Curtiss-Wright Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 3, 2023

There are 9 speakers on the call.

Operator

Welcome to the Curtiss Wright Second 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.

Speaker 1

Quality.

Operator

I would now like to turn the call over to Jim Ryan, Vice President of Investor Relations. Please go ahead, sir.

Speaker 2

Thank you, Carrie, and good morning, everyone. Welcome to Curtiss Wright's Q2 2023 earnings conference call. Joining me on the call today are Chair and Chief Executive Officer, Lynn Bamford and Vice President and Chief Financial Officer, Chris Parkes. Our call today is being webcast and the press release as well as a copy of today's financial presentation is available for download through the Investor Relations section of our company website at www.purvestripe.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 Securities Litigation form act of 1995. These statements are based on management's current expectations and are not guarantees of future performance. 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 non GAAP That excludes certain costs in order to provide greater transparency into Curtiss Wright's 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.

Speaker 2

GAAP and non GAAP reconciliations for current and prior year periods are available in the earnings release and on our website. Now I would like to turn the call over to Lynn to get things started.

Speaker 1

Thank you, Jim, and good morning, everyone. I will begin by covering the highlights of our Q2 2023 performance and a brief update on our full year financial 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 Q2 2023 highlights, Sales increased 16% overall to $704,000,000 and improved 12% organically. Our results reflected the strength of our combined portfolio as we delivered higher year over year sales growth in all our end markets.

Speaker 1

Underscored within this performance in Aerospace and Defense, we demonstrated strong 23% growth. This was principally driven by the easing of defense electronics supply chain conditions, including improvement and lead time and component availability and strong conversion on our backlog. We also achieved 20% growth in commercial aerospace as we continue to benefit from strong OEM demand. Growth in our operating income increased 18% year over year and exceeded our strong sales growth. This performance reflected favorable absorption on higher revenues in all three segments and we were able to generate 30 basis points in overall operating margin expansion in the quarter despite some unfavorable mix.

Speaker 1

Diluted earnings per share of $2.15 increased 18% year over year and exceeded our expectations, primarily due to higher A and D sales. Adjusted free cash flow was also Strong at $99,000,000 in the quarter, generating nearly 120% in free cash flow conversion. We continue to experience very strong demand across our A and D end markets and for commercial nuclear products to support maintenance, modernization and plant As a result, our order book continues to grow at a rapid pace with new orders up 8% year over year. This provides great visibility and bodes well for our expectations in the second half of twenty twenty three and our long term outlook. Overall, book to bill was 1.2x in the 2nd quarter, building upon our already strong backlog, which is now up 9% year to date and in excess of $2,800,000,000 Next, some highlights of our full year 2023 guidance.

Speaker 1

Our strong first half results combined with solid trends across our markets and expectations for continued easing of the defense electronic Slide 18 gives us confidence to raise our outlook for sales, operating income and diluted earnings per share. As we'll discuss this morning, our updated guidance reflects increased sales and operating income in all three segments, mainly driven by increased profitability in the Defense Electronics segment. Overall, we increased our full year sales growth to a new range 7% to 9%, along with 8% to 11% growth in operating income. And we continue to maintain strong profitability with 10 to 30 basis points of year over year margin improvement. This puts us on track to deliver double digit growth in diluted EPS this year.

Speaker 1

In addition, we increased the bottom end of our already strong free cash flow guidance to reflect higher confidence in the full year outlook. In summary, we are well positioned to deliver strong results in 2023. Now I would like to turn the call over to Chris to continue with our prepared remarks.

Speaker 3

Thank you, Lynn. I'll begin on Slide 4 with the key drivers of our Q2 2023 results by segment. Starting in Aerospace and Industrial, we delivered another solid performance as sales increased 8% and operating income improved 10%. Within this segment's commercial aerospace market, We experienced nearly 20% sales growth based on strong OEM demand for sensors and surface treatment services supporting the ramp up in production on Boeing and Airbus platforms. We also experienced solid growth in actuation sales within the segment's Aerospace and Naval Defense markets due to the timing of production on various programs.

Speaker 3

In the general industrial market, our results reflected increased sales of electromechanical actuation products and surface treatment services. In addition, overall industrial vehicle sales were flat as solid growth in the on highway market was offset by the timing of off highway sales. Turning to the segment's profitability. Our results reflected favorable absorption on higher sales as well as some unfavorable Next on lower margin actuation and sensors products. Next, in the Defense Electronics segment, Sales increased 32%, reflecting improving supply chain conditions and the conversion of our strong order book, particularly for our tactical communications in the ground defense market.

Speaker 3

We also experienced solid sales growth in aerospace defense for embedded computing on various foreign military programs as well as flight test instrumentation on the F-thirty 5 program, where we support the testing of aircraft that has completed the Tech Refresh 3 or TR-three upgrade. Regarding the segment's operating performance, operating income increased 77%, while operating margin improved 5.40 basis points, principally due to favorable absorption on the strong sales growth. Turning to the Naval and Power segment, Overall sales growth of 12% was principally driven by the contribution from our Resting Systems business, which continues to exceed our initial due to the strong international demand for its products. And as a reminder, the sales from that acquisition are mainly reflected in the aerospace defense market. Elsewhere in the naval defense market, higher revenues principally reflected the ramp on the Columbia Class submarine and solid growth on aircraft handling systems, partially offset by reduced revenues on the CVN-seventy 4 overall program.

Speaker 3

In the power process market, sales increased approximately 5% overall and were approximately 10%, excluding the revenue headwind associated with the wind down on the CAP1000 program. Our results reflected strong growth in the commercial nuclear market supporting for design. We also experienced mid teen sales growth in the process market driven by increased maintenance and turnaround activity as well as the timing of customer investments to expand production. Turning to the segment's profitability, favorable absorption on the solid sales growth was set by unfavorable mix on the CAP 1,000 program as well as naval aftermarket revenues. In addition and partly offsetting the strong segment performance, we experienced an increase in corporate costs resulting from higher 401 expenses as continue to hire in support of our growth as well as higher foreign exchange transactional losses from FX volatility and spreads in the current interest rate environment.

Speaker 3

To sum up the 2nd 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 5% to 8%, with total sales growth of 7% to 9%, reflecting an increase in sales of nearly $80,000,000 compared with our prior expectations. Across the entirety of our aerospace and defense markets, We now expect total sales to increase 9% to 11%. First, in the aerospace defense market, Our guidance remains unchanged and we remain on track to demonstrate strong growth in the second half of twenty twenty three based on the timing of embedded computing revenues.

Speaker 3

In ground defense, we now expect full year sales growth of 16% to 18% based on a strong

Speaker 2

and growing order book for our

Speaker 3

$20,000,000 in tactical communications equipment sales that were accelerated into the first half as we burned down some of the prior year's backlog at a faster pace. Next, in naval defense, where we raised our full year outlook and now expect sales growth of 6% to 8%, primarily driven by the timing of production on the Columbia Class Submarine Program. Turning to commercial aerospace and based upon the strong first half performance, We now expect sales growth of 9% to 11% due to expectations for strong OEM sales growth on narrow body platforms. And of note, we expect this growth to be driven by higher sales of sensors and surface treatment services in the A and I segment, as well as improved demand for avionics and flight test equipment in the Defense Electronics segment. Outside of our A and D markets, we raised our growth outlook for the power and process market to a new range of up 3% to 5% based on the strong year to date performance and increased demand for both our commercial nuclear aftermarket and industrial vehicle valve products.

Speaker 3

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 now expect The high single digit full year growth rate in both our commercial nuclear and process markets due to our strong order book as well as higher nuclear outages and process turnarounds in the first half of this year. We now expect sales growth of 3% to 5%, primarily based upon an improved growth outlook for on highway sales in our industrial vehicles business as well as reduced impact from FX. As a result, we have raised our full year growth outlook for our total commercial markets to a new range 3% to 5%. Continuing with our full year outlook by segment on Slide 6.

Speaker 3

I'll begin in Aerospace and Industrial, where our top line guidance has been increased to reflect 4% to 6% sales growth, principally driven by the strong first half sales growth in Commercial Aerospace. Regarding the segment's profitability, we continue to favorable absorption on higher sales driving a solid increase in operating income to a new range of 5% to 9%, while our revised outlook reflects the impact of unfavorable mix experienced in the first half of this year. Overall, we continue to expect Strong profitability in this segment and to deliver 20 to 40 basis points in operating margin expansion. For your modeling purposes, we expect the segment's 3rd quarter sales to be slightly below our 2nd quarter results and operating income to be largely on with the Q2 due to the timing of sales in our European operations. We then expect the segment to deliver a strong finish to 2023.

Speaker 3

Next in Defense Electronics. Following the strong first half performance, improving supply chain conditions and continued order activity, we raised our revenue forecast and now expect sales to grow 9% to 12%. We feel very confident in this improved outlook as a significant portion of our sales are in backlog as of June 30, and we anticipate continued improvement in the as we move through the balance of the year. Regarding the segment's profitability, we now expect operating income to grow 13% to 17% And full year operating margin to range from 23% to 23.2%, reflecting 60 basis points to 80 basis points in year over year expansion, which is 30 basis points above our prior expectations. Of note, we expect our second half results to reflect both Favorable absorption and mix on strong sales growth.

Speaker 3

And lastly, Enable and Power. We now expect Strong sales growth of 8% to 10%, principally driven by improved expectations within our Naval Defense and Power and Process markets. Regarding the segment's profitability, we raised our operating income guidance to reflect growth of 2% to 4% and continue to expect favorable absorption on higher sales, but we maintained our prior margin outlook primarily due to unfavorable mix. Again, for your modeling purposes, we expect this segment's 3rd quarter sales to Firstly, in line with the Q2 as well as additional margin pressures associated with the timing of higher development contracts in the power and process market. Regarding our non segment or corporate expenses, our updated guidance reflects a slight increase in assumptions related to higher foreign exchange transactional losses So to summarize our outlook, we expect total Curtiss Wright operating income to now grow 8 to 11% overall in excess of sales growth of 7% to 9% as we continue to deliver on the Pivot to Growth strategy.

Speaker 3

As a reminder, this includes an increase in internally funded R and D investments, the shift to lower margin development contracts on customer funded programs and the headwind associated with the wind down of the CAP 1,000 program. Overall, we expect full year operating margin to improve 10 points ranging from 17.4% to 17.6% as we continue to drive our operational and commercial excellence initiatives throughout the organization. Continuing with our financial outlook on Slide 7, building on our solid first half performance and for strong growth in the second half of twenty twenty three, we've increased our full year adjusted diluted EPS guidance to a new range of $8.90 to $9.15 or up 10% to 13%. As we look ahead to the second half of this year and based on the timing of sales as Previously discussed, we expect our overall Q3 2023 sales to be slightly below our 2nd quarter results, along with a modest improvement in operating income and diluted EPS followed by a strong finish to the year. Turning to our free cash flow.

Speaker 3

As Lynn shared earlier, we generated nearly $100,000,000 in the 2nd quarter as improved working capital management and higher cash earnings showed a solid year over year improvement. As we look forward across the remainder of the year, our greatest challenge And opportunity in free cash flow continues to be in working capital management. And more specifically, inventory reduction as supply Pressures continue to ease and we execute on our healthy order book. Regarding our full year guidance, we raised the bottom end of our range by $10,000,000 based on improved confidence in our full year financial outlook and our intense focus on working capital management. As a result, our free cash flow outlook now ranges from $370,000,000 to $400,000,000 reflecting strong growth of 25% to 36%, which still implies a Free cash flow conversion rate in excess of 110% at the midpoint of our guide.

Speaker 3

Now, I'd like to turn the call back over to Lynn.

Speaker 1

Thank you, Chris. And turning to Page 8. As we have discussed today, we are pleased with our Q2 results and we remain well positioned to deliver another strong year for our shareholders. We're very focused on executing on our Pivot to Growth strategy to drive long term profitable growth across the organization. The continuing strength of our order book, growing backlog and deep foundation in operational excellence provide visibility and confidence to successfully achieve our 2023 financial guidance.

Speaker 1

And I want to commend our global employee base for their continued focus and dedication to driving Curtiss Wright's success. Of note, for the 3rd straight year and in line with our 2021 Today commitments, we expect growth in operating income to exceed our strong top line growth, while also driving double digit growth in earnings per share. Beyond that and following the strong start to the year, we have improving confidence in our free cash flow outlook and continue to drive towards an average Free cash flow conversion target in excess of 110%. The near and long term prospects for Curtiss Wright and the markets we serve are very healthy and our continued investment in critical technologies and alignment to long term secular growth trends provide a strong basis for current and future growth. While we are excited for these prospects across the full portfolio, I would like to spend the next few minutes providing some additional perspective on our commercial nuclear business, which serves the dynamic and growing commercial nuclear industry.

Speaker 1

This is a market that has been gaining increasing interest and presents compelling value creation opportunities for Curtiss Wright and our stakeholders. As global sentiment shifts towards decarbonization and bipartisan support strengthens in an effort to restore the U. S. Competitive nuclear energy advantage, the industry continues to see increased government funding as well as emerging domestic and international market opportunities. Thursright is very well positioned in both the U.

Speaker 1

S. And internationally benefit from this momentum. In the U. S, as many are aware, we have been a critical supplier nuclear components since the industry's inception with the majority of our nuclear sales today serving the aftermarket business. The U.

Speaker 1

S. Government continues to increase its focus on funding and support for retaining and extending the domestic fleet of nuclear plants, and we expect this will continue to bolster demand for our solutions. Outside of the U. S, we continue to advance our position to service The global fleet of operating reactors building upon our content in Canada and South Korea and emerging opportunities in other countries as they too need to extend the lives of their plants. On the newbuild front, We have a tremendous opportunity for long term growth in 2 key areas.

Speaker 1

We have solid exposure to the growing list of Westinghouse AP1000 power plants where we are a critical supplier of our highly profitable reactive coolant pumps or RCPs and we're only beginning to establish our footprint to serve the leading designers of next generation advanced and small modular reactors or SMRs. Taking a closer look at the Gen 3 AP1000. First, we would like to extend our congratulations to those involved in Start up of Vogtle 3 AP1000 plant in Georgia, which recently began commercial operation and represents The first newly constructed nuclear power plant in the U. S. In more than 30 years.

Speaker 1

In addition, we are encouraged to see Westinghouse's Ongoing pursuit to expand this technology by building relationships and signing MOUs throughout Eastern Europe. This includes prior agreements with Poland, Ukraine and the Czech Republic, as well as more recent discussions to assist Bulgaria, Slovakia, Slovenia, Finland, Sweden and more. This strong momentum implies a potential of nearly 25 plants thus far, several of which are expected to be on track to begin construction in the next 5 to 10 years. As a result, we continue to believe there is a strong opportunity for Curtiss Wright to secure new contracts for our reactor coolant pumps within the next 2 to 4 years. Further, this excitement only builds upon our previously communicated expectations to secure more than $1,500,000,000 in RCP orders from Eastern Europe with the potential long term value well in excess of this amount should Westinghouse be successful in its global negotiations.

Speaker 1

Aside from the AP1000, we are also working to establish relationships with all the major advanced Small modular reactor designers leveraging our long tenured stature and deep engineering knowledge to secure new and meaningful content. Of note, 2 manufacturers, X Energy and TerraPower, have received funding from the U. S. Department of Energy's Advanced Reactor Demonstration Program or ARDP. We have established a strong position with X Energy where we have secured more than $100,000,000 in content for each 4 pack or 3 20 Megawatt plant.

Speaker 1

X Energy continues to announce new partners and projects. In May, Dow Inc. Selected the Seadrift Operations manufacturing site in Texas for X Energy's first deployment of the XE-one hundred reactor. Construction work on that initial reactor is expected to begin in 2026 and targeted for completion by the end of the decade. In addition, last month X Energy and Energy Northwest announced their intent to build at C100 Advanced SMRs in Washington State, generating up to a total of 9 60 megawatts or the equivalent of 3 4 packs with the first module anticipated to be online by 2,030.

Speaker 1

More recently, we were selected by TerraPower to supply our reactor protection system for their natrium reactor for the demonstration plant in Wyoming. The RPS is a critical system for safely shutting down the reactor in the event of an unusual plant condition. As they advance through the initial stages under the ARDP, It opens the door for Curtiss Wright to become a significant supplier of this and other technologies supporting TerraPower's future reactor. Aside from these two designs, we expect to develop similarly strong footholds with advanced SMR designers to secure meaningful content Ranging from $10,000,000 to more than $100,000,000 per project as they seek to deliver safe, reliable and carbon free power. I'd like to remind you that we are recognizing both orders and revenue in 2023 for advanced SMRs and this activity will continue to ramp up as we progress through the development and continue to secure new awards.

Speaker 1

We have a long runway ahead of us to support this arm of the commercial nuclear industry and generate meaningful returns for Curtiss Wright. As we look over this decade and beyond, there are a number of opportunities for Curtiss Wright within the commercial nuclear market that would build on the great base As we've said before, we expect to learn much more about these opportunities in 2023 early 2024 as we approach our next Investor Day. As you can see, the activity for commercial nuclear is advancing at a relatively rapid pace. We are excited to keep you updated as we continue to establish new relationships, work towards the development of these new generation technologies and share in our customers' success. In closing, we've had a strong start to the year and I'm pleased with Curtiss Wright's momentum.

Speaker 1

Our updated guidance reflects our increased confidence and we remain focused on delivering a successful second half of the year, which will put us on track to achieve record sales, profitability, earnings per share and new orders. Looking beyond 2023, I'm truly excited about Curtiss Wright's future and the value we can deliver to our long term shareholders. We look forward to providing some additional insights into growth factors and new financial targets at our next Investor Day, which is currently planning for May 2024. At this time, I would like to open up the conference call for questions.

Operator

The floor is now open for questions. Our first question is coming from the line of Peter Arment with Baird. Please go ahead.

Speaker 4

Yes. Thanks. Good morning, Lynn, Chris, Jim. Nice results. Lynn, on the Snapback and Defense Electronics, it sounds like the supply chain has really improved quite a bit.

Speaker 4

Maybe you could just talk about a little more color on what you're seeing there? And are you also seeing share gains as some of your competitors out there have struggled? Thanks.

Speaker 1

So it is true. We definitely we've been talking The last earnings call and thank you for that, Peter. We were definitely beginning to see trends in the right direction and You worry that it's forward, 2 steps forward, 1 step backwards, but we really haven't seen that. But those trends have continued and The momentum continues. We monitor a lot of statistics on our supply base from on time delivery to lead times to de commit.

Speaker 1

I mean, you've heard us talk about them. And they all continue to trend in the right direction. And the tone of the conversations with our suppliers really reveals that they are in a very different place than they were 12 months and even 9 months ago. And so We feel good about it. They're making commitments.

Speaker 1

They're working with us on Poland. I think we had started to talk about that last quarter, but we're seeing more of that and Really getting on top of things. So we feel good about that. We're really seeing price stabilization within the supply chain to a large degree. So that's been Very healthy for us and supports some of our confidence in raising the margins in that group.

Speaker 1

And so We feel like we have a handle around it. It's not back to 2019 levels. A lot of people ask that. And I'm not sure really of the trajectory to that. Most of our suppliers won't say, oh, by 2024, we'll be back to 2019 lead times.

Speaker 1

I don't I think that's a little farther out, but we're dealing with it and coming up with strategies to drive working capital improvements in this environment with longer lead So it's good and it's quite a different field than if I turn the clock back 12 months ago and it just Seems like every day you didn't know what you were going to find. So we're really pleased. And I don't want to just say it's just happened easily. The team has done Great work, put in new systems, put in we talked about some of the new strategies we've put in and approaches we've taken to managing it. So it has been a change in the supply chain, but I'd say it's also You know, matched by a response from us as a company and how we have learned to manage it.

Speaker 1

So that's kudos to the teams that are all in the middle of dealing with this situation. From a market share standpoint, I think our order book says it all. We have the order book is up 31% in Defense Electronics year over year. They're part of our overall Strong order book and our pipeline of opportunities are putting out of significant RFPs Continues to accelerate and we feel great about where the team is and we're getting new products out in the market and turning we're spending more R and D in that business every year as Growing operating margins, it's not coming on the backs of our IRAD or customer funded R and D, which we're seeing Also increase in that group. So really the team is doing a great job managing in this time and building for a great future for going forward.

Speaker 3

And just to add one more color and just

Speaker 2

to add one more data

Speaker 3

point behind that, Peter, We're guiding this year to $765,000,000 in the midpoint in Defense Electronics. The last 12 months orders as of June 30 For $945,000,000 and the current year run rate is $927,000,000 So a very Strong and healthy order book, providing us with confidence as we get deeper into the year and into 'twenty four.

Speaker 4

That's very helpful. Thanks, Chris. And then just one last follow-up on just your kind of all your commentary around nuclear. You kind of indicated that over the next 2 to 4 years When you start to see really maybe in a figure backlog, is that the best way to frame it that this is the backlog story that will kind of emerge over the next 2 to 4 years?

Speaker 3

I think

Speaker 1

there's we put it in 3 buckets. I think our aftermarket business is on a steady ramp. We said we feel comfortable saying it's going to ramp at the mid single digits going forward, which is 90% of our commercial nuclear work today. And so that is happening here and now. The work, it's just under 10,000,000 Dollars that we're anticipating this year on this Gen 4 ARBP type of development, that is going to accelerate in 'twenty four and in 'twenty five.

Speaker 1

I mean, that It was early days with really a lot of engineering worksheets. We're not building things yet. We're going to be needing to build stuff For those advanced reactors in 'twenty five for sure and that's meaningful. The 2 to 4 years is really still of an AP1000 order, which is just a flashpoint. I mean, if it's everyone knows our 16 RCP order was $450,000,000 And Some of these opportunities are big opportunities and that's just a lightning bolt for the company and we're making

Operator

And we'll take our next question from the line of Louie DiPalma with William Blair. Please go ahead.

Speaker 5

Lynn, Chris and Jim, good morning.

Speaker 1

Good morning.

Speaker 5

Your Navy business continues to do well. Last week, You announced how you received a $250,000,000 add on contract from Electric Boat and Bechtel for additional Propulsion Valves and Control Systems, should this further increase the revenue run rate that you have been generating For your Navy platforms or at least maintain that revenue cadence? I know that you've been doing well and the comps get harder, but should we continue to see that grow and expand? Thanks.

Speaker 3

Yes. Thanks for that, Willie. We did just increase Guidance here within our naval defense market 6% to 8%, but that's really mainly based upon some of the things that we've been doing in staffing and the ramp up that you're Seeing on the Columbia Class 7 Marine Program this year. So I think there's some good things that are starting to happen in that regard. As you look at the $250,000,000 orders in that recent press release.

Speaker 3

We try to share with our investors each year the substantial volume of orders that we get and work that we get From the Navy, encompassing not only the defense electronics, but the generators, pumps and valves that we Provide to the most critical programs in the fleet. So, yes, when I look at that 250, I think what that helps us To really do, it just provides us with greater long term confidence and the trajectory of where our enabled business is headed. So that's A very positive sign. Many of those orders are multiyear in nature, but it really provides us with kind of a strong baseline of which

Speaker 5

Thanks, Chris. And you and Lynn both referenced how Your tactical communications equipment products elevated orders, which I believe is your PACSTAR brand. Within this demand, do you assess that the strong order flow is related to Ukraine Or is it for like other parts of the business?

Speaker 1

So, Az, it is within PACCAR, you're correct in that, which Again, there's another acquisition, turn the clock back a couple of years that just continues to really fire on all cylinders and we're really I made some good choices over the recent years with our acquisitions. And there is some pull that is from across the NATO countries And I think driven by the war in Ukraine, but mostly it's planned readiness within The U. S. Army and Marine Corps and then executing to the plans that were before us when we chose to make the acquisition. And Now, would you say the urgency and the commitment to those plans are solidified seeing the state of the world?

Speaker 1

Yes, probably and Absolute recognition that ready war fighters are critical and the ability to deploy troops and all that stuff. So It is all connected to some degree, but it's largely the modernization and we continue to win new programs Within the Army and the Marine Corps and our initial look just carrying on with that at the 24 budget is The thinking is most likely the Army will be flat broadly in 2024, but we've Doug, through the line items where we gain our funding in the 2024 budget and okay, it's not past yet, so we don't know for sure. But from what we see so far, There's really good solid funding for where PACCAR receives its funding in the 'twenty four budget. So we feel good about that going forward.

Speaker 5

Excellent. Thanks, Lynn, and thanks, Chris and Jim.

Speaker 3

Thank you.

Operator

And we'll take our next question from the line of Nathan Jones With Stifel, please go ahead.

Speaker 6

Good morning, everyone. Hi, Liam. Follow-up question on the defense electronics business. Maybe you could help frame where we are in catching up, Maybe in terms of like where you were in terms of past dues at the end of 2022, where you are now, Where you expect to end 2023? Just to help give us some color around where the supply chain is.

Speaker 1

So, I mean, we saw the significant increase in the ground defense guide. And some of that is when we made the initial guide, We were that was one of the areas that was heavily hit, high supply chain issues in 'twenty two. And it has really bounced back as Part of the surge in Q2 in the strong ground defense and that was shipping some of the revenues that slipped out of 'twenty two, Getting caught up on those in 2023. So for sure, we are catching up on those and have seen really great

Speaker 3

Yes. So if you recall, last year, I mean, it was a pretty challenging environment. And Yes, we had to drop our guidance, I think it was in the Q3 by roughly $15,000,000 to $20,000,000 And that created some past due, right? And in the first half of twenty twenty three, we've come on out fairly strong and we're seeing some of that past due burn off And that will create a little bit of a headwind here in the second half of the year, along with the timing of some actuation development in ground defense and TDSS Which can be a little bit lumpy. The other thing I'll say about that too is, as you look at that burn off, I mean, The revenue bump

Speaker 1

that you see here in

Speaker 3

the first half of the year is accentuated by the ship and build nature of largely our ground defense I mean when you look at it, it's like 90% of it is ship and bill, which is kind of unusual. I mean defense electronics is I'd say 55, 45 ship and build POC, but getting those parts, getting that product out the door that helps That accentuated the spike in the type of accounting that we're doing there. So generally, we see the supply chain improving as Wend had mentioned, Some really good things, but concerns still do exist. I mean, there are certain vendors that are recovering faster than others. And We've got that

Speaker 2

as a little bit of

Speaker 3

a watch item as we move into the second half of the year. So I think when you're looking half to half, Yes, we would just encourage you as you're getting to the midpoint of that guidance for modeling purposes just to think about that past due burn off. But the order book is looking great and we're all optimistic about where we could go.

Speaker 6

Just to follow-up on that, do you expect to still have past due by the end of the year with your current outlook for supply chain knowing that might change? And then with the you talked about $945,000,000 of orders in the last 12 months. Even with Maybe some additional demand catch up in 'twenty three. We should still be thinking about Some pretty decent growth in defense electronics in 'twenty four?

Speaker 3

So I'll take one of those And I think that we've been very fortunate in working with our customers throughout this whole supply chain matter that They have been very, very understanding of the issues that are taking place within the industry. As we categorize past due, I just want to be very cautious to say that they have been working with us, modifying dates And largely, we're not causing the customers any concerns and timing at this point. So they're really working with us well. I think so it's really hard to categorize exactly where we'll be in terms of pass At year end and but we are definitely working with our customers and the customer satisfaction rates are high. I think if you look at that $945,000,000 over the last 12 months and the $927,000,000 current year run rate, It does give us a lot of confidence.

Speaker 3

I mean, I think as you look towards the end of the year here, while we're pleased to see the defense budget moving Through the Senate Armed Service Committee and some of the conversations that are happening there, I mean, we could face a continuing resolution at year end. I don't know if that will be an extended continuing resolution. But certainly, this will provide us with a very nice bridge into this next year. And then we're about where we can go. Really love the alignment of the technologies to The defense needs and where we're headed here, it's exciting.

Speaker 3

Thanks for taking my questions.

Speaker 1

Thank you.

Operator

And we'll take our next question from the line of Myles Walton with Wolfe Research. Please go ahead.

Speaker 3

Thanks, Maury. Hey, Maury. I was

Speaker 7

just reflecting on the guidance that you're putting Together for organic growth for this year and looking back into the annals of time, I think you did it maybe once or twice back in 2,006, 2,007 Growth is anywhere close to what you're putting up. And I guess, Lynn, the pivot to growth must be working in that respect. And so As you put out that target for the 3% to 5% organic growth through 2025, looking beyond this year, do you feel comfortably at the upper end of that range?

Speaker 1

So honestly, I'm very proud and so fortunate to be the CEO and have The team that is Curtis Wright and hence the call out to everybody across the organization. People have really embraced The pivot to growth, they get it. Everybody's enthusiastic about it. It's been fun to have discussions about wanting to Spend more R and D and looking to drive our operational excellence savings into more R and D funding. So It's well implanted in the company and it does give confidence for the growth that I think It's coming for a decade and beyond when you look at the dynamics in the markets and where our technology is, It's up to us to execute and to plan and drive customer satisfaction in those things and we watch those things equally Along with just the R and D project, then you have to be a reliable supplier.

Speaker 1

And we're not perfect in all cases, but we really absolutely attack Anything where we do have any challenges. So yes, I feel that there's really great optimism and again not getting ahead in giving any We have multiyear guidance. We'll do that in 'twenty four, but the prospects for organic growth are fantastic.

Speaker 7

And you mentioned the recent acquisitions both TAKSTAR and Safran, arresting systems were going well. It certainly looks like that in the numbers. Can you give a comment on the M and A environment backdrop? It's been about a year since after.

Speaker 1

Yes. We've looked at we A comment on this frequently that we look at a lot of properties before we choose to find one that we can bring into Curtis, right? And that has been very true Through the past 6 months, I'd say for sure, there's been a lot of properties that have come across our desk and really just You couldn't see a line of sight to the financials ever being accretive to Curtiss Wright. And we were very open when we bought PACCAR, their Financials were not afraid to perish, right? So it's not like you have to be in that sweet spot on day 1, but we have Understand the value proposition of what they're taking to the market and believe that with operational excellence that we can bring to them and pricing strategies, You PRs talk about frequently.

Speaker 1

I think Curtis Wright has done a really good job and matured our approach to how we price products that we can see line of sight with that. So We have dismissed a lot of properties in the first half of this year. We have properties out there right now that we have LOIs in play with that we are Looking into and so it's not that there's no properties, but I'd like to think optimistically we bring something across the finish line in the back half of this year, but we'll see. You have to just be patient and do the process correctly and not try and force something. And I think that attitude,

Speaker 3

which has been

Speaker 1

in place for many, many years, has led us to really bringing in very successful acquisitions and not ones that can't ever live up to the financial returns you need to have

Operator

We'll take our next question from the line of Mike Ciarmoli with Truist Securities. Please go ahead.

Speaker 8

Hey, good morning guys. Nice quarter. Thanks for taking the questions here.

Speaker 6

Good morning, Clayton.

Speaker 8

Hey, maybe I don't know who wants to take Chris, you talked about a very strong demand environment in aero defense nuclear, but You didn't really get too granular on what you're seeing in kind of general industrial or that order book. Maybe if you could give us A little bit of detail on how you're seeing kind of demand trends in various geographies in some of those general industrial sub segments you have?

Speaker 3

Sure. I'll take that one, Mike. And my apologies for kind of repeating myself, but I just feel it's kind of important to set the stage When we talk about the general industrial environment and 2021 we did reach historic highs. The orders are 48%, backlog doubled. Over the course of 'twenty two, the order rates slowed in GI.

Speaker 3

It was really down 8%, but still up 9% versus pre pandemic levels. And then this last quarter, we saw the orders down 20%. So we were kind of bottoming, I would say, At that 2019 level, but still a very strong and healthy backlog. So here in Q2, we were down again, but we were down 5 So we see the rate of decline slowing. Some of the decline is due to the supply chain recovery and customers reducing their order rates Back improving orders in the second half of this year.

Speaker 3

Now that will be supplemented by our new power management electronics We've talked a little bit about and so we expect some uplift in the back half of the year. As you dig a little bit deeper on surface tech And surface tech provides technologies to aeroget, commercial aerospace, to general industrial. Their order output in the GI space, which is more representative of kind of the current production output that we're seeing from our customers is in a mid single digit growth rate. So I think that speaks well to the full year guide that we now have in general industrial, which is that 3% to 5 There was a little bit of a minimization of the FX headwind that we're facing there. But as you look at what's Happening within industrial vehicles, it's mainly on highway, I'd say mid single digit growth, mostly North America.

Speaker 3

Off highway has been kind of flat. We're seeing some positives in ag, but those are being offset by construction and that's mainly Kind of a lower global construction space and then industrial automation and services, we just had a big quarter, had a lot of EM actuation sales, But we expect that to be more in the low single digits across the full year for revenue purposes, just slightly outpacing GDP.

Speaker 8

Got it. Got it. That's helpful. And then maybe, Lynn, you kind of mentioned pricing a bit and maybe to even Tie into what Biles was asking about organic growth being so good here. Can you maybe talk to I don't know If you can get specific on how much pricing is helping to contribute to the organic growth and what you're seeing in terms of Your ability to get price on the newest orders that are coming in and flowing to the backlog, anything else you could share there?

Speaker 3

Yes, I'll maybe try

Speaker 1

and expand on that a little bit. So I mean, you definitely know we've been talking about pricing for 2.5 years and really started Talking about pricing before the realities of the inflationary situation were so evident. And so I feel good as a company that we were really well ahead of it and Part of our OGP that we rolled out in May of 2021 and the teams have taken it very seriously and we monitor it Every month in our monthly financial reviews with the teams as to what they're getting, I'd say roughly 1% of our growth rate is due to pricing. It's not an exact science in measuring it. So how would make 1.00 in your models?

Speaker 1

But that's a Fair estimate to say that what's coming from pricing. And I will say, we're having some more sticky discussions with some of our Customers that still have ongoing LTAs where do we really need to get them to open up and change LTAs and that's getting a little bit more challenging. We don't see it as A roadblock, but some of that is the things that we don't think we're going to get done to affect pricing in this current year and It's reflected a little bit of some of the margin pressures in the ANI segment as some of those LTAs Anticipating those not getting renegotiated until later in this year. And so it's continual But even with that mentioning the ANI and some delays in some of the LTAs negotiations, Chris and I were just talking this morning reflecting that since the 2020 baseline, we've increased over 100 basis points in margin in that group every year. So clearly pricing is a big part of that and it really reflects the success the team has had.

Speaker 1

And then elsewhere, Enable and Power Group is a little different from what they do with their long term contracts and such. But in Defense Electronics, we've maintained a very dynamic And looking at our cost basis and adjusting prices as we can. And I think it is contributing to our the steady increase in ability to raise margins.

Speaker 8

Very good. Perfect. Thanks for that detail. I'll jump back in the queue.

Speaker 1

So I guess with that, I would say

Operator

I'm sorry?

Speaker 1

Sorry, I was just going to say thank you everyone for joining us today and we look forward to

Operator

Thank you. This concludes today's Curtiss Wright

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Key Takeaways

  • Sales rose 16% year-over-year to $704 million (12% organically), led by 23% growth in Aerospace & Defense and 20% growth in commercial aerospace.
  • Operating income increased 18%, driving a 30 basis-point expansion in margin, while diluted EPS of $2.15 was up 18% and adjusted free cash flow reached $99 million (120% conversion).
  • New orders grew 8% year-over-year, pushing the backlog up 9% year-to-date to over $2.8 billion and delivering a book-to-bill ratio of 1.2x for the quarter.
  • Management raised full-year guidance, now targeting 7%–9% sales growth, 8%–11% operating income growth, 10%–13% EPS growth, 10–30 basis points of margin improvement and increased free cash flow to $370–$400 million.
  • Curtiss-Wright highlighted strong momentum in its commercial nuclear business, with mid-single-digit aftermarket growth, potential >$1.5 billion in AP1000 reactor coolant pump orders and advancing small modular reactor contracts with X-Energy and TerraPower.
A.I. generated. May contain errors.
Earnings Conference Call
Curtiss-Wright Q2 2023
00:00 / 00:00