Okay, good morning, everyone. Thanks for joining us. My name is Peter Arment. I'm the Senior Aerospace Defense Analyst here at Baird. With us this morning, we're very happy to have Curtiss-Wright Corporation. Joining us from Curtiss-Wright, we have Lynn Bamford, who's Chair and Chief Executive Officer, and Chris Farkas, who's Vice President and Chief Financial Officer. Lynn, Chris, thanks for joining us. Really appreciate your support of the conference.
Thank you very much for inviting us. It's been a great conference, and look forward to this discussion.
Great. So one of the areas I guess we're gonna start with is Defense Electronics. It's been in kind of a hot area for supply chain disruptions over the last, really, probably 2 years, but particularly within, you know, the areas that you've been participating. What, what are the signs you're seeing kind of in the, the conditions are... Is there any stabilization? And when do you think the industry can kinda get back to pre-pandemic levels? Is that, you know, is that still a possibility? You know, what do you think about that?
Definitely an area we've talked a lot about between yesterday and this morning. So, clearly, it was an area that dominated a lot of what we talked about in 2022, as we were, you know, really living the life of some turbulent times in the supply chain. I think even in the beginning of this year, we began talking about, you know, seeing some stabilization, and I think that's just incrementally improved as we've gone through the year. I would say we're definitely nowhere near back to the 2019 levels. And to your last question, I don't know if we have line of sight on when we think we will return to those levels. But to be more specific, what we're seeing now is, you know, the on-time delivery out of our supply base, continues to creep up.
We're over 90% on-time delivery for the majority of our components across our various divisions in Defense Electronics. But the lead times definitely are still an issue. We bucketize our lead times for just getting statistics on how the supply chain's performing, and we tend to think of long lead items as 40 weeks and over. The parts that are in that category, the lead times have been pretty stable. I'd say very stable and reasonably good on-time delivery. You know, the components that are more in the 20 and 30 lead times, we still see some turbulence in the lead times and some lead times actually going up in those areas.
A lot of those tend to be older processors, older memory chips, that, you know, one of the value proposition Curtiss-Wright brings is when we produce a product, we will revision lock it and supply it to our customers, you know, ideally, as long as they want us to. And so we have a lot of, you know, products that we build that use older chipsets, and those have definitely become more on the back burner from some of the big suppliers, and so we need to be really proactive with that, and we've seen some tumult with the supply chain. But I'd say, you know, obviously, we're really pleased with the performance out of the Defense Electronics group.
We raised guidance again to 12%-14% growth year-over-year, so pleased with that, and inched up the margins in that group to 23.5%-23.7%. So the team's really performing well. You know, surely, the supply chain situation externally has helped, but I really do, you know, give credit to the team and the people working in that group that, you know, they've done a lot of things in 2022 from. You know, we've implemented major new tools that help us have really analytics and predictability around the supply chain, or predictability of unpredictability might be a better way of saying it, so that we can really proactively manage the situation. So the team's done a great job. The order book is really strong.
Our trailing twelve-month order book in that team is $983 million, so just really outstanding. I think it's reflective of, you know, the focus we've had on where we've spent our R&D over the past many years, but specifically since the MOSA mandate was put forward, you know, between 2019, 2020, and the success of the product offering we've had. Things are going great, and that team's doing a great job.
I just want to ask you about that MOSA standard, 'cause you were kind of preparing for that for a long time. I think you kind of thought that was gonna be an advantage for you guys.
Very much so. That, for those, again, it's an acronym, you know, from the industry. It's really an open standards approach to producing the various parts of a computing solution that go into many different applications, whether it's electronic warfare, a mission computer, a radar system. And, you know, the government really, you know, the government's pushed the concept of COTS, and it's really, you know, the roots of that team's inception, you know, for many years. But they really upped it when they put forward the MOSA standard, like three and a half years ago, to saying it was gonna be a discriminator in decisions making on, awarding various systems, you know, electronic systems.
We very much, from the get-go, you know, we participated in making the standards and very much, you know, jumped on to having the most robust product offering compliant to that standard in the industry, and it has surely served us well with, you know, the business we're winning. If you look on our website, you know, we have a handful of press releases of systems we've won based on the MOSA standard. That's where we can get our customer's agreement to let us do a press release, which is more rare than the norm, but it does give you a sampling of, you know, the various types of systems we're winning based on that MOSA standard. So thank you.
Thank you for that. Yeah. So you did just recently raise your 2023 outlook in defense. You're now projecting, as you mentioned, double-digit growth. Maybe help us understand where you see some of those opportunities, you know, and, and particularly, you know, how it's flowing from the 2024 budget.
Absolutely. So really, really pleased with what we've been able to see. And, you know, the order book, you know, as I just mentioned, really, you know, demonstrates that, you know, we've got a great future before us with this group. But, you know, one area I'd point out, we're really seeing, you know, pretty strong growth across the various product offerings within that team. But I would say, you know, one that stands above the others is really the tactical communications equipment from our PacStar acquisition from a couple of years ago, that their order book is really been strong, and you can see it in the growth that we're predicting in our ground defense business. And, you know, I think some of that is absolutely it's, you know, the U.S. Army and the U.S. Marines, who are big fans of their equipment.
We work very closely with them to continually evolve our product offering to meet whatever the latest needs are-
Right
from them. But I think we're also seeing the flow, direct and indirect from increased NATO spending, that their type of equipment is equipment that can, you know, really increase the operational readiness of a warfighter in the battlefield. And I think that's also very much supporting their, you know, their sales. And I think, you know, that's gonna continue to be a tailwind, a good tailwind for, for Curtiss-Wright Defense Electronics going forward. And I think that's just, you know, that's the type of equipment they can get that they can have it near term, and it's impactful to their operational capability immediately. And so I think we're seeing that surge most there, but I think it's just gonna continue, and, you know, whether it's vehicle production or the other areas we've talked about.
It's either all that modernization trend you kind of see in front of you.
Absolutely.
Yeah.
So, you know, a lot of, a lot of retrofits to existing systems, you know, new mission capability. I mean, we do a lot of programs that are, you know, driving special needs and operational capability on existing platforms. Another area I'd see that's really we're seeing that, that trend is in our test instrumentation area, that, there's really a change of mindset that, you know, the instrumentation on these very advanced fighter jets isn't, do it once and then set it aside and say, the, the, airplane is qualified. That they're continuously changing mission packages and different things that they always need to be re-instrumenting, and it's almost become a mentality towards a permanent fit, on those planes. And so that fits very nicely into, our product offering that was from our TTC acquisition back in-
Yeah
2017. So that business has performed outstanding for the corporation and continues just to be a source of growth for us.
Just when we think about defense electronics in general, you have exposure in, you know, kind of all areas in terms of Army, you know, Navy, and, you know, kind of airborne and Air Force, right?
Absolutely. It's across the services and globally. So, you know, a reasonable portion of that business is sold internationally throughout the NATO countries. And, you know, we have good growth factors really across all those. You know, our 901D acquisition from a couple of years ago really has helped us really start to build out our naval footprint, which was never as dominant of a piece of that business as, you know, the Air Force and the ground. And so, you know, we're really just beginning, you know, early days of being able to see the growth we can drive through that acquisition.
So let's talk about FMS, 'cause I think, you know, foreign military sales, you know, seems like it's an opportunity. You know, and when you think about that, you know, the demand factor there, you just mentioned kind of your global exposure, but also like, you know, just what we've seen just since Ukraine happened. Maybe you could talk a little bit about that.
Maybe I'll turn that over to Chris.
Sure, yeah. So when we talk about foreign military sales, we're talking about sales directly to foreign customers. So this doesn't include those sales to U.S. primes that are shipping internationally and the platforms that we support, like the F-35, the F-16, maybe it's a Stryker, maybe it's a Black Hawk. So this is direct foreign military sales. Today, it's about 8%-9% of our business. And we're starting to see a pickup in order activity this year, you know, globally, but also in NATO countries that are committing to increase their spending relative to GDP. And this year, to date, we're up 15% in that area. So we're seeing it more broadly across our defense electronics portfolio.
We have a fairly extensive product portfolio serving the aerospace, ground, and naval markets, so we're seeing it there. We had our arresting systems business for fixed-wing aircraft-
Mm-hmm
that we bought back in June of 2022. That concentration is 25 domestic, 75% rest of the world, but that acquisition this year is growing in the high teens.
Wow!
So doing another acquisition-
Yeah
that's doing very, very well for us. And then we have kind of a legacy rotary wing.
Mm-hmm
arresting systems business, you know, pulling helicopters onto the backs of frigates and things like that. But that business is doing very well this year in demand as well. So I think, you know, as we look out into the future, you know, given the rising threat environment and the alignment of our technologies to both domestic and foreign defense priorities, we see this as a growth area for us in the future.
Yeah, so tailwinds in defense for sure.
Yeah.
Yeah.
Yeah.
All right, let's switch over to a subject that I'm sure no one wants to hear about, is nuclear. There's been a lot of exciting news coming out of, kind of Eastern Europe around potential AP1000 reactors. Maybe help us understand how you're sizing the overall demand for Curtiss-Wright in this area.
So it is definitely something we're really looking forward to, you know, landing some of those really big orders here. And, you know, a lot of people have asked us, probably many of you in this room have heard it, that, you know, we think we will have orders within the next 2-4 years. And the background giving us confidence in that timeframe is really a lot of activity, as Peter just mentioned, throughout Eastern Europe, of, you know, various countries consistently making progress on their commitments to build out a nuclear capability to give them energy independence. So really, you know, there was the push from green, but surely, the war with Russia galvanized the need to have energy independence across many of those countries.
A couple examples for those maybe are not as close to it is, you know, Poland has declared that they're gonna build 6 large nuclear reactors and declared the first 3 will be AP1000. The following 3 quite likely could be, but they have not made that selection yet. Just last week, or two weeks ago, I guess now, Bulgaria declared that they're going to build 2 AP1000 reactors, so that's great. Again, kind of similar timeframe, early 2030s for being on board, which, you know, it's a very kind of well-established timeline for pouring concrete, ordering materials and stuff, which is what, you know, drives those orders to us in the next 2-4 years.
But broadly, when we look across Eastern Europe, across Sweden, Finland, Slovakia, Slovenia, you know, all the countries that have said they're going to build large, large reactors, that there's roughly 25 plants have been declared throughout Eastern Europe. Not that those have all been selected Westinghouse as the technology, but even if you say, you know, they win half of those, you know, that's $1.5 billion of business for Curtiss-Wright that will materialize, you know, over the next decade. And again, so we think we'll start, you know, recognizing those orders and then have a steady drumbeat of those following. So a real great trend for Curtiss-Wright.
Let's maybe just remind everyone, like, so if Poland wants to have an operational plant in 2033, they have to have what the industry calls the concrete date-
First concrete date.
five years before, I think-
Yes
if I remember correctly. So 2028, but then the order has long lead materials that, that's even, you know, before that, correct?
Yeah, and if you dig back through scripts, you'll find that, you know, we've, in the past, indicated that those orders could come to us up to 4 years beforehand. That would put an order next year. We're not saying that 'cause we're not hearing that from Westinghouse, but that has been the, the traditional cadence that has been laid out in the industry for how this would play out. But, you know, Westinghouse is definitely indicating to us they think it'll be 2-4 years, and so that's what we're, we're sharing, you know, with our investor base, is that that's when we anticipate we'll start seeing orders.
Chris, just to talk about the financial aspect of, you know, in terms of this is a very high-priced product for you, high-margin product. Maybe give everyone just a little flavor, you know, 'cause of the past when you had the China direct order.
Yeah, sure. So the last order that we had directly with China was for 16 RCPs. It's $450 million, so that puts the price of the RCP at roughly $28 million. That was back in 2015. Things have changed. Very profitable business for us. We, you know, don't like to talk about that, especially as we go to head into commercial negotiations in the future, but I think, you know, 23%+ is certainly accretive to Curtiss-Wright. And, you know, I like to do simple math, so I think as I look at it, you go, well, 4 reactors for plants.
So every time you hear somebody, you know, talk about a plant being added, 3 in Poland, 2, you know, 1 in Bulgaria, you know, 9 in the Ukraine, whatever it is, just take that number and multiply it by $100 million, and that'll give you a rough idea of the revenue that's associated with it, and those are typically recognized over, like, a 5-year bell curve.
So it just feels like this is gonna just layer-
It will
throughout the second half of this decade when you're thinking about the AP1000?
Yep.
Yep.
How do you think about competition for your reactor coolant pumps?
So if, again, those of you who have, maybe followed us for a bit longer, that, you know, we signed an agreement with Westinghouse in the beginning of, twenty twenty-two. We talked about it on our earnings call at the beginning of that year, that we had had just some contractual debates we had been having with them, put those all to bed, and, they signed an agreement that we would be their RCP supplier, going forward. So we feel very positive. We have a great working relationship with Westinghouse. Even when we were, bumping elbows over some, contractual issues, it really never changed the working relationship. And so, you know, we're a great supplier to them. We work well with them, and so we feel, you know, very positive about, you know, those plants driving orders to Curtiss-Wright.
Yeah, great. Let's stay with the nuclear, the new build. Well, small modular reactors-
Mm-hmm
a hot topic, and advanced reactors, I guess, also included in there. Possible timelines on announcements and maybe talk about, you know, how you think about potential content and, you know, and just the timing in general.
Yeah. So it's something that, you know, we've talked a lot about, you know, over recent conferences, but even here today, you know, the benefit, the revenue benefit to Curtiss-Wright from the small modular reactor programs is happening here, you know, in 2023 for us. That is, you know, we very publicly announced our work with X-energy, that we were pleased. They wanted to announce our content in a plant as they would define it. There's over $100 million of content for each plant being built from X-energy. And, you know, they saw it as important as having us press release our content with them for their credibility, given our reputation as a supplier to this industry. So we were really proud of that. That's been our most visible announcement for revenue content on the SMRs.
We said our goal is to have anywhere from $10 million to $100 million of content per SMR. No dollar figures out of TerraPower, and for those maybe who don't follow it quite as close, TerraPower and X-energy were the two recipients or winners of the ARDP funding out of the government back in 2020. So really, they've got good, solid backing from that. And TerraPower announced a couple of months ago that we've been selected to build the reactor protection system, which is really a large control system that basically runs the power plant. So obviously, a significant win for us and an endorsement for a different technology than we are providing for X-energy. So just really showing those really meaningful systems that we and capabilities we have, are being selected across those programs.
And then, you know, going down the line to the others, you know, we're working very much with Rolls-Royce to secure our content with them, and Rolls-Royce is really, you know, gaining favor across a lot of the Eastern or Western European countries. You know, they, they seem to be gaining momentum there, and we feel good about the content we'll have with them. The other SMR that was announced, you know, here a few months ago was Westinghouse jumped into the SMR game with kind of a scaled down version of the AP1000. They call it AP300, and it's, you know, essentially a quarter of an AP1000. And, you know, their very publicly stated goal is to reuse as much equipment as they possibly can that's proven in the AP1000.
You know, you can see a picture of it. That includes one of our reactor coolant pumps. So as you know, Chris just talked about the value of those reactor coolant pumps. That's, you know, the starting point for our content in that AP300, and, you know, we're working with them to see other, you know, other products Curtiss-Wright can bring to bear that will support them. So, you know, this is, you know, the kind of mode of, you know, the way the industry works is they tend to pay for a lot of the development work, and so that's, you know, giving us revenue growth this year as we're working across several of those companies to be doing the design work.
You know, specifically, when you think of the two ARDP plants that, you know, in receiving their funding, you know, they had to commit that they would have a work to have a reactor online by 2028, in that timeframe. So if you really think what that means for us, that, you know, you know, we're designing the equipment now, we will, we will need to begin building the prototypes of that equipment so we can get stuff to them that they can build the reactor, test it, and get online. So that's that content is, you know, and equipment that needs to go into test facilities, you know, which is on top of that, that, is really gonna drive revenue through the middle of this decade to support them getting online.
And, you know, we're super pleased that, you know, with our most visible and impactful partnership today being with X-energy, that, you know, they not only have, you know, Dow Chemical as their lead ARDP customer, Energy Northwest has indicated they intend to build three of the plants. And so it's just great to see them, you know, lining up that customer support for, you know, for their future builds. And again, you know, just as meaningful as the AP1000 orders will be, as Chris talked about, you know, this is an equal, kind of impact to Curtiss-Wright. And I think, you know, it's, it's interesting to know, like, throughout the Eastern European area where there's a lot of momentum towards the large plants, they're also talking how they'll supplement those large plants with SMRs.
We're pleased to see just, you know, this summer, Duke Energy actually announced that they intend to tear down two coal plants.
Right
in North Carolina and replace those with SMRs. Undecided which plant they're gonna choose yet, but I think it just shows, you know, the momentum just continues, you know, across the trend that, you know, nuclear energy is being embraced as part of-
That seems like-
the journey to get
a no-brainer. Yeah.
Yeah. I mean, you look at Duke. I mean, you know, all these energy companies, they've committed to trying to be carbon-free by 2050. And, again, 2050 is a ways away, but if you talk about, you know, today, nuclear in the U.S. only produces about 20% of all energy. That's a lot of other energy that needs to be converted over to carbon-free.
I think the statistics I've seen is 30% of the grid is powered by coal.
Mm-hmm.
And so if you think about just tearing down a coal plant and swapping it out for an SMR, which will give you the same output, you go from carbon producing to carbon neutral.
Absolutely
you know, right tied into the grid. So it seems like the momentum from SMRs-
Yeah
just continue to grow.
Yeah, and just as sort of for thinking about what, how impactful this can be to Curtiss-Wright is the average coal plant, and there's no exact figure, is 70-800 megawatts. The four-pack from X-energy is 320 megawatts, so the general assumption is, if you're replacing a coal plant with an SMR, it'll probably be two SMRs. And so, you know, each one of those is, you know, $200+ million of business for Curtiss-Wright as they turn those over. So it's, you know, it's, it's just a phenomenal amount of business that we need to be prepared and are doing, you know, doing the work and thinking long-term capacity planning. It's exciting, so.
That's great. You also have exposure to nuclear aftermarket. You know, so mid-single-digit growth rate, does that seem sustainable? It seems like maybe that could even have some upward lift, when we think about that. Maybe describe some of the key drivers in what you're seeing from plant life extensions that are driving this.
Yeah.
Uh-
I'll take that one. Sure. I mean, yeah, broadly speaking, things are good in commercial nuclear. We've seen a number of forces across the globe that are influencing the trajectory of whether it's SMRs or Gen III+ technologies, or just maintaining the existing infrastructure and operating fleets that we have today. I think if you look back to where we were as a business maybe 10 years ago, and you asked us that same question, we'd be talking about this as a low single-digit growth rate business, kind of shrugging a little bit, going: "Boy, we wish we could do a little bit better." But we've been fighting since post-Fukushima, the consistent shutdown of plants year after year after year.
And that's presented opportunity for some consolidation within the industry, for us to take on some additional technologies and supplement our portfolio during that timeframe. But, you know, more recently, as you look across the U.S., the U.S. government's said they want to reassert themselves as a commercial global commercial nuclear leader across the globe. And I think that's. There's some geopolitical implications to that, but it's also just a recognition that, you know, nuclear has to be a critical component to meet our future rising energy demand. And then, you know, beyond that, we have to meet our carbon-free goals. So we've seen strong bipartisan support coming through the government, through the infrastructure bill. There was the Civil Nuclear Credits Program
Yeah
which provided $6 billion of funding to operating fleets to protect them and prevent them from shutting down. We've actually seen some plants in California and Illinois stop their plans to shut down, which has been nice. And then, I think as you look at the Inflation Reduction Act, there was $30 billion of production tax credits that were offered to the fleet operators and owners, which basically cuts the cost of producing nuclear energy in half for them. So there's a lot of incentives for them to continue to now, you know, upgrade and-
Right
and maintain those facilities and preserve, preserve, you know, the life of those going forward. So, you know, in the US, we've seen some good signs in that regard. There's also a movement to take these plants that have been operating for close to 60 years and extending their licenses so that they can operate another 20 years, so a movement from 60 to 80 year life. And that provides an opportunity for us not to just go in and do our kind of typical 18-24-month maintenance-
Right
that has to happen in the turnarounds, but now you're doing work inside the plants that's gonna pre- preserve those plants to be able to operate for another 20 years. So that kind of layers in on top of that work. And, you know, two-thirds of the plant operators have declared that they have-- you know, they intend to go from 60 to 80 years' life, and we feel it'll certainly be more than that.... I think as you look outside the U.S. and you look more globally, you know, we're seeing some good things. We have a footprint in Canada, we have a footprint in South Korea. We're seeing things grow in that regard.
And then, beyond that, I think there's a lot of countries, you know, like the UK, or you step into Japan, or you look at France, where they've kind of done a turnaround in the past few years.
Right
and said, "You know, we need to preserve these fleets and get them back up and running." So, you know, we've been working hard as an organization to try to drive into those markets and gain some share and show our capabilities, and that represents an opportunity for us. So year to date, the order book's up in the mid-teens. We've seen commercial nuclear grow high single digits year to date. And as we look out into the future, we see mid-single digit growth as very achievable.
Sure. Oh, in our remaining, just a few minutes, so, with the strong growth you're kinda talking about for 2023, what are your thoughts relative kind of to your Investor Day targets? And also just, you know, when we think about your working capital, kind of profile and, and also, you know, opportunities for improvement.
So first, you know, speaking about the Investor Day, we're looking forward to it. And, a shameless plug, it will be next May in New York City, and I hope everyone here could attend or possibly listen in if you can't attend, but we'd invite you in person. We're gonna have some show and tell, and really try and make it a great event.
Everyone gets an SMR?
Yeah, absolutely. Everybody gets their own SMR. So, but, you know, we're really working through the process about how to best present the company to our investor base to understand, you know, what the future is. And it's, you know, the timing is really great because there is so much taking form around all these topics, all these nuclear topics that we've been talking about, that we're thinking a lot of things will have... You know, more things will have shaken out by then, and we're really hoping to paint a really great picture for the investment community to understand where we're going in the future.
For, you know, for where we're going as a company, you know, we've said it for a long time. We're committed to being a top financial performer as a company, and how we take that commitment and turn that into goals, you know, we'll make you wait for May to hear. But maybe, Chris, you wanna talk a little bit about capital allocation?
Yeah, sure, and just really quickly on the Investor Day targets. So we are hitting and expect to fully achieve all of the targets that we laid out-
Sure
... in 2021 as it relates to sales growth, operating margin expansion-
Nice
top quartile margin performances, performance. You know, the one target where we're struggling ever so slightly is we said that we would do 110% conversion over the three-year period. Nine out of the last 10 years, we've done greater than 100% conversion. It's how we like to run our business. This year, we're having a great year with free cash flow. We're guiding $300 million-$400 million, a 29%-36% improvement year-over-year, conversion of 110%-113%. But we think we're gonna fall just 2% short of that 110% after the three years, so we'll probably come in around 107%, 108% on the conversion over the three-year period.
But, we still have a few days left. We're working real hard. It's kinda hard, though, when your earnings keep going up and
Yeah
you know, you've got a lot of sales in the fourth quarter to kind of bring that, bring that up.
But on the working capital front-
Yeah
that was a big focus on you for, you know, for several years.
Yes.
I still think, do you still view that as an opportunity to kind of continue to kind of work on that?
Absolutely, yeah. So I think with, especially with what's happened in the supply chain, and Lynn talked about that extensively already, I mean, it's been difficult for many companies to control their inventory and make sure that they're able to meet their customers' needs. So, we did see a spike this last year. I think this year, through some of those practices that Lynn had talked about to kind of, you know, get a better flow of product through the shop and continued focus, we're hoping to bring those inventory levels back down as a percentage of sales, down to where we were in, like, 2020 and 2021, so kind of prior to this whole issue breaking out. And then we have a tremendous collection opportunity in front of us.
I mean, our sales are up mid-teens, year to date, and that, that provides opportunity to take money out of the hands of our customers, and we're only so happy to do that. So, I think there's an opportunity in DSO and inventory turns going forward.
Terrific. Well, we're right exactly out of time. So thank you, Lynn, thank you, Chris, for joining us. Thank you, everyone, for joining us.
Yep.
Appreciate it.
Thank you, everybody.