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

Okay. Okay. Thanks, everyone. Good afternoon. My name is Peter Arment Senior Aerospace Defense Analyst here at Baird. We are delighted to have Curtiss-Wright with us. Thank you back for joining us. With us Curtiss-Wright, we have Lynn Bamford, who's Chair and Chief Executive Officer; and Chris Farkas, who's Vice President and Chief Financial Officer. Lynn, Chris, welcome. Thank you very much for coming back and supporting the conference. Appreciate it. Let's jump right into Q&A, right? No opening statement, right.

Good. Okay. We'll jump right in. So maybe we'll get to the nuclear, relax, everyone. We're going to start in aerospace defense briefly which supports -- when we think about aerospace defense, supports about 2/3 of your portfolio today. You've recently raised your '25 outlook in several of your defense markets are now projected to grow 10% to 11% revenue growth in aerospace defense. What are some of the key drivers you think about growth this year? And then you can give us some early indications when you're thinking about '26?

Okay. Thank you for that. And I really sincerely want to say thank you for having us back. This is a fantastic conference, and we're pleased to be here. I am obligated to say that today's statements will include some forward-looking projections with risks and uncertainties that are outlined on our website. So with that, I just -- I see a lot of familiar faces here. So I know a lot of you do know who Curtiss-Wright is, but in a snippet, who we are as a company is we are a complex engineering design and manufacturing company that builds a lot of critical components that are highly engineered and often are part of must not fail systems that have safety-critical applications. In many of our end markets, we've been in those markets since the inception of the markets and obviously, the name Wright comes from the Wright brothers. So aviation and aerospace, a lot of people don't utilize that, and I just got a couple of looks that indicated that. But from that to Navy nuclear to commercial nuclear to the birth of the COTS electronics industry. So we're proud of that because we really are seeped in these industries and know the market dynamics and know our customers. There's a lot of things going on, a lot of different market growth vectors going on across our various end markets that are really providing solid projections of growth going forward. And Peter has asked about one of those, and we'll come to that in just a second. But we launched our Pivot to Growth strategy 5 years ago. It's focused on driving organic growth while driving ongoing operational excellence and delivering strong free cash flow and it's really provided great value to our shareholders as we've moved to the point where we're compounding earnings at a mid-teens rate over time and generating strong free cash flow. So sort of a quick snippet of the company. If you want to learn more, you can go to our website and see our last earnings call and look at our Investor Day from May of 2024. But turning to defense -- aerospace and defense. It is about 2/3 of our portfolio, and I'll just start out in commercial aerospace because it's not -- it's a smaller portion of the segment, but it's got the highest growth rate at 13% to 15% within our A&D markets. When we got really solid positions across all the major Airbus and Boeing platforms that as they look to see a ramp going to the future, we think we're well positioned and don't really see ourselves in a from what we can tell in a destocking position across those, we believe we're going to be afforded a ramp in revenues as those platforms ramp. And it's not just the content we have, we're always bringing new capabilities to market whether it's sensor technologies or surface tech to meet the future demands as the platforms evolve and temperatures and the engines go up. We're right there winning new content. Another thing we've talked about recently is we've done this for a while, but it's really started to ramp and drive some revenues in the commercial aerospace is our 25-hour flight data recorder. And I won't go into too much detail here but it's been mandated by the FAA for all new builds and a retrofit of the Boeing planes that are out in the field and a lot of regional jets, and we have our partnership through Honeywell where we're delivering that. EASA has also mandated that across the European markets, and we're working with Airbus to achieve certification on the Airbus platform. So that's really just started ramping this year and has got a great growth trajectory through the back of our -- back half of this decade and beyond, quite frankly. And so that's commercial aerospace not -- doesn't get quite as much the talk time. So I thought maybe I'd lead with that. But across our defense businesses, we have very solid positions really across ground, naval and aerospace predominantly here in the U.S., but we've got great positions in Europe, which as NATO considers ramping its spending, and we're beginning to see early signs of it. We're well positioned to be aligned with that. And if I look inside of the '26 budget, naval shipbuilding is a priority. We're on all the major platforms. Again, content is in our Investor Day presentation from 2024. You can go through those numbers in there. So well aligned there. And then all things about increasing the superiority, air superiority, golden Dome, various defense systems fit very nicely into our defense electronics capability and the really interesting new capabilities we're bringing to market continuously in that space as long -- as well as our footprint across Europe, where we've always had sold directly into the European defense industry. That positioning those relationships position us well as they ramp spending were there. And one example that's particularly exciting for us is our partnership with Rheinmetall to do turret drive stabilization equipment and other things that as a lot of the NATO spending really will be geared building ground vehicles, we're very well positioned there.

Perfect. That's great. So a lot of growth drivers as we enter next year. A lot of good tailwinds. You mentioned last week on last week's earnings call, I spoke about how you -- kind of the bullish pipeline in defense electronics, maybe give us a few examples on what's driving that optimism. I think that's -- and obviously, there's some really strong margin performances when it comes with?

Thank you. And if you're not familiar, our Defense Electronics business is about $1 billion business that is the highest margin performing business across the portfolio. And there's a lot of things that have allowed us to operate in that manner for many years at this point in time. And one, the business goes to market from a commercial standpoint, if you listen to stuff in the Defense Department, the push for commerciality only continues. There were stuff in the forge in the SPEED Act or stuff the secretary head set talked about just last week, and it very much fits our go-to-market strategy. So I talked a little bit before about some of the programs where we're well aligned. But I think it's really important to know kind of what we're doing to assure our leading position and bringing value through the products we offer that even though we're going to market commercially, you need to bring the value to drive the types of margins we have. And just a couple of examples. Forces that are very strong in that market is compliance with the MOSA SOSA CMOSS mandate. This year, we'll bring over 20 products to market aligned with those open standards. And that's just very important. I know it's probably a hard number to completely digest if you're not familiar with the industry, but that's a significant amount of new product introduction, broadening our capability and broadening where we can take in different applications we can play in. We've talked a little bit about our NVIDIA partnership. We are now shipping our embedded Blackwell products to customers, the demand is great and we were the only company to demonstrate a running embedded Blackwell processor at the GTC conference just shortly ago, our Fabric100 product offering is out in the marketplace. It provides the highest speed internet between the computing element that's available in the industry and a very specific unique differentiator for Curtiss-Wright. And then just to name one that's a little more off the beaten path is we've recently had some of our small form factor products achieve what is considered Microsoft Azure validated. And with that, they are put in Microsoft's Azure catalog, which has a customer reach that I don't even know if we fully appreciate what kind of doors that's going to open up to a company like Curtiss-Wright. So it's early days but we're really pleased with that. And I really listed things out to just try and put some specificity on the things we're doing with that IRAD, we spend in this group to make sure we're always looking for new applications, new places that we can push our available market and go win new content.

That's terrific. Well, and just if you didn't see 29% operating margins in the third quarter, defense electronics. So tremendous performance. So really, really a great growth story and a great margin story. Let's shift a little bit. Let's let's think about -- how do you view Curtiss-Wright's exposure to Golden Dome?

Yes. That's -- I didn't maybe barely mentioned it before, but this is very well aligned with how we have product offerings. And if you think of what Golden Dome is to do for the United States, it's a combination of 3 major buckets of technologies. There's the sensor technologies that's looking to find anything that's coming towards the United States. There's the effector technology, which is to defend against anything that's coming at the United States. But most importantly, what's new is the networking capability that ties all these different systems together into a unified defense system across the country. And so we have been in this industry for a long time, we have not just our electronics, but our electromechanical actuation products on many of the products that are the sensors and effectors. So we're well positioned there. But our tactical communications capabilities is really embedded in the 3 main approaches that are being decided how they're going to work together to form this command and control capability that ties these networks together and we are well entrenched in the 3 different approaches that will be intertwined to build this networking capability. So it's very -- it's going to be a fantastic opportunity for Curtiss-Wright. A lot of the networking configuration is classified, so it's not something to be talked about. And it's early days, we don't have content yet. It would be too premature to talk about that. But a lot of very senior level conversations and it's going to be very positive for Curtiss-Wright.

That's great to hear. Another area, I think, where you're seeing -- continue to see benefits is related to outside of domestic spending NATO and kind of sort of allied spending. And obviously, we know that funding is accelerating. How do you think you're positioned there to benefit?

Yes. So maybe just I'll talk a little bit about our direct foreign military exposure, Peter, not where we're selling to the F-35 or F-16 or Stryker, which is then sold internationally, but where we're selling direct to international customers. I think, first, it's important to note that we have a very broad defense portfolio across Curtiss-Wright. We're selling both domestically and we're selling internationally. When we're selling internationally, it's the NATO and allied countries. And we're selling products into the aerospace defense markets, the naval defense markets and the ground defense markets. So just some examples to build upon what Lynn was saying in the aerospace defense markets, we're selling embedded computing to European fighter jets. We're on all the major platforms here in the U.S., and we've got great content on the major platforms that are over in Europe. But we're also selling arresting systems, ground-based arresting systems so that you can land those aircraft and locations. You look at the naval market. And while we're selling embedded computing equipment, we're also selling like rotorcraft arresting systems or towed sensor arrays that go on the back of frigates, and that's to NATO and allied countries. And then within ground defense, we've got a great tactical communications business. And then in addition to that, we sell things like turret drive stabilization systems that go into ground vehicles. And if I dig a little bit deeper into ground defense, that turret drive stabilization systems business that we have has a great relationship, a long-standing relationship with Rheinmetall. We've been working with them for a number of years. You probably all heard in the news earlier this year, there were some announcements regarding Germany's intent to procure $30 billion worth of ground vehicles going forward, 3,000 to 3,500 boxes. We released some press releases earlier this year where we're actually selling product to drive stabilization systems, not only to the Boxer, but to the Hungarian Lynx to the Panther and other vehicles. So these are some of the things that are actually influencing our results. And the order book has shown tremendous growth. Over the past 2 years, revenues in this area have grown at a mid-teens pace. This year, they're growing at greater than 20%. It's 10% of our total business. So it's $335 million. Now so great momentum. But then as you look forward, and we've all heard the statements that have come on out of the NATO Secretary General, Mark Rutte statements recently where he said, "Hey, we need to move this NATO spending from 2% of average GDP to 5% of GDP going forward. And that's a very favorable thing for Curtiss-Wright in the way that we're positioned. Rheinmetall is particularly well positioned to benefit from that, and we'll certainly leverage our customer relationships to be the best supplier that we can to help make them successful in that going forward. But as we look out, we think this is a strong area of growth for us, and it will help to accelerate that already strong base that we have in defense spending going forward.

Terrific. So we've got strong tailwinds across the board in aerospace defense, both domestically and abroad. Let's shift to the topic du jour. Let's talk about little nuclear. So last year, when you were here, we were discussing kind of the expected increasing news flow out of Eastern Europe and the potential for AP1000 reactor orders. And clearly, I think a lot has changed also domestically. We've seen the administration's executive orders and most recently, $80 billion in funding that is going to be earmarked for nuclear. And so how do we think about this U.S. and Europe opportunity for Curtiss-Wright?

Yes. We've reflected a little bit with a couple of people today on how exciting this was a year ago and how much new things have come even in the past year. It's pretty amazing. But to frame our nuclear business really just again for people less familiar with in the room, it's about 12% of our revenues. And it's dominated 90% in the aftermarket business, which is mostly here in the U.S., but has a global footprint. And that's really keeping the existing reactors online and being able to extend those life cycles from 60 to 80 and most likely to 100 years over time. And so that's a good healthy portion of our business that's growing very nicely. We're also very active with the SMRs, but to touch specifically about the AP1000, this is fantastic news. The executive orders were really great. And there's one thing to target building a nuclear power plant, but you need the whole infrastructure around it, whether that's fuel, a willing NRC, a workforce. And the executive orders really covered all that. So it really set the stage for the revitalization of a successful nuclear industry in the United States. And this announcement, we put out Investor Day targets that had strong growth targets in this area. And none of this U.S., you can see them in our Investor Day presentation from May of last year. And we really didn't have any predictions of new AP1000 builds in the U.S. And so that's all incremental on top of that. And this is really meaningful business for Curtiss-Wright. And we're in the middle of a lot of capacity planning with Westinghouse and figuring out how we're going to ramp for this. But this is a fantastic growth driver that's going forward. And we didn't include it in any of our 3-year Investor Day targets that we gave last year. So this is incremental revenue to those targets. But at that time, we talked about getting to a $1.5 billion annualized revenue rate by the middle of the next decade, and that was before these announcements. So that surely layers a lot of additional revenue into our projections going forward.

Yes. And just to be clear, because we -- this was talked about last week on the earnings call. So AP1000, you are the only one in North America that can make a reactor coolant pump to support that. You have an exclusive relationship with Westinghouse, 4 reactor coolant pumps per reactor. It's one of your higher price point products and also a very attractive margin. I know we haven't discussed the margin opportunity for that, but we know it's previously from what past history was. So this is clearly -- and there's some incremental content as well that you have with AP1000. So maybe you could just highlight that it's not just for reacting coolant pumps.

Yes. Very, very good point. Thank you for bringing it back to that. So we laid out, again, this $110-plus million of content for the reactor coolant pumps. In prior contracts, we had, say, $10 million to $20 million of other equipment that we supplied into each plant to build and reactor build, I should say. And we're looking to double -- ideally triple that content per reactor, putting our content up more in the nature of $150 million per reactor. And we're still working opportunities that we're trying to be the best supplier we can to Westinghouse and where they have need -- supply chain needs that were there to meet them, and we're working hard to be a rock solid. So you can take that content, the number of plants. Eastern Europe is still going. It's still -- today, we still think that the Eastern European opportunity, whether it's Bulgaria or Poland, will drive the first orders. But believe me, in the U.S., whether it's these -- the funding from these 10 plants or the [ Fermi ] opportunity, there's a lot of horses in the race that are heading down with a pretty close alignment. So...

Yes. So Bulgaria, Poland, potential order for next year, right? I think that's kind of the timing. And then obviously, this all from America is happening at a pretty fast clip. And it seems like you've got huge support from not only the administration, but both sides of the aisle and for nuclear is very, very supportive.

It's been great to see that the ARDP program started in the prior Trump administration. It was very well supported through the prior administration and continues to be. And thank you for mentioning that. We've been very steadfast in saying the time lines of when we believe this would turn into an order, starting back in 2022, and we have held that exact cadence, and we do feel confident we're going to get an order next year. And again, that was not in our 3-year Investor Day targets. And we feel very positive about the possibility of it coming.

Great. Great. And then let's just quickly move over to kind of thinking about SMRs. So Curtiss-Wright has also discussed align with several of the major designers and advanced SMRs. Maybe if you could remind us and maybe content on some of those designs and when you would start to think of those start to ramp to revenues.

Yes. So when we talked about the size of our nuclear business, the 90% is the aftermarket. The 10% today is paid for design work we're doing across the various SMRs. And when we think of the SMRs that are of the size that they're relative to our capacity, it's X-energy and TerraPower, who are the RDT funders, but Westinghouse has a small modular reactor, NuScale, Rolls-Royce are the predominant ones where we have the most significant content. And we've sized that content as $20 million to $120 million based on the different designs. And we feel really good about working towards not just achieving the low end of that, but working through that range and getting to the midpoint or the upper point across those various platforms. So one of the things I think is so great, investing in nuclear is part of your thesis. The thing I think that's really exciting about Curtiss-Wright is you get the here and now in the aftermarket. You get the very near future of the AP1000s that is coming really faster than we even anticipated or I think Westinghouse might have anticipated, but that's around the corner. And this SMR thing, we've been doing design work for quite some time. I think we'll be moving into prototyping of those various complex components next year, 2027, maybe through 2028. But that's meaningful business to Curtiss-Wright when you're prototyping $50 million, $60 million, $80 million, $100 million of content on these plants and then moving to production in the early 2030s. Now there's a lot of things that need to be accomplished between -- to make that happen, but there's a lot of forcing functions driving this. And as that portion of the market grows, we're well positioned to grow with that portion of the market.

So there's obviously a lot of demand signals. So let's talk a little bit about your capacity to be able to support that. So when we think about the ability to kind of help support all the RCPs in production, how do you think about what the factory can support today and just capacity overall?

Sure. So I mean, it's something -- and maybe I'll let Chris speak to this a little bit more, but -- we've been very much focused on capacity. We have a standing capacity planning meeting where we're going through various iterations of what we need to do. We've mentioned a couple of times, we can imagine we may need to greenfield a site by out in the middle of the 2030s. That's prior to the $80 billion announcement. So believe me, these are real-time discussions. But when I think of capacity planning, I think of cash flow. And with that, I'll turn it over to Chris.

Yes. So just to step back a little bit, I think it's important when you think about Curtiss-Wright and when we talk about increasing our CapEx investment to know that we produce a very strong free cash flow. This year, we're guiding $520 million to $535 million in free cash flow and 108% free cash flow conversion. We've got a strong track record of producing cash ahead of earnings and being in that range of above 105%. Over the past 2 years, in '24, we increased our capital spending by 30%. This year, we're going to increase our capital spending by 40%. So we're maintaining those strong free cash flow conversions and the strong free cash flow despite the fact that we're increasing our capital expenditures. And when we think about CapEx, we view this as a great sign for our stakeholders. This is Curtiss-Wright committing to growth and committing to efficiency in our capital equipment going forward. We're convinced that when we spend capital money on CapEx, that it's going to be a great return on investment for you going forward. And Curtiss-Wright with all these great growth factors that Lynn has been talking about is extremely well positioned to grow going forward. So maybe I'll just talk about a couple of different areas where we're seeing CapEx spend as we look forward in '26, where we expect things to kind of accelerate. And the first I'll talk about is funded outside of Curtiss-Wright, but it's still very relevant. Back in the February time frame, Lynn had mentioned that we had secured $20 million in marine industrial-based funding at that point in time. Since then, we've secured another $20 million worth of marine industrial-based funding. Now in the grand scheme of things, you look at that and you say that's not a tremendous amount of capital. But the signal that we really want you to take from that is that Curtiss-Wright is seen as a very solid supplier to the U.S. Navy. And the U.S. Navy is convinced that they need to provide us with more capacity to be able to grow going forward. So while the naval defense market is growing at very strong rates this year, the strong support that you see for naval shipbuilding going forward, this injection of marine industrial-based funding that's coming to Curtiss-Wright, and we believe that there's more even on the way, this is a strong signal that growth lies ahead for us in this business. The second example that I'll talk about is we spend a lot of time talking about commercial nuclear. And while we are pen to paper right now in design on SMRs, starting this next year and into the following year, we're going to be working on prototypes. So this design work, which is 10% of our commercial nuclear portfolio today is going to be accelerating. We need to have the capital in place to be able to build those prototypes and then eventually have that shift into production. And regarding the AP1000, yes, that's exceeding our expectations, right? I mean the conversations that we're having with our customers about capacity are very exciting. So we're having those discussions. We're not only thinking about the people, but the capital equipment, and we're preparing ourselves for the future volumes that lie ahead. And we've talked, Peter, before that we have the capacity today to do 12 to 16 RCPs a year within Curtiss-Wright, that's 3 to 4 plants, but we're looking beyond that and preparing ourselves to make sure that we can handle more going forward. So more CapEx to come, but we'll continue to maintain a highly efficient working capital structure to balance that out.

So growth CapEx for sure. The RCP, just to double-click on the kind of 12 to 16 RCPs, it still is kind of a 4- to 5-year build process when we think about delivering an RCP. So you're talking about sustained kind of capacity of that 16 to 18 because there's that many RCPs that would be needed, what you're talking about?

Yes. I think that's what's different about now. And for those of you that maybe followed us during the China period, I mean, when we entered into our Investor Day in May of '24, we were just talking about a European opportunity to hit that art of the possible $1.5 billion in annual commercial nuclear revenue by the middle of this next decade. A lot has changed. Now you've got the U.S. opportunity. We're pretty excited about the art of the possible of becoming more probable.

Sure. So -- we only have 2 minutes left here. Lots coming to the left, which is a good sign for nuclear. So very excited about that. Maybe just talk briefly on capital allocation. You've been on track for record share repurchase activity in '25. Maybe help us understand that, and maybe we'll wrap there.

Okay. So first, I do -- when people are topic comes up, I think it's important to note, we do still prioritize acquisitions as our top priority for our capital use. And -- but we're very diligent and have a pretty high bar for bringing acquisitions into the company. We've looked at a few that we thought there was a chance we might close on this year and have chosen to walk away from them for various strategic or financial reasons. And so the pipeline is still strong. We have a couple of companies we're in dialogue with right now that are more on a proprietary basis, which is always good in my opinion, but we'll see. I know we walk away from probably 10 potential acquisitions or more for any one that we close on. So we just got to be willing to do the work and keep working through that. But the decision to buy back our stock is a very purposeful one, and it reflects our opinion and the Board's opinion that the value in our stock is still there at the prices that we repurchased. And maybe, Chris, just...

Yes. I agree with Lynn. I mean acquisitions are absolutely our top priority. We're looking for critical adjacent technologies to help supplement our customer offering. But beyond that, share buyback, we believe, is the most effective way to return capital to shareholders. And to kind of further Lynn's point, this isn't just kind of a cash dump for us. I mean we are having a lot of discussions with our Board regarding the growth in earnings that lies ahead for Curtiss-Wright. We look at the relative valuations from a number of different angles, and we're making a conscious decision to buy back stock. I mean earlier this year, they increased our authorization by $400 million to $535 million. We've had 2 successful $200 million buyback programs here in the third quarter. We're going to have a record share repurchase here for Curtiss-Wright. The future is bright. And beyond that, our ninth consecutive year of increasing the dividend 14% this last year, and we expect that to continue going forward.

Terrific. Well, we're out of time. Thank you very much, Lynn. Thank you, Chris. Thank you to support the conference.

Thanks everybody.

Thank you, everyone.