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

Good morning. I'm Louie DiPalma. I cover aerospace and defense on William Blair's Equity Research team. This is the second day of the 45th Annual William Blair Growth Stock Conference. We're pleased to be hosting a presentation, with a few questions at the end, with Curtiss-Wright's management team. Joining me today are CEO, Lynn Bamford; CFO, Chris Farkas; and Head of Investor Relations, Jim Ryan. I'm required to inform the audience that a complete list of disclosures and potential conflicts of interest are available on our website at williamblair.com. Lynn will provide an overview of the business and then we'll have a couple of questions. So Lynn, thanks for being here, and please take it away.

How do I advance the slides? Sorry, I'm zipping in last minute. This? So good morning, everyone, and thank you for the invitation and the chance to be here again for the second consecutive year. So it's my pleasure to have a chance to speak to you today about a lot of really great things going on within Curtiss-Wright. And I know there's probably -- I see some familiar faces I know I've talked to before, and so a lot of familiarity with company, and some people that probably aren't. So I'll try and strike a balance to make this relevant for everybody. I'm obligated to say today's presentation will contain some forward-looking statements that contain risks and uncertainties. These are outlined on our website. Check for Jim; I've accomplished my goal there. So what are the big messages today? We launched our Pivot to Growth strategy 4 years ago, and it really was building on a lot of years of success in the company and making the company well positioned to really start to focus on growth as a corporation. And so I'm the recipient of a lot of work for a lot of years that I've been with the company, well over 20 years, participated in, and really fortunate to become the CEO at a time where we could take this inflection point and begin to focus on growth. And it's definitely working. And as you can see from our results, we are very much holding momentum in this area. Over the past 4 years, something that I think is very important is, as much as we've invested, and we talk a lot, and we will today, about the technologies, our end markets, how we're positioning ourselves competitively in those end markets, we very much equally put focus on how we manage ourselves as a company and the structures inside of the company, how we develop talent, how we attract talent, to assure that we're setting the stage that we will be a successful supplier delivering on that growth, that we're winning. That's an important part, I think, that is driving the operational success in the company, is we're paying attention to both sides of that equation. And during that time, we've continued to drive strong financial results, and you can see that by looking at some of our recent earnings calls or possibly looking back at our Investor Day presentations, our first one in 2021, and then May of last year, and how we've put forward financial targets and have a track record of achieving those financial targets that we put forward. The 50,000-foot view of the company. We celebrated our 95th year of being traded on the New York Stock Exchange. I got to ring the bell last summer. That was fun and kind of a good, celebratory time across the organization. And I think the importance of that 95 years is that, in many of our end-industries, we have been in the industries since the inception of those industries, and we'll talk more about some of those. But whether that's, obviously, the legacy of the Wright Brothers, and hence, the name Curtiss-Wright, Glenn Curtiss and the Wright Brothers, so since the inception of aviation, but the inception of navy nuclear, commercial nuclear, defense COTS industry, many other parts of avionics that have developed over the years, that we have built history and knowledge of industries. And with that, we've grown to a company that does service diversified end-industries. But the thing that stitches us together is, across all those industries, we very much focus on products that are highly engineered, very specialized capabilities that perform in must-not-fail applications where the performance is, in most cases, safety-critical to the people in those environments. And so we like those challenges. We specialize in those challenges. We've honed our capabilities on how we assure we deliver quality and produce products to the standards of those industries. We're just under 9,000 people at this point in time, of which about 2,000 are engineers. So we have a very strong engineering workforce. And one of the things we've done over the past several years is really figure out how to help empower the engineers to collaborate better across the organization and know that skill set exists within the organization, and bring it bear, to take the technologies we build for one end market across multiple end markets. And that aspect has been key to some of the margin expansion we've been able to drive. This is sort of a summary of what I just mentioned about the things that we are doing inside of the company. We launched our Operational Growth Platform hand-in-hand with the Pivot to Growth. And I think this really shows the balance of focusing externally on where we can grow and making sure we're doing the things inside the company to maximize the profitability of that growth. And whether that's thinking about things like commercial excellence on top of operational excellence and supply chain excellence, that these are all programs we've put in place, that we make sure we're bringing the best practices from the individual businesses across the corporation -- across the entire corporation and really bringing up all the businesses that are within the organization. So it's been a great program that's been part of the great success we've had where, over the past 4 years, we've grown our R&D investments above our sales growth, which has been very strong and, during that time, expanded operating margin with a nice significant extension this year that are -- is in our current guidance. And with that, it has allowed us to really deliver compounding earnings growth in the mid-teens that we believe we can carry forward, while generating great free cash flow. The underpinnings of the Pivot to Growth strategy and how we think about it from a business model standpoint is fairly straightforward. But it's really, I think, in how you execute on it that makes -- the strength of Curtiss-Wright, that we continue those programs where we're continually looking for how we can drive cost efficiencies in the business. We have a current consolidation program that's going on that some people ask me: Why do you do that when you're delivering such great results? And it's really just who we are as a company. We don't ever stop looking at ourselves for areas that we can drive efficiencies in the business and just tackling those things. And we take those efficiencies and we've committed to both delivering those to profitable growth to our shareholders by incremental expansion of operating margin, but also pouring those back into the business to build on the positions we have. And we've done that quite effectively over the past 4 years and it's really resulted in some exciting new capabilities we're bringing to market across our various end markets. And we'll turn to those end markets here in just a second. But one of the things, before we turn to the end markets, is I'll take a second and talk about the philosophy for how and the approach we take to how we pick where we deploy our R&D. And this is a big focus, I believe it's a very fundamental strength of the company, is how we deploy our engineering resources. And that's both whether they're internally funded or on customer-funded projects, about really targeting those in the areas that are going to drive the best long-term profitable growth for the company. And really making sure you're analyzing those, and just because the customer shows up with a check doesn't mean that that's the right way to deploy your engineering workforce. And so to do this, we've implemented a variety of strategies, from launching our innovation platform, which really allows collaboration across the entire enterprise around the globe, reaching to every employee literally across the globe, and to be able to see ideas that other people have and share -- they have or market experiences that could help build on that. And it's really just completely increased the amount of collaboration across the organization. It's been really great to see that it is not needed to be a push from the top, that the employees want to do it, they love to work together across the teams and they just take it upon themselves to go do these things and pitch in and help each other out. With that, we've really considered how we evaluate the return on investment and other financial metrics for various investment projects. And again, we do this at a corporate level. There's certainly a lot of decisions that are driven in the business unit level. And we always want to strike that balance where we leave decisions down in the businesses to assure we're remaining nimble in those businesses, but also making sure we target the biggest, most important investments and make sure we fund those as a corporation. As we think about those investments, I want to touch on a couple of things across 3 of the secular growth trends in some of our key markets, and then how we think about those investments and targeting those across both the near term, the midterm and the long term. Because it's very important that, with a 95-year history, you have to be planning for next year's success, the back-half-of-this-decade success, but success out in the 2030s and 2040s. And we very much manage that, the company, in a manner to assure we're going to be here for many, many years to come, continuing to grow market share and deliver value to our customers. And if I think of maybe the carbon -- the push for carbon-free is one of the examples. Right now, in the near term, we're making sure we're doing the things to support the aftermarket and the extension of the lives on the commercial nuclear fleet. In the midterms, we're doing things to make sure we're ready to build out the large reactors that are coming, as an example. And over the long term, we're positioning ourselves to be a critical player across the various small modular reactors. And you can see the examples, whether it's battlefield technology, things around the electronics we provide in naval shipbuilding where we're definitely doing things for the next couple of years, the rest of this decade and into the next decade to assure Curtiss-Wright is going to continue to just grow as a company. If I take a second and touch on each of those 3 end markets. When I think about our Navy footprint, it's pretty strategically important. And we have a comment that the team is considered a national asset to our U.S. Navy. And I know that from relationships we have across the highest levels in the Navy, of the importance they see of the work that Curtiss-Wright does. And that is our content on really all the major platforms as a critical supplier in the propulsion equipment and critical operating equipment on the various platforms. And again, when I talk about things we're doing here, to build for the long term, we're very active in building our content for future generation platforms. Specifically, we talked at our Investor Day about SSNX, which will be the follow-on to the Virginia sub, and believe that we're targeting 2 to 3x the content on that platform than we have on the Virginia, which is significant content. And again, that's a reflection of what the Navy sees as the capability Curtiss-Wright has and how we can deliver value on those platforms. Moving to the next area, just to touch on for a minute, of Defense Electronics. Again, we're doing things that -- very tactical things, releasing new products that are going to secure the future, and things that are very much building for years to come. We launched our partnership with NVIDIA, announced it -- launched it a while ago, but announced it a couple of months ago, to bring a whole new capability of products to market, to really build out our electronics capability and take that computing to the tactical edge of the battlefield, which is very much, if you look into the priorities that are in FY '26 budget, the Reconciliation Bill, we're very well aligned with where they want to take the technology in that space. You think of what Golden Dome will be and the networking together of a lot of systems to make them operate as a unified capability across various ways to protect the country, many of our capabilities will absolutely be critical players in that place. So again, we'll be at a Golden Dome Industrial Day next year -- or next week, excuse me, doing things to make sure that we're positioning ourselves for growth across many of these areas. And this team also has a very meaningful footprint across Europe. So as the NATO countries look to increase their spending, well above the 2% that has been the historic goal, that eventually many countries have moved towards, we're very well positioned to grow on the backs of that and have been already experiencing that growth over the past couple of years, and see that as continuing to accelerate. Lastly is touching on our nuclear footprint, which is, I know, a big area of interest and something pretty unique for Curtiss-Wright, of being a company that you have a lot of different angles of the nuclear industry. By investing in us, where our footprint is, that we have the opportunity to grow in. And as I mentioned, whether that's the aftermarket, the plant life extensions, the restarting of nuclear power plants here in Canada, in South Korea. That is the business that we've nurtured for many years and participated in, again, since the inception of that industry, and see great growth in our ability to work with those plants for them to meet those operational needs. We've had a partnership with Westinghouse for many years. And things seem to be very exciting for them as the opportunity to build out in Eastern Europe, which we really focused on in our Investor Day a year ago as being so meaningful for Curtiss-Wright. And then with the executive orders challenging for 10 new large reactors being built in the U.S. and under construction by the end of this decade, is [ surely creating ] opportunity for Curtiss-Wright, on top of the market we sized at our Investor Day that you can find inside of that presentation from last May. And so really there are so many things here that are great. When I think about the small modular reactor opportunities, we've very much made the focus that we are going to hopefully be a meaningful partner across all the larger small modular reactors, all the major players. So regardless of who wins build-out across the globe, it will be good business for Curtiss-Wright. And we're doing -- the team has done a great job in really moving towards that. We've targeted our content across the SMRs at anywhere from $20 million to north of $120 million in content. So I mean, this will be meaningful growth as those reactors get pushed forward, and there's a lot in the executive orders trying to push the time frames for when those SMRs will be, being able to be built. So that's another thing that's very much in the future for Curtiss-Wright. We've had great growth over the past couple of years, but there are so many things that are still to come that we haven't really started experience in our revenue growth. And that's one of the important examples. Turning from our end markets to the allocation -- both Chris and I in how we manage the company and think about very judiciously and carefully allocating what we have within the company, that we've very much been able to have a balanced approach where we're very purposeful to say acquisitions remain our highest priority for our use of capital. We have a very good pipeline right now and hope to be able to continue with some even more meaningful acquisitions than we've executed on to date for the corporation. But we absolutely will put our capital to work. And whether that's operational investments in the company or returning capital to shareholders through share buyback or dividends, is very much -- we very much implemented that over the past handful of years. You can see the numbers here of how the money has spread. And we've just increased at our Board meeting a couple of weeks ago our authorization for share buyback. And so we're looking at the pipeline. We evaluate the value for doing share buyback. And we very much believe we're still a very good value and there's a lot to be had there. So that is still actively something that we are evaluating. And something that the financial minds very much want to see is we very much allocated that capital and delivered very strong ROIC returns for our investments over the past 4 years, delivering over 400 basis points of expansion. And again, I think it's important to note, we've done that while increasing our R&D spend, while integrating acquisitions that are very frequently dilutive and making meaningful investments in CapEx. So that's something that we're pretty proud of as a leadership team that we've been able to deliver on. Looking back at the financial targets we've put out in our May Investor Day last year of delivering the 5% organic sales growth over the 3-year window, and again, very much emphasizing that does not include new orders for our reactor coolant pumps as part of the AP1000 build-out, that that is incremental to this. And we chose to just leave it out because it can be such a meaningful flashpoint that skews how you would go about picking the numbers. And we really want to emphasize, we got very solid growth across our businesses, across our various end markets, and we're very much focused on growing the entire portfolio. And the RCP orders are a great thing and will be great for the company when they come, but that's -- we manage the entire portfolio and assure we're driving that growth across the board, and feel confident that we'll overachieve on that 5% target over the 3-year time frame, and deliver on the rest of the financial targets with expanding our operating margins, delivering top-quartile performance. We touched, mentioned earlier, but we're well above the 10% EPS CAGR and really have been able to compound that mid-double -- mid-teens double-digits earnings growth, and are continuing on that trajectory, and that's something that's very important. And delivering on cash flow well over 100%. I think it's important to come back to this slide. This was in our Investor Day about a year and a few months ago. And these are the numbers that we could see at that time, based on what we knew in the industry and how we saw our commercial nuclear business growing, doubling by 2028 and moving to a $1.5 billion run rate by the middle of the next decade. And really, I think the thing to note here is this situation has only gotten meaningfully stronger since we put the slide up. We're not going to talk about new numbers today. But I mean, minimally, if you talk about the 10 large reactors to be under construction by 2030, that's an addition $1 billion of potential market share for Curtiss-Wright during that time frame. And that was not contemplated in these numbers that we put forward. So to wrap up: Why invest with us? I think our Pivot to Growth strategy is working. We are building momentum in our end markets. We're well positioned with great technologies, great customer relationships. We're building a company that's prepared to deliver on the growth successfully for our customers, and are very focused on delivering strong financial performance. Thank you.

Great. Thanks, Lynn. And I think on Slide 14, you showed the 3-year financial targets that you laid out at the Analyst Day that was roughly almost exactly 1 year ago today. Can you update us on your progress relative to those 2024 Analyst Day targets? And circling back, you just made the comment that, as it relates to that $1.5 billion TAM for Eastern Europe associated with the RCPs, that today the opportunity is meaningfully stronger. And so can you provide more color on why it's...

I'll ask Chris to talk about the financial targets, and then maybe I'll talk a bit about the TAM.

Sure. So the first financial target, and Lynn, I think, covered this very well in her presentation today, is related to sales growth and exceeding a 5% organic sales CAGR. We targeted to do, across our defense markets, a mid to high single-digit growth rate, aerospace, defense, ground defense and naval defense. And if you had taken a look at the FYDP, our international plans for spending when we were at our Investor Day, you would notice that they were significantly lower than that. So we've got some really great things that are kind of going on in the portfolio. Lynn touched upon within Defense Electronics, and then more broadly in trends and increases in foreign military spending and also defense aftermarket that are contributing to meeting or exceeding those growth rates. Commercial aerospace is on a multiyear ramp. We're heavily OEM focused. So the future is bright in that regard. You saw the eye-popping numbers on commercial nuclear. Lynn will talk a little bit more about those in a minute. If there are 2 areas where maybe we're a little bit more challenged, it's in the process market. But we do have some exciting developments in subsea pump technology that we're working on right now that are going to produce some big returns for the company as we get closer to the end of the decade. And it's a very challenging time in the general industrial market, particularly for industrial vehicles. But I do think that the team is doing a solid job there. But that will be a little bit more challenging to achieve. But overall, we're on a great growth trajectory from an organic perspective. The other KPIs that we set for ourselves, we said operating income would grow at a faster rate than sales, which implies continued operating margin expansion, and that we'd also be in the top quartile for operating margins, which for this year for us is 18.4% at the midpoint. Obviously, that cultural -- we have a deep cultural expertise in commercial and operational excellence that's contributing to that remarkable stability and consistency in performance in that regard. This year we'll expand our margins another 90 basis points while increasing R&D investments and while covering the initial dilution from our acquisition of Ultra Energy at 12/31. Beyond that, you saw EPS growth -- or an EPS growth target of 10% or greater, CAGR -- [ profitability ] that we've talked about from sales, it's the margin expansion. But it's also balance sheet efficiency, tax efficiency and then capital allocation. It's a very -- we're generating close to $500 million of free cash flow this year. And it's very important for us to put the money in the right places to contribute towards that earnings growth. Just as an example, this last year, in 2024, we bought 2 high-quality commercial nuclear businesses for $240 million, both under 12x EBITDA. And we bought back $250 million of shares. And we stayed off of our revolver. So we really have a great balance sheet. And then lastly, I'd just say free cash flow conversion over 105%. And we also committed to generate $1.3 billion of free cash flow over a 3-year period. Much like what you saw with the margin expansion over the past decade, we have been consistently above 100% free cash flow conversion. We are very, very focused on ensuring that working capital as a percentage of sales comes down over time. That's improving the speed of inventory throughput through our shop and collections. But this year, with that $500 million of free cash flow and 2 years through our journey generating nearly $1 billion of cash, we're well positioned against exceeding that $1.3 billion cumulative target over 3 years. So we're doing real well and building momentum.

Thank you for that. And then touching back on the second part of your question about the available market. There was a lot in the 4 executive orders. This framed the world as we saw it a year ago. And there was a lot in those executive orders that really only enhances these numbers. And starting with the aftermarket, there was a target of several hundred gigawatt of upgrades on the current reactors. Again, that is good and drives more aftermarket work for us. So again, for that portion of our business, which is the dominant portion of the revenue today, that's a very good directive. Talk now of turning 2 more nuclear reactors, bringing them back online. That again is very good for us. So that's in things that were in there around the aftermarket. Obviously, the building was not part of that $1.5 billion that's in the first bullet there. That $1.5 billion was really sized fairly conservatively out of only Eastern Europe and declared plants across various countries there, they're kind of outlined at the bottom, that has again only continued to take form. Poland and Bulgaria are very much leading the charge in a bit of a foot race, you could say, to see who's going to have the first AP1000 build-out in Eastern Europe. So that was that $1.5 billion. The 10 large reactors in the U.S. should be an additional $1 billion of business for Curtiss-Wright, in that portion of the executive [ order ]. Within there, there's the target to 4-fold increase the amount of nuclear energy on the grid by 2050, which is just explosive. And whether that will be more large plants than the 10 that are in the executive order, most likely it will, but it absolutely will include a lot of the small modular reactors to be built out across the country to be able to meet that demand. And again, we're really pleased about the footprint we're building, whether it's across Rolls-Royce, X-energy, TerraPower, NuScale, the main players in this area. We have our relationship with Westinghouse on the AP1000, which the AP300 is essentially a smaller version of the AP1000. So again, we're very well positioned across the various providers to be able to provide those. And so how that changes that $1.5 billion, we need to see how some of these things play out before we maybe take another refresh of this slide. So it's early days. But really, really important moves in the industry for Curtiss-Wright.

And the slide just mentions how Poland and Bulgaria are in production. Do we know how many plants are being contemplated for those countries?

Yes. So Bulgaria has declared they're going to build 2, and that's what their initial contract will be. Poland has stated they want to build 6 large plants. They're moving towards contracting 3 with Westinghouse by the -- really towards the end of the year. And they've really marched through -- these are their first nuclear reactors, and so there was some skepticism whether they'd be able to hold to the time lines. But they really have, and they're in their final engineering studies that will go through the end of this year, which is really should be the last step before them negotiating their contract with Westinghouse that should lead to our long-lead material. And we've been stating that we anticipate getting those first AP1000 orders in 2026. So that's pretty exciting for the company. And again, I'd remind that's outside of the 5% growth target that we put forward at Investor Day.

Great. I think we are out of time for the main session. We are going to continue the conversation in the breakout session in the Jenney B room upstairs, in which we will talk more about Poland and Bulgaria. Thanks.