Good afternoon, everybody. Thanks for coming to Curtiss-Wright's presentation. Very pleased to have CEO Lynn Bamford with us and CFO Chris Farkas with us. As with all of these presentations, I'm going to present three bear cases. Lynn and Chris are gonna tell me why I'm stupid. Then I'll present three bull cases, and Lynn and Chris will tell me why I'm a genius.
Brilliant.
They are, they are all valuation agnostic, as we are with all of these things. So we don't use valuation as a bull or a bear case. So the first bear case, guidance for operating income to grow faster than revenue doesn't commit to much margin expansion over the next three years. Lower operating leverage could call into question the 10% earnings CAGR target.
I'll turn them over to you, Chris.
Okay, sounds good. I guess, so just for some historical context, if you go back and look at where our company was about a decade ago, our operating margins were in the single digits, and this year we're guiding to 17.4%-17.6%. So we've expanded our margins historically through operational excellence and commercial excellence and achieved more than 800 basis points of expansion during that timeframe. More recently, I think as you take a look at what we're doing under the Pivot to Growth strategy, the fundamental premise is that we will continue to take operational excellence and commercial excellence and apply that to our the core of our business, to free up money for either margin expansion or investments that go back into the core of the business.
Now, we launched our Pivot to Growth strategy back in May of 2021. Our guidance was operating income growth greater than sales growth, and during that timeframe, we were able to expand our margins by more than 110 basis points. So very successful, and during that timeframe, we actually overcame some pretty significant supply chain challenges. We overcame inflation, and we invested significantly back into talent management within the organization to position ourselves for future capacity to grow. So as we entered into this most recent Investor Day, that we just came out of, within the past few weeks, we're continuing with that theme of operating margin growth or operating income growth greater than sales growth, which implies operating margin expansion.
It's important to note that this year, we're guiding 10-30 basis points of margin expansion, but we're increasing our R&D investments by more than $20 million across the company. We've got so many great things that are going on in the markets that we participate in right now, that there's a really exciting time for us to invest for future growth. If we didn't invest in the future, and we weren't thinking about the long-term profitable growth for our investors, we could provide 50-70 basis points of expansion this year alone. Operational excellence and commercial excellence are thriving within the corporation, and we're committed to providing that operating margin expansion going forward while we continue to invest in the future.
Thanks, Chris.
So if I ask. Can I ask a follow-up question to that? If there are a number of good growth investments that you could make, why not make more?
So we, o ne of the things I think I'm very proud of that we did, as Chris was talking about some of the numbers over the past three years, is we outpaced our investment in R&D ahead of our sales growth, and so we are showing that we are quite willing to flex and step up when the business case is right for the organization. But we take a very disciplined approach to how we allocate our engineering resources, and we, when we speak of R&D, I would definitely note that it's both customer-funded R&D and internally funded R&D. And we see that as a combined pool for, you know, what we choose to have our engineers work on to do the maximum return. And where we have business cases, we have flexed up. We spent $20 million.
In 2023, we increased our total R&D spend by $20 million, and we've increased it again, $20 million this year. So it's very significant amounts of money, but while delivering margin expansion to our shareholders, 'cause we do see it as a balance to create value for our shareholders, and so we will, you know, look at the total picture, but make those investments where, where needed.
Is there a bandwidth issue when it comes to R&D investments? I mean, a lot of it's engineering, right? Is there just only so much you can put through? Is there only so many engineers you can hire? Is that kind of something that naturally throttles the level of investment that you could flex up to?
There's a degree of that, for sure, 'cause engineers, you know. Of our 8,600 employees in the organization, about 20% are engineers, so we're a very engineering-centric company and, you know, do a lot of cool things. So we've got a great track record of attracting talent into the organization. We added over 500 people to the organization over the past three years during the last Pivot to Growth strategy, and we have probably 400 open heads in the organization right now for many technical people, whether they're technical machinists or technical engineers. So there is absolutely a balancing factor with that, but we have a great.
One of the things I spoke about in Investor Day was our corporate talent management group that helps us attract talent across the entire organization, which is a real strength for Curtiss-Wright, 'cause it's a very sizable group that is able to invest and have best-in-class practices and understand, you know, the most leading-edge ways to attract talent into the organization. And we can surge that team at places where we have needs, where there's great opportunities, and we need to build up technical staff. Plus, we work with a lot of outside groups that maybe have very specialized skills that you don't need all the time, that we have good ongoing relationships, that we can put work with them.
So, it's a balance, you know, and I would say for probably some of the Curtiss-Wright people that are listening out there, 'cause I know they're always listening, they'll say, for sure, that, you know, we need more engineers, more engineers, more engineers. So I definitely have to recognize that, but I think we are, you know, do a great job of attracting talent to the organization.
Well, as an engineer, I'm sure you agree with them.
Of course.
Okay, I'll go to the second bear case. Over the last decade, the portfolio has seen an average of 1.3% organic growth and 3.5% total growth. Recent elevated growth has been driven primarily by inflationary price increases. The 5%+ organic growth target that you laid out at Investor Day a couple of weeks ago is incredible.
Why, thank you. So, I'd like.
This is the part where you tell me I'm stupid.
Yeah. So I can understand the question and put it in perspective, but let me, y ou know, Chris started by, you know, giving just a little bit of history on Curtiss-Wright, and I'm not here to do a history lesson. But, you know, up until the Pivot to Growth strategy was launched in 2021, we had really focused on really optimizing the financial performance across the portfolio and made great stride. Chris said 800 basis points over that, you know, that prior decade. So when we put our minds to something, we get it done. We have now pivoted to growth, and we've, I talked to Investor Day about a lot of the things that we're doing inside the company, and it's.
You have to balance the actual spending of the R&D as to the systems and processes and how you're managing the company, so you're growing and maturing as a company to be able to have the proper oversight and risk management across, you know, those activities. So with that, we're building momentum towards where we're going. And, you know, we gave our guidance three years ago at the 2021 Investor Day of 3%-5%. We came in at 4.7%, so we really, you know, delivered at the very high end of that organic growth range and 7.4% total growth during that time frame.
So we feel that the 5% is achievable and doable, and that's really how we set targets within Curtiss-Wright, is setting targets for our, the investment community that we feel confident we can achieve. And I would also add comment that, you know, we chose not to put any AP1000 orders, which is, you know, a large commercial nuclear program that we participate in as a supplier to Westinghouse, that we do anticipate the flow of orders beginning in the one to three years. That could have dramatically changed that number, but we chose, you know, for showing what is credible, that we chose to not put it in the number and, you know, make it, you know, even higher than that and show what the core business outside of, you know, that dramatic event when we get that AP1000 order will be.
So we feel really, you know, pleased about what we did in the last Investor Day and feel good that, you know, the 5% is a base case that we will achieve or beat. I don't know, Chris, if you'd like to comment on a few of the drivers in the end markets.
Sure. I think if you just step back and you look at Curtiss-Wright and who we are, you know, we are predominantly an A&D company. It's 2/3 of our portfolio today, and as you look across those A&D markets, we have good to great visibility for the long term of that revenue. Just as an example, 30% of our business is to naval defense markets, and that's comprised predominantly of long-term contracts, and we have very secure and stable content across all of the major naval platforms, including the Columbia-class submarine program. We're also starting to win new development work on the next generation programs, and that's development wins now for production work that'll go in, into play in a decade from now. So we've got tremendous long-term visibility.
I think as you look across the rest of our defense markets, and I'll talk mainly about defense electronics, I think the demand for our advanced technologies, the demand for advanced electronics and tactical communications in the battlefield is tremendous right now, and it's only growing given the elevated threat environment. If you look at our company and where we've been over the past few years, we've had record levels of orders, record levels of backlogs, so that continues to mount and only become more special for us. I think when you look thematically across our defense markets, we're also experiencing a strong pull from foreign direct military customers right now. As you look broadly across our portfolio, those sales to foreign direct customers grew 20% this last year, and in 2024, we're off to another great start.
Now, Lynn had mentioned that, I think, just turning to our commercial markets, that as you look at commercial nuclear, we don't have an AP1000 order projected within our guidance for the next three years, but we continue to believe that we will receive an order for the next one to three years. We showed at our Investor Day how this could be very impactful to Curtiss-Wright, and we believe that it will be. It's just that the timing isn't right, and we wanted to show what a great core of businesses that we have absent this, we'll call it, nuclear optionality that is, is in front of us right now.
So but that market's projected to grow low double digits, really driven by the strong demand for energy, carbon-free energy, and energy independence that exists, changing public sentiment, and also showing in, in a lot of the regulation, through strong bipartisan support going forward. So we feel very confident in our guidance and where we're headed going forward. And, you know, on top of that, we've got a strong, you know, balance sheet, and we generate a lot of free cash flow, and we'll put that to work for our investors as well.
So I know both you guys and investors are very excited about the nuclear opportunity that's ahead of Curtiss-Wright. And I'm gonna admit to cheating 'cause I, I knew that we were gonna need to talk about nuclear, but I couldn't really come up with a third bear case, so I put nuclear in here as the third bear case.
I'm curious to see how you're gonna make our nuclear story a bear case.
I know, right? Just watch me right here.
Okay.
Nuclear opportunities are significant, but it's going to take a long time for revenue to actually hit the P&L, which increases the risk of that revenue actually materializing.
So I would put it rather differently as to how I see what's going on in the nuclear industry. That, you know, there has been a really broad shift in opinion across the United States and across the globe as to how people see the role of nuclear energy in the push towards carbon-free and energy independence, which both the criticality of just continues to rise. And, you know, with that, there has been a lot of support here in the U.S. through some of the acts that have passed through Congress, kind of most notably the Inflation Reduction Act and the Infrastructure Bill, but even in some of the other bills, even in the CHIPS Act, to support all things nuclear.
You know, I look at Curtiss-Wright, and, you know, from Fukushima up until a handful of years ago, you know, we struggled to have low single-digit growth in this market in our commercial nuclear business. That was with, you know, the continuation of the shutdowns of plants here in the U.S. and really globally. Over the past three years, from our prior Investor Day, we managed to grow that business in the high single digits, and now we're projecting that we're gonna grow going forward, as Chris just mentioned, in the low double digits. So we're seeing those dollars really come to fruition.
To frame our footprint in commercial nuclear, for maybe those who don't know you quite know Curtiss-Wright quite as well, it's about 10% of our portfolio today, and about 90% of that 10% is in the aftermarket, and 10% is in new build. That 90% in the aftermarket is what we're saying is, you know, where we see growing at low double digits. That's really great growth for Curtiss-Wright, great value creation for our shareholders, and really pretty tightly coupled to what's going on in the funding of commercial nuclear here in the U.S. and globally. It's not just the U.S. government that's doing that. Then, beyond that, you know, we just mentioned briefly the AP1000 opportunity that, again, we see coming.
You know, in the over-the-horizon, that will be more dramatic to Curtiss-Wright when it does come. And you know, we framed in our Investor Day recently that over the next decade, we see $1.5 billion of business for Curtiss-Wright as partnering with Westinghouse to provide, you know, major equipment into the plants that they are targeting winning. And that's really assuming a fairly moderate 50% win rate for Westinghouse across Eastern Europe, in the countries where they've already declared and are on the journey of building these plants. And this isn't, you know, for the timing of the revenue to the P&L, you know, as your bear case is. You know, these countries, Poland, you know, put their hand, you know, to start the process probably four years ago. They have made.
We put in our Investor Day, if you wanna reference, a timeline of kind of what it takes till, you know, you're really pouring concrete and building the plants, and how our orders flow and timeline to that. And so, without taking the time to go through that here today, you can see that Poland has just marched through those milestones and are getting close. Bulgaria is marching through those milestones and getting close. Ukraine, interestingly, is progressing on. They have a desperate need for power in that country, you know, quite sadly, of taking the steps and securing global funding. And so, those, there's real evidence, and if you, you know, want to have a fun read, pull up World Nuclear News and, you know, search AP1000 or search things, and you will see just a steady stream.
Almost every month, there's some announcements of localization partners being signed, you know, site agreements being signed. You know, it was just about two weeks ago, Bulgaria signed Hitachi to help them do some major procurements. And so these are all things that lead, you know, towards that becoming real and into revenue. And, you know, the last area is the build-out of the next generation small modular reactors and advanced reactors that are not all technically advanced.
But across that portfolio of opportunities, we talked at Investor Day that we feel we will have anywhere from $20 million-$120+ million of content across each of those reactors, and we're working very hard to make ourselves a player across all the major providers, you know, whether they're U.S.-based or, you know, across the pond in with Rolls-Royce. And so that, that's something, you know, we feel there is, again, very steady, ongoing traction for the things happening. X-energy, who we have the most significant content with that we've talked about, the CEO of Dow, of Dow Chemical, who's their lead customer, you know, was on CNBC, gave an interview and was really promoting their commitment to making this happen and getting nuclear to help them drive their carbon-free footprint.
You know, there's a lot more talk here in North America, maybe that even large reactors will be built, but definitely plans for hundreds and hundreds of small modular reactors to be built by 2050. You know, one of the parts, if you didn't attend our Investor Day and want to listen in or read the transcript on the part, we had a commercial nuclear panel with experts from the industry, you know, really talking about, you know, their perspectives on how much energy is going to be needed over the next 25 years, and the, just the absolute need that nuclear needs to be part of it. And the perception around small modular reactors really breaks that not-in-my-backyard model because it's got such a different safety footprint.
And, you know, you can read across the various utility companies, them making statements about their intent to, you know, replace coal plants with new small modular reactors. And that's, again, in the CHIPS Act and some of the other acts, there's a lot of funding made available to support this kind of turnover in the community. So I think there's just so much evidence that I think, you know, we're feeling it today. You know, putting up low double-digit growth is no small thing, and then having our nuclear optionality, as Chris just said, layering on top of that. It, it's, it's real, and it's coming for Curtiss-Wright.
Just for clarification for people out there, your market share of AP1000 is?
100%.
100%. Okay. So if it's Westinghouse, it's Curtiss-Wright.
For the content we provide.
For the content.
So we provide a couple major components. The most notable is the reactor coolant pump, and we have been Westinghouse's partner in doing that, and we'll act like a partner with them to help them succeed. One of the guests on our panel was the person responsible for the AP300, which is the small modular reactor version of the AP1000. It's, and it's essentially half of an AP1000, and Westinghouse has very publicly stated that their goal for that AP300 is to change as little content as possible to accelerate NRC approval. And so, you know, we fully expect to be supporting Westinghouse on the AP300s also.
Huge opportunity over the next 10, 20+ years.
So did I pull you from a bear to a bull?
Well, I only put it in bear so we could talk about it.
That's now, five years from now, 10 years from now as well, so it's pretty, yeah.
Okay, so we'll go into the bull cases now. We used 2/3 at the top. Huge opportunity over the next 10, 20+ years.
So did I pull you from a bear to a bull?
Well, I only put it in bear so we could talk about it.
That's now, five years from now, 10 years from now as well, so it's pretty, yeah.
Okay, so we'll go into the bull cases now. We used 2/3 at the time on the bear cases anyway. Increased growth investments offer the opportunity to further differentiate Curtiss-Wright's product offerings, gain share, and drive above.
Other areas across the business. We're investing in EM actuation technology that can transition between commercial aerospace to industrial applications to ground defense applications. We're investing in taking our technologies and our rich history in producing, you know, reactor coolant pumps for the U.S. Nuclear Navy into products like the AP1000 that are paying off for us now. But then, as we also mentioned with Investor Day, we're investing in things like subsea pumps for process markets, where our technology, given how ruggedized and durable it is, can be used by oil companies to save them massive amounts of money at a fraction of the cost, and we're actively working on the development of those pumps with three different customers right now. And we see that by the end of the decade here, that market, you know, will be substantial.
Then I think as you look out, you know, the next 10 years, some pretty big opportunities. So, you know, we're investing in a number of different places in the business. It's very important to us. This is why, you know, not to get repetitive, but to come back to the margin discussion, you know, we could be that 18% business, we could be that 18% business today, but we're investing for the future, and that's what's most important, going forward. I don't know, Lynn, if you have anything else that you'd like to add in there?
I'll just only supplement that with one point and something that got mentioned at our Investor Day that was new news, and pretty exciting for Curtiss-Wright, is we've entered the NVIDIA partnering program to co-develop products with them to take to the military market. All things NVIDIA are pretty exciting in this day and age.
Your mouth just went up.
I just put that out there. It's a big development for us, and I think it's a real testament to who Curtiss-Wright is, because they're very selective in who they work with, because it's a complicated product, and they don't wanna support a ton of people. I think it really shows where, you know, where Curtiss-Wright fits into the strategic defense of our nation.
Okay, next one. Capital allocation's been a source of significant upside, with the company buying good to great properties at very reasonable prices and then outperforming targets on synergies and accretion. Going forward, management is leaning in more aggressively on the acquisition front, and with a good record for smart buying, this should lead to more inorganic value creation. Pretty timely, seeing as I think you announced something recently.
We did, just yesterday. With that, you know, we really are, you know. I wanna start by saying, you know, we take our use of our capital as a very large responsibility as the leadership of the company, and are very purposeful and disciplined in how we evaluate the use of that capital. Of course, we're gonna make the investments we need to be operationally ready for the growth that we've talked about that's coming in the commercial nuclear. So that, you know, really sometimes almost gets set aside, but it is priority number one. We don't see anything dramatic, you know, over the immediate horizon.
Maybe at the end of this decade, there might be a greenfield project if, if things go the way we anticipate, but it'll be a great day and a great ribbon cutting for Curtiss-Wright if we, you know, if we get to that point, you know, by the end of the decade. But, you know, we really do very much say our, our top priority outside of that is M&A for our use of capital. And that doesn't mean that we will change the discipline with which we evaluate targets. And, you know, during, you know, the first three years, really, the only major acquisition we did was ESCO, which is doing fantastic and, you know, really, you know, outperforming what we had anticipated. We've announced two acquisitions here, you know, recently, over the past couple months, both in the commercial nuclear space.
You know, really reflecting our firm belief that the commercial nuclear business is here, it's real, it's building. Two very different companies. The one about a month ago does simulations for nuclear plants, and so they have access to practically every nuclear plant around the globe and helps the plant operators figure out what maintenance they wanna do and plan for new builds. And so they are the first partner almost, you know, as these, as utility operators and others, you know, are planning plants. So what a great position and part of your go-to-market strategy to have as an organization. So very, very strategic. Smaller in nature. They're about $15 million in revenue last year. We announced an acquisition, again, as you said, you know, at good prices, $200 million for Ultra Energy. It hasn't closed yet.
It'll probably take about a month to close, but we think it'll close in Q3. We don't see any obstacles to that. Again, paid, you know, just under 12 times earnings for that. So we feel good, again, paying the right price, that we can really create value for Curtiss-Wright shareholders. So we continue to look. You know, we had said over the last year that, you know, we had held on to some cash because we knew we had a good pipeline, and so pleased to say that, you know, we put some of that cash to use here in the past couple of days and brought in a great company into our portfolio that, you know, is about $65 million in revenue next year. We've got a great pipeline.
That Ultra Energy not only gives us new technology that we can take into the power plants and the nuclear defense industry also. It's not a big portion, but you know, an area where you know, we have a lot of content, and they're a critical supplier in there. But they also have a plant over in the U.K., their primary plant, which gives us a footprint over in that you know, in Europe, to build out from. As you know, these you know, when they're building nuclear power plants, people are always looking for localization partners. It's part of the financial equation that justifies the spend. And so this really it opens up a pathway for us to be able to expand and offer that localization partner for a wide variety of our products.
It's both geographic reach and technical reach with the product offering they add to our portfolio.
All right, you've got 90 seconds for the last one. The current geopolitical environment, with the war in Ukraine, rising tensions in the Middle East, and geopolitical issues with China, creates long-term business opportunities for Curtiss-Wright's defense businesses, which are more than half the portfolio.
I'll turn that one over to Chris. I did a lot of talking.
Sure. So I think, you know, as you look at the rising threat environment, whether it's the situation that we have in the Indo-Pacific and the strategy that the U.S. government has to kinda shore up our naval industrial base, it's, it's of critical importance. I mean, you've heard a lot about, you know, the submarine industrial base in particular, and being behind in rates of production. You know, we have very, very strong content on not only the Virginia-class submarine at about $75 million per ship set, but then also on the Columbia-class submarine program, which is in excess, I think, of $140 million of content, and that's the U.S. Navy's number one, you know, priority.
I think if you just step back about 10 years from this date, you would also say that, you know, 10% of the fleet that's out there is more active, and you've got more ships in a maintenance status than you have 10 years ago. And that represents an opportunity for us because we have three fleet service centers, two on the East Coast and one on the West Coast, where we're gonna be able to leverage those fleet service centers to see the types of products that are getting repaired, to get in there and provide additional aftermarket services going forward. And then also see where our competitors are stubbing their toes, right?
That provides opportunities, you know, not only to take product, maybe through a tech refresh or some other, you know, milestone within the program, you know, but then to also be an alternative source, you know, given the restraints on capacity going forward. So there's a lot of opportunity there. I talked briefly about what's happening in the defense electronics area, the critical importance of advanced electronics and tactical communications in the battlefield. We're seeing a lot of that through what's happening in the Ukraine right now. These are all very unfortunate situations, but a strong defense is your best defense, right, to making sure that you have yourself and your country protected going forward. So there's a lot that's going on domestically and internationally.
We've got a proven ability to grow regardless of local budgetary pressures, you know, based upon our approach to total lifecycle management, and tech refreshes and defense electronics. So a lot going on out there right now, but our portfolio is really well positioned to the top priorities of our defense, our DoD and international defense agencies.
Okay, cool. Well, we're out of time, so thanks everyone for joining us. Lynn, Chris, thanks for joining us.
Thank you, Nathan.
Okay, thank you.