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

Great. We'll go ahead and get started. Thanks so much for joining us. We have up next Curtiss-Wright. So super excited to have Lynn Bamford and Chris Farkas with us from the company. You're just coming off of a big Investor Day, just a couple of days ago, where you spent several hours, went into pretty deep dive of all the units and medium-term targets, which is a redux of 3 years ago when you put out medium-term targets and overachieved pretty much across the board. So maybe I'll give you the stage to just revisit some of the messages from the Investor Day to sort of kick you off. What do you think is sort of the most important message delivered to investors today about Curtiss-Wright. And then I'll open up for questions right after that, but did want to give you the -- at least the opening to pitch the Investor Day once again because it's fresh in your mind, and you put all the effort into it.

It is a lot of effort, it is fresh in our mind, although we tried to make it a little less fresh last evening, but that's a whole another side point, which I won't dive into. But all that aside, really, I think the most important message is we've had a great track record over the past 3 years. And we did deliver on 4 of the 5 financial targets. We were 2 percentage points under our free cash flow conversion of 110, coming in at 108.

You're a tough grader.

We're a tough grader. So we said we did -- we don't overstate it. But I think, really, reaching the top of our organic growth target of 4.7% really is indicative of where we're going and that our confidence that we are building that momentum to compound profitable growth. And really the themes of yesterday was to walk through our various end markets and really talk about the dynamics in the market. Some have great tailwinds, some defense spending over the next couple of years is anticipated to be at a slower [ accelerant ] rate than it had been in '22 and '23. But regardless of that, what we're doing in our end markets to outpace our end markets from a growth standpoint and that the initiatives aren't -- they're real and they're specific, and we can walk through the products and the customers and really like mark down why we think we're going to be able to overachieve a 5% organic growth rate going forward. And we're sitting in a great position from a balance sheet and some cash on hand. And we've got a great acquisition pipeline that we're pretty optimistic that we will be able to add some properties to the company to build out on that organic growth rate even yet this year, I hope. But as we always say, that if they don't come to fruition because we're not going to force anything, we will put our capital to work by share buyback. And we have authorization to buy up to $400 million of shares from our Board of Directors. So the future is bright, and we're going to put our capital to work.

And what I thought was equally impressive is that 5% -- greater than 5% organic doesn't contemplate the nuclear side of the house kicking into gear just yet. But you did tease us with a couple of, I don't know what you call them, targets, maybe, of revenue potential within that landscape, which, I think, to equate to a 10-year 20% CAGR of revenue growth from here to the mid-2030s, which is pretty impressive. I know there's going to be a lot of questions on nuclear, so maybe just hit that one first. The profile of medium-term target doesn't include a new AP1000 order.

Yes. Thank you for profiling that. I probably should have said it in my opening comments. So the over 5% organic growth has no assumptions of benefits from an AP1000 order. It does have, of course, our commercial aftermarket business and the ongoing work we're doing and working with the various builders of small modular reactors. We've been doing design work. We're still doing design work. During that time frame, it should turn into early prototyping work. That is part of the 5%, but we chose not to put an AP1000 order just because the timing is variable. We still consistently reaffirm a 1- to 3-year time frame for that, but it can be dramatic enough to those growth rates that we really felt it was more transparent to give our growth targets without it and then let that come. But as you say, we talked about by 2028 as the prototyping of the SMRs is in full speed, and we do believe we will be in production on building RCPs for probably Poland and Bulgaria by then. We expect our commercial nuclear business to double by 2028, so that's from a $300 million baseline in 2023 to double. And that we really have a very -- kind of come at it from different angles and feel that we can drive our commercial nuclear business to be $1.5 billion annualized by the middle of next decade. And that's a combination of the plant life extensions of the existing fleet are continuing. And that -- I mean, that is work. Sometimes we get asked if that's work that's very temporary and is going to go away. That's -- we're at the beginning of decades of work on doing these plant life extensions that, that's not a short-term tailwind. That's a very long-term tailwind. We should be in kind of steady-state production on AP1000s by that time as a lot of the Eastern European countries are building out their plants. And if you listen to any of the prognostication on how many SMRs should be being built just for the electricity needs, we should be receiving 10 to 20 plants -- our customers will be seeing orders for 10 to 20 plants, which will flow to revenue for us by that time period. And so pretty dramatic. I do think it's kind of, though, worth noting that, today, we're 2/3 aerospace and defense. We've worked hard to help us peep -- or the investment base transparently see our aerospace and defense business. And with it growing at a reasonable rate, we still will be -- the majority of the company still will be in aerospace and defense, but obviously, the commercial nuclear coming up behind it at that level would be a very significant portion of the business.

And I would just add, Myles, that we did try to provide some information for you to be able to do this modeling yourself. While we're not directly in control of the timing of the order, we are trying to absolutely influence it. And then we also provided a time line. So if you like World Nuclear News and you want to see what's going on and, oh my gosh, they're now in site-specific engineering. Okay, you can kind of follow that along and see where we are in relation to the overall program and when that order might hit.

Maybe go back to the last time you had production of AP1000 RCPs, that was some of the most profitable piece of your business, and also came with cash advances that were pretty significant. As you look to the next 5 to 7 years of what you're looking at from commercial nuclear, does it have similar characteristics? It's accretive to corporate margins, cash terms are favorable. Is that a likely outcome?

It's reasonable to expect outcome, but we really have to enter into commercial negotiations with Westinghouse and work through those things, but I think it's a reasonable expectation. It will be a very, very good business for Curtiss-Wright.

Okay. So let's go back to the aerospace defense piece of the business. Defense Electronics has been sort of red hot for you guys since supply chains normalized, and you're able to get components effectively. And the orders have been equally sizable. When you look at that growth rate that you've experienced, how would you dictate it relative to catch-up of what you've missed, core demand or competitive share gains because some of your competitors are falling down?

So just starting with the supply chain situation, it has been good. The supply chain situation really did normalize even fairly early last year, I would say, and it doesn't mean everything is as it was. There are longer lead times. There has been price escalations. We built that into our pricing structure. We make great margins in that segment. So we obviously have our hands around that and know how to address that. Really, it's -- I would say, it's a broad-based growth across the business, which, to me, is very powerful because it's not particularly in just one business area. I will give a shout out to our tactical communications equipment is probably seeing the strongest demand within that market. That came -- we bought that capability back at the end of 2020, have really shaped that business into a fantastically performing business within the Defense Electronics segment. And really, the situation in Ukraine has just driven a broader understanding of the importance of being operationally ready by militaries across NATO countries and here in the U.S., and it's just really driving demand. One of the things that was mentioned at our Investor Day is we just got put on an approved government list for software, which is a big deal because it allows it to be very freely bought. And we've just really entered into our first significant contract with the U.S. Air Force. So again, taking that capability more broadly, but fundamentally, the products we build in that market, we work hard to have them be part of what's a COTS or an open standard architecture, which was the fundamentals of how the business has been built since the mid-'90s and where we've participated in the market. But with the MOSA and SOSA standards, which 2 geeky names, but it's just a more defined definition of what the open standards are, were codified into law back in the very beginning of this decade, it's really increased the drive for the defense primes and the government to pick solutions that are based on the MOSA standard. And we put our hands to work at back, really, 2018, 2019 to build out our product offering in this area. I feel confident we have the most robust product offering in industry in that. And so it's really that capability, broadly, that is winning us design wins and new customers across the industry, and our reach to be able to increase foreign military sales, direct foreign military sales, not [ selling ] F35s to Poland. But our reach, we have a channel that is very active over in Europe, and that portion of the business is also growing very well.

And I would just add, I mean, you mentioned the competitive landscape, and we all know that there are competitors out there in the industry that are struggling, and it's an opportunity for us. I mean, we look at it as a way to get out there and improve our strength. We're able to get through the supply chain issue relatively quickly, and I think our customers appreciate that, and that's -- that enhances demand.

Thanks for going back to that, Chris, because I skipped over that.

[indiscernible]

Okay. I was [ neither ] from one side or the other. But I do -- honestly, it is an important point to note that it is fairly well-known what's going on in the competitive landscape. And it is opportunity for us, but it is not really part at all of, or in any meaningful way, the great bookings and the great revenue we're seeing that, for those types of transitions to happen, that's a 1- to 3-year journey out of our customer base. And so there's engagements based on that, and there's activity and opportunity for sure for Curtiss-Wright based on that, but that is going to be additive to what we're seeing in that business right now.

Okay. And then you mentioned the international piece as being incrementally positive. Can you give us a landscape of how much of that business today is domestic versus international within defense?

Yes. So we categorize it as direct foreign military sales, which is directly to a foreign government or a foreign customer. So it doesn't include F35s that are being shipped abroad or Abrams tanks or what any of the other -- what we ship to U.S. primes. And today, that's about 9% of our portfolio. We've seen some pretty solid growth coming out of that business. This last year, we grew in the high teens. And this year, we're off to a really good start in Q1 and would expect that to grow in the high single digits for us this year. We have a very, very broad product portfolio. We've got -- we're on over 400 platforms and 3,000 programs. So as we're designing these technologies for defense purposes here in the U.S., there's a lot of application and a lot of platforms abroad that we can service as well. And then more recently, we bought our ESCO ground-based Arresting Systems business, and that's 75% rest of world. And their customer -- and the way they face their customers, and that business is doing tremendously. It's been a really good acquisition for us. It grew in the mid-teens this last year, and it's surpassing all of our financial expectations to date.

Okay. That business -- so just staying on Defense Electronics for a second. When I asked at the Investor Day about margin potential, that business, in hindsight, has been one of the biggest sources of margin growth. But Chris, your answer to me, the sense I got was I should temper my expectations of how much further I can underwrite margin expansion within that segment. Is it because investment, that's required? Is it because of portfolio mix? Is it because you want to contain expectations? I mean, can you give us a little color?

Yes. Go for it.

Yes. So we spend the greatest portion of our R&D in Defense Electronics. So it really takes a lot of investment to not only sustain that pricing and stay ahead in the technology. And I think you see that investment coming out of our order book today. So as we look at that business, I think we have to be very careful and cautious to ensure that we are staying ahead in those advanced technologies. I mean, that's really what's making us so special. So as we look to the future, I think the range that we're in for margins is probably something that we view as a sustained level. Not saying that they won't improve over time, but our first priority is to make sure that we can grow that business as fast as we can, for as long as we can.

Okay. Makes sense. Switch gears a little bit to Naval & Power. You have a dominant role and sole source of naval pumps since the beginning of time, I think, since the constitution, probably. And so can you give us a landscape of -- you laid out per shipset content on all the vessels, which I imagine most of it is in Naval & Power. The industrial base of shipbuilding is seemingly overwhelmed with demand and massively constrained on supply, and doesn't seem to be hitting the mark on output levels. Are you, as a company, at 2 subs a year and a Columbia that's going through? Or like the rest of the industry, are you at 1.2 subs a year, even though we're being funded at 2 subs a year?

So it is a good portion of the content that was on that slide, for those of you who go back and look. And without saying specifically where we are, I'd say, broadly, just to start with, I think the government is making available a lot of funding to help the industrial base help the shipbuilders. And we've mentioned in Investor Day, we've taken $15 million of funding over the past 2 years to help us with that. And we have a lot of active bids out right now to take on, hopefully, attract more of that funding to Curtiss-Wright to help us enhance our capabilities and our ability to take on work. We are very actively working across the shipyards for work that they can potentially outsource and get out of their shipyards as they're trying to hire and have capacity limitations. And I think there's work that we will be pursuing this summer that is around the corner that are things that we can really move inside of Curtiss-Wright is incremental content. So one of the things we also talked about in the slides from Dave Micha, who runs Naval & Power segment, that we have during the past 3 years, have transitioned through the development on the Columbia and are transitioning into the production on that. So we're in great shape to support the shipyards with that as the first ship. It's not expected to be ready until into the mid-2030s.

Okay. And you mentioned also the next-generation attack sub and the 2 to 3x content gain. Is that aimed more at the propulsion side than anything else and to Curtiss-Wright's potential capture of that share within the platform? Or is it more somewhere else and the cost of the ship is higher and, unfortunately, your shipset goes up?

It's building out on the equipment we do today. So it is the pumps, the generators, the valves, electrical equipment and keeping all that and then adding some of it. It's a much more complex sub, so it is more complex items. But then also adding some incremental capabilities allows us to bring more value to the shipyards and, honestly, pull -- be able to make us as a supplier, a capable supplier, able to deliver broader shipsets to them and move that work to allow them to ramp.

Okay. It's a very long-term business. So the design and development that we started several years back is going to produce benefits for years and years and years to come. We know that platform is really scheduled for the middle of this next decade, but we are firmly entrenched with our customer and the design and development of those products.

Within the Naval & Power business, your undersea, subsea pumping opportunity, can you describe that in layman's terms, what it is today and where it could be 5 years from now?