energy and the ramp-up through the ARDP program, $100 million plus of content alone to support that program and they need that product in advance of being able to start up the plants and demonstrate the technology. So as you're a long-term investor, looking out across the next 3 to 5 years, there are some things that really could accentuate the great base that we currently have and change some dramatic changes in that nuclear market, which is roughly 10% of our business today.

Got it. So you kind of touched on my next question, but margin-wise, across kind of each of those segments that you just mentioned in the nuclear space, how do they compare to each other? And how do they compare to kind of your existing margin?

Yes. We don't really get into too much detail. I mean our nuclear -- commercial nuclear business exists within the Naval & Power segment, and that segment has been in the 17% and 18% margin range and nuclear is certainly a strong contributor to the profitability and cash flows of that business. The AP1000 program, we've been very clear publicly. I think we said it's 23% plus-plus margin and we had the plus-plus because we blush a little bit, but I think ultimately -- we have to approach each commercial negotiation independently as we move forward and some of these -- now we do have an RFP for Poland. I think some of these negotiations are still yet to come. And then I think it's a little too early to put a stamp on the Gen 3 -- I'm sorry, the Gen 4 work that we're doing for small modular reactors because we're really in the development cycle right now in many of these exciting ideas, but rest assured, we are very proud of our operating margins and intend to continue to sustain those high top quartile rates going forward.

Sure. Any questions from the audience? I was going to ask M&A, the other areas, a lot of things you guys do already, but any areas of the portfolio you think you could beef up or I guess maybe flip side, any areas that you don't think kind of fit with the core business?

Well, I'd say we absolutely are still active and out looking for properties that we can bring in to Curtiss-Wright. We really look across our end markets. You can see there's been an A&D focus by -- our last list of acquisitions are almost exclusively defense-oriented, but that doesn't mean we don't look for properties, and we're very much looking where we see the dynamic growth. So were there to be a nuclear property, that would be something that would be of interest to us or an area to expand out our content and the footprint we're growing across electric vehicles as another really dynamically growing area. So those are non-A&D areas where we would be open to acquiring. So we often talk about -- we very purposefully work with our teams to try and find companies that are private before they're in an auction mode or something and have them come and go exclusively with Curtiss-Wright. We talked a bit about PacStar. That was the situation with PacStar. That property never went to an auction. We had partnered with them for years and really convinced the ownership that the company would best serve by becoming part of Curtiss-Wright. And with that, we've paid very fair prices for companies, 10 to 12x EBITDA multiples typically. And so we have some properties right now that we've got indications of interest out in that we're looking at, but we go through a lot of properties before we find one that we'll bring across the finish line that we're very, very serious about. We laid out our strategic fit and our financial fit, and you really have to get through both of those gauntlets to be able to be a property that we're going to decide we want to bring in to Curtiss-Wright.

Yes. Sure. How does the pipeline look? I mean there are a lot of assets coming to market, reasonable prices that are...

There's been a lot of assets over the past 12 months, but not ones that had very strong finances and yet still expecting very high multiples for not very stellar financial performance that we wouldn't even consider. And so a lot of those, there's a handful. I'd say, in the past couple of months, I think some people -- some properties that people held off on as the interest rates were going up, thinking maybe wait for them to come down and now it looks like they're just going to stay here for a while. So it seems like some properties of people have chosen to go ahead and bring the properties to market. And we'll see what others are willing to pay. I know what we're willing to pay and we'll pay a fair price, but not a chase things type of price.

And I guess kind of broader thoughts on capital deployment maybe beyond M&A, share repurchase, CapEx cycle?

Sure. Yes. I mean with our capital allocation strategy, finding these acquisitions that offer critical adjacent technologies to the portfolio, supplement our customer offering, meet our stringent financial criteria, that's our top priority. And it's obviously a very strong balance between what we do inorganically and what we do organically. We're investing a lot to grow the business organically. But then I think when you look at the cash beyond that and you look at what we've done over the last 3 years, we bought back $600 million in stock. So Lynn and I both believe that we want to return capital to shareholders and share buyback is the most effective way to do that. We bought our stock back at a price of about $1.19, and today, you can see we're $1.70-plus. I haven't checked it more recently, but I think we're still in there today. So I think it's about finding what we want to do and thinking about where is the best place to put our cash and seizing those opportunities. The only other thing I'll say is that for the past 3 years, we've been increasing our dividend steadily and we believe that we'll continue to increase that dividend going forward, put the growth rate in alignment with what we're doing from a sales perspective, but again, that's not our top priority.

Got it. And I guess, nuclear propulsion, probably last question. I guess 2 questions there. One, some of the shipyards seen a little bit of delay, just trouble getting labor. Are you impacted at all by that? And then just thoughts further out on AUKUS and potential opportunity to grow there?

Yes. We definitely are aware of the situation in some of the shipyards and we're trying to look to make that an opportunity for Curtiss-Wright as we can do things to better service those customers. So it's not really impacting us, but we're very proactive and having discussions about ways we can take work off of their hands and drive more work into Curtiss-Wright. So hopefully turn that into an opportunity over time for us. And honestly, there's not a lot to comment on, on AUKUS. There was the announcement in March of 3 with optionality for 2 more Virginia-class subs, but not a lot of clarity as to how those would be manufactured or if there's a ramp to 3 a year from the current 2 a year. I do think it's interesting they put forth 2 different buckets of over $2 billion to help support the industrial base, which implies that they're trying to prepare for a ramp, but nobody has said that and I'm surely not saying that I have any inside information on that. But -- I mean AUKUS will be good for Curtiss-Wright over time. It's just a little -- it's still a little murky as to when and how that's going to play out.

Yes. Certainly, a lot of demand for those ships. Great. With that, well, maybe we'll leave it there, but -- yes, thank you both for your time.

Thank you.

Yes. Thank you very much.

Our pleasure.