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

Good morning, everyone, and thank you for taking some time this morning to come learn a bit more about Curtiss-Wright and hear about what we see in the future that is yet to drive an absolutely outstanding future for Curtiss-Wright. So with that, I'll try to keep this to maybe half of the time. So we do have time for Q&A, and I'm going to jump right into it. There are forward-looking statements, and there is risk. Did I cover it Jim? So for those of you who maybe don't know, Curtiss-Wright quite as well, I'll just say Curtiss-Wright [ is a glance ] that we are a highly engineering-centric company that builds very specialized products there for applications that are frequently and must not fail safe -- mission-critical, safety-critical applications across the aerospace and defense market, predominantly was about 2/3 of our business, but then select commercial nuclear or commercial industries for about 1/3 of our business. We are a global company. We have major sites across 45 countries. And we have 8,600 employees currently. We built up our workforce quite a bit over the past 3 years and about 20% of our workforce is engineers. So I think one of the things that's really essential about Curtiss-Wright and foundational to why we win and why we have the positions we have in our industry really comes from the deep expertise and the history, the legacy inside of our end industries. And hopefully, many of you here recognize Curtis is Glenn Curtiss and the Wright is the Wright Brothers. And so that foundation in aviation is core to the company as we move towards celebrating our 95th Anniversary here in a couple of months. But what's possibly not known is that same legacy of being in our industry since the very inception is true across the nuclear navy, commercial nuclear and our defense electronics portfolio of products that is our Defense Electronics segment. All those companies really started at the inceptions of those industries. And with that comes deep knowledge as to what the customer needs are, deep relationships with customers. And one of the things I think is special in Curtiss-Wright is our transfer of knowledge over decades through -- from generation to generation of employees as we take the learnings of the past and the understanding of how a customer wants to work and pass that on to newer employees. And we don't just do that in a, hey, let's have a 4-hour discussion in the conference room, there's processes and procedures for how we go about doing this. And it's a very formal process. And I think that's part of what gives us our unique relationships with our customers across many of our industries. The other thing that I think is unique within Curtiss-Wright is, we have a very collaborative culture that values innovation. We clearly increased the focus on that over the past 3, 4 years as we launch the Pivot to Growth strategy, and I'll come to more of that in the beginning. But we really take our global reach and our unique IP. And we work very hard to take our products and our solutions across the globe to relevant countries. And then we work very hard to see the various end markets we play in and say, hey, this technology could be applicable in this other end market and work the channels that serve that end market to take technology may be developed for one end market. And a simple example of that is our electromechanical actuation, which was developed for commercial markets for industrial automation, and we have taken it to commercial aviation and are taking it very broadly across defense applications. And so those engineering dollars you spend you get to leverage across multiple end markets. And I think that's a really key element of why we've been able to drive the financial performance we've driven over the past decade. So turning back in time for a moment. We launched our Pivot to Growth strategy at our Investor Day 3 years ago. If you don't know, we had an Investor Day just 2 weeks ago, and the information on it is up on our web. And clearly, there's a lot more detail than anything we're going to even begin to touch on today. But we had several key messages. And fundamental to the Pivot to Growth was us giving ourselves to balance our financial targets with committing to operating margin expansion by growing our operating income faster than our sales growth, but giving ourselves the freedom to invest back into the business because of some things that we saw going on in our end markets and the criticality of it being the time to invest for the growth of the future. With that, we would deepen our customer relations. We would launch the Curtiss-Wright OGP, which is really kind of codified whether it was in our DNA around a continuous improvement mindset, and we've continued that. And that's very important that when we first launched the Pivot to Growth strategy, we were asked, does this mean you're taking your focus off of operational excellence and that continuous improvement? And the answer is absolutely not. It's fundamental and key to how we've created the dollars to be able to reinvest into ourselves. And again, I will have a slide on that in just a moment that I'll come back to. But the results on the right-hand of the side show what we delivered over the past 3 years. We said we would grow total sales between 5% and 10%. We ended right in the middle of that at 7.4%. Very pleased that we came in near the top end of our organic range, sales growth range of 3% to 5% at 4.7%. And I think that really is fundamental to demonstrating our Pivot to Growth strategy is working. We expanded margins 110 basis points over the 3-year period. We grew our EPS by 12.5% and came just short of our goal on free cash flow of 110% average cash generation at 108% cash generation. But there was a quite a supply chain disruptions during that time that were impactful to our business. And so I'm still very proud of the team for achieving that result. So within the operational growth platform, which I just mentioned, there's a lot of different parts of it that are about us having better approaches, more sophisticated approaches to managing the company. So as we grow, we're not just growing by spending R&D, but we're growing by building up our processes and our approach to managing the business as it gets bigger and bigger that we have the tools that give visibility down inside of our different business units, management, tolls for oversight, ways that we can evaluate efficiencies within the business. And so that's broadly from across all portions whether it's how we manage contracts and implementing an AI tool for how we manage contracts to visibility on our shop floors. But the one area I wanted to touch on here in these opening remarks is really our approach to innovation and R&D, which is near and dear to me as a trained engineer, and I practice probably half of my working career as doing engineering work before I became -- move more into a manager role. And really, as I said in the beginning, we're an engineering-centric company and how we manage our R&D spend and our engineering talent is really at the heart of how we succeed as a company. There's a lot more to it, but it is the foundational element. And so it's not just what we spend on R&D. It's how we have structured within the company and matured our processes to the managing of that R&D. And it all starts with innovation. We launched our Innovation platform about 3.5, 4 years ago, which is across enterprise platform that every employee can have access to, to put forward ideas of how we can make the company better. Everyone -- all the employees can see the ideas that are inside the platform and add their expertise ideas across the corporation. So it's really helped bind us together as an organization in many ways and look for those areas of collaboration across the organization because it was just people didn't know what was going on across the entire organization and how they do. So that's really fundamental to making sure the best ideas across the organization have visibility and then have a chance to get funded even if they can't be funded at a local level, they can be brought forward and can be funded at the corporate level. So as those innovation ideas move through that platform, there's very good rigor for how we analyze both the value proposition for differentiation in the marketplace and the customer base to really be able to target and steer our investments across the corporation to the best areas of use for profitable growth for Curtiss-Wright. And so that's a real maturing of how we manage the company over the past 3 years that's different than in the past. It's still work in progress, but it's an area that a lot of progress has been made on. And likewise, it's not just about spending more money, we want to spend more money and always drive the efficiency and how we're using that money. So that's something that's also -- something we're focused on right now is our measurement tools for the efficiency of our R&D because the more efficient we are, the more of those innovative ideas that are in the platform, we can turn into R&D projects and turn into products and services we bring to our customers. So definitely, a lot of information on this slide, and a lot of this is what is laid out in much more detail in our Investor Day presentation a couple of weeks ago. But really, the reason we pivoted to growth 3 years ago is there have been secular trends that have been building across our end markets that are really found -- where we have very solid footprints, and it was critical that we make the choice to invest now to maximize the value for our shareholders, our employees and our customers, going forward. And that's everything from the ramp of naval shipbuilding to the advancement of technology in the battlefield, across so many different areas where we have very relevant products, very proper progress there, the move towards decarbonization and energy efficiency and the electrification of many things across many different platforms in the air, on the land and in the sea. And we have really established positions in all of those places. And as the industries are changing, there's dynamics that are both near term that we need to be ready to solve our customers' problems, maybe in the next 1 to 3 years, midterm 3 years to 5 years and then long term, 5, 10, 10-plus years. And so we really look to balance those R&D investments across all those time lines to ensure we're setting the stage for Curtiss-Wright to have success going forward through the next decade and beyond. So when I talk about investing, there are several areas, obviously, we've invested in a lot of different things, but I wanted to highlight a couple. So we talked a lot about R&D already in these few brief moments. We delivered that financial performance that I showed with the margin expansion of 110 basis points over the past 3 years, while investing an incremental $20 million in total R&D in 2023 and targeting to invest another $20 million of incremental R&D in 2024. So we are doing what we said we are both investing in ourselves and delivering margin expansion. And if you can clearly, take your mind to understand that there must be a continuous improvement and lean mindset within the company to be able to achieve both of those things. Something that I've always very personally been passionate about is that as you invest in the R&D and build these great products, you need to balance and align your investments in R&D with your investments in sales and marketing. If you have a great product, and you don't get it out and show it to the world, and you have a sales force that can go out and represent it to the global industry, you're not going to maximize the value for the organization. And so that is an area we don't talk about as much, but we've done some really interesting things and are in the process of doing some interesting things to really improve our approach to sales and marketing. And it's everything from -- we're most of the way through implementing a common CRM across the organization, which may not sound like much, but I mean, it will connect -- allow us to have full visibility into our customer base and our reach across our global customers. We're in the process of implementing a unified website, which again is something that's well overdue that make us -- help us -- help our customers when they're looking at products we have connect all the products that we have that maybe can be part of their solution set by what they find when they go to a website. And then, of course, people, which is the most critical asset across almost everything we do is our people. I mentioned a little bit about the systems and process. There's a lot more information about that in our Investor Day presentation and things we're doing around everything from automation to visualization of data, to employee tools to modernize the tools we give to our employees that make Curtiss-Wright a more modern place to work. So we're really looking broadly across these things and making investments across all of those. And then, of course, acquisitions. And an area that is -- we say is our top priority for our capital allocation. Of course, that's after we make the investments in the businesses we need to make to be prepared for our growth, but that is our top priority. But we will return capital to shareholders if those opportunities don't exist. We've got a strong track record of buying back stock as another example. Maybe we'll talk a bit more about that, and Chris can elaborate on that in the Q&A. So just we gave a track record of our recent acquisitions over the -- really the PacStar was a little bit before, right, is the transition from the prior CEO was being made to myself just over 3.5 years ago. But we've really had a great track record and are really pleased that what we pride ourselves in that we know how to do due diligence from both a strategic standpoint that we really understand the differentiated position and the unique value position in the market to matching our financial filters that we're able to find companies that we can bring into Curtiss-Wright and create value because they're better being part of Curtiss-Wright. And a really strong track record there. I'm pleased that we announced on Monday this week, another commercial nuclear acquisition, Ultra Energy. It's not closed yet, but should close here in the next couple of months and feel very passionately that it will match the excellent performance of the other ones on the slide. And so that's maybe something we'll come to in the Q&A a little bit. So we put up our new financial targets. We've committed to grow organic sales over 5%, continue our push to grow operating income at a pace faster than we grow sales, implying operating margin expansion, maintaining top quartile performance. And that is something during the prior decade, we had talked a lot about getting ourselves to top quartile performance, and we achieved that through the end of the last decade, but we did not achieve it with -- in the sales area, and that was really the accelerant we needed to focus on and are seeing early days, and I do want to say that we're really in the process of building momentum around what we can do with our focus on growth. But again, growing our EPS over 10% and delivering free cash flow at an average rate of 105%. And really important to note that these targets do not include a new AP1000 order. And for those of you who know us, you know exactly what I'm talking about. And if you're new, this is our significant content into the Westinghouse AP1000 plant that is game-changing revenues for Curtiss-Wright when the orders come. We've not been executing on any -- the very wind down over the past couple of years of just a handful of millions of dollars and none this year. And so when this comes, it's needle moving for Curtiss-Wright, and we'll be excited. And we do still say it will -- we expect an order in the next 1 to 3 years. So very likely in this time frame. But the revenue profile can differ from it so much depending if it's on the front end of the one or more on the back end of the 3. And we felt just it was better to show where we think we can take the core of the company outside of that meaningful business without that AP1000 orders and hence, why we chose to leave it out of our targets. With that said, just to take a touch on where -- how we feel we will perform in our end markets to achieve that greater than 5% organic growth that we feel strongly that we can achieve across all our defense markets, we think we will grow mid or high single digits. And I'd like to emphasize this is in a backdrop where the FY '25 FYDP is really showing very low single-digit growth. And global defense growth as much as it's ramping, it's very low single digits. And so it's really the strategies we have, the products we're bringing to market, our position in the marketplace that really give us the confidence to say we're going to very much outpace those defense markets. And again, there's a lot of detail in the Investor Day presentation that really lays out a lot more detail around that than I have the time to go into here today. We pick to grow our target for commercial aerospace at high single digits. We've taken a fairly conservative approach here just given some of the dynamics in the industry and the slowness to ramp rates, than I think is desired. And so just took a conservative position there. We're really pleased to say that our commercial nuclear business, which is largely aftermarket business and the growing new build business we believe we'll be able to grow at low double digits for both our process and our industrial business that they're relatively flat markets, but it's really through new product introductions, whether it's in the power electronics area or our subsea pumping area, which is again another dynamic growing portion of Curtiss-Wright's business that is laid out in the Investor Day presentation that we think we can overcome some of the dynamics in those markets and grow slightly faster than the markets. And lastly, probably today, we'll talk about it, in our meetings we'll talk about it. There's a lot of interest in where Curtiss-Wright sees the future related to our commercial nuclear business because it is very, very exciting. We always want to make sure we're taking the time to emphasize our defense electronics business is great. We are well positioned in our naval business. Across the board, we have wonderful positions with the business, but this does stand the most dynamic growth opportunity for the organization. And without -- we feel that by 2028, that we can double our commercial nuclear business from the $300 million baseline in 2023 to $600 million and grow that business to a $1.5 billion annualized revenue by the middle of next decade. And so those are pretty dramatic numbers, but the reasons why we believe that are laid out on the slide that for those again, some of you probably have heard us talk about this, but the concept of plant life extensions, keeping the current operating reactors around the world online, there's been a lot of financial support for that. That is only beginning to ramp. That will continue. There's a lot of declared interest in building AP1000 plants across Eastern Europe as they look to find alternative sources of energy. So we believe we will be ramping and in production beginning for sure, for Poland and Bulgaria by 2028 as part of that 2x. And then a kind of a steady rate production by the middle of next decade, supplying the content we do into Westinghouse's AP1000 and then building out the SMRs that are small modular reactors through going -- we're in design phases right now moving to prototyping and initial production by the middle of next decade with the predictions that are very clearly outlined by industry that we should be seeing orders of 10 to 20 per year by the middle of next decade. So there's just a great opportunity, and we are well positioned to win across that industry and participate in that and very proud of it. And one other thing, if you do have a chance to look at our Investor Day or listen to it more specifically, we had a great nuclear panel that participated in our Investor Day with the Head of NEI, individual that leads to AP300, which is Westinghouse's small modular reactor and a customer with Energy Northwest who is committed to building out nuclear power plants after they get through their ARDP build. And they really talked about the industry, not about Curtiss-Wright and how determined there is to make this happen. And so with that, I'd encourage you to go there and just close with, I think, at a very quick level, we really feel the future is great for Curtiss-Wright. We're proud of what we've achieved over the past 3 years and the value we've created. But in no way, shape or form have we arrived. We really feel we're at the beginning of a journey, and we're doing the right things inside of the company to build the structures and the processes and the tools to scale with our growth and continue to be -- give success to our customers and our employees and investing in our R&D in the right places and then very purposely allocating capital in a very thoughtful manner as we have. Thank you.

Thanks, Lynn. I think many members of this standing room -- room audience are interested in learning more about the acquisition that you announced earlier this week of Ultra Energy. And how is that strategic for the company.

So I'll be hopefully quick with this. So we're super excited about the acquisition. And I mean I don't usually use those kinds of words, but it has got a fantastic technology that's incremental to what we do with radiation and flux monitoring and some very highly specialized temperature and sensor, pressure and temperature sensors, that we know we can -- we partnered with them in the past, that we can leverage into our systems and help them expand their reach. They don't have quite as good of a reach in the U.S. as they do in Europe. And so that's a place where we're very strong, and so we'll be able to take our sales force and get right to business of helping build out their product footprint in the U.S. And almost more important is their major site is over in the U.K. And as the various countries want to build these plants, the concept of localizing jobs is just critically important to how they make selections of who they want to work with. And this is our first nuclear plant. We obviously have other plants over in the U.K., but with nuclear engineers and the equipment that's needed and we know we'll be able to localize some of our technologies over to their site and be able to really demonstrate that European footprint, which we know is going to help us as specifically Rolls-Royce who've got a lot of momentum building across Europe. And we're building a great relationship with them, but this is really going to help us build that out.

Great. And you mentioned how for your electromechanical actuation products, you've been able to successfully cross-sell them through your like very wide and diverse customer base. Do you think you'll be able to do some of that with the Ultra Energy assets since it seems that there'd be applicability there.

So there's definitely a couple of areas for that. So it's in the press release, but they have a very deep relationship into the navy and the European navies for the -- specifically the U.K. So that is an area we will leverage that footprint to build out our relationship with that customer. But the pressure and temperature sensors are pretty specialized capabilities that they've only ever taken into the nuclear industry. And obviously, Curtiss-Wright builds a lot of sensors, and we take them to many other industries largely aviation and our teams as part of the due diligence really looked at what -- how they build their technology and they have some great things that we know we will be able to leverage over into the commercial aviation. So that's something that we'll be exploring and probably will have to do some tweaks to the product. It's not going to be just pick it up and sell it. But the core technology, which is quite advanced, the team is excited to have brought into the portfolio.

Great. And there's the nuclear energy renaissance that's taking place. And you showed on your slide, your projection, I think, to grow your commercial nuclear business from I think, $300 million in revenue last year to $1.5 billion, and you mentioned your Pivot to Growth strategy. And I think that exemplifies it. What is your outlook in terms of the existing nuclear reactors in the United States? Like upgrading to like newer technologies and your ability to continue to offer plant life extensions as well?

So the topic, Louie, you just mentioned plant life extensions is really when the operating reactors. So to get their license reapproved to go from 60 years of operation to 80 years of operation. And that drives a lot of forced by the NRC maintenance work, but it also makes the operators really look at how they're operating their plants and look for opportunities to do upgrades and drive efficiency in the workforce and such. And a lot of times, that leads them to really modernize a lot of systems, which is a great place for Curtiss-Wright. And so early, early days, about 1/3 of the 94 operating reactors in the U.S. have declared that they're going to go through plant life extension. It's anticipated by 2050, 80% of those reactors will go through that extension. We laid out that we see this as a $7 billion opportunity for products and services like Curtiss-Wright makes as these existing opportunities go through these life extensions that we'll be right in the middle of pursuing business for us. So again, that's -- that portion of our nuclear portfolio, which is 90% of the 10% that's our commercial nuclear footprint is growing well and really kind of at the heart of the low double-digit growth that we showed on the prior slide that we believe we'll be able to achieve.

Great. And that's for your current generation technology. Can you also discuss some of your partnerships with the small modular reactor OEMs?

So our goal when we think that one of the things that's a unique investment thesis for Curtiss-Wright is our goal is to have a meaningful role with all of the significant small modular reactors. They're in that 300-megawatt type of range that's really for building out the electricity grid and major process applications. And we've established our content across X-energy, which is 1 of the 2 ARDP. They're leading Gen 4 technologies of over $120 million of content per reactor. We have some wins announced with TerraPower, but no dollar figures with that. And that's Bill Gates' company that he's partnering with Warren Buffett to build out their first plant at PacifiCorp, X-energy's first plant will be Dow Chemical. But then just moving through the other, what we consider the other 4 major reactors may not have the same level as X-energy on all of them. But we did put forward at our Investor Day, we expect to have $20 million to $120 million of content across the other 4 major players. And if you take just Westinghouse's SMR, the AP300, which is kind of half of an AP1000 to make it really more simple than it is. But for Curtiss-Wright, where we have well over $100 million of content per plant on an AP1000, that should translate to over $50 million of content on the AP300. So that's another one that's clear line of sight. And then with Rolls-Royce, and GE and NuScale, it's a bit more of a work in progress as they're designing aspects of their reactors, and we're working with them.

Great. And for Chris, what is the general like margin and profitability profile for the SMR business, the AP1000 or the commercial nuclear in general?

Well, we're heavily focused on profit margins. As Lynn presented some of the results over the last 3 years, we achieved 110 basis points of margin expansion while increasing our research and development by more than $20 million over the same time frame. We're entering into 2024 with another $20 million increase in focused R&D investments, and we're still going to provide operating margin expansion. Step back over the last 10 years, I mean, it's been a remarkable transformation for this company, more than 800 basis points of operating margin expansion. So it's something that's kind of fundamental in our core, our people have very strong financial acumen and we're constantly driving to free up money for funding. And these investments are going to capitalize upon these great markets that we sit in and these technologies that we offer that can help us to exceed the market growth rates. As you look forward, I mean, right now, we're in the process of developing these advanced technologies. So we don't have a specific margin profile that we can say, hey, it's going to be x or y. But I think as you take a look at where we are, where we sit as a company, knowing that we're focused on retaining and controlling the technology, which helps us to command the premiums helps us strategically price, it's going to be a good business for us going forward. We're excited about it.

Fantastic. Thanks, Lynn and Chris, and we're going to resume the conversation in the Jennie B room upstairs. Thanks.

Thank you. Louie.

Great. Thank you.