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

Okay. We'll move right along. We are now honored to have our next guests. We have Curtiss-Wright here today and -- being here for Curtiss-Wright, we have CEO, Ms. Lynn Bamford, CEO of Curtiss-Wright; and Chris Farkas, CFO. Curtiss-Wright designs, manufactures and overhauls precision components, engineered products and services, primarily in the aerospace, defense, general industrial and power generation markets worldwide. Curtiss-Wright has 38 million shares outstanding, trades at a whopping $303 for $11.5 billion market cap, $670 million of net debt for 12 -- almost $12.5 billion total enterprise value. We are delighted to have Lynn and Chris here today with us to discuss the growing opportunities in aerospace and defense. Thank you for being here.

Thank you, Tony.

Well, maybe just to kick things off. I attended your wonderful Investor Day, you wrapped up a strong quarter where you reported record results and backlog in all of your businesses. What excites -- you have so much going on. And what excites you the most about your business going forward?

Well, thank you for that. I definitely want to say thank you for being invited to the conference. Today's remarks may include some forward-looking statements with risks and uncertainties are -- I think you have the point. So I know we're -- this is our first time at the conference, and maybe some of you know Curtiss-Wright more than others. And so I'd really encourage everyone to go to our website and look at maybe our most recent earnings material and the material from the Investor Day that Tony just referenced that it really lays out our strategy for the company. It shows 3 year and beyond financial targets. So it's a great starting point if you want to learn more about the company. And so thank you, we did have a really strong Q2. It was very nice to be able to report those results. And it's especially rewarding because the strength is across the business. We report our business in 3 different segments, and we're seeing great things in all of those. Our book-to-bill is up 1.3% year-to-date, and that's on 12% increase in revenues. So that's really something that I think shows the momentum we're building in the business as we launched our Pivot to Growth strategy 3 years ago as I became CEO, that it's taking hold and beginning to work. And we're at a point where we have record backlog across the corporation at $3.2 billion, and that's record backlog in revenue across all 3 segments. So it's exciting. And I think one of the things that for me is a real focus and something that I'm very proud of is we're not achieving this without spending inside the company and investing for the future. And so in our Investor Day, we announced that we would achieve greater than 5% organic growth. And for those of you who know us, our commercial nuclear portion is an exciting portion of our portfolio right now, and it does not include a new AP1000 order, which is really a lightning rod for the organization. So that 5% growth is over the next 3 years, excluding that order. We've committed to expanding operating margins during that time. And I'm especially proud that we're continuing to expand operating margins while we continue to significantly grow our investment in engineering spend. And that's both a combination of IR&D and customer-funded R&D engineering spend. These projects are -- maybe I'll highlight a few for those who maybe haven't seen the Investor Day material and where we're investing. But if I start in our A&I segment, we're investing in our electromechanical actuation capabilities. This is a capability that was initially created for the automation in manufacturing that we have taken to both commercial aerospace with a significant win with Airbus, which is a great growth potential for us as Airbus is obviously doing quite well and also taking it to the ground defense market. And that's an example of something you'll see repeatedly as you maybe dig into Curtiss-Wright, that one of the things that I think is a real strength of the organization is we're very purposeful about seeing where we've invested dollars in a core capability for a targeted end market that we can then releverage that technology to different end markets. And hence, have very fruitful returns for Curtiss-Wright because you're not -- you're starting from a point of strength with an engineering capability that's already been developed and maybe just tailoring it for a new market. Another example, if I move on to our Defense Electronics organization, the term MOSA was mentioned in the last presentation, not too many people say that. So that was kind of fun. I was like, wow, music to my ears. But I mean that's really an open standard that has been mandated in 2019 across the defense -- all segments of the defense industry. And just to put a little history for our Defense Electronics group. People maybe associate Curtiss-Wright, obviously, with the origins of flight in aviation. But our team that is the Defense Electronics group, has really been in that industry since the inception of COTS back in the mid-90s. And so long legacy, long history, great capability and track record. And we've been investing in the MOSA and SOSA platforms. It's where the majority of our IR&D goes and believe we have really the strongest product portfolio in the industry right now. And our -- that business has been growing quite dramatically, and it's really great to see they had a great Q2, as you mentioned, with record margins out of the group at 25.7% return on sales. So a lot to be proud there. We're investing a lot in that. And another example of a crossover technology, if I just move to the Naval & Power segment is we've had some recent announcements around our subsea pumping capability, which, again, technology that we've been in the Navy nuclear industry since its inception take -- took that core pumping technology, have taken it to commercial nuclear and are now taking it to subsea pumping. And so these types of activity -- the culture inside of the organization is very collaborative. And we've done a lot of things to put new processes and systems in place to allow the teams to collaborate and innovate together across a geographically diverse business. And I think those things are really driving Curtiss-Wright forward into the future. Another area just to touch on that -- what I'm excited about. We've been in the commercial nuclear industry since its inception also. Again, most of our businesses are leaders and first-innovators in our end markets. And the commercial nuclear industry was -- had a very tough period of time when it had clearly fallen out of favor. And broadly, we were shutting down -- across the globe, shutting down a plant every year or so often. And we've stayed true to our belief that commercial nuclear is and will be an important part of the energy profile going forward, and I think the world has shifted its views and is embracing that. And as I see our business that has a potential for so many different avenues of growth, that's surely an area where we are investing right now and is an exciting part of the business, too.

Lynn, that's a great overview and talking about a lot of things that are going on at Curtiss-Wright. Maybe we can touch on the commercial aerospace. Just another hot topic, what's going on right now, given some of the industry dynamics. How is Curtiss-Wright aligning with current production rates from the OEMs? You brought up having growth in the double digits for '24 and stronger OEM production. What does your outlook look like, Chris?

Thanks for that. Microphone is on? Okay. Yes. So just to provide a little bit of context, Lynn already mentioned that you probably are all aware of our historical ties back to the Wright Brothers. We've been in commercial aerospace since the inception. We have very strong relationships with Boeing and Airbus that date back to their inception. The products that we provide within commercial aerospace, it's a pretty broad portfolio. We had a great slide at Investor Day that shows all the different areas that contribute in commercial aerospace, but it's predominantly actuation, sensors, surface treatment services and electronics, so -- as you look across all those platforms. And we have content on all the major platforms, we're on the 737, we're on the A320, we're on the A350, the 787. We're mostly OEM, I'd say, 90% OEM, 10% aftermarket, and we're a little bit more heavily weighted towards narrowbody than we are widebody. But with that in mind, we're going through a great ramp right now. I mean we all recognize that the backlogs in commercial aerospace are at record levels. There are certainly some challenges within certain manufacturers right now. We're all familiar with them, and I probably don't need to bring that up. But there's a few things that are actually happening here in the fourth quarter as well. We've got CEO turnouts. We've got potential strikes that are on the horizon. But for the full year in commercial aerospace, which is 12% of our business, we're guiding 13% to 15%. We just raised that guide here in the second quarter based upon the strong first half performance that we have. So we feel very confident with our positioning and where we are despite some of these things that are facing us here in the second half of the year. And then I think as you step back and you look at this in the situation that we raised our guidance 3%. It's important to note that we're constantly communicating with our customers. It's a little bit difficult sometimes to avoid slack within the supply chain when you're a Tier 2, Tier 3 supplier. So communication is of vital importance to us. But beyond that, we try to step back and look at this a little bit more holistically. And if we take a look at Curtiss-Wright's growth rates over the past 3 years and we compare that to the production output of both Boeing and Airbus over that 3-year period, we actually feel like we're a little bit behind in terms of the production. We all know the very steep ramps that are facing us here in 2025, particularly within widebody. So uncharacteristically, I think, as we that 13% to 15% guidance, we're saying we feel confident and the future is bright.

That's very interesting. It's good to hear that. Maybe switching to Defense Electronics. Lynn, you touched on this a little bit. But some of the key drivers behind the strong growth in the quarter, much of your -- much of it was driven by your Tactical Communications business, a business that you bought in Ground Defense. What are you seeing in share gains? And how are you versus your competitors?

Thank you. It's really exciting to see what's going on within the Defense Electronics segment and the amount of profit that we're able to make inside that group. It's something that everyone is very proud of. And a good portion, we have double-digit growth we're predicting this year in our Ground Defense market. So it's the highest across our various defense markets. And our Tactical Communication equipment is absolutely part of that as it continues to gain adoption across all the services. We had our first significant win with the Air Force earlier this year to just open up in predominantly Army and Marine. So that was an exciting dynamic. And we're also seeing a much stronger pull across the NATO countries as the equipment is NATO-certified. And so there's a lot of things going on with it. And unfortunately, war reminds you that the ever-present need for secure comms on the battlefield. And we really make a great product in that space. And there's a couple of things about what we deliver that has driven our -- the adoption of our product and really separates us from the competition. And one is a software interface that we provide that allows for setting up and tearing down networks in the battlefield that are really manageable by an average young soldier and you don't need a networking engineering degree or any of such things, which makes it very implementable in the battlefield and able to add troops as they come in and various equipment as it's in. And so it's a tool that is very much appreciated by our military customers. And we continuously are improving it and adding to it to just really maintain that intimacy with our customer. And the other area where we're very differentiated in is the secure comms. So the encryption, the various things we do that make sure only the people you intend to listen to what you're communicating are hearing what you're communicating, and we really have some outstanding capabilities in that area. But really the growth across our defense group is broad. We're seeing -- I've mentioned -- most to your opening question, but really our efforts in that area are paying off that are driving growth across our core C5ISR business, which is really how we have built out from that at the heart of who the business is. And that's always a very profitable business. So it's great to see that but some of our smaller computing areas. And an area I get asked about frequently is there's some turmoil in our industry across some of the competition and whether the growth we've seen over the past couple of years is really a market share move from competitors to competitors. And it really is not at this point in time. That is market opportunity for Curtiss-Wright, access to new customers, new RFPs are responding to. But that's a journey, not a sprint that happens in a quarter or even a year. And so I feel that is a dynamic that is going to drive growth to Curtiss-Wright. We have it on top of what we're doing, but it has not really been part of the growth to date. And so I think that's just kind of important to note to assure this isn't just some near-term shift of business. But I also -- we stay focused on the fact that the defense electronics market that we think is addressable by the products we offer is across the U.S. and NATO countries is a $50 billion market. Our -- the midpoint of our guide for our Defense Electronics segment this year will be $890 million. Hopefully, we'll push to the top of our guided range. But -- so I make that point with -- we're still -- our biggest opportunity is convincing the primes to outsource, and we work on that every day and the MOSA mandate back in 2019 really upped the ante on the push for primes to outsource. So we're really pleased with where we are, leadership across that team, and it's got a bright future.

You can see -- you've seen, obviously, news articles and just all the critical -- the criticality of secure communications and resilient data link networks. And you guys right in the middle of it, which is awesome. Maybe back to foreign military sales as a key growth driver in '24. Could you discuss the key drivers across the business supporting this international demand and how we think about profitability on these contracts maybe versus domestic?

Sure. Yes. Maybe I'll just build a little bit upon what Lynn was talking about within Defense Electronics and provide some context regarding the overall market. So while defense electronics is a $50 billion market, as you look at global defense spending, that's a $2 trillion market. And the elevated threat environment that we're all facing right now has certainly contributed towards an increase in spending, particularly within NATO countries. I think as you take a look at where we are here in 2024, and these NATO countries have been on a mission to increase their spending to get greater than 2% GDP focused on defense. 70% of those countries are going to meet that objective this year. Spending is expected to be up 18% in 2024. That's the largest increase in decades. So as we look at what's been happening within our foreign military sales markets, and when I say foreign military sales, I want to be clear, this is direct foreign spending to foreign governments or to foreign militaries. It excludes all the great programs that we're on, like the F-35, the Stryker, the Blackhawk, where we may be selling domestically and then those units are kind of going -- or platforms are going overseas. But it's 9% of our business today. And as we step back and look at what happened this last year in terms of growth in that market, we grew greater than 20%. Now a lot of this was based upon the success that we have within our Defense Electronics business and the very broad portfolio that Lynn was mentioning, but we're on over 400 platforms and 3,000 programs. So we really touch upon so many different places within defense, aerospace, ground defense, naval defense and we're really well-positioned to benefit from some of these increases in spending. I think this last year, we saw that in the aerospace defense market and our flight test instrumentation and avionics products. We saw this in our Ground Defense through Tactical Communications and also our Turret Drive stabilization systems. And we also saw this in things outside of Defense Electronics and our arresting systems that go on the back of naval frigates or arresting systems for ground base. It's just a tremendous amount of increased spending that we're seeing. And then this year, we're up in the high teens growth year-to-date once again. So we're seeing more good things. I think it's a little bit different of a focus this year. We're seeing more naval aircraft arresting systems for the backup frigates. We had a great second quarter with orders, and there were some surprises there as well with aircraft handling systems. But -- as we look at the elevated threat environment, we look at the positioning of our product portfolio, the commitments that these countries have for increased spending, NATO and globally, we feel like the future is bright. And it will be one of those ways that we will exceed the defense spending targets both domestically and globally going forward over the next 3 years.

That arresting business was a great acquisition. That was awesome. Maybe let's move to the commercial nuclear, you obviously touched on it quite a bit, but you provided some ambitious expectations, which I think, rightly so, your recent Investor Day including the art of the possible to highlight various avenues of growth. How do we think about the timing on these key -- I mean, these are long, long, long-cycle programs? Maybe if you could just talk about that and then the aftermarket piece.

Thank you for that. And it is -- I'm glad we've had a chance to talk about the other portions of the business before we start talking about it because at some point, it's almost overshadowing all the really strong things that are the rest of Curtiss-Wright. But it is an exciting part of the business. There's no doubt. That our Investor Day, we guided that it will grow low double digits over the next 3 years through 2026, that we expect to double the business by 2028 and fivefold the business by the middle of next decade. And those aren't numbers pulled out of thin air. We clearly triangulated those with a lot of assumptions and came at them from different ways. But to sort of break down our business, maybe for those of you who are not familiar with what we do in that space. There's kind of 3 buckets of growth drivers in our commercial nuclear business. One is aftermarket serving the existing operations that are reactors that are here in the U.S., some in Canada, some in South Korea. And again, as we've said a couple of times, our businesses have been in the commercial nuclear business since its inception. So another place where we've got a great pedigree and a great history and reputation with our customers. And so as the move comes to stop the shutting down of reactors, and 2023 was the first year we haven't shut down a reactor in several decades, that's a great opportunity for us to be in there helping those plants extend their life because they're not just staying on the grid. Most of them are reaching a point where they need to go for life extensions with the NRC from 60 years to 80 years, which drives an increased amount of aftermarket work. And that's just a great growth driver for Curtiss-Wright and has been fueling our growth that we've experienced over the past couple of years. So that's here and now and something we'll continue on for decades as we service the current operating fleets around the globe. The second bucket is something for those of you who maybe have watched Curtiss-Wright over the years, our AP1000 business with Westinghouse is -- can be very dramatic, very profitable, great business for Curtiss-Wright. And we have wound down our last contract 2 years ago. And -- but since then, with the shift of sentiment towards nuclear energy, there's been a lot going on. And across Eastern Europe with both the drive for carbon-free energy but absolutely energy independence from Russia is -- there has been quite a few declarations of large plants that will be built. And 20 to 25 currently are slated. Westinghouse is doing a great job of being in the middle of all that and winning their fair share. We put out that even if Westinghouse only wins half of just those reactors that are declared over in Eastern Europe, that's $1.5 billion of business for Curtiss-Wright over the next decade. So it's, again, really meaningful business. We've been consistently saying a timeline for when we expect those orders to start flowing at this point, that's 1 to 3 years. So again, it's not revenue driving the immediacy, but it is revenue that is in the near future for us. And I think it's important to note that the 5% organic growth target we put out for our Investor Day does not include an AP1000 order. And so that's really just optionality on top of what's great growth. But the third portion of growth for our commercial nuclear business is something that we've been recognizing revenue over -- since starting in 2022, and that is our design work with the creators of these new small modular reactors, which is really, I think, what most people think will be the approach the U.S. and many countries take for really adding nuclear energy to the grid. They're entirely different technologies with different risk factors that are essentially, really have taken away the risk factor that people are still aware of with commercial nuclear energy. And something there's a lot of detail on that in our Investor Day material, but we're working across all the larger SMRs with an intent and a belief that we will have anywhere from $20 million to north of $120 million contract per reactor. There are slated -- there's reports that were a couple of years old even as some of the power needs from the data centers was not really being fully understood, that the U.S. will most likely build 300 SMRs by the middle of this century. And so it's -- that's just dramatic business for us, but that can feel far away, I get that. But we're in the design phase now. We're taking revenues, working with the various designers of these reactors doing this. That's going to move into prototyping revenue in '25,' '26, '27 is they're all rushing to try and demonstrate their reactors by the end of this decade is really the target that everyone is really trying to prove they can do it. And we're right in the middle of all that. And I'll tell you another factor that's going on in -- with -- tied to commercial nuclear that has not fully revealed itself yet, but I think it's going to even change what we anticipate coming in commercial nuclear is there's more and more dialogue -- and you can find lots of articles about it around the owners of these large data centers wanting to do something to sort of jump-start, bypass, collaborate with the electricity providers to really assure a reliable source of energy at a rate they can afford and control. And so more and more talk that whether it's Amazon Web Services or Microsoft or whoever it might be, is going to open up their wallets and get in the middle of providing the capital to really accelerate the spend that is needed to really get this whole industry moving. And so that is just really exciting. We'll see how that unfolds over the next handful of quarters probably. But I think there's something exciting coming from that also.

I was going to say is that's a breathtaking amount of potential growth with a lot of funding from private industry. That's impressive. I'll take -- I'll see if the audience wants to ask a question.

You mentioned about commercial nuclear energies in Eastern European countries, that there is a big scope of demand there. There is a big demand of commercial nuclear energy in Southeast Asian countries also. So are you planning to expand your activities? Or any business plans you have for those countries?

So we do work very actively with South Korea today. It's not a significant portion of our business, but we're very active with them. And if their leading large reactor is selected through that region, we will have close to $20 million of content on that reactor. So it doesn't get quite the fanfare because our content on a Westinghouse reactor is dramatically more, but it is a good area. We have a great working relationship with the South Korean energy providers and very actively support them as they sell their plants throughout the region. And just you brought up Eastern Europe. One of the things we're also doing and we'll see what fruits this brings to Curtiss-Wright. But -- you were very -- a lot of the Eastern European current reactors are Russian reactors and obviously, they do not want to have any reliance on Russia for anything. And we are very proactively over -- we've toured some of the Russian reactors to see how we could potentially take our aftermarket capability and work to support those same kind of aftermarket services that are needed to keep the Russian reactors operating. And so I think we're very proactively looking at all the opportunities around the globe and have a fantastic team that's doing the right things to explore these.

Well, Lynn, there's so much to ask and so much to discuss with all your successes. And I think let's give you a chance to get your victory lap on your Pivot to Growth strategy, which I think has driven a lot of this, fueled a lot of this growth and success. But thank you for being here, and thank you for all you're doing, and we'll have you back next year.

Well, great. Glad to hear that.

Thank you, Chris.

Thank you very much.