Curtiss-Wright Corporation ($CW)

Fantastic. Good morning. I'm Louie DiPalma. I cover aerospace and defense on William Blair's equity research team. This is the third and final day of the 46th Annual William Blair Growth Stock Conference. I hope everybody in the audience has had an amazing conference. We're pleased to be hosting a presentation and discussion with Curtiss-Wright's management team. And joining me today are CEO, Lynn Bamford; CFO, Chris Farkas; and the Head of Investor Relations, Jim Ryan. I'm required to inform the audience from William Blair's perspective that there is a complete list of disclosures and potential conflicts of interest on our website at williamblair.com, and Lynn will provide an overview of the business, and then we will have some Q&A. So Lynn, please take it away, and thanks for joining us again.

Yes. Thank you, Louie. Thank you to William Blair for inviting us back to the conference for another year. It's always a great conference. So thank you for that. I also am obligated to say that there are some forward-looking statements that contain risks and uncertainties and our SEC disclosures are outlined on our website. So now to introduce you to Curtiss-Wright, and I see many familiar faces in the audience that know Curtiss-Wright well, but a lot of new faces, which is wonderful. And if you are new to the story, I'd encourage you to go to curtisswright.com and possibly check out our first quarter earnings results and go back to May of 2024 and check out our Investor Day that really walks through our end markets and our key strategies and technologies that are within those markets to get an overview. But really, when you step back and you think about who Curtiss-Wright is, you can see our end markets on the bottom left-hand side of the slide, we are a diversified company. But we really focus in creating highly engineered, mission-critical technologies that really are deployed in must-not-fail applications. And so doing the hardest engine -- solving hardest engineering problems is really at the heart of who we are. One of the things that I think is very special about Curtiss-Wright and is greatly contributed to the financial performance we've had over the past years, which we'll touch on in a little bit is that we are as much as we are a broad portfolio of capabilities and end markets. We're a very integrated company. And what's behind that is we very much look for opportunities where we can create core technology and then maybe modify it ever slightly and take it to different end markets. And so the investment on those initial engineering dollars, we don't just take the one end market, we take it to multiple end markets and elaborate the sales channels and the customer knowledge we have across those various end markets. And that's really been one of the main reasons that Curtiss-Wright has been able to achieve the financial performance it has over the past many years. Today, we are -- just this year, we'll be over $3.7 billion in revenue. We'll continue to grow our op margin again, grow EPS in the mid-teens and deliver very strong cash flow. So it's -- the company is performing well, and we're going to touch into some of the reasons why we are able to deliver such strong financial performance. So going to sort of big picture of why we win as an organization. Innovation is at the heart of Curtiss-Wright. I said we solve the hardest engineering problems. We have a workforce of 9,000 people and close to 1/4 of those are engineers of multi-disciplines. We have engineering counsels. We challenge these people to work together, collaborate, leverage the expertise that's within the company, across the company, to solve those hard engineering problems. In the end markets that we worked, whether it's commercial nuclear commercial aerospace, the commercial off-the-shelf electronics market, and others, we've really been in those markets since the inception of the markets and, therefore, have deep domain knowledge, deep customer relationships, really understand the problems, the future problems the customers are looking to solve. And very often are a design partner with our customers as they always look to continue to improve the product offerings they offer. And we really value those customer relationships and treat them with great care and work hard to always meet our commitments to our customer. It's a highly engaged culture. Something that I'm proud has changed during my tenure as CEO is really an enhancement of the collaboration across the company and the desire the company has to work across those different end markets and build a stronger company as an integrated company, as I was just mentioning. So a lot of great people, lean forward with ideas, bring their best to work every day and work to solve our customers' problems. I think we also do an excellent job of analyzing where we're going to spend our R&D. And I'm proud to say that with all the financial performance we have achieved over the last 5.5 years, we've grown our R&D investments at a faster pace than we've grown sales. So we're looking for those opportunities where we know we are aligned with key secular growth drivers and are seeing where we have unique IP and can bring very differentiated solutions into the markets and invest that R&D, and are very purposeful in measuring how we get payback from those R&D projects, and I think the company does a great job of that. Kind of taking a big picture of -- we launched the Pivot to Growth strategy back in the beginning of 2021. And just to touch at a high level, what's behind the thesis of the Pivot to Growth strategy. And it starts with -- we have a $4.3 billion backlog, which is a great place to be as a company. It gives you very much the ability to plan and have those R&D investments to be able to make. But also with that, we've had a long-standing culture long before the Pivot to Growth strategy was launched of driving operational excellence. And looking to always optimize our capabilities and how we go to deliver the products we do. And with that, in the Pivot to Growth strategy instead of just targeting specific new op margin types of targets, we made a commitment to the investment community, we would grow OI faster than sales, but would give ourselves the freedom to take some of the fruits from all those operational excellence work and invest back in ourselves given that we could see we were at such a crucial juncture in so many of our end markets and had great technologies that would really drive growth for decades to come and to allow ourselves the freedom to invest in some of those things. So it's a continuous cycle of driving that operational excellence, delivering results for our shareholders, which is very important to us, but then also making target investments back into ourselves. And I think many of you would realize, I'm sure that when you work in the end markets like we work, big defense projects, commercial aerospace, commercial nuclear, those investments are journeys that take several years to begin to pay back in dividends of revenue after you make those investments? And if you think of us really doubling down and focusing on this and starting in 2021, we're reaping the benefits today with some of those investments that were made in those early years. And that $3.7 billion that I talked about is close between a 7% and 8% growth this year. And so those investments are accelerating in our ability drive revenue and get the payback. And so the investments we've made in '22, '23, '24, those are all coming in the future and are going to continue to accelerate that growth engine. So talking a little bit more about really the way we think about the company and what's led to the industry-leading margins that we have as a company. We formalized some of the processes around operational excellence with our operational growth platform kind of in parallel with launching the Pivot to Growth strategy. And it's really given us a tool that we communicate with our employees, measure our different business units and encourage people what we need them to do. And it's everything from commercial excellence, and that includes terms and conditions, you take in contracts to how we analyze our pricing and the value we bring into our end customers to encouraging the cooperation and the continuous optimization of the portfolio. And this entire system, which, again, we go out, we measure our various business units score them in a very purposeful manner and find areas of improvement and then share those best practices that we have across our various business units to help each business gain from being part of the larger organization. And this has led to 300 basis points of margin improvement since the launch of the Pivot to Growth strategy. And again, that's why we've grown R&D at a faster pace than sales. So that's something that we're very proud of. I mentioned earlier that as we entered this pivot to growth strategy, we could see a lot of key secular strategies. So we're very much aligned with where we have our core technologies. And as we think of those R&D investments, I think it's important to share that we plan for the success of our company for decades to come. And we're not only making targeted investments that we think are going to pay back in the short term in the next handful of years, 2, 3 years. But we're also -- we have to do things that we know are going to drive growth in the medium term, which we think of as 3 to 5 years, and then the long term, which is 5 to 10-plus years and make those targeted investments today. So we're prepared when those types of opportunities are moving to production and more meaningful revenues that we've secured content on those. And if you with naval shipbuilding. We're working to be an outstanding supplier on the content we have today is shipbuilding ramps, and you can see that in the FY '26 and the proposed FY '27 budget, very strong support for shipbuilding and we're making sure we're there with that. We are working with the government to consider places where we can potentially be a second source across opportunities on the major naval platforms, which will provide growth in that midterm. And then we're doing work and have been with the government on SSN(X), which is the next-generation Virginia attack sub and positioning ourselves with very meaningful and increased content on that platform. It's just one example of how we're doing the things for both the near, the mid and the long term. There's examples of that in how we bring technology to the battlefield and things with commercial aerospace. We're taking very targeted activities that range from enhancing content on the current platforms where we have good coverage across Boeing and Airbus on the major platforms to preparing ourselves to find the role that will play on the next-generation single-aisle, which is obviously a long-term platform. I'll talk about nuclear a bit more, but just to frame our nuclear business because I know it's a point of interest and rightly so. on a attention we're kind of unique in that position that our commercial nuclear business is 90% the aftermarket. And 10% is the work that we've been doing with the SMR community broadly, and I'll talk a little bit more about that, that has grown from design work to prototyping there's no large light water reactors or AP1000 orders than any of the targets that we've set today. And we'll talk more, that is shortly coming shortly around the corner and is unbelievable business for Curtiss-Wright, but we've chosen to not make a part of our targets. So you can see how the core of the business is performing and then that just layers on top of it. So turning a bit more to the commercial nuclear space. At our Investor Day in May 2024, we laid out -- we gave targets for our commercial nuclear business for a 3-year period, but we felt it didn't really paint the full picture of what was the potential before us in commercial nuclear. And we talked about doubling our business from the 2023 base by 2028, which is a mid-teens growth rate and taking that business to $1.5 billion annual run rate by the mid of the 2030s, which is a high teens growth rate. And based on some very specific assumptions that are laid out pretty clearly in the slide that was a combination of the plant life extensions or the aftermarket work, AP1000 orders beginning to flow into the company and our work on the small modular reactors in moving either the prototyping or early production. And if you think what has happened in the world since we laid out these targets most specifically here in the U.S., but sort of globally, the continued realization of what role nuclear energy needs to play in solving our electricity needs. And the U.S. becoming not just willing, but government support and umph behind having the United States moving out and building both large and small-scale nuclear power, it's pretty dramatic. And that all is happen since these targets were laid out. And many of you probably know, there were the 5 executive orders back in May of 2025 challenging industry to have 5 large light water reactors or AP1000s under construction by the end of the decade and many other things, streamlining the NRC to help support the ongoing operation of existing plants, restarting some plants and doing upgrades in some of the plants. These are all things that drive business to Curtiss-Wright and are good for us. So the pipeline for the AP1000 orders is just very strong, and this is just a very great business for us, and we believe it's just around the corner and we'll begin seeing that opportunity. So on top of what we're doing from driving our specific strategies, it's one thing we're very thoughtful about, I think, and very purposeful about and that is how we deployed the capital that we have created over the prior years, but specifically looking at the Pivot to Growth strategy from '21 through '25. We've deployed $2.5 billion of capital. About half of that has been returned to shareholders, largely through share buyback. We've very much ramped our operational investments back into the company as we prepare for the growth that we see is ahead of us. And in the past 3 years, we've ramped our capital investments in ourselves over 30% each of the past 3 years. And that's really us doing the work we need to make sure we can deliver on the increased demand we're going to get from our customers. And also $0.5 billion directed towards M&A. It does remain our top priority, and we are always, as a company, working and looking for targets, is trying to find targets we can source in a proprietary way working actively in the finance community. But we're very selective in what we will do and are going to very much assure it is a strong strategic fit and a strong financial fit. And over the past months. There's been quite a few properties we've looked at that we've chosen not to move forward with because they just did not meet our criteria, but they're out there, and we will continue to find them and add them to our portfolio. So how is all of that resulted in -- I mentioned our May 2024 Investor Day a couple of times. We lay it out targets. Those are in the white boxes along the top of the page of the financial targets we set for ourselves. And we're doing, I'd say, quite outstanding against those targets. And starting with revenue growth, we targeted greater than 5% organic growth target. We're on track to achieve a 9% organic growth target and 10% total when you lay in acquisitions. Commitment to grow operating income faster than sales. And we're on track to have a 13% op income CAGR growth over that time frame, maintaining top quartile margins and topping 19% this year. We're really proud of that is really being up at the top end of that top quartile. Greater than 10% EPS CAGR, where have really moved to really being an earnings compound or delivering in the mid-teens earnings growth over the past several years and delivering 17% EPS growth this year. And that's again something we're very proud of. And all the while maintained very strong free cash flow generation, beating our 105% free cash flow target conversion rate by 5%. So all that quick, quick overview or a complicated company, but a snippet of where our end markets are, how we think about investments, how we deploy capital, things are really at early stages of so many of the great growth vectors across our end markets, and there's so many things coming that we've been working to earn the right for the growth over the past couple of years and new ideas that are being pursued now in this calendar year that will continue to support that Pivot to Growth strategy and continue to build momentum. We're a solid supplier into our customer base that has good relationships, understands or problem set attracts great engineering talent and builds great products. And that's really the culture and the pride of the people who work in Curtiss-Wright. And I think is the fundamental reason why we've had such strong financial performance. So with that, I'll say thank you, and we'll go to Louie.

Yes. Thanks, Lynn. Defense modernization has been a major theme of the Trump administration. What areas of defense monitor create the largest white space opportunities for you?

Thank you, Louie. And our defense electronics portion of our business is our most profitable segment. Some of you know that. Someone may check that out. But this team offers an absolutely a fantastic portfolio of products that's really aligned quite well to support many of the modernization activities that are in the FY '26 budget and laid out in the FY '27 budget. We were pleased in -- as one example, we announced in Q1 our C-17 cockpit modernization project to really modernize the entire cockpit in the C-17 program. We were pleased that Boeing would allow us to put a press release out on that, that we do a lot of different things that we're not always able to talk in a public forum about. But that's a great example of bringing more total capability of Curtiss-Wright in doing those things. But whether it's aircraft or ground vehicles or upgrades within the submarine community, there's always opportunities for us to take our technologies. And we're always building on our technology portfolio, whether it's -- we brought our NVIDIA Blackwall capability to market at the end of last year. We're seeing great uptick with that. That takes us to new application spaces that we're not really on the table prior to that. And whether it's the Blackwell or whether it's the Thor which is a much more size, weight and power optimized processor that allows us to play in a very different range of applications for different size and scale of deployments of whether that's drones or antidrones, activities is just one example where that technology takes us. So I think the product breadth within that group has set the stage that we go down that FY '27 budget and have places where we can do everything, just to mention maybe one last one. is there's a lot of talk around gold and Dome and that will be a big growth opportunity for Curtiss-Wright. And whether it's in the systems that will be networked together that will be part of Golden Dome, where we have had content are working on some significant upgrades in some of that capability or the networking that really one of the fundamental principles of Golden Dome is to network all these systems together so they can work as a unified defense system for the country, and we are right in the middle of that with great technology to solve that.

Great. And then for Golden Dome, would you be a prime contractor? Or have you been bidding with partners? How should we think about that?

More with partners, but with the tactical communications equipment, that's one of the places where we work more directly as a prime into the government. So I think we'll find avenues for both where we're part of the networking, but then we'll work with the primes where they want to have, whether it's a missile launcher or a radar system or whatever it is, be part of that network in those cases, we'll work with the primes.

Great. And related to this defense modernization topic, one of the areas of consternation amongst like many investors perhaps not in the audience. But for many investors has been the different political back and forth with the midterm elections and the potential that the midterm elections could result in a deviation from the current path in terms of investing in like missile production ramps or other initiatives. How resilient or sensitive do you view your defense business to the different like politics that take place?

Really, we're pretty immune to it in all honesty. I mean, we are working with the primes on the major platforms that I think there is bipartisan recognition are needed for the defenses of our country. And I was on Capitol Hill. In the past couple of months, I've been both in the Pentagon and on Capitol Hill, meaning, of course, with a bipartisan group of people and support for the defense budget, quiet behind the scenes is very bipartisan. And so -- and we're aligned with the top priorities. I mean, there will be some -- there could be some pushes and shoves based on how the elections shake out. But given the broadness of our capability and where we play, it's not something we spend a lot of time worrying about.

And I would just add to that, Louie, I mean we are on the major shipbuilding platforms, and there's a very long outlook and strong ramp that's coming regardless of who's in office, across shipbuilding. And to further Lynn's point, we're on 400 platforms, and we've done 3,000 programs globally for the past 10 years. It really doesn't matter where you're spending in defense, whether it's here in the U.S. or whether you're spending globally. We're going to be aligned to that growth going forward. And we have a proven ability, given the fact that we've got this relationship to dense electronics and electronics are proliferating against these platforms and growing. It's kind of this embedded growth vector that says regardless of what's happening in the defense environment, you're going to see electronics continue to move across the platforms, and that's going to help us grow.

You just spoke about the global defense. So I was wondering, can you provide more information in terms of what is your exposure to like rising European defense spend in terms of how there's then the conflict in Ukraine since 2022, and there has been back and forth in terms of U.S. NATO support and Europe is an increasing spend. So how does that represent an opportunity?

Yes. I mean it's been a great opportunity for us to see the NATO and allied countries increase their spend relative to GDP over the past few years. Curtiss-Wright's broad portfolio. I mean we're on all of the domestic platforms, but we're also on all of the foreign military platforms. So if you want to talk about the F-35 or you want to talk about the [indiscernible] and Gripen were everywhere. But we've grown at a mid-teens pace in what we consider to be direct foreign military sales. So as a Tier 2 supplier in most cases. That's when we're selling directly to the foreign customer, and that's now 10% of our total portfolio. Here in the first quarter, we started off with the forecast to high single digits again this year. We're already -- we're getting great demand signals across our portfolio. We've got embedded computing across our defense platforms. We've got great positions on naval platforms and the aircraft handling systems and [indiscernible] systems, but also within ground defense. And the interesting thing about ground defense since you brought up Ukraine is that when we first saw the conflict erupt, I think everybody saw the AR contrast in vehicles that existed between Russia and Europe. And Lynn and I talked quite vocally about that, we said, wow, this is an opportunity for Europe. And we have a very long-standing relationship with Ryan Mittal. You probably saw some press releases that we issued this last year where we're winning awards on vehicles for drive stabilization systems. Germany is committed this year to spend another EUR 25 billion in ground vehicles, and we see that as a very strong area growth as we move forward. We think we're going to have some more announcements here in the back half of the year to share with everyone. But it's a great growth factor. It's going to continue to help us exceed those defense budgets and as we move forward.

Great. And one final question before we move to the breakout. Lynn, you mentioned how the pipeline for AP1000 orders is very strong, and you expect some activity just around the corner. Would you consider the pipeline just as strong as when you held your Analyst Day in May of 2024 in which you sized the European TAM? And just any other color around.

Yes. So it's surely grown significantly since the May 2024 Investor Day. And whether it's the funds that are -- the Department of Commerce being behind building 10 AP1000 plants across government sites or the DOE supporting the build-out of 10 additional sites in partnership with utilities. That's all new since our Investor Day last year. There really wasn't an expectation the U.S. was going to build large light water reactors again. And I think those are huge numbers in and of themselves, but the follow-on with that is that as they get these reactors being built and the success has seen the belief that more utilities, more hyperscalers will be willing to step in and add these projects to how they're getting to the electricity needs they have. So a couple of times, people have asked us, should you be updating your targets or you may and we will do that in due time. But clearly, there's been a lot of demand signals that were not known in that time.

And has the European opportunity remained strong?

Yes. And so it's almost gotten overshadowed and not talked about, but really, there's steady progress at probably a slower scale than having the DOC and the DOE really push sheet behind these. But Poland has moved through the stages. They have their funding. Bulgaria has moved through the stages have their funding. And it's kind of a little bit of an interesting dynamic. There is limited capacity and everybody doesn't want to be behind each other. So a lot of times we get asked, what's our intelligence on where the first orders will come from. And I think that's we're surely not going to predict that, but I don't think it's really established because everybody is trying to move fast across all of these opportunities, which is great for us, and we work with Westinghouse, that's our customer, and we'll work to sort them.

Thanks. And Thanks, Lynn and Chris. And we are going to resume the conversation in the Adler room.

Thank you, everybody.

Thanks, everybody. Thank you.