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

Good afternoon, everyone. My name is Sheila Kahyaoglu with the Jefferies Aerospace Defense and Airlines equity research team in case you don't own me. We don't cover Curtiss-Wright. So Lynn Bamford is going to educate me, who is the Chairwoman and CEO of the company; as well as Chris Farkas, who's VP and CFO. So thank you both for being here. Maybe just to kick things off, I think you have a brief -- if you could give a brief overview of Curtiss-Wright and the drivers and the strategy across your markets.

Okay. Thank you for that. And I want to say thank you for having us here and inviting us this conference again. It's definitely our pleasure. Make sure I'm being picked up by a mic. I do want to say that today's presentation will contain some forward-looking remarks that carry certain uncertainties and risks, and are outlined on our public filings on the SEC. Thanks for my IR guy. So with that, for those of you today that are maybe a little less familiar with Curtiss-Wright, we'd encourage you to go to our website and look at our latest earnings call, which was just a handful of weeks ago. But even more importantly, we had an Investor Day in May and really laid out the strategy for the company, some new 3-year targets and even beyond that. So it really -- it's a good overview of really our end markets and the strategies inside of those, probably more than we'll get a chance to cover in this 30 minutes a day. But with that, Curtiss-Wright was listed on the New York Stock Exchange in 1929, and we had the pleasure of celebrating our 95th anniversary of being continuously listed on New York Stock Exchange and ringing the closing bell last week with some of the leadership team. So that was a fun event for all of us to really take a moment and reflect on the history of the company. So as you can imagine, with that history, we have built quite a reputation for solving some of the industry's hardest problems in solving some of the most mission-critical problems. We often sell our products into applications that must not fail and our safety critical is really kind of a broad brush to help you understand where Curtiss-Wright looks to build out our business in our end industries. As you can easily see, we've been part of the aviation and aerospace industry since its inception, 95 years ago. But something many people don't know about Curtiss-Wright, we've also been in our Navy nuclear business since the inception of that industry, commercial nuclear since the inception of that industry and the COTS electronics industry, just to name a few. So where we do business, we've got long legacies of being leaders in those end markets. We often operate at both a component and the subsystem level, and one of the things I think the corporation does a great job is taking core technologies that we develop for 1 end market and taking it across to other end markets and leveraging those R&D spends into multiple end markets, and that's obviously very fruitful for the company. We have a long history of delivering returns to our shareholders and are really proud of what we've accomplished the past 3 years since our prior Investor Day of May of 2021, where we launched our Pivot to Growth strategy and have really done quite well over that time frame. The Pivot to Growth strategy is really fundamentally around accelerating organic growth while continuing to drive operational excellence and implementing the disciplined capital allocation structure to assure we're setting the stage for long-term profitable growth for the organization. I think it's important to emphasize that as much as we're proud of what's happened over the past 3 years, we are definitely at an early phase in our -- in the tremendous opportunities that are before us in our industry, and have a great future and a long runway ahead of us. The way we're targeting these markets, we know that we have technologies that are solving some of the greatest challenges in these end markets and are very much aligning ourselves to the secular trends that are driving growth in our markets. And there are many of them. We outlined those in our Investor Day, but just depict 2, whether it's increased NATO spending for defense spends across NATO countries or whether it's the growth of commercial nuclear power driven by energy independence and the desire for carbon-free energy are just 2 examples of meaningful secular trends that are very impactful to Curtiss-Wright. I think it's important to note also that as we are a growing company, we're not just focused on the engineering aspects of the company, but making sure we're investing in the tools and the systems and the talent to make sure we're really ready as a company to be able to capitalize on these opportunities that are before us. So again, if you look at our Q2 earnings call, we just ended a great quarter. We exceeded our expectations. So far in 2024, our book-to-bill is 1.3x revenues, and that's on revenue that's up 12% year-over-year. So we're really pleased with how we're performing, and make note that revenue and backlog is up across all 3 of the segments that we report our results with. So with that, the Pivot to Growth, it's early in our journey. It's working, and we're definitely building momentum as we go forward.

Maybe if you could just -- you gave a great overview of the company. If you could talk about your A&D market, which represents about 70% of sales and commercial is 30%. How do we think about the growth rates associated with each of them?

Sure. We -- to Lynn's point, we do have a lot of great growth factors across the company, and then we do have some exciting things in commercial nuclear optionality. We just came out of our Investor Day, and we set our 3-year targets at a 5% minimum organic revenue CAGR. So we're expecting growth across all our markets over the next 3 periods. Now specifically, as you dive down into who we are as a company, 2/3 of the company is A&D and 1/3 of the company is commercial, power and process and then also general industrial. But the growth vectors within the defense businesses over the next 3 years are all projected to be mid-single-digit to high single-digit growth rates. And then across commercial aerospace, we're forecasting that those will be high single-digit growth rates. So this backlog that Lynn had mentioned and some of the things that we've talked about at Investor Day in ways that we can grow the business beyond what you see for defense spending trends over the next 3 years are very, very real to the company. You're seeing them in this year's results. And then I think as you look into commercial, and I won't go into it in a lot of detail because nuclear is a very complex topic, but we are issuing new products into the general industrial market and the power electronics management space that are helping us to navigate through some, I'll say, more difficult times in that market. But then we're -- we've got a lot going on in terms of development and commercial nuclear and process that's going to help us grow at a mid-single-digit growth rate plus. And then again, our numbers do not include an AP1000 order over the next 3 years, and it's a very profitable and large business to us. So we've kind of put that back in your hands as to what the time line is events you can follow as to when that's actually going to hit the business, but there's some exciting things going on.

Maybe if you could talk about Pivot to Growth strategy. What do you think is least appreciated or most misunderstood by the investor community?

Well, that's definitely going to fall under in my territory. So I think one of the things that's probably the least understood or appreciated, and we get feedback on this a lot, is that while we've committed to expand operating margin going forward, we haven't committed to a specific operating margin target. People want to be like, "tell me you're going to be at 18%" or "when are you going to be at 18%? And how are you going to get there?" Well, with these investor targets that we set and the organic growth CAGR that's in front of us, what we have committed is that we will grow operating income faster than revenue growth, and that basically implies continued operating margin expansion. But one of the fundamental financial thesis behind the Pivot to Growth strategy is that we will continue to use commercial and operational excellence to free up funding for investments that are going to accelerate profitable growth back into the core. And we have so many great things and technologies that we can invest in to take advantage of these secular trends in these markets that we participate in right now, that the last thing that we're going to do is we're going to cut R&D to the detriment of our shareholders when we know that we can continue to feed this engine and continue to build upon profitability and the growth rates going forward. I will say as an example, when we set very similar targets back at our 2021 Investor Day, we said the very same thing. And we increased our R&D spending substantially over that 3-year time frame, and we still expanded our operating margin by 110 basis points. Now we're not saying 110 basis points, but you have to kind of take a look at who we are. And then over the past 10 years, and when Lynn and I have both been here on that journey, we have expanded operating margin in 9 out of 10 years, more than 800 basis points. So we take this very, very seriously. We believe in the operational excellence and commercial excellence programs that we have within the company, but we also believe in investing for our future, and we're doing that right now.

So just on that topic, given the strong Q2 results, both beat and a raise, why announce a restructuring program? And can you just recap for those who don't know what the restructuring program entails?

So with the results that Chris just mentioned a few minutes ago about our continuous journey of expanding operating margins. Operational excellence is really in the fabric of who we are as an organization, and we continuously look through the organization. We're a complex organization of areas where we're sure we can drive efficiencies by retooling the business, reshaping the business. So the program we announced in Q2 was not as dramatic as some of the ones we've done in the past, specifically back in 2020, but we're going to spend $15 million to realize a $10 million annualized run rate of savings. And so it's really -- we don't ever not look at the business regardless of being proud of what's going on with the financials. If there's areas to improve, we go after them continuously. I'd also like to note that typically, when you think of consolidations programs, you're taking cost out of the business to reshape the business to drive profitability. And while that is usually the case and common even to Curtiss-Wright, part of this consolidation program is to really set the stage for growth in our defense electronics business, where we really need an expanding footprint and need to spend a little bit of money to set the stage for growth. So it's really kind of rewarding to see some of those dollars being spent to set the stage for an even stronger future. So it's who we are as an organization.

Sounds like it. In terms of the defense business, Lynn, that's the business you ran prior to becoming CFO -- CEO. In 2024, you're forecasting mid-single-digit growth or greater for aerospace, ground and Naval. How do you think about more broadly the business growing over the next few years, given the defense budgets for those programs or end markets are growing around 2%?

So we really -- and think about it as a team that we have the opportunity to grow really in any defense budget environment. And I won't say it's not great when defense budgets are growing, and we absolutely look to take advantage of that. But if you think of where our products are, the defense electronics portion of the business, which was my routes through the organization, we're targeting being around $900 million in revenues this year. We estimate the size of that market globally for the U.S. and NATO countries to be about $50 billion. So when you think of growth, there's clearly a lot of market that we can grow in. And we have a fantastic product portfolio. We have invested heavily in the MOSA and SOSA standards, which if you don't know what those means. It's just an open standard for computing architectures that the U.S. government has mandated be a requirement in systems going forward. And you start making those investments very heavily back in 2019 and 2020. So we're really well positioned with our product portfolio as a technology leader. And to the point of the defense budgets, sometimes when defense budgets are more constrained, the primes have less R&D dollars that can drive them to outsourcing because they don't have the money to design customized electronics. So that really drives the increase of outsourcing. We also do run a lot of programs that allows us to extend the life of our products, which means that they don't have money to maybe do a tech insertion that they had wanted to do, but that's something they're going to trim out of the budget. We work very closely with our customers to be able to extend the life of our products and have cases where we've done that 10, 15, even up to 20 years, where we produce the same products, which is quite a specialty capability that Curtiss-Wright has. And so those are all things about our business that allow us to defend against very different budget environments. And then if I speak to the Naval business, just briefly, a lot of that business is sole-sourced. Shipbuilding is definitely a focus worldwide. Obviously, we're predominantly here in the U.S., but we have a footprint across global shipbuilding and that is a priority for nations around the globe. And so again, we make sure we're taking our products across those militaries, and we've seen very nice growth across the foreign military spending, and that's direct for military spending dollars, and are well positioned as the NATO countries do more and more reach their 2% threshold and go beyond that our footprint is very well positioned to make sure we're there to service those countries and capitalize on those dollars. So we really think of it broadly as a global business and have strategies for various different kind of budgetary environments.

What's your mix of international versus domestic in defense?

Yes. So when we talk about direct foreign military sales, it's about 9% of our business. Now that doesn't include where we're selling on the F-35 platform or Blackhawks or F-16s or Stryker platforms where they're growing internationally. That's a little bit -- obviously, a little bit more than that, but we have a very strong global presence across many, many platforms worldwide.

And in terms of your growth prospects, how much of it is share gains from competitors that might have weakened over the past few years? Do you see any of that? And how much is more outsourcing?

So I appreciate that question, and we've talked about that a handful of times this morning with different people. We're always starting more on the Naval side of the business. We are a very good supplier to the Navy. We work very carefully closely with them. They know our capabilities inside out. And there is some share gain that we are able to achieve across the platforms, even though these are very established platforms that suppliers fail, and we come in and sometimes we help work with those suppliers for the betterment of the Navy. And then sometimes we're able to take over production work. And so we can -- and those situations don't happen monthly or their long-term prospects, but they do happen. But in the defense electronics area, which is where a lot of people have questions about whether we are having share gain. To date, I would say the growth -- the really great growth we've had over the past 2 years is really nothing to do with taking market share from competitors. It will come in, in the future because we are very much working to take market share and having some great successes in that, but it's a journey until that turns into real production revenues for us. And so that's something that's still in the windshield for us to be able to really realize the gains from taking some of that market share.

Is there R&D levels required? Or is just the customer acknowledging that you have the ability to do that and moving it over to you?

So sometimes our investments that are made in that area, and we're increasing our R&D spend across defense electronics this year again, we've consistently grown it each year. But largely, it's really having a broad product portfolio that can solve a wide variety of problems. And largely, we have the product set. We just need to go through the process of working through porting software requalifying systems, those types of things that are just -- they're not -- those are not quick activities with the complexity of the systems that exist. But again, things that I think we're very well positioned to benefit from.

Maybe if you could talk about commercial aerospace, it's a smaller part of the portfolio. How do you think about your -- I don't know if you provide shipset content and how you align to current production rates that you're seeing?

Sure. I'll take that one. So with a name like Curtiss-Wright, you probably are mostly familiar that we've got a strong history and rich history with dates back to the right brothers in commercial aviation. We've got a very long relationships with Boeing and Airbus. And if I step back and just try to break down that business a little bit more, while it's a small portion of our business, it's about 90% OEM. 10% aftermarket. We're more heavily weighted towards narrow-body than we are wide-body, I'd say, 60-40 when we look at those splits. But we have content on all the major platforms. So we're on the 737, we're on the A320. We're on the 787, we're on the A350. And we also do some work on regional jets and business jets. And the product portfolio today is mainly actuation, sensors, surface treatment services and also electronics. So our current guidance for the year is 13% to 15%. We just raised that 3%. So despite some of the instability that we all know exists out there with certain customers, we feel confident or felt confident enough to raise our guidance on the full year, and we still do. But there are certainly some things that as you look out over the next quarter or 2, there's some big potential decisions or actions that could be taken by some of those customers. So we try to position ourselves conservatively. We know that Boeing is producing at about 25 per month right now and have the ambitious plan to get up to 38 per month by year-end. Across our very broad product portfolio, we're probably producing 25 to 30 per month, depending on which product you're actually talking about. But we do spend a lot of time talking to our customers. We're a Tier 2, 3 in many, many situations. So that makes it a little bit more difficult for us to get ahead of the certain slack within the supply chain. But we feel good about where we're headed. And then while this isn't really a way to manage the business. I think when you step back and you look at Curtiss-Wright's rates growth rates for the past 3 years and you look at what's happened within Boeing and Airbus and you compare that, we actually feel like we're really well aligned, right, all the way up to this year's guidance. And in fact, as you take a look at the growth rates that are projected for this next year, particularly in wide-body, we see opportunity that's in front of us. And I think between where we sit, the communications we have, the growth rates that we've exhibited and then what we see going up the head and then even you have to discount it for pricing. We feel like we're actually potentially being a little conservative with where we are moving forward. And so we feel like we're in a good spot.

What's driven that 3-point increase to the guidance, given volumes likely not it? Have you had pricing power?

I would -- we certainly -- that's probably the 1 area of the portfolio where pricing opportunities exist the most right now, and we are certainly pushing that. We started off the year a little bit conservative given where we are. I mean, we are an organization in our core. We like to deliver upon the numbers that we commit to hit. So seeing some of that instability and uncertainty as we entered into the year, we kind of took an appropriate action. And we had a great first half of the year, very strong performance. The order book is great. It was up 26% in Q2. We're seeing it both our long-cycle and short-cycle businesses. So I think it's just mainly just confidence.

And then maybe if we could talk about the commercial nuclear business for a little bit. An area I'm less familiar with. How do we think about the outlook for that business, whether it's the aftermarket or new builds. Can you put just some context around that?

Sure. Thank you for that. It's definitely an exciting portion of our portfolio that -- we had some tough years where we were not able to drive very much growth as nuclear had fallen out the popularity and surely, that sentiment has changed worldwide. But with that history, we have a very strong presence in the aftermarket work. So this is just work that goes on in the current operating reactors, there's 94 in the U.S. that just to be able to maintain their safe operational continuation. And in those operating reactors as the sentiment has changed, many of those operators -- those plants are entering a plant life extension, which they extend their licensing from 60 to 80 years. That drives incremental maintenance work in and of itself. A lot of those plants had intended to shut down at the 60-year mark, and that kind of weaned away from some of the maintenance, more optional maintenance and so there's some catch-up. So that's a great driver for us and has been really fueling solid growth in that aftermarket. And it's important to note we are primarily here in the U.S., but we do aftermarket work in Canada, which will also be going for 60- to 80-year extensions as well as South Korea. So that's kind of the underpinning of our business. Those of you who are familiar with us will remember years of celebrating our wins with Westinghouse on AP1000 pump orders, which are a very significant business for Curtiss-Wright. That's sort of another wave of growth as Westinghouse has done a great job working across Europe to position themselves to be the nuclear power plant of choice across Eastern Europe. And many actions underway across Poland, Bulgaria, early planning stages in Ukraine as difficult as that is in many other countries to go through the process to be able to build these plans. And so we're very excited to continue to work with Westinghouse, and we are looking forward to starting expecting significant orders for the AP1000 pumps in the next 1 to 3 years. So the aftermarket is here and now. The revenues coming from those pumps is not very far in the future. And we laid it out at our Investor Day there's 20 to 25 declared large plants in Eastern Europe alone, and it's not going to end there. But even if Westinghouse wins half of those, which is pretty conservative, it's $1.5 billion of business for Curtiss-Wright. So pretty meaningful business. And then really the -- even the most exciting part of our nuclear position in the market is our content across the small modular reactors, which is really the way there's a belief how the United States will really build out its nuclear fleet in many other countries around the globe is with the small modular reactors. And we've been very active in pursuing content with all the major providers. We've been pretty public about our position with X-Energy that we have 120 million plus content per plant, and they're moving along nicely through their design. We're working with TerraPower who are the 2 ARDP providers, which are true Gen 4 nuclear power plants, but then across the various other SMRs, whether it's Westinghouse, GE, Rolls-Royce, working to assure we have content across all of those. And we recently announced an acquisition of Ultra Energy, which we hope to close on here in the very near future. They have a plant in the U.K., which is really helping us position ourselves specifically with Rolls-Royce. So there's just a lot of things going on. We're in the paid design phase and a lot of that work right now, it will move to prototyping and first production units in the 25 to 28 period of this decade and then moving into production in 2030. The consensus in the U.S. is there will be hundreds and hundreds of plants built by 2050. And so this is a real business that's going to be a great, great tailwind for Curtiss-Wright for decades to come.

Just on that Ultra Energy deal, looking at your historical balance of both acquisitions and buybacks, how do we think about capital deployment, given relatively low leverage from here?

Yes. So we're very purposeful to say acquisitions is our first priority for our use of capital at. And definitely, put a lot of effort in it across the organization throughout all the leadership team to be always pursuing potential acquisitions. And for us, that often comes with us cording maybe privately owned companies that when the time is right to sell to work exclusively with Curtiss-Wright, and we've got a great track record of getting companies to do that. We'll participate in open auctions also, but we prefer when we get a company to go exclusively with Curtiss-Wright. But with that being said, we're not going to force an acquisition. We have a very stringent set of strategic fits and financial fit. And as we said in one of the meetings earlier today, we kiss a lot of frogs before we find the prince. And we're not bashful about that. We put indications of interest in on properties and probably walk away from well over 90% of those don't choose to have them join Curtiss-Wright. So we found some good companies. We've announced 2 acquisitions here in the recent months between WSC, which is a nuclear simulator company. And then Ultra Energy, we feel great about those. We will continue to look. The pipeline is good, but we will return capital to shareholders. So if we do not find acquisitions, we have a strong history of buying back shares, and we will continue to do that if we don't find an acquisition.

Great. Thank you, Lynn. Thank you, Chris, and thank you, everyone, for participating.

Thank you.

Thanks, too.