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

Good morning, everyone. Thanks for joining us this morning. My name is Peter Arment. I'm the senior aerospace defense analyst here at Baird. We're delighted to have with us Curtiss-Wright Corporation with us this morning. With us from Curtiss-Wright, we have Lynn Bamford, who's Chairman and President and Chief Executive Officer; and Chris Farkas, who's Chief Financial Officer and Vice President. So thank you, Chris. Thanks, Lynn, for joining us. Really appreciate it. Lynn, I guess we'll just jump right in, and I appreciate always your support for the conference.

In May, you've had an Investor Day, issued new 3-year targets, continue to drive momentum with a Pivot to Growth strategy. Help us understand some of the key drivers. What may be different compared to your last set of targets, I think, that you had prior to that?

Well, thank you for that. And it's -- honestly, this is a fantastic conference. So it's really our pleasure to be here, and thank you for inviting us again. I must say that today's discussions may contain some forward-looking statements that contain risks and uncertainties as outlined on our SEC filings. But now that that's behind us, we will move on to -- it's just fantastic to be here, and there's a lot going on. And for those of you, I know there's a lot of familiar faces in the room and a lot of new faces that I'd encourage you to go to our website and look at our Investor Day presentation that really lays out the strategies and the drivers of growth across the organization as well as the new financial targets, which we can touch on here today. But it's good tutorial, and also maybe potentially our last earnings call, which was just a handful of weeks ago. Just to not try and do a history of Curtiss-Wright, but to just give a bit of perspective. The company was founded in 1929. We just had the pleasure of celebrating our 95th anniversary and ringing the bell on the New York Stock Exchange. With that legacy is the foundation of the aviation industry, the Wright Brothers, Glenn Curtiss. But as a corporation, we've been first in many of our end markets, whether it's the Navy nuclear, commercial nuclear, defense COTS, some of the things that I'm sure as you try and understand the company and where we're going that are really fundamental pillars to who we are as an organization, and our roots are deep in that. And when you think of those end markets, we're about 8,600 employees, over 2,000 of those are engineers. We really are an engineering-centric company and most fundamentally look to solve some of the hardest problems, hardest challenges in those end industries where the products we build are mission-critical, safety-critical and must-not-fail applications. And that's really where we target doing business in the areas we go after. So turning to the Investor Day. It's exciting. We launched the Pivot to Growth strategy back in our May 2021 Investor Day with -- really proud that we had really achieved a lot financially over the prior decade, having improved margins 800 basis points over the prior decade, that really believe firmly the time was right to focus on growing the revenues of the organization. And that's a combination of good financial planning, but also where we were in our end markets and what was going on in the industries we are in and that we have such great footprints, technologies, capabilities that are in really end markets that are at a point of flux and change and opportunity. And so with that, we committed then, as we committed again in May of this year, that we will continue to expand operating margins, growing OI faster than the top line. But we took -- we committed to 3% to 5% organic growth in our '21 Investor Day, committed over 5% organic growth in our May '24 Investor Day. And I would note that does not include a new AP1000 reactor, which for those of you who know us, knows exactly what that means to the organization. Those who don't, it's needle-moving business for Curtiss-Wright, and we just left it out of our targets because it too dramatically changes things and there's uncertainty as to when that order is going to come, not if it's going to come, but when it's going to come. But the things that are different is we really started committing to investing more in R&D, both customer-funded and internally funded back in 2021. I'm proud that during that time frame, we increased R&D spending faster than sales growth while expanding margins. So that's something I think we inside the company are really proud of. It's also motivating to the employees that our teams love seeing that we're willing to allow that funding of dollars. But we increased R&D by $20 million in 2023. We're going to increase our total R&D, both customer-funded and internally funded spending, again, $20 million this year. And those have -- you spend now, the payback is years in the future and then going on for years. And so we're just feeling some of the momentum from those new investments we're making across our end industries really begin to pay fruits. And so there's that. And another thing you'll see if you have a look or do look at our Investor Day is we're really changing who we are as a company, expanding it and maturing it and investing in not just the R&D, but the systems with which we use to manage the company, give proper oversight to leadership throughout the organization and just doing a lot of different things from data visualization tools to portals for us managing our strategies and giving visibility, real-time visibility, across our strategies, implementing a common CRM across the organization, moving towards an integrated website. I mean it's just a variety of things that are just maturing how we take -- we can manage the company and present ourselves to the industry. So -- but what's different is that's a broad brush, and I know you're going to want to probably dig into some of our end industries, so I'll just leave it at that level for...

Yes, I would highly encourage everyone to look at the May investor deck for the Investor Day. There's a lot in there, and obviously, we'll get into some of it. But I want to dig a little deeper into the operating margins. Like earlier this year, you announced a little -- some restructuring efforts, the majority of which was expected to impact the Aerospace and Industrial segment. Do you think these are more kind of targeted for your growth and efficiency? Or are they based on kind of the challenges you're seeing in a few businesses? And how might they benefit kind of the long-term margin trajectory?

I'll turn that over to Chris.

Thanks, Lynn. So we're actually in a really, really great shape. I think Lynn had started off by mentioning that we've expanded our operating margins by more than 800 basis points over the last decade. We have operational excellence ingrained into the culture of our organization. And when we started the Pivot to Growth strategy 3 or 4 years back, we had a more concentrated focus on commercial excellence, and we've put a lot of practice and training and procedure in across the organization to make sure that people aren't just focusing on how do I rip out costs, but how do I grow that top line? And that's been very, very effective for us, and it continues to provide opportunities for us going forward. As we look at the operating margin expansion, and you look at the things that we've done over the past 10 years to get that, we've rationalized product lines. We've sold businesses. We've modified the way that we're producing product. We're talking about all these systems that we're implementing across the organization to enhance efficiency and control of management throughout the organization. But we also do restructuring. And this year is no different. We're doing restructuring, I would say, from 2 different viewpoints. One is we continuously have businesses within the organization that are not meeting the average margin of Curtiss-Wright, which is in the 17% range. So we're looking to optimize a few businesses. But more importantly, given the great growth vectors that we have across our markets, we're also positioning ourselves to produce for long-term profitable growth. So we are doing things like footprint rationalization and reorganizing the flow of product and how we're producing that across the organization to support that long-term profitable growth. So it's actually a little more rewarding for us than what we've typically seen in the past in terms of the restructuring activities. It's really about delivering long-term profitable growth. So we'll continue to move forward as we have in the past. There's other things that we continue to look at. This year, we're going to spend $15 million for $10 million of annualized savings. You'll see some of that benefit this year through the margins. You'll see the majority of the benefit through this next year's margins. But for us, it's about freeing up that money so that we can reinvest back into the organization and keep that engine growing.

That's terrific. Yes. It's really obviously going to be great as volume continues to increase. So I appreciate that. All right. Let's go, move on to the boring topic, commercial nuclear. I'm sure no one wants to hear about that. Vision is back, as we like to say. So commercial nuclear, obviously, has become an area, obviously, of increasing focus. There's been several large tech companies, as you all know, that recently announced interest and support their data centers. Curtiss-Wright is really well suited for, I think, potential tremendous growth opportunities. Help us understand your overall -- how you look at the overall demand, sizing it for -- in the Curtiss-Wright opportunity. And then maybe talk about the aftermarket business, which is currently a very sizable business for you, and the recent reactor news that's getting restarted at Three Mile Island, how that might impact you?

Sure. So again, this is -- a lot of detail on this in our Investor Day, again, to go back to that point. But we're really -- it's a very invigorating time, honestly, within our organization, to see everything going on. And it's a fun time to be working in the industry. And for the teams that worked through some kind of very challenging years and hung in there in this industry, it's a happy day to get up and go to work and be a very meaningful player in this industry. And it's -- there's kind of 3 aspects of our business, and you asked specifically about aftermarket. But we laid out we think we can grow our nuclear portfolio low double digits during the 3 years that we gave our Investor Day guide for, so that's a great change over prior years, where if we could achieve low single digit, it showed as plants -- as the current operating fleet was being shut down, we could still ink out growth, but it surely wasn't anything meaningful. And now that, that's stabilized, and really shutting down reactors seems to be in the past, driving that to low double-digit growth. But even looking beyond just the guidance of 2026, we feel confident we can double our nuclear business by 2028. So it's roughly a $300 million base of business that we're talking about doubling by 2028, and have line of sight that it feels very reasonable to grow that business to $1.5 billion by the middle of next decade. But going back, and that's a combination of the SMRs, large light water reactor build-outs, but the aftermarket, which is kind of the most here and now, there's 94 operating plants in the United States, 80% of them have given some level of indication they intend to do a plant life extension. And for those -- probably many of you know, but it's to get an operating license from the NRC to go from 60 to 80 years. Many of them are already beginning to say, "if we go from 60 to 80, we're probably going to go from 80 to 100." And that's kind of considered today's thinking the limit, but that will go on. And we provide -- we have a long legacy in this industry. As I mentioned in my opening comments, really since the inception, we have a very, very broad portfolio of products. And if you look into our Investor Day, it's just lists of all the things, just really show we're all over the operating plant. We have a great commercial sales team that is active in every one of those 94 plants knowing what they're doing and working with them to provide the products and the services they need as they go through their normal outage and then extra work that's required to do these life extensions. And we're often asked what that means per operating plant, and it's very difficult to say because it really depends on what equipment they have, what they've done over the years. But it's meaningful business to Curtiss-Wright inside of these. And for us, even as this recognition maybe going from 80 to 100, that encourages more major systems, redesigns, taking systems from analog to digital and thinking through there's a payback on those investments. So that's great business for us and really gives us a chance to increase that content. And these life extensions are also going on up in Canada, early days there, and just around the corner in South Korea, where we do meaningful business. And sort of less clear line of sight, but we're absolutely trying to see how potentially we can expand that footprint across Eastern Europe, where there's a lot of Russian plants that they need new sources of supply. So I don't -- that's not part of any of our guidance, but doors that might be open down the future for that. So we size the aftermarket business that we have the ability to win content in. It's a competitive market. We're out there bidding. We do -- it isn't just a -- we're a sole source provider, but we've got a great capability and a great reputation. But it's a $7 billion market between now and 2050, so this is just to try and put some scope on what does this mean. That's a lot of business that we have a chance to gain access to.

Yes, that's terrific. And just one quickly on that, just a follow-up. Just like lead times typically, like when a plant like a Three Mile Island getting kind of restarted, how does that impact you like typically?

Yes. So I mean I don't think it's going to change us the $7 billion number. I don't -- a couple of people have actually asked us, would you change that number? And it's not on that level of magnitude that we're going to rescope the $7 billion, but it's great backup that, that number is very achievable. And the dialogue begins already. We're engaged with them on the things they're going to do. And I think it's also important that in thinking about these plant life extensions along the lines of your question is these are multi, multiyear journeys in these plant life extensions. So this isn't a spike that's going to come and you get a surge of revenue 1 year that drops off. I mean these are 5- to 10-year journeys of the work they need to do as they get these plant life extensions. And you look at the number of plants and the different phasings of those, this is a very solid business base that's going to be steady as we go forward.

Yes. Secular growth for sure. Let's shift over to the nuclear new build side. Increased -- we've seen more increased news flow out of Eastern Europe around potential AP1000 reactors. Let's talk where you are with that work. I think that's important. And of course, you're seeing some developing relationships with X-energy. Amazon plus Google and other are positioning themselves to pursue SMRs for their energy-intensive data centers. Are there 1 or 2 major players in the SMR space where you're playing favorites?

Yes. So just maybe starting with the AP1000, that's Westinghouse's Gen III+ large light water reactor that we've been partners with Westinghouse for several decades, really many decades to prior plants. But again, being in the industry since its inception. So it's meaningful business to Curtiss-Wright. We're engaged with them. The opportunity across just Eastern Europe, and I think it will go beyond that, but sizing things that have been made public, intentions to build large plants across Eastern Europe is 20 to 25 plants being built within over the next decade, maybe a little bit longer, but in that time frame. And if we assume Westinghouse wins half of them, which I think they might win more, but if you even just assume they win half, that's $1.5 billion of business for Curtiss-Wright, just to give a perspective of what that opens the door for us to have access to revenue for. So we have a great working relationship with Westinghouse. We're engaged with them, and we'll support them. And there's -- early days, people actually even mentioned the concept of building new large plants here in the U.S. and Canada, where that was [ forbidden ] for many, many years. So we'll see. But we're just taking just that Eastern European opportunity and sizing it. At this point, we think that's what will be first. And the news continues to move steadily. When we talked about reengaging with Westinghouse, settling some contractual issues we had with them back in 2022, we said 3 to 5 years that we expected a first order from what we knew. And times march forward and the line of sight to that just continues to get cleared. This year, we've said 1 to 3 years, and there was -- Poland and Bulgaria are kind of leading the charge of who most likely will be the first site build out, and every time you turn around, there's just a steady drumbeat of news. And Poland's reaffirmed funding for their first plant. And in Bulgaria, they've signed an engineering service contract, which puts us on the time line of really getting to ordering long lead material that very much supports that 1- to 3-year window. So it just gets more clear that, that will be something that will be materializing for us in the time lines we anticipated.

Yes. And just on the SMR space, you've had a strong relationship with X-energy. Maybe you could talk a little bit about that. I think that's been one I think that's a strategic maneuver for you.

Yes. So we -- one of the things that I think is an advantage with Curtiss-Wright is we actually have a great relationship with X-energy. But stepping back for a second, we look across the breadth of who are going to build the larger SMRs, not necessarily the micro reactors per se and some of those and are very much looking to be a meaningful supplier across that entire base of business and not being -- trying to focus ourselves only in on one of those. So we put forward -- we believe we're working towards having content on all of them, both the SMRs that are based on more Gen III technology, Rolls-Royce, Westinghouse, NuScale to have a minimum of $20 million up to $120 million across those, and the 2 advanced reactor technologies, which is TerraPower and X-energy. And we've been the most public with our content with X-energy, targeting having $120 million plus of content per reactor build out. And it was absolutely fantastic to see the announcement just a few weeks ago with -- between them, Amazon and Energy Northwest, with both -- some funding into them from Amazon and others, Citadel and some others. And then the intent -- the commitment to build the first of probably 3 reactors on the Energy Northwest power grid. And so really just cements the time lines that these things need to happen and gets kind of a -- get some funding push with that. But very much, we're engaged across all the major reactors and fully intend to make us sort of like you don't have to pick a winner and loser. By investing in Curtiss-Wright, you can invest in the belief that nuclear energy will be built and it will drive business to Curtiss-Wright.

Yes. It's just starting, actually. An AI query, I think, uses 10x the amount of electricity of a Google search. So this is really just ramping up, which is pretty material.

And along those lines, it was -- Amazon announced that with X-energy, which is clearly top of mind for us, but Google and Microsoft also announced things that they're intending to invest in that just shows the industry is going to change and some of that money is going to get behind accelerating this build-out, which is so needed, and not try and drive all the funding through the utilities that don't have anywhere near as deep a pocket as these tech giants.

Yes. The utilities are notoriously conservative, so the partnering up with the tech guys is great. Chris, I'm sure no one wants to talk about margins of the nuclear business. So let's talk about the opportunities. I think the operating margins in nuclear, historically, it's been really attractive. I can remember back when the China direct orders happened and how we used to always be surprised how strong it was. So maybe how should we think about the mix of aftermarket, SMRs and then large new builds for RCPs?

Well, the aftermarket business is a very profitable business for us. I mean, as Lynn mentioned, we've been in it in the inception. We've got very specialized skills, and the product portfolio that we have is extensive. So it really allows us to go on in there, and we're a lean organization as you've mentioned, and price effectively, but price profitably. So that's really a strong business for us and kind of underpins this low double-digit growth rate that we're going through right now and speaks positively towards the future. When you start to think about the AP1000 business, and that order coming in, in the next 1 to 3 years, which I think at year-end here, we'll even change the messaging on that, it is large profitable business. So each plant that goes into Europe is 4 RCPs, and the last time we negotiated pricing on those RCPs, they were -- several years back, it was $28 million per RCP. So you're talking about $130 million per plant and profitable business to Curtiss-Wright. I think one of the things that we have to maintain as we go forward is we want to be the best supplier to all of our customers. So we'll know more about the margins as we enter into the next commercial negotiation, but rest assured, it's something that we're very, very focused on. Right now, even though we're expanding margins for the organization for the year, we are investing greater than $20 million of incremental R&D year-over-year. So that's not -- development margins are typically a lot less than what you see in the production environment, but we're really building great product and capturing those strong growth vectors that you see across all different SMR technologies going forward. And eventually, that will turn into production. And as you look out across the targets that we provided, with low double digits through 2026, doubling the commercial nuclear business by 2028 and then that $1.5 billion of annual revenue, that will only continue to accelerate going forward.

Right, right. We look forward to it, obviously. How about your capacity? Given just enormous breadth of opportunities you've cited over the next 10 years, is there a limit how much kind of nuclear exposure you can actually accommodate in your plants today? Is there a big CapEx ramp on the horizon?

Yes. It's another great question. I mean as you look across all of our segments, and I know we're talking a lot about commercial nuclear today because that's where the excitement is, but there's growth really across all segments. And our backlog has grown in the high teens this year. So there's not a segment that doesn't have a strong underpinning as we head out into 2025 and beyond. So we spend a lot of time thinking about capacity. We think about capacity not only from a capital perspective, a facilities perspective, but we also think about the people that are required to do that going forward. So right now, I think we're in a great position to be able to execute on that strong backlog that we have. And looking out into the future, we don't see any immediate needs that would change the profile that we've had in capital expenditures, which has been about 2% of sales for quite some time and will be into the future. But we're also spending a lot of time on staffing. We're out there developing strategic relationships with top universities to get the best engineering talent to be able to support what's happening in commercial nuclear. There's a lot of trade people that are required in that process as well, so we're out there working with trade schools and increasing our focus on hiring and talent acquisition across Curtiss-Wright. It's not just about bringing new people in. It's also about retention. So we've done a lot of things over the past few years to ensure that people are not leaving as we're bringing new people in. But the future is bright, and I think should we find ourselves in a situation towards the end of this decade where we're talking and have a greater clarity over the $1.5 billion of annual revenue, it's possible we may have to greenfield the site. But if we're in a position where we're greenfielding a site, that's going to be a very good thing for our investors because that means that there's a lot of profitable business that's heading our way. So we're doing a lot in that area.

Terrific. Let's squeeze a few more in before our time is up. Let's turn to defense. You recently raised your '24 outlook in several of your defense markets, now projecting double-digit revenue growth in each, at least at the midpoint. Help us understand where you see the opportunities for growth given that you -- we began the 2025 budget with another continuing resolution, which we all know. And can this top line momentum continue as we think about going into '25?

Yes. So we feel really good about where we're aligned with where the defense spending is. And the top line growth is not great, not huge this year, it's coming on the back end of some very big growth years, but we don't feel constrained by that top line growth, that there's a lot of dynamics in our business and where we're aligned that we have really somewhat unbounded opportunities to grow. I mean, obviously, we have our big naval shipbuilding content that we lay out pretty clearly to the investment community across the major platforms. But there's other things around this. We can incrementally take on new work. We work very actively in the overhaul work across the shipyards. And we have an ever-growing international presence in shipbuilding. So as much as you can lay out, it's 2 Virginias a year or whatever for things. We do a wide variety of things to give us the opportunity to grow in that space. And then you move out of naval and talk aerospace and ground. On ground, our tactical communications capability that came to us through an acquisition 4 years ago is seeing quite dynamic growth. And just the needs of the interconnectivity on the battlefield and getting information to the war fighter in a real-time, meaningful way that takes all this great technology we're deploying, it's only good if you get it down to the individual soldier to make a decision on, and we are right in the middle of all that. So that trend across all of the branches of the government, we're very critical to, and also building the systems that are able to collect the data from those sensors, do the high analytics on it and turn it into actionable data. So our product, our portfolio, is state-of-the-art. We've talked a lot, for those of you who've heard us talk, about our MOSA- and SOSA-compliant product offerings. We're very proud. We have -- I feel very confident we have an industry-leading capability in that space. The teams that develop products there, they're innovative and use their R&D dollars very wise to bring a very broad, very state-of-the-art offering to the industry. And I feel very good about where we are in the sales team that goes out there and shares those products across the world. And again, in those spaces, we also benefit from increased spending across the NATO countries as we have salespeople across Europe working directly in those countries and various capabilities that are part of capturing that increased spending that's directly in country on top of obviously buying equipment from the U.S. And so our position is great, and we definitely don't feel bounded by defense spending on our ability to grow.

Yes. You've got great growth tailwinds in your defense business, particularly Defense Electronics. Finally, last, we got a minute left. Let's talk about capital allocation. Recently announced your second commercial nuclear acquisition. You've done some buybacks that have been completed. Preferred balance of M&A, share repurchase, how do we think about things in '25?

Well, with 48 seconds left, I look forward to talking to you guys in the breakout room more about this. But historically, we've got this great margin expansion that we've talked about. We've also done some really tremendous things with free cash flow. Over the past 3 years, we generated nearly $1 billion of free cash flow that we deployed towards high-quality acquisitions and share repurchases. We still believe that we're a bargain out there in the market as evidenced by our most recent announcement to repurchase another $100 million of shares. But at that same time frame, we averaged -- the last 3 years, we averaged 108% of adjusted free cash flow conversion. So we like getting our cash in before we do the work. That's kind of how we operate. And as we look out across the next 3 years, we're planning on generating $1.3 billion of free cash flow. So we have a very, very solid balance sheet. We're really well positioned. We have a strong history of buying high-quality acquisitions at low prices. We're looking for critical adjacent technologies that will help to supplement all that great organic growth that we have currently inorganically. And beyond that, we believe in returning capital to shareholders. We did $450 million the last 3 years. We're on a pace to do that again this year, and it's a great balance sheet to work with.

Perfect way to end. Thank you all for joining us.

Thank you, everyone.

Thank you, Lynn. Thank you, Chris. Thanks, everyone.

Thank you.