Curtiss-Wright Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 2, 2023

There are 10 speakers on the call.

Operator

Welcome to

Speaker 1

the Curtiss Wright Third Quarter 2023 Earnings Conference Call. At this time, all participants have been placed on a listen only mode and the floor will be open for your questions following the presentation. If at any point your question has been answered, you may remove yourself from the queue by pressing star 2. So others can hear your questions clearly, We ask that you pick up your handset for best sound quality. I I would now like to turn the call over to Jim Ryan, Vice President of Investor Relations.

Speaker 2

Thank you, Arisa, and good morning, everyone. Welcome to Curtiss Wright's 3rd quarter 2023 earnings conference call. Joining me on the call today are CARE and Chief Executive Officer, Lynn Bamford And Vice President and Chief Financial Officer, Chris Vargas. Our call today is being webcast and the press release as well as a copy of today's financial presentation Available for download through the Investor Relations section of our company website at www.curtisswright.com. A replay of this webcast also can be found on the website.

Speaker 2

Please note today's discussion will include certain projections and statements that are forward looking as defined in the Private We detail those risks and uncertainties associated with our forward looking statements in our public filings with the SEC. As a reminder, the company's results include an adjusted On GAAP view, it excludes certain costs in order to provide greater transparency and occurs right to ongoing operating and financial performance. Any references to organic growth are on an adjusted basis and exclude foreign currency translation, acquisitions and divestitures unless otherwise noted. GAAP to non GAAP reconciliations for current and prior year periods are available in the earnings release and on our website. Now I'd like to turn the call over to Lynn to get things started.

Operator

Thank you, Jim, and good morning, everyone. I will begin by covering the highlights of our Q3 2023 performance and a brief update on our full year financial outlook, which we are updating to reflect stronger expectations for revenue, earnings and free cash flow generation. Then I'll turn the call over to Chris to provide a more in-depth review of our financial results and updates to our 2023 guidance. Finally, I'll wrap up our prepared remarks before we move to Q and A. Starting with our Q3 2023 highlights, Sales increased 15% overall to $724,000,000 and improved 14% organically as we demonstrated higher year over year sales growth in all our end markets.

Operator

Our A and D markets grew 18% year over year as we benefited from the continued easing of the supply chain in Defense Electronics, which drove strong increases in both aerospace and ground defense as well as mid teens growth in commercial aerospace. We also experienced widespread growth in our commercial nuclear process and industrial which Chris will cover in more detail shortly. Operating income grew 17% year over year and exceeded our strong sales growth, while operating margin expanded 30 basis points. Underscored within this performance was strong profitability in Defense Electronics segment. As we continue to overcome the dramatic impact of last year's supply chain challenges, We continue to benefit from steady improvements in lead times and component availability within Defense Electronics providing further confidence in achieving our full year outlook.

Operator

Diluted earnings per share of $2.54 increased 23% year over year, While adjusted, free cash flow was up 59%, resulting in 140% in free cash flow conversion. We were also pleased with the continued growth in our order book, up 3% in the quarter and now up 8% year to date. Leading the way was our Defense Electronics segment, which achieved a record bookings quarter exceeding the previous record set in the last year's Q3. This activity was driven by continued strong demand for embedded computing and tactical communications equipment. In addition, in our Naval and Power segment, we continue to experience strong demand for commercial nuclear products to support maintenance, modernization and plant life extensions, as well as advanced small modular reactor designs.

Operator

Overall, book to bill was 1.2 times in the 3rd quarter, building upon our already strong backlog, which is now up 12% year to date and in excess of $2,900,000,000 Next to some highlights of our full year 2023 guidance. Our growing backlog and strong performance to date along with favorable trends across all our end markets provides us with confidence to raise our sales outlook again. This positions us to deliver 8% to 10% top line growth with increased sales projected in all three segments. Overall, strong profitability remains unchanged with expectations for 10 basis points to 30 basis points in year over year margin improvement, reflecting the balance of the combined portfolio whereby a reduction in the Naval and Power segments profitability Was offset by a stronger outlook in Defense Electronics. As a result, diluted EPS Is now expected to grow 11% to 13%, which as a reminder keeps us on track to exceed our long term targets.

Operator

In addition, for the 2nd consecutive quarter, we increased the bottom end of our already strong free cash flow guide to reflect the year to date performance and higher confidence in the full year outlook. In summary, Curtiss Wright remains well positioned to deliver another strong performance in 2023. Now, I would like to turn the call over to Chris to continue with our prepared remarks.

Speaker 3

Thank you, Lance. On Slide 4, we have the key drivers of our Q3 2023 performance by segment. I'll begin in Aerospace and Industrial, where overall sales growth of 3 Within the second's commercial aerospace market, we experienced double digit growth in OEM sales Supporting the ramp up in production on Boeing and Airbus platforms, most notably on the Airbus A320 and A350 programs. We also experienced higher sales in the general industrial market driven by solid growth in EM actuation products and surface treatment services. Partially offsetting those increases was a decline in actuation sales within the segment's aerospace and ground defense markets due to the timing of production on various programs.

Speaker 3

Turning to the segment's profitability, favorable absorption on higher sales was offset by unfavorable mix in the timing of development contracts, Principally for Actuation Products. Next in Defense Electronics segment, sales increased $55,000,000 or 34%, reflecting continued supply chain recovery and the conversion of our strong order book, which drove increases in our aerospace and ground defense markets. Of note and included within that strong performance, Approximately $10,000,000 in tactical communications equipment sales were accelerated into the Q3 from the Q4 as we burned down some of our backlog at a faster pace. Elsewhere in ground defense, we experienced increased sales of embedded computing equipment, most notably on the Stryker platform, which is another example of the strong demand from our customers for our MOSSA compliant solutions. Within aerospace defense, we experienced strong sales growth for embedded computing equipment on various domestic and foreign military programs, as well as flight test instrumentation on the F-thirty five program.

Speaker 3

Regarding the segment's operating performance, Operating income increased 54%, while operating margin improved 330 basis points, principally due to favorable absorption on the strong sales growth. Also included within those results was a year over year increase of $4,000,000 in strategic IR and D investments to enable our future organic growth. Turning to the Naval and Power segment. Overall sales growth of 12% was essentially in line with our And reflected growth in both our A and D and commercial end markets. Within the segment's aerospace defense market, our arresting systems business Continue to perform extremely well based upon the strong global demand for our products.

Speaker 3

In the naval defense market, our results reflected Higher revenue supporting the ramp up on the Columbia Class Submarine and solid growth on the Virginia Class subs, partially offset by the timing of production on the CVN-eighty 1 aircraft carrier In the power and process market, sales increased approximately 10% overall and inflected mid teen Sales growth when excluding the revenue headwind from the wind down of CAP 1,000 production. These results reflected continued strong demand in our commercial nuclear market Supporting the operation and maintenance of existing reactors as well as higher development revenues mainly supporting the X Energy Advanced Reactor design. We also experienced strong sales growth in the process market, driven by increased refinery maintenance and turnaround activity, as well as higher Subsea pump development revenues. Turning to the segment's operating performance, favorable absorption on solid sales growth was partially offset by unfavorable mix from the CAP 1,000 program. In addition, as you look at the segment's profitability, our results reflect a small number of naval contract adjustments reflecting the continued training and development of new hires to support our ramp in growth.

Speaker 3

To sum up the 3rd quarter results, overall, strong growth in operating income once again exceeded growth in sales And resulted in 30 basis points in year over year operating margin expansion. Next, turning to our full year 2023 guidance on Slide 5. I'll begin with our end market sales outlook where we now expect organic sales to grow 7% to 9% with total sales growth of 8% to 10%, of $30,000,000 or 1% compared with our prior guidance. Across the entirety of our aerospace and defense markets, we now expect Total sales to increase 10% to 12%. Taking a closer look at the aerospace defense market, we've increased our expectations for Full year sales growth to a range of 11% to 13% based on strong demand for arresting systems equipment and higher embedded computing revenues in defense electronics.

Speaker 3

Next in ground defense, we now expect an even more favorable full year sales growth of 23% to 25%, driven by the continued strong demand for our tactical communications equipment and easing in the supply chain. Based on the accelerated receipt of materials and timing of revenue that shifted into Q3, we expect sales in the ground defense market to decline sequentially in the Q4. Next, in Naval Defense, while we expect a solid 5% to 7% outlook for year over year growth, we reduced our outlook slightly, mainly due to the timing of production on the CVN-eighty one aircraft carrier program as we now expect some revenues to shift out of 2023. Before we wrap up our defense markets, I wanted to highlight an area where we've received a number of questions over the past year since the start of the Ukrainian conflict And commitment by NATO countries to increase defense spending as a percentage of GDP. As anticipated, We've steadily seen an increase in strong contribution in direct foreign military sales as we progress through the year.

Speaker 3

Collectively across Curtiss Wright, we now expect these sales to grow approximately 15% year over year. And the notable drivers of And include higher sales of avionics, flight test equipment and arresting systems in aerospace defense, turret drive stabilization systems on ground defense platforms And aircraft handling systems on naval vessels. Given the rising threat environment and alignment of our technologies to domestic Informed defense priorities, we continue to see this as an opportunity to drive solid long term revenue growth in this area. Turning to Commercial Aerospace. Based upon the year to date performance, we are now increasing our expectations as sales to grow 14% to 16%, driven by Strong OEM sales growth on both narrow body and wide body platforms.

Speaker 3

Outside of our A and D markets, We raised our growth outlook slightly for the power and process market based on the continued strong demand for both our commercial nuclear and industrial valve products. And as a reminder, the outlook in this market includes a $20,000,000 year over year revenue headwind from the wind down on the CAP 1,000 program as we substantially completed this contract in the Q1. Excluding that impact, we expect the high single digit full year growth rate in our commercial nuclear market as well as a low double digit growth rate in the process market reflecting higher nuclear outages and Process turnaround as well as a ramp in development of advanced SMRs. Overall, across our total commercial markets, We continue to expect full year sales growth of 3% to 5%. Continuing with our full year outlook by segment on Slide 6.

Speaker 3

I'll begin in Aerospace and Industrial, where we increased our range of sales slightly to reflect the strong demand in Commercial Aerospace and continue to income in 20 to 40 basis points in operating margin expansion. We continue to expect the segment to deliver a Strong Q4 and finish to 2023. Next in Defense Electronics, we raised our revenue forecast again and now expect sales to grow 12% to 14% based upon the strong year to date performance, continued improvement in the supply chain and record level order activity. Regarding the segment's profitability, we now expect operating income to grow 18% to 21% and full year operating margin to range from 23 point which is 50 basis points above our prior expectations. As noted earlier, based on the segment's stronger than expected 3rd quarter results, we Sales to decrease sequentially in Q4, but still demonstrate strong profitability with an operating margin of approximately 30%.

Speaker 3

And And lastly, Maval and Power, we increased our range of sales slightly to reflect the aforementioned changes in end markets and continue to expect strong sales growth of 8% to 10%. Regarding the segment's profitability, while we anticipate favorable absorption on the overall increase in sales, we reduced our operating income guidance to now reflect flat 3% growth and trimmed our prior margin outlook by 40 basis points, primarily due to the timing and efficiency on a small number of naval contracts. While the impact of the contract adjustments is immaterial to overall Curtiss Wright guidance, we see this as an opportunity going forward, which Lynn will address further in our closing remarks. And lastly, in regard to the segment's margins, our outlook continues to reflect margin pressures associated with the timing of development contracts in the power and process market and unfavorable next on lower CAP 1,000 revenues. Regarding the increase in non segment or corporate expenses, our updated guidance This reflects an increase in assumptions related to higher than anticipated foreign exchange transactional losses in 2023, which we now To fully offset lower year over year pension costs.

Speaker 3

So to summarize our outlook, we continue to expect total Curtiss Wright operating To grow 8% to 11% overall in 2023 in excess of sales growth. And as a reminder, this Outlook includes a year over year increase of more than $20,000,000 in our total engineering spend on both internal and customer funded programs and remains in line with our initial guidance provided earlier this year. Despite that offset, we expect to drive 10 to 30 basis points in full year Operating margin expansion as we continue to deliver on our 2021 day Investor Day commitments. Continue with our financial outlook on Slide 7 and building upon our solid year to date performance and expectations for a strong finish to the year, We have increased our full year adjusted diluted EPS guidance to a new range of $9 to $9.20 for up 11% to 13%. And lastly, turning to free cash flow.

Speaker 3

We delivered a strong performance through the 1st 9 months of 2023 that puts us back in line with our more historical cadence. As a result, we raised the bottom end of our range by $10,000,000 to reflect improved confidence following increases to our full year financial outlook And our intense focus on working capital management. Our adjusted free cash flow outlook now ranges from 380 $400,000,000 reflecting strong growth of 29% to 36% and is also within striking distance Our record of nearly $400,000,000 achieved in 2020. Our updated guidance continues to imply a free cash flow conversion rate in in excess of 110%. Now, I'd like to turn the call back over to Lynn.

Operator

Thank you, Chris. And turning to Slide 8. As we have discussed today, we achieved strong Q3 results and remain on track to deliver another outstanding year for our shareholders. It's worth reiterating that we Gain organic growth well into the future. As I reflect upon the challenges that we and many defense companies are facing today, Ranging from supply chain to staffing, I'm incredibly proud of the accomplishments of the team, our ability to pivot, to deliver strong growth and the effort we put forth to accomplish our 2021 Investor Day commitments.

Operator

When leading in a growth environment amidst a dynamic global market, there are always challenges to be faced. For example, the events of the pandemic led to the unfortunate turnover of nearly 15% of our workforce. Within these types of challenges, we have consistently found opportunity to advance both financial and operational excellence with the goal of improving Curtiss Wright's overall efficiency and resilience. We've continued to focus on enhancing our processes, Programs and systems to ensure that the team is fully engaged and supported as we've reshaped the workforce, we have done so With increased efficiency while driving record high sales. As we prepare to meet strong demand ahead of this, We've added back about half of those jobs lost during the pandemic, many of which are engineers.

Operator

We continue to see encouraging trends in employee hiring, retention and turnover, and this remains critical as we continue to ramp up our focus on new projects and opportunities which will drive our growth well into the end of this decade. Further, we are committed to continuing to refine our processes as we onboard employees and implement new training programs to assure we develop the future generation of Curtiss Wright's workforce. As I near the end of my 3rd year as CEO of Curtiss Wright and look out across the portfolio to our future, It is clear that we are well positioned to continue to capitalize on the tremendous secular growth trends driving our A and D and commercial end markets. Before we wrap up, I'll highlight a few of those avenues for growth. In defense, an increasing global focus on security and our position as a trusted proven supplier provides confidence in our ability to deliver strong long term growth across our defense businesses.

Operator

As you can see by our performance this year, we're certainly benefiting from the strength and alignment of our portfolio to the FY2023 spending bill, which appropriated $817,000,000,000 or 10% year over year growth for the DoD budget. Although we're faced with the current continuing resolution and delayed signing of the FY 'twenty four spending bill, we remain in an elevated U. S. Budget environment with the proposed legislation calling for at least 3% top line growth in FY 2024. We see continued opportunities to support our efforts in natal shipbuilding, the expansion of our MOSA product offering in defense electronics, as well as ground modernization to name just a few.

Operator

The trends driving global defense spending most positively by the U. S. And its NATO allies are expected to remain a strong tailwind for Curtiss Wright in the industry. In commercial aerospace, Growth in the global passenger travel, the need to replace the aging commercial fleet and our drive to Expand our capabilities on existing and new platforms is expected to provide continued growth for years to come. Further, the emergence of electrification in aerospace and defense provides yet another opportunity to expand Curtiss Wright's technological reach, Building upon our relationships and new product introductions addressing the electrification of vehicles in the general industrial market.

Operator

As I look to commercial nuclear, emerging technologies and nuclear power and the tremendous efforts that exist worldwide to truly impact global decarbonization and energy security provide a long runway of opportunities for Curtiss Wright. This includes opportunities to support large scale AP1000 reactors in Europe as well as the large volume of advanced small modular reactors expected to be built to supplement the existing nuclear reactors or replace existing coal plants, all of which will be needed to meet the tremendous global demand for energy. Level of activity for commercial nuclear continues to advance at a relatively rapid pace and we remained aligned as a strategic supplier to support our customers' needs. Finally, I'm pleased to share that just this week, Bulgaria's government announced that they have approved the construction of their 1st AP1000 reactor, which is anticipated to be operational by 2,033, followed by a potential second expected to go online 2 or 3 years after the first one. This exciting news follows Poland's Earlier selection of the AP1000 reactor and their recent signing of an engineering service contract with Westinghouse for the construction of the first three of potentially 6 AP1000 reactors.

Operator

Those initial reactors are expected to be operational in the early 2030s. Bulgaria's News provides yet another positive endorsement for the AP1000 technology, while also reaffirming Curtiss Wright's Opportunity to secure multiple contracts for our reactor coolant pumps within the next 2 to 4 years. In closing, I'm pleased with our continued momentum and the healthy outlook for the near and long term prospects for Curtiss Wright and the markets we serve. Across every avenue, we are diligently investing in our employees and in critical technologies today to support our future, which will enable Curtiss Wright to deliver long term profitable growth and tremendous value for our shareholders, our employees and our customers. Based on our strong outlook in 2023, we continue to maintain line of sight to the 3 year Investor Day commitments Established in 2021, providing confidence that our pivot to growth strategy is working.

Operator

We look forward to providing a recap of our results and performance against our 3 year targets in February, followed by our May 2024 Investor Day in New York. Thank you. And at this time, I would like to open up today's conference call for questions.

Speaker 1

Now open for questions. Our first question comes from Peter Arment with Baird. Your line is open.

Speaker 4

Yes, thanks. Good morning, everyone. Hey, and congrats on the nice results. Lynn, when you think about the nuclear business, just thinking back The days when we had the big China direct order and you look at the kind of outlook over the next several years, I know how do you think about in terms of sizing The opportunity certainly seems like there's just a

Speaker 5

lot more going on, a

Speaker 4

lot more opportunities, whether you look at the AP1000 or you look at SMRs, how are you framing it?

Operator

So the potential is actually very significant and we're very encouraged to see the steady drumbeat of this Wide group of opportunities for RCP pumps to keep across all the fronts. There's multiple countries. We talked about Bulgaria and Poland on the All here, but Ukraine, Romania, the Czech Republic, even in the UK, Slovenia, Slovakia, Finland and Sweden are all You can find press on all of them that they are taking steps to move forward with building significant new nuclear Some of those are still in a competitive position, but Lessinghouse clearly continues to begin continue to win across that market, given the track record and the great safety profile of the AP1000 nuclear power plant. Today, we think there's potentially room for 50 to 100 RCPs and this is well into Over $1,000,000,000 and potentially north of $2,000,000,000 of business for Curtis Wright. And it was a pretty consistent timeline The countries seem to be targeting on getting these plants online in the very early 2030s.

Operator

So The significance of bringing some meaningful orders to Curtis Wright, similar to what we saw with the China Correct order or even more is coming in the next 2 to 4 years and we're making sure we're prepared to be a great partner to Westinghouse and ready to ramp And to do that. So it's fairly dramatic when it comes. It's going to be an amazing flash point for Curtis Wright. And the timeline, we said 3 to 5 years. At the beginning of 2022, we're now saying 2 to 4 years.

Operator

And things consistently are just moving forward. And It's not as if a year passes and the timeline still remains 3 to 5. We feel good that this is moving in a very meaningful Direction.

Speaker 4

Appreciate that. And just on your overall defense business, are you seeing any kind of replenishment activity? I know there's A lot of activity that we're sending over to Ukraine and given everyone's kind of interest of what's going on in the Middle East. Are you guys seeing any impact in your order environment?

Operator

We're not heavily to be transparent that you were not in munitions and the type of stuff that is being very much However, we are in a lot of the equipment that is very much needed and whether that's from tactical communications Types of equipment, definitely seen some order trends there to many of the missile defense systems where we have significant content. So It's a little it's not the quick reaction stuff that is being asked for, but definitely Chris spoke to the increased Trends and one of the other areas outside of Defense Electronics, we tend to think about, but clearly our new ESCO acquisition is 75% of their business is outside of the U. S. They're having an absolutely knock the doors off kind of year and a lot of that is Countries throughout Europe trying to assure their position for readiness and their equipment is essential for that. So clearly that is The position there has been driving orders into our ESCO business.

Speaker 4

Thanks. And just one quick last one, Chris. You guys continue to generate obviously very strong free cash flow. Are you still seeing opportunities kind of whether it's working capital days or how should we think about just working capital profile going forward?

Speaker 3

Yes, I'm pretty pleased with the performance and what we've been able to accomplish year to date. I mean, just even looking at Q3 in that high free cash flow That we generated, which I think if you look back over the past 5 years is stronger than most. But year over year, we were able to reduce our working capital Total as a percentage of sales in the 3rd quarter by approximately 300 basis points. And with the increase in sales and what's happening across the organization to Support the ramp in growth, it really didn't come through collections. Collections is certainly an opportunity for us on a throughput basis, but Yes, we've got a lot to close out here at year end.

Speaker 3

It really came through lower inventory. So I think we're starting to make some progress. You're going to see that in the throughput of the product. And As we get to year end here, we're expecting to finish in that 24% range showing 200 basis points of year over year improvement. A lot of that will be Yes, burning off this great collections opportunity that we have in front of us now and inventory burn down.

Speaker 3

I don't know that we'll be quite as aggressive as we have been in the past with payable stretching. We're pretty We're tough with our suppliers this last year and I think given our situation here, it's good to Maybe not be quite so aggressive, but yes, there is opportunity ahead of us. I mean, I think we still have more opportunities. We head into 'twenty four to burn down inventory and to get this Working capital as a percentage of sales back in line with some of those historical bests that we were heading back in that 2019 timeframe. So more to come.

Speaker 4

Appreciate the details. Thanks.

Operator

Thanks, Peter.

Speaker 1

Our next question will come from Christine Liwag with Morgan Stanley. Your line is open.

Speaker 6

Hey, good morning, everyone.

Speaker 7

Laurie, good morning.

Speaker 6

So Lynn, just want to go back in terms of the timing for the AP1000 order. If Bulgaria and Poland both want to have the power plant online in the early 2030s,

Speaker 1

I mean, it seems like they should

Speaker 6

have to order the reactor coolant pump like now. So just want to understand a little bit more On timing and regarding the progress of your discussion with them, could this be late 2023 or even a 2024 order?

Operator

So we have a great relationship with Westinghouse. We have regular market update meetings with them and We work very transparently on know what they're seeing, what they're bidding, etcetera. And so they understand as I think as the orders may begin to have more security in the number of opportunities they're going to have that They're trying to build plants in that early 2030 timeframe. I think it does put pressure for Us to make sure we can build the number of reactor cooling pumps to be in line with them to date. What we've shared the 2 to 4 years is still the discussion we're having with Westinghouse.

Operator

So this isn't really this is You have a very clear discussion with Westinghouse and what they indicate. But I know we feel as we see the potential for orders and the number of plants Being desired to build and know what that means for reactor coolant pumps, we know that the order back in 2015 was for 16 RCPs Between Poland and the 1st Bulgaria plant, that's 16 RCPs. So that's an order of that same magnitude. And you took us that was initially anticipated to be a 5 year bell curve of deliveries. That has us putting pumps out Over a 5 year plan turned into 7 year, but so I mean, we're everybody's very aware of this.

Operator

And Really just at this point, we don't want to speculate on it being earlier, but it clearly as the world evolves and there's more commitment to AP1000 plants, I would say it does put pressure on them trying to hold off and they're obviously these are very costly comps and they're Trying to control cash flow and all the things every company does, but at some point that trade off will move to getting us started earlier, but that is still a TBD.

Speaker 6

I see. And then, if I recall right, the RCP for the AP1000 in the same facility where you guys build The RCPs for submarines. With the 2 Virginias plus you've got Columbia class as well, which is incremental capacity. Can you remind us what the capacity is for an annual build? I mean, You've also had your Romania and a few other countries who have put an interest in EP-one thousand.

Speaker 6

I mean, sometimes right when it rain, it pours. Should all these orders come through, what's your ultimate capacity that you could build if these orders all Come in and they all want to have a plant opening in 2030s.

Operator

So we do have a lot of capacity to ramp up in our Chesapeake plant with adding shifts and adding Staff to the current ships running 2 full shifts and even potentially a 3rd shift. So we are well positioned with the capital equipment we have to flex up. I mean, obviously, every that always has a limit. One of the things we are very much in the process of evaluating is as Broadly, our content across the various SMR platforms, you very notably talked about all our content with X Energy As their line of sight on their customers continues to grow and be positive, whether we would need to do Some footprint expansions later in this decade. And so that work is ongoing to consider if that is going to be needed.

Operator

We're not there yet, But it's definitely something we're considering whether just like we built the plant in Somerville, Curtiss Wright is not afraid to make Capital investments when you can see line of sight on important meaningful business and this clearly is for us. So We're not worried about what we can produce out of the facility in Chesapeake as of now, but there might be some expansion in the back half of this decade.

Speaker 3

And I would just also add to that, that those contracts are typically front loaded with cash, right? So I think if there is any type of CapEx Spike, at this point, we wouldn't expect it to be significant, but we would expect the cash flows on those contracts to fully You help us ramp up in those circumstances. And obviously, it's very profitable business. So we think people will be really happy with anything that we do in that area.

Speaker 1

Great. Thank you. I'll keep it to 2. Thanks, Christine. We'll take our next question from Nathan Jones with Stifel.

Speaker 1

Your line is open.

Speaker 7

Good morning, everyone. Hi, Nathan. Good morning. I'd just like to start off with digging a bit more into the margin And the overall margin expansion in 2023, up 20 basis points on 8% organic growth. It's not huge operating leverage.

Speaker 7

And I know there's a number of puts and takes. I'd like to dig into those a little bit more. So maybe you could Comment specifically on some of the headwinds like CAP 1,000 winding down. I know you talked about additional R and D investments.

Operator

So maybe unpack that for us a

Speaker 7

little bit more and then talk about what may or may not repeat in 2024 as we're thinking Yes. I think when you

Speaker 3

look at Curtis Wright from an overall level, when you look at the absorption that we're getting on sales this We're getting on sales this year. It's fairly in line with what we've said, we've experienced historically, which is in that 25% to 30% range. I think at the Midpoint of our guide right now, we would say about 27% of incremental margin. But as we've talked about a number of times throughout the year, We have so many great opportunities to invest not only through IR and D, but also contract R and D to continue this great growth trajectory that we're on. So when you look at just the incremental IR and D year over year, that's $5,000,000 and as we look at the total R and D, which includes contract R and D, and we've talked a little bit about things like Advanced naval cots and subsea pumps and the various development contracts that are going on within The A and I segment across the actuation division, I mean, we're going to be spending in excess of $20,000,000 of R and D this Sure.

Speaker 3

And that puts a little bit of pressure on margins. So I think as we go to capture these great Growth sectors that we're on and push ourselves in our growth for the future, it's important to maintain That investment. And then beyond that, we have had a reduction in AP1000 year over year. We've talked about the profitability of that contract. I won't get into the numbers again on that, but that's a $20,000,000 year over year headwind that we're facing within the Naval and Power segment.

Speaker 3

So I think 10 to 30 basis points year over year, if you pull back the some of these items, there's a lot going on in the organization, not only from a pricing perspective and And commercial to push forward commercial excellence, but also operational excellence to support that investment that we're doing for the future.

Speaker 7

So if we stripped out all of the kind of discrete things that are going on, your position is that you're still in that kind 25% to 30% core absorption, core incremental margins on growth?

Speaker 4

Yes.

Speaker 7

And I mean, the CAP 1,000 headwind is going to decline year over year going into 2024 just because the contract is running out of revenue to decline off of. You guys have made a commitment to continuing to invest in growth. Should we expect further headwinds To the margin line, obviously, I understand that they're getting paid back in growth in 2024 from increased investment there. Just how Should we think about the puts and takes there as we go into 2024?

Speaker 3

Yes. We are certainly still on The journey and what we've set out to accomplish here in Investor Day, I mean, there's a lot that goes into answering the question as to where you're going to be in 2024. We're Still actively engaged in our strategic planning process, evaluating some of these investment opportunities that stand in front of us this next year. But I mean, specifically, as you brought it up, I mean, as you look at Naval and Power margins going forward, I think the positives here that We've got a real solid naval defense outlook, including a ramp on the Columbia Class submarine. We've got this new business integration With our Resting Systems business that is going very well, we're seeing FMS sales growing.

Speaker 3

We have we should have no AP1000 headwind this next year. I mean, boy, it would be nice if something happened a little bit sooner on those orders. We're still forecasting 2 to 4 years, but we know that will be an accelerant when it hits. And we'll have a tailwind and a benefit from this small natal contract That we had here in the Q3. So we'll get through this strategic planning process here in the Q4.

Speaker 3

We're going to look at These R and D investment opportunities that are in front of us in advanced SMR subsea, advanced enabled tech type technologies and Absent investments in R and D or other factors, I mean, we'll get to that incremental 25% to 30% as we have in the past. So That's how I would look at that.

Speaker 7

That's helpful. Thanks. I think important for people to understand what the call looks like. So thanks very much for taking the questions.

Speaker 3

Thank you, Nathan. Yes. Thank you.

Speaker 1

Our next question comes from Pete Osterland with Truist. Your line is open.

Speaker 8

Hey, good morning. I'm on

Speaker 3

for Mike Ciarmoli this morning. Thanks for taking our questions.

Speaker 8

The first just wanted to ask

Speaker 3

on the book Bill, for the quarter, I was wondering if

Speaker 8

you could provide some more detail on what that looked like by segment or by end market. Just trying to get a sense for Strong orders were in defense electronics and if there are any markets you would call out where order trends are showing any signs of relative weakness? Thank you.

Speaker 3

Yes. So there's a lot to unpack in that question. So let me start off and say the total purchase rate level, we were Approximately a 1.2 times book to bill and that's on very strong sales growth of 15%. As you look across the three segments, Aerospace and Industrial was about a one times book to bill. The Defense Electronics was 1.3 times book to bill.

Speaker 3

And that's really the 3rd consecutive Quarter for that segment, with very strong book to bills, I mean, they were 1.2 times in Q2, 1.4 times back in Q1. Last 12 months of orders $983,000,000 So, some very strong things happening there on top of Very solid sales growth and in the Enable and Power segment, about 1.2 times. The book to bill is a little bit stronger In the defense markets, we're still at about a 1.1 time in commercial aero. The commercial markets are really kind of a balance, right? And we're seeing some very strong growth that's taking place in orders, Up 15% in our nuclear submarket.

Speaker 3

We're seeing mid single digit growth here in Q3 in the process markets, But high above that on a year to date basis. We've talked a little bit about the industrial market and what we're seeing there in the past. I think the positive is that while we've been in A fairly steady decline on a very strong order book since the highs of 2021. Here in Q3, we flattened out a little bit as we had projected. We're dealing with a little bit of slack in our customers' Inventory that seems to be balancing out.

Speaker 3

We've got some new product introductions, I think that are going to help that going forward. And commercial aero continues to be very, very Strong. So no concerns in that regard, continue to produce and expect to produce an alignment The trajectories that Boeing and Airbus have laid out for their critical platforms.

Speaker 4

And then just one follow-up on nasal defense. Have you

Speaker 8

seen any signs of increased activity or conversations around August? And do you have any updated expectations around timing for when that could potentially be additive to that business?

Operator

There's definitely a lot of activity happening in the background around August and figuring out how those submarines are going We built and replaced. A lot of those were not really at a free hand to speak to, but it's we've said Kind of over the past year that the plan for office is not very clear. Well, it is becoming more clear. I can say that for sure that And we continue to know it's going to be a very good tailwind for Curtiss Wright in our business, but really the timing and the But really the timing and the details is not something we can freely speak to.

Speaker 2

All right, understood. I'll leave

Speaker 3

it there. Thanks for taking the Thank

Speaker 6

you.

Speaker 1

At this time. We'll take our next question from Myles Walton with Wolfe Research. Your line is open.

Speaker 5

Hi, good morning. This is Greg Dahlberg on for Myles Walton. I just had a quick cleanup on SMR. I think previously you mentioned content on X Energy Comments that we are in discussions with Hitachi and Rolls Royce. So I don't know, maybe any updates on those discussions and maybe expectations for design revenues into 'twenty four and beyond?

Operator

So we've been very public on we're over $100,000,000 of content on the 4 unit PlantRx Energy, we continue to work with them and explore other systems that we can build. I would say,

Speaker 3

I don't know if you saw

Operator

a press release we put out maybe a month or so ago for a major Control system that we've won with TerraPower, so that was something we could go out go ahead and put out into the public. And so those are the things that We're okay to talk about at this point in time, but the activity is very steady across the board in all the major SMR Reactors and we're really hoping that as we move to our Investor Day next May, our goal is obviously we have To comply with what our customers want, but hopefully a lot of this will become a little bit clearer and we'll be able to really talk about some of where we sit Across the very reactors by that Investor Day. So, that's your piece to try and make you really want to come to our Investor Day.

Speaker 5

Great. Thank you. And one more quick one. Anything on M and A, just broad color on expectations in the year end, what you're seeing right now? Thank you.

Speaker 6

So we have quite a

Operator

few very interesting properties in the pipeline. I wouldn't see their Well, I guess, there's a chance it could be something yet coming by year end, but our pipeline is very healthy and I feel Optimistic and in 2024, we'll be able to have at least one announcement of A really good solid property that matches both those strategic and financial filters that I talked about. I will say that as we've said years in the past, we surely have evaluated a lot of properties this year, small to some very large ones. But Considering the cost of capital right now, it's a pretty high bar to want to make sure The 5th is really good. The forecast, all those things are really solid and we passed on quite a few properties this year, but we have some we're very optimistic about.

Speaker 3

Yes. And then just to that point, I mean, just relative to financing, I mean, back in June of 'twenty two, we completed that EAS acquisition and then we paid down $200,000,000 of notes in Q1. And I'm really pleased to report that based upon that strong free cash flow generation that we've shown Year to date, we exited the Q3 off the revolver. So those borrowing rates are approximately 6%. So With a strong 4th quarter finish, we'll be putting some cash onto the balance sheet here, not too much, but Certainly preparing ourselves for any of these opportunities that present themselves as we move into 2024.

Speaker 3

Great. Thank you. Thank

Speaker 1

We'll take our next question from Louie DiPalma with William Blair. Your line is open.

Speaker 9

Lynn, Chris and Jim, good morning.

Speaker 7

Good morning.

Speaker 9

Congress Newport News and Electric Boat have referenced how the submarine industrial base remains Very fragile. Specific with the Virginia class, has this impacted

Speaker 3

You at all? And

Speaker 9

in the context of how the contractors are ordering long Lead time materials, is there the potential that your Navy business Expands as Virginia class production expands?

Operator

So one thing we talked about Back in our Investor Day back in 2021 and continues to be true is, we're a very solid supplier across the submarine programs and have a great reputation within the customer base for our ability to deliver on the submarine programs. And so We're always making it clear that we're interested in expanding our content across those programs as potentially Other suppliers fail and we have instances of that over during the period and continue to have very pro Active discussions with those customers that you referenced around that topic. It's Something that again, I guess twice on this call say something we're not really that free to speak about the specific subs, but The other area associated with that is there's been money made available in the defense budgets and then there's Money in the current plus up that's being debated in Congress to support Israel And Ukraine, there's actually money in that there for the submarine supplier base that we're considering How it might apply to us that make sure we are doing those things as things like August comes and Columbia ramps to about a year and they want to potentially ramp up Virginia that we're really prepared to do that.

Operator

So we're very proactive about considering how we can pursue those funds to be a really solid portion of that supply base into those important submarine programs.

Speaker 9

Thanks, Lynn. And Across your, industrial and defense segments, are you still Seeing any supply chain headwinds, I know that several of your competitors have referenced A new reality in terms of the supply chain on the defense side, but it seems you've been able to manage better than most. But If the supply chain improves, like should that lead to like better output and potentially higher margins?

Operator

So there is the supply chain is and it's interesting. I was talking to some of the team members just to get their latest perspective on it earlier this The supply chain is nowhere near at the point it was in 2019 and that really is As you just kind of referenced, there's no clear line of sight on when the supply chain would perform at that level again. It is largely stabilized. I'm very proud of how we have responded. The teams that are right in the middle of Have responded and implemented new systems, new tools, new approaches to be successful with the supply chain the way it is You know, in its current state.

Operator

And so I think we are being successful and it isn't just the supply chain is completely back The normal with how we've responded as a business. And I mean, you can see that where we were hit the hardest was in defense And you can see that with the 12% to 14% growth we're now projecting in that segment this year. But just to put a little color on it, we Broadly, when we think statistically of what's going on in the supply chain, we look at a lot of different metrics across it. And in the And what's considered our long lead parts, which we consider anything over 40 weeks, there's pretty much stability in the lead And some improvement on the on time delivery of those parts, but there are still components that are out there at 52 weeks and some even greater of lead time and there was Nothing was that long. 26 weeks would have been the longest we would have seen prior to the pandemic.

Operator

So there's still that. And I will say that recently within the lead times of components that are less than that 40 weeks, Some under 20, some in the 20 to 40 kind of category. We've seen some volatility in the lead times in those components and some of those going Back up from how they had come down prior. So it's still a dynamic environment that the team is having To deal with the areas where we see some of the lead times creeping back up is really around some of the older legacy Processors and memory components example that are were brought to the market many, many years ago. That dynamic is true in our industrial businesses also is where they have largely seen their lead times come back from the 52 weeks Down to 10 to 14, but they still have some issues with where they have legacy parts.

Operator

And part of our value proposition, However, our defense electronics team is with the combination of we bring state of the art products to the market with the latest technologies across GPUs, FPGAs, all the various ways you can do computing, but we also work with our customers to Keep producing the same products that they build systems on for many, many years, 10 to 15, even up to 20 in some cases, Years until we have a lot we're very dependent on some of those legacy processors and are working very hard to do that. So It's the team is managing it. I'm not foreshadowing any kind of change or problems Going forward, I think we've got systems to manage it, but we're still dealing with a situation that isn't the way it used to be.

Speaker 3

Yes. And I'll just comment really quickly on the margins there, Louis. I mean, I think as you look at 23 to 23.5 to 23.7 on the margins. I mean, we've been here before. You can back up and see it in 2020 2019.

Speaker 3

A lot of what I had said earlier on the call regarding our forward outlook in 'twenty four, It's really going to depend on where those investment opportunities are in Defense Electronics. But we will manage as we have historically the entire portfolio to continue to provide that incremental margin expansion.

Speaker 9

Sounds good. Thanks for all the detail. Greatly appreciate it. And I guess one final one, it appears that IIJA infrastructure bill funding is Hopefully set to increase next year, at least that's what some of the companies have been Saying on the Q3 earnings call, can you remind investors, do you have any significant Exposure on your industrial side and even a little on your federal side, as it relates to the IIJA?

Operator

So we do not directly, we're not out building bridges and things, but we do have Tenantals said a lot of that funding is a good tailwind from Curtiss Wright and whether that's we have a significant footprint across construction vehicles. And so as there is building of the various infrastructures that it's directly funding, that's driving Increases in those areas that will come through the Curtiss Wright with our content across those types of customers. Inside of the bills, there are also investments for the civil nuclear fleet that is very much helping a lot of these plants Go from their 60 to 80 year life extensions and Chris talked about what we're seeing in our aftermarket sales, Very strong performance out of that team. And there's no doubt that some of that is clearly being driven by the money that's Available in the infrastructure bill. And then broadly, there's support for various types of electric vehicles.

Operator

We don't obviously do we're not focused on automobiles or anything along those lines, but large trucks, buses, school buses, that Type of equipment where there's funding for that is another place that we'll see the tailwinds from that. We do it is supportive of Curtiss Wright's business broadly.

Speaker 9

Great. Thanks, Lynn. Thanks, everyone.

Speaker 6

Thank you.

Speaker 1

There are no further questions in the queue. I will turn the floor over to Lynn Bamford, Chair and Chief Executive sir, for any additional or closing remarks.

Operator

I'd just like to say thank you to all of you for joining us today, and we look forward to speaking with you again during our 4th Quarter 2023 earnings call in 2024. So have a great day.

Speaker 1

Thank you. This concludes today's Curtiss Wright Third Quarter 2023 Earnings Conference Call. Please disconnect your line at this time and have a

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Key Takeaways

  • In Q3, Curtiss-Wright reported 15% sales growth to $724 million (14% organically), 17% operating income growth, a 30 bp margin expansion, $2.54 EPS (+23%), and 59% free cash flow growth.
  • The company achieved a record bookings quarter with a 1.2x book-to-bill, backlog exceeding $2.9 billion (+12% YTD), led by strong Defense Electronics and >3% order growth across all segments.
  • Curtiss-Wright raised its full-year 2023 outlook to 8–10% sales growth, 10–30 bp operating margin improvement, 11–13% EPS growth, and $380–400 million in free cash flow, driven by broad end-market strength.
  • Secular tailwinds remain robust in Defense Electronics (supply-chain recovery boosting embedded computing and tactical comms), Commercial Aerospace (narrowbody OEM ramps) and Nuclear SMRs, with >$1 billion of reactor coolant pump opportunities over the next 2–4 years.
A.I. generated. May contain errors.
Earnings Conference Call
Curtiss-Wright Q3 2023
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