Thanks so much for joining us. We have up next, Curtiss-Wright. So super excited to have Lynn Bamford and Chris Farkas with us from the company. You're just coming off of a big investor day, just a couple of days ago, where you spent several hours going into a pretty deep dive of all the units and medium-term targets, which is a redux of three years ago, when you put out medium-term targets and overachieved pretty much across the board. So maybe I'll give you the stage to just revisit some of the messages from the investor day, to sort of kick you off. What do you think is sort of the most important message delivered to investors today about Curtiss-Wright?
And then I'll open up with questions right after that, but did wanna give you at least the opening to-
Thank you.
To pitch the Investor Day once again because it's fresh in your mind, and you put all the effort into it.
It is a lot of effort, and it is fresh in our mind, although we tried to make it a little less fresh last evening, but that's a whole other side point, which I won't dive into. But, all that aside y ou know, really, I think the most important message is, you know, we've had a great track record over the past three years, and we did deliver on four of the five financial targets. We were 2 percentage points under our free cash flow conversion of 110%, coming in at 108%.
You're a tough grader.
We're a tough grader.
You can round up.
So we said we did.
Yeah, you can round up.
You know, we don't, we don't overstate it. But I think, you know, really, you know, reaching the top of our organic growth target at 4.7%, you know, really is indicative of where we're going, and that our confidence that we are building that momentum to compound profitable growth. And really, the themes of yesterday was to walk through our various end markets and really talk about the dynamics in the market. Some have great tailwinds, some-- You know, defense spending over the next couple of years is anticipated to be at a slower accelerant rate than it had been in 2022 and 2023. But regardless about what we're doing in our end markets, to outpace our end markets from a growth standpoint, and that the initiatives aren't.
You know, they're real and they're specific, and we can walk through the products and the customers and really, like, mark down why we think we're gonna be able to, you know, overachieve a 5% organic growth rate going forward. We're sitting in a great position from a balance sheet and some cash on hand, and we've got a great acquisition pipeline that, you know, we're pretty optimistic that we will be able to add some properties to the company to, you know, build out on that organic growth rate, you know, even yet this year, I hope. But as we always say, that if they don't come to fruition because we're not gonna force anything, we will put our capital to work by share buyback.
You know, we have authorization to buy up to $400 million of shares from our board of directors. So the future's bright, and we're gonna put our capital to work.
What I thought was equally impressive is that 5%, greater than 5% organic, doesn't contemplate the nuclear side of the house kicking into gear just yet. B ut you did tease us with a couple of, I don't know what you call them, targets maybe of revenue potential within that landscape, which I think to equate to a 10-year, 20% CAGR of revenue growth from here to the mid-2030s, which is pretty impressive. I know there's gonna be a lot of questions on nuclear, so to maybe just hit that one first, the profile of medium-term target doesn't include a new AP1000 order.
Yeah, thank you for profiling that. I probably should have said it in my opening comments. So the over 5% organic growth has no assumptions of benefits from an AP1000 order. It does have, of course, our commercial aftermarket business and the ongoing work we're doing in working with the various builders of small modular reactors, that, you know, we've been doing design work, we're still doing design work. During that timeframe, it should turn into early prototyping work. That is part of the 5%, but we chose not to put an AP1000 order just because the timing is variable. We still consistently reaffirm a one to three-year timeframe for that, but it can be dramatic enough to those growth rates that really felt it was more transparent to give our growth targets without it, and then let that come.
But as you say, you know, we talked about by 2028, as the prototyping of the SMRs is in full speed, and we do believe we will be in production on building RCPs for probably Poland and Bulgaria by then. We expect our commercial nuclear business to double by 2028, so that's from a $300 million baseline in 2023 to double. And that we really have a very, you know... kind of come at it from different angles and, you know, feel that we can drive our commercial nuclear business to be $1.5 billion, annualized by the middle of next decade. And that's, you know, a combination of the plant life extensions of the existing fleet are continuing, and that, I mean, that is work. Sometimes we get asked if that's work that's, you know, very temporary and is gonna go away.
That's, we're at the beginning of decades of work on doing these plant life extensions that, you know, that's, that's not a short-term tailwind, that's a very long-term tailwind. We should be in kind of steady state production on AP1000s by that time, as a lot of the Eastern European countries are building out their plants. And if you listen to any of the, you know, prognostication on how many SMRs should be being built just for the electricity needs, we should be receiving 10-20 plants, you know, or our, our customers will be receiving orders for 10-20 plants, which will flow to revenue for us, you know, by that time period. And so pretty dramatic. I, I do think it's kind of, though, worth noting that, you know, today we're two-thirds aerospace and defense.
We've worked hard to, you know, help the investment base transparently see our aerospace and defense business. And, you know, with it growing at a reasonable rate, we still will be, the majority of the company still will be in aerospace and defense, but obviously, the commercial nuclear, you know, coming up behind it at that level would be a very significant portion of the business.
And I would just add, Miles, that we did try to provide some information for you to be able to do this modeling yourself. You know, while we're not directly in control of the timing of the order, we are trying to absolutely influence it. And then we also provided a timeline, so if you're-- you know, you like World Nuclear News, and you wanna see what's going on, and, oh, my gosh.
Who doesn't?
You know, they're now to.
Yeah.
They're now in site-specific engineering. Okay, you can kind of follow that along and see where we are in relation to the overall program and when that order might hit, so.
If you go back to the last time you had production of AP1000 RCPs, that was some of the most profitable piece of your business and also came with cash advances that were pretty significant. As you look to the next five to seven years of what you're looking at from commercial nuclear, does it have similar characteristics that's accretive to corporate margins, cash terms are favorable? Is that a likely outcome?
I'd say it's a reasonable to expect outcome.
Okay.
But, you know, we really have to enter into commercial negotiations with Westinghouse and work through those things, but I think it's a reasonable expectation. It'll be very, very good business for Curtiss-Wright.
Okay. So let's go back to the aerospace defense piece of the business. Defense electronics has been sort of red hot for you guys since supply chains normalized, and you were able to get components effectively, and the orders have been equally sizable. When you look at that growth rate that you've experienced, how would you dictate it relative to catch up of what you'd missed, core demand, or competitive share gains because some of your competitors are falling down?
So, you know, just starting with the supply chain situation, it has been good. The supply chain situation really did normalize even fairly early last year, I would say, and it doesn't mean everything is as it was. There are longer lead times, you know, there has been price escalations. We've built that into, you know, our pricing structure, and we make great margins in that segment, so we obviously have our hands around that and know how to address that. Really, it's I would say, you know, it's broad-based growth across the business, which to me is very powerful because it's not, you know, particularly in just one business area. I will give a shout-out to our tactical communications equipment is, you know, probably seeing the strongest demand within that market.
You know, we bought that capability back at the end of 2020. We have really shaped that business into a fantastically performing business within the Defense Electronics segment. And, you know, really, you know, the situation in Ukraine has, you know, just driven a broader understanding of the importance of being operationally ready by militaries, you know, across NATO countries and here in the U.S., and, it's just really driving demand. One of the things that was mentioned at our Investor Day is we just got put on an approved government list for software, which is a big deal because it allows it to be very freely bought. And, we've just really entered into our first significant contract with the U.S. Air Force, so again, taking that capability more broadly.
But, you know, fundamentally, you know, the products we build in that market, we work hard to have them be part of what's, you know, a COTS or an open standard architecture, which, you know, was the fundamentals of how the business has been built since the mid-nineties and where we've, you know, participated in the market. But, you know, with the MOSA and SOSA standards, which, you know, two geeky names, but it's just a, you know, a more defined definition of what the open standards are, were codified into law back at the very beginning of this decade. It's really increased the drive for the defense primes and the government to pick solutions that are based on the MOSA standard.
And we, you know, put our hands to work back, you know, really 2018, 2019, to build out our product offering in this area. Feel confident we have the most robust product offering in industry in that, and so it's really that capability broadly that is winning us, you know, you know, design wins and new customers across the industry. And our reach, you know, to be able to increase foreign military sales, direct foreign military sales, not, you know, selling F-35s to Poland, but, you know, our, our reach, we have a channel that is very active over in Europe, and that portion of the business is also growing very well.
And I would just add, I mean, you mentioned the competitive landscape, and, you know, we all know that there are, you know, competitors out there in the industry that are struggling y ou know, it's an opportunity for us, and we look at it as a way to, you know, get out there and prove our strength. We were able to get through the supply chain issue relatively quickly.
I think our customers appreciate that, and that enhances demand.
Thanks for going back to that, Chris, because I skipped over that, so it's a good.
I wasn't gonna let you get away with that.
Yeah.
I was gonna come back to it.
Okay. Okay. I was gonna get it from one side or the other, b ut I do... Honestly, it is an important point to note that it is fairly well known what's going on in the competitive landscape, and it is opportunity for us, but it is not really part at all of, or in any meaningful way, the you know the great bookings and the great revenue we're seeing. That for those types of transitions to happen, that's a one, two, three-year journey out of our customer base, and so there's engagements based on that, and there's activity and opportunity for sure, for Curtiss-Wright, based on that, but that is gonna be additive to what we're seeing in that business right now.
Okay. You mentioned the international piece as being, you know, incrementally positive.... Can you give us a landscape of how much of that business today is domestic versus international within defense?
Yeah, so we categorize it as direct foreign military sales which is directly to a foreign government or a foreign customer. So it doesn't include, you know, F-35s that are being shipped abroad or Abrams tanks or what, what, any of the other, what we ship to U.S. primes. And today, that's about 9% of our portfolio. We've seen some pretty solid growth coming out of that business. This last year, we grew in the high teens, and, you know, this year we're off to a really good start in Q1 and would expect that to grow in the high single digits for us this year.
We have a very, very broad product portfolio. We've got, you know, we're on over 400 platforms and 3,000 programs. So, you know, as we're designing these technologies for, you know, defense purposes here in the U.S., there's a lot of application and a lot of platforms abroad that we can service as well.
And then, more recently, we bought our ESCO ground-based arresting systems business, and that's 75% rest of world. And their customer, and the way they face their customers, and that business is doing tremendous. It's been a really good acquisition for us, it grew in the mid-teens this last year, and it's surpassing all of our financial expectations to date.
Okay. That business, so just stay on defense electronics for a second. When I asked at the investor day about margin potential, that business, in hindsight, has been one of the biggest sources of margin growth. But Chris, your answer to me sent the sense I got was I should temper my expectations of how much further I can underwrite margin expansion within that segment. Is it because investment that's required? Is it because of portfolio mix? Is it because you wanna contain expectations? So can you give us a little color.
Go for it.
Yeah. So we spend the greatest portion of our R&D in defense electronics. It really takes a lot of investment to not only sustain that pricing and stay ahead on the technology, and I think you see that investment coming out of our order book today. So, you know, as we look at that business, I think we have to be very careful and cautious to ensure that we are staying ahead in those advanced technologies. I mean, that's really what's making us so special. So, you know, as we look to the future, you know, I think the range that we're in for margins is probably something that we view as a sustained level.
Not saying that, you know, they won't improve over time, but our first priority is to make sure that we can grow that business as fast as we can for as long as we can.
Makes sense. Switch gears a little bit to naval and power. You have a dominant role in sole source of naval pumps since the beginning of time, I think.
Since the Constitution, probably. So, can you give us a landscape of... You laid out per shipset content on all the vessels, which I imagine most of it is in naval and power. The industrial base of shipbuilding is seemingly overwhelmed with demand and massively constrained on supply, and doesn't seem to be hitting the mark on output levels. Are you, as a company, at two subs a year, and a Columbia that's going through and-- or like the rest of the industry, are you at 1.2 subs a year, even though we're being funded at two subs a year?
So it is a good portion of the content that was on that slide, for those of you who go back and look. You know, without saying specifically where we are, you know, I'd say, broadly, just to start with, I think the government is making available a lot of funding to help the industrial base, help the shipbuilders. We've mentioned in Investor Day, we've taken $15 million of funding over the past two years to help us with that, and we have a lot of active bids out right now to take on, you know, hopefully attract more of that funding to Curtiss-Wright, to help us, you know, enhance our capabilities and our ability to take on work.
We are very actively working, you know, across the shipyards for work that they can potentially outsource and get out of their shipyards as they're, you know, trying to hire and have capacity limitations. And I think there's work that we will be pursuing this summer that is, you know, around the corner, that of things that we can really, you know, move inside of Curtiss-Wright is incremental content. So one of the things we also talked about in the slides from Dave Mica, who runs the naval and power segment, that, you know, we have during the past few years have transitioned through the development on the Columbia and are transitioning into the production on that. So we're in great shape to support the shipyards with that, as the first ship is not expected to be ready till into the mid-2030s, so.
Okay. You mentioned also the next generation, attack sub and the two to three times content gain. Is that aimed more at the propulsion side than anything else, and Curtiss-Wright's potential capture of that share within the platform, or is it more somewhere else, and the cost of the ship is higher, and fortunately, your shipset goes up?
It's building out on the equipment we do today. So it is the pumps, the generators, the valves, electrical equipment, and, you know, keeping all that and then adding, you know, some of it, it's a much more complex sub, so the, you know, it is more complex items. But then also, you know, adding some incremental capabilities allows us to bring more value to the shipyards and honestly, pull, you know, be able to make us, as a supplier, a capable supplier, able to deliver broader shipsets to them and, you know, move that work to allow them to ramp.
It's a very long-term business, so the design and development that we started several years back is gonna produce, you know, benefits, you know, for years and years and years to come. We know that platform is really scheduled for the middle of this next decade, but we are firmly entrenched with our customer and the design and development those products.
Yeah. Within the naval and power business, your undersea, subsea, pumping opportunity, can you describe that in layman's terms, what it is today and where it could be, you know, five years from now?
Layman's terms it is. All right, so,
I didn't do that for that reason, just for the record.
You've got a track record.
I was gonna say, it was almost not nice.
From a finance guy, basically what we're doing is we are in the process of developing subsea pumps for Shell, Petrobras, and Saipem. There's a challenge that the oil and gas industry faces with these pumps offshore, where basically it's very, very expensive when their pumps go down. It's just, you know, millions and millions of dollars that they're losing every day as those pumps don't work. So we have a long, rich history in providing very ruggedized pump technology that operates in harsh environments. It started with the nuclear navy. We took that technology to commercial nuclear and the AP1000s, and that technology has great application in oil and gas. So, it's a really exciting business venture for us moving forward.
It has the potential to be $250 million in orders by the end of the decade, and I would say within the next 10 years, as much as $500 million. It really... There's a great value proposition for our customer. I think we're gonna be able to strategically price that product appropriately, and I would expect to complete the development on these three products, you know, within the next three years and see our first production pump order by the end of 2026.
Okay. Moving to aerospace and industrial. So the industrial piece has been one of the least clear to predict. Shorter cycle b ut also is commercial in nature, so maybe there's more pricing opportunity, more rationalization opportunity. So maybe talk about that sector, 'cause I know, Chris, you'd mentioned that might be the sector that most margin expansion opportunity sits within.
Sure.
Keep going.
All right. Aerospace and industrial it is. I mean, we, we have tremendous backlog. You know, obviously, Boeing and Airbus have tremendous backlog in across aerospace and industrial, and that represents an opportunity for us. I think, you know, as we've approached the guidance here across the next three years, we, we approached this conservatively. We said we were gonna, you know, grow that business at high single digits. It's a little bit disconnected from the rest of the market, but we've taken kind of a cautious approach, given some of the problems that are out there and our customers are experiencing.
But as we ramp up, I mean, certainly the volume absorption that's associated with that, but then also, I think when you look more broadly across the segment, that's an area where the businesses can be a little bit more short cycle, and it provides us with some pricing power and the opportunity to go on and insert commercial operational excellence, so.
The one thing that's, you know, we talked about a little bit yesterday, for those who listened in. Sorry if this is repetitive, but, you know, it is an area of the business, the industrial business, that we're sometimes asked about the strategic fit within Curtiss-Wright. And, you know, when you think of, you know, our electromechanical actuation capability, which is a fantastic potential in defense end markets, it was first developed for industrial automation, you know, in an industrial markets. And, you know, so there's that. That is just one example of some really core capabilities, whether it's our power electronics for electric vehicles and many other things that are going electrified, to various surface treatments that were first developed for commercial or industrial applications, that we find great applicability taking them across into defense applications.
You know, really can compound profitability by, you know, spending engineering dollars once to develop the capability and take it to end markets. So when we look at, you know, that business broadly, you know, we see the connectivity very much across the rest of the business.
We'll come back to M&A for a second. You mentioned the pipeline's very active, and you hope to close something or some further acquisitions by the end of the year. Commercial aerospace, as an area of acquisition, hasn't been an area where you've done a lot. Is there a reason? Is it just availability of properties, pricing of those properties, or is defense just the more attractive market, and then if something nuclear came along, obviously you'd have interest, too? But I'm more curious if you think commercial aerospace is a business you can scale inorganically.
We have evaluated properties for sure over the past three years in that area, and really, none get very far through the financial fit, to be quite frank. So, you know, we laid out yesterday, you probably heard us talk other times, we've got a pretty stringent set of both financial and strategic targets. I would never say never, but, we haven't come across a property that would meet those. And we also are pretty transparent that we say, you know, our top priorities for end markets where we look for acquisitions is to add on to our defense electronics capability. It's a great operating business with a worldwide reach from a sales and a marketing channel and an engineering capability that knows how to, you know, prepare products to go into extreme environments.
So that's, you know, really pretty much at the top of the list, but absolutely major naval subsystems, where we can build out our content on those platforms and provide value into our Navy by helping them with this ramp in shipbuilding that we're talking about. And then clearly, with everything going on in nuclear, you know, broadening our capability set that we can take across, you know, the broad applications of, you know, future SMRs and, you know, just increase our content across the suite of them, where, you know, it's the whoever wins, it's gonna drive good business to Curtiss-Wright, really are probably the top three areas we're focused on right now.
That's consistent with what you see in your pipeline, too?
Yes, it is consistent with what's in the pipeline.
If there's any questions, I'm happy to fold them in, so raise your hand. Maybe to look a little short-term, so apologies in nature, but you crushed the first quarter b y $0.30 relative to your own guidance. You raised the guidance $0.10. The order activity seemed like it was off the chart the first quarter. What are we seeing as a slowdown that's causing some level of conservatism through the rest of the guidance in the rest of the year?
Well, you know, I think it's still Q1.
It's Q2 now.
Well.
You're on a webcast. Feel free.
That's right. We're in Q2 now. It was Q1 when we raised our guidance, and I would say that, you know, the defense electronics business is doing fantastic. You're right, the order book is very strong. We beat our revenues in the first quarter by 31% increase year-over-year. We had nearly a 1.4x book-to-bill in that business, so very, very exciting. We raised our guidance by $25 million in that segment, so we really wanted to make sure that we were reflecting that appropriately as we move forward. We expanded our margin guidance as well.
We initially thought we were gonna be facing a little bit more of a headwind from, you know, the incremental $5 million of R&D that we're putting into that business this year, but we're gonna do that and expand margins at the same time. Now, some of that's mix in tactical communications and higher-margin C5ISR products. But then I think as you look across the rest of the portfolio, we added the WSC acquisition, and I think that was a, you know, a bump that we put into our nuclear market. We gave or increased our growth rates there by about 1%. But we did pull back in process a little bit, so we're seeing some slowness in the orders in that market for the year. It was about an $8 million cut within our guidance.
Still the market is growing overall, but just not as strong as we thought it was gonna be for the year. We continue to be excited about the future and what's happening there in process, but this is just kind of a temporary, you know, catching up to some of the slack in the heavy output they've experienced over the last three years, where they grew at low double digits. So I think between that and some potential conservatism as we're approaching the general industrial market and what we're seeing in with industrial vehicles, we felt that the caution was appropriate at that point in time.
Okay. Questions? On the SMR effort, how much... I recall the RCP effort wasn't, there was investments made?
Yes.
Let's call them charges at the time. On SMR development, how low risk is it? I mean, the AP300 seems relatively straightforward. It's 2 RCPs instead of 4 RCPs. I'm less familiar with the level of development and risk associated with your other SMR endeavors.
So they vary reasonably broadly across the different types of reactors. And speaking to the two that, you know, X-energy and TerraPower, that are really Gen IV reactors, so new technology using the HALEU fuel and different approaches for cooling them, that there are new development activities going on. But I would say, as a company, I would never say there's no risk, but it's a very low risk in the approach we're taking to incrementally do largely paid development by our customers and working on the designs hand in hand with them. You know, moving into prototypes maybe in, you know, 2025, 2026, 2027. And so it's a very incremental journey, not take on one huge high-dollar contract and then hope you execute within the constraints of that.
So, I would say all the things we're doing are things that are extensions of capabilities we have or retooling of capabilities we have. There's not anything that's, you know, completely new or like a greenfield area for us.
Okay. One more. I was gonna let... If there is one. There isn't. So on M&A, at the last Investor Day, the only—I'm sure there are other differences, but one difference I saw was there was a, what was an annual holding bucket for M&A. I think it was $400 million, if memory serves, as maybe a potential M&A outcome. There wasn't one this go around. Understanding that M&A is unpredictable, and you never know what's gonna happen, is that still a reasonable thought process of the size and scale of, of deals you're looking at, though?
It's a good down the middle estimate. Obviously, we make a little bit more cash than we made back then, so we would have the ability to, you know, change that, but it wouldn't broadly change the modeling. And, you know, we've been asked several times this morning, we like bolt-ons. It, you know, they work well. I think we've got processes well defined to be able to add technologies and then bring the greater good of Curtiss-Wright to those, you know, companies and have them, you know, do better as part of Curtiss-Wright than they would on their own. But we are... You know, we do not take off the table doing something that might be a little bit more transformative to the company. Obviously, you know, those aren't every day, you know, coming up as opportunities.
But we have looked at some, chosen to pass to date.
But we would consider it. And, you know, WSC was not, you know, overly significant in a revenue standpoint, but very significant in the capability, a customer access, an ability to have, you know, their relationships with all the SMR designers and operational plants around our country and others, to be able to, as they model doing outages and plant life extensions and figure out what equipment they need to do maintenance on, have us have visibility to be able to figure out all the places where Curtiss-Wright can provide content. So, you know, we're fairly open and, you know, have various markets, which I do think is a real advantage for Curtiss-Wright, that we're not shoehorned into only being able to acquire in one area. So if you do want to acquire, you've got a very narrow filter.
You know, we look in defense electronics, we look in naval, and we look in commercial nuclear.
Okay. Well, this is great. Thank you so much.
Thank you.
Thanks so much. Appreciate it.
Yeah.