We're good to go. Okay, good morning, everyone. Thanks for joining us this morning. My name is Peter Arment. I'm the Senior Aerospace Defense Analyst here at Baird. We're delighted to have with us Curtiss-Wright Corporation with us this morning. With us from Curtiss-Wright, we have Lynn Bamford, who's Chairman and President and Chief Executive Officer, and Chris Farkas, who's Chief Financial Officer and Vice President. So thank you, Chris. Thanks, Lynn, for joining us.
Oh, thank you.
Really appreciate it. Lynn, I guess we'll just jump right in and appreciate, you know, always your support for the conference. In May, you had an Investor Day, issued new three-year targets, continued to drive momentum with a Pivot to Growth strategy. Help us understand some of the key drivers, what may be different compared to your last set of targets, I think, that you had prior to that?
Well, thank you for that. And it's honestly, this is a fantastic conference, so it's really our pleasure to be here. And thank you for inviting us again. I must say that today's discussions may contain some forward-looking statements that contain risks and uncertainties as outlined on our SEC filings. But now that that's behind us, we will move on to, you know, it's just fantastic to be here, and there's a lot going on. And for those of you, I know there's a lot of familiar faces in the room and a lot of new faces that I'd encourage you to go to our website and look at our Investor Day presentation that really lays out the strategies and the drivers of growth across the organization, as well as the new financial targets, which we can touch on here today. But it's a good tutorial.
And also, maybe potentially our last earnings call, which was just a handful of weeks ago. Just to, you know, not try and do a history of Curtiss-Wright, but to just give a bit of perspective. You know, the company was founded in 1929. We just had the pleasure of celebrating our 95th anniversary and ringing the bell on the New York Stock Exchange. You know, with that legacy is, you know, the foundation of the aviation industry, the Wright brothers, Glenn Curtiss. But as a corporation, you know, we've been first in many of our end markets, whether it's the Navy nuclear, commercial nuclear, defense COTS. You know, some of the things that I'm sure as you, you know, try and understand the company and where we're going that are, you know, really fundamental pillars to who we are as an organization. And our roots are deep in that.
You know, and when you think of those end markets, you know, we're about 8,600 employees. Over 2,000 of those are engineers. We really are an engineering-centric company. And, you know, most, you know, fundamentally look to solve some of the hardest problems, hardest challenges in those end industries where the products we build are mission-critical, safety-critical, and must-not-fail applications. And that's really where we target doing business in the areas we go after. So turning to the Investor Day, you know, it's exciting. We launched the Pivot to Growth strategy back in our May 2021 Investor Day with, you know, really proud that we had, you know, really achieved a lot financially over the prior decade, you know, having improved margins, 800 basis points over the prior decade that, you know, really believed firmly the time was right to, you know, focus on growing the revenues of the organization.
You know, that's a combination of good financial planning, but also where we were in our end markets and what was going on in the industries we are in and that the, you know, we had such great footprints, technologies, capabilities that are in really, you know, end markets that are at a point of flux and change and opportunity. So, you know, with that, we committed then, as we committed again in May of this year, that we will continue to expand operating margins, growing OI faster than the top line, but you know, we took, you know, we committed to 3%-5% organic growth in our 2021 Investor Day, committed over 5% organic growth in our May 2024 Investor Day.
I would note that does not include a new AP1000 reactor, which for those of you who know us know exactly what that means to the organization. Those who don't, it's, you know, needle-moving business for Curtiss-Wright. And we just left it out of our targets because it too dramatically changes things in, you know, there's uncertainty as to when that order is going to come, not if it's going to come, but when it's going to come. But, you know, the things that are different is, you know, we really started, you know, committing to investing more in R&D, both customer-funded and internally funded, you know, back in 2021. I'm proud that during that timeframe, we increased R&D spending faster than sales growth while expanding margins. So that's a, you know, something I think, you know, we inside the company are really proud of.
It's also motivating to the employees that, you know, our teams love seeing that we're willing to allow that funding of dollars, but you know, we increased R&D by $20 million in 2023. We're going to increase our total R&D, both customer-funded and internally funded, spending again $20 million this year, and you know, those have, you know, you spend now, the payback, you know, is, you know, years in the future and then going on for years, and so we're just feeling, you know, some of the momentum from those new investments we're making across our end industries, you know, really begin to pay fruits, and so, you know, there's that.
You know, another thing you'll see if you, you know, have a look or do look at our Investor Day is, you know, we're really changing who we are as a company, expanding it and maturing it and investing in not just the R&D, but the systems with which we use to manage the company, give proper oversight to leadership throughout the organization, and, you know, just doing a lot of different things from, you know, data visualization tools to, you know, portals for us managing our strategies and giving visibility, real-time visibility across our strategies, implementing a common CRM across the organization, moving towards an integrated website. I mean, it's just a variety of things that are just maturing how we take, you know, we can manage the company and present ourselves to industry. So, you know, the what's different is that's a broad brush.
I know you're going to want to probably dig into some of our end industries, so I'll just leave it at that level for now.
Okay. Yeah, I would highly encourage everyone to look at the May Investor Deck for the Investor Day. There's a lot in there, and obviously we'll get into some of it. But I want to dig a little deeper into the operating margins. Like earlier this year, you announced some of the restructuring efforts, the majority of which was, you know, expected to impact the A erospace and Industrial segment. Do you think these are more kind of targeted for your growth and efficiency, or are they based on kind of the challenges you're seeing in a few businesses, you know, and how may they benefit kind of the long-term margin trajectory?
I'll turn that over to Chris.
Thanks, Lynn. So we're actually in a really, really great shape. I think, you know, Lynn had started off by mentioning that we've expanded our operating margins by more than 800 basis points over the last decade. We have operational excellence ingrained into the culture of our organization. And when we started the Pivot to Growth strategy three or four years back, we had a more concentrated focus on commercial excellence. And we've put a lot of practice and training and procedure in across the organization to make sure that people aren't just focusing on how do I rip out costs, but how do I grow that top line? And that's been very, very effective for us. And it continues to provide opportunities for us going forward.
As we look at the operating margin expansion, you know, and you look at the things that we've done over the past 10 years to get that, we've, you know, rationalized product lines, we've sold businesses, we've, you know, modified, you know, the way that we're producing product. You know, we're talking about all these systems that we're implementing across the organization to enhance efficiency and control of management throughout the organization. But we also do restructuring. And this year is no different. You know, we're doing restructuring, I would say, from two different viewpoints. One is we continuously have businesses within the organization that are not meeting the average margin of Curtiss-Wright, which is in the, you know, the 17% range. So we're looking to optimize a few businesses.
But more importantly, given the great growth vectors that we have across our markets, we're also positioning ourselves to produce, you know, for long-term profitable growth. So we are doing things like footprint rationalization and reorganizing the flow of product and how we're producing that across the organization to support that long-term profitable growth. So it's actually a little more rewarding for us than what we've typically seen in the past in terms of the restructuring activities. It's really about delivering long-term profitable growth. So, you know, we'll continue to move forward as we have in the past. There's other things that we continue to look at. You know, this year we're going to spend $15 million for $10 million of annualized savings. You'll see some of that benefit this year through the margins. You'll see the majority of the benefit through this next year's margins.
But for us, it's about freeing up that money so that we can reinvest back into the organization and keep that engine growing.
That's terrific. Yeah, it's really obviously going to be great as volume continues to increase. So appreciate that. All right, let's go move on to the boring topic, commercial nuclear. I'm sure no one wants to hear about that. Fission is back, as we like to say.
Yes.
So commercial nuclear obviously has become an area, obviously, of increasing focus. There's been several large tech companies, as you all know, that have recently, you know, announced interest in supporting their data centers. Curtiss-Wright is really well-suited for, I think, potential tremendous growth opportunities. You know, help us understand your overall, you know, how you look at the overall demand sizing it for in the Curtiss-Wright opportunity. And then maybe talk about the aftermarket business, which is currently a very sizable business for you, and the recent reactor news that's getting restarted at Three Mile Island, how that might, you know, impact you.
Sure. So again, this is, you know, a lot of detail on this in our Investor Day, again, to go back to that point. But to, you know, you know, we're really, it's a very invigorating time, honestly, within our organization to see everything going on. And, you know, it's a fun time to be working in the industry. And for the teams that work through some, you know, kind of, you know, very challenging years and hung in there in this industry, it's, you know, it's a happy day to get up and go to work and be, you know, a very meaningful player in this industry. And it's, you know, there's kind of three aspects of our business.
And, you know, you asked specifically about aftermarket, but, you know, we laid out, you know, we think, you know, we can grow our nuclear portfolio low double digits during the three years that we gave our Investor Day guidance for. So, you know, that's, you know, a great change over, you know, prior years where if we could achieve low single digit, it showed, you know, as plants, you know, the current operating fleet was being shut down, we could still eke out growth, but it surely wasn't anything meaningful. And now that that's stabilized and really shutting down reactors seems to be in the past, you know, driving that to low double digit growth. But, you know, even looking beyond just the guidance of 2026, you know, we feel confident we can double our nuclear business by 2028.
It's roughly a $300 million base of business that, you know, we're talking about doubling by 2028 and have a line of sight that it feels very reasonable to grow that business to $1.5 billion by the middle of next decade, but you know, going back, and that's a combination of the SMRs, you know, large light water reactor buildouts, but the aftermarket, which is kind of the most here and now. There's 94 operating plants in the United States. 80% of them have given some level of indication they intend to do a plant life extension, and for those, you know, probably many of you know, but it's to get an operating license from the NRC to go from 60 to 80 years. Many of them are already beginning to say, if we go from 60 to 80, we're probably going to go from 80 to 100.
That's kind of considered today's thinking the limit, but, you know, that will go on. You know, we provide, you know, we have a long legacy in this industry. As I mentioned in my opening comments, you know, really since the inception, we have a very, very broad portfolio of products. If you look into our Investor Day, it's just lists of all the things just really show, you know, we're all over the operating plant. We have a great commercial sales team that is active in every one of those 94 plants knowing what they're doing and, you know, working with them to provide the products and the services they need as they go through their normal outage and then extra work that's required to do these life extensions. You know, we're often asked, you know, what that means per operating plant.
It's very difficult to say because it really depends on what equipment they have, what they've done over the years, but it's meaningful business to Curtiss-Wright, you know, inside of these, and for us, even as, you know, this recognition of maybe going from 80-100, that encourages more major systems, redesigns, taking systems from analog to digital and thinking through there's a payback on those investments, so that's, you know, great business for us and really gives us a chance to increase that content, and these life extensions are also going on up in Canada, early days there, and, you know, just around the corner in South Korea where we do meaningful business.
And, you know, sort of less clear line of sight, but, you know, we're absolutely trying to see how potentially we can expand that footprint across Eastern Europe where there's a lot of Russian plants that, you know, they need new sources of supply. So I don't, you know, that's not, you know, part of any of our guidance, but, you know, doors that might be open in the future for that. So we size the aftermarket business that we have the ability to win content in. It's a competitive market. We're out there bidding. We do, you know, it isn't just a, you know, we're a sole source provider, but, you know, we've got a great capability and a great reputation, but it's a $7 billion market between now and 2050.
So this is, you know, just to, you know, try and put some scope on what does this mean. You know, that's a lot of business that we have a chance to gain access to.
Yeah, that's terrific. And just one quick one on that, just follow up, just like lead times typically, like when a plant, like so Three Mile Island getting kind of restarted, how does that impact you? Like what typically?
Yeah. So, I mean, I don't think it's just going to change us the $7 billion number. I don't, you know, a couple of people have actually asked us, would you change that number? And it's not on that level of magnitude that we're going to, you know, rescope the $7 billion, but it's great backup that that number is very achievable. And, you know, the dialogue begins already. We're engaged with them on the things they're going to do. And I think it's also important that, you know, in thinking about these plant life extensions, you know, along the lines of your question is, you know, these are multi, multi-year journeys in these plant life extensions. So this isn't a spike that's going to come and you get a surge of revenue one year that drops off.
I mean, these are, you know, five-to-ten-year journeys of the work they need to do as they get these plant life extensions, and you look at the number of plants and the different phasings of those, you know, this is a very solid business base that's, you know, going to be steady as we go forward.
Yeah, secular growth for sure. Let's shift over to the nuclear new build side. You know, we've seen more increased news flow out of Eastern Europe around potential AP1000 reactors. Let's talk where you are with that work. I think that's important. And of course, you're seeing some developing relationships with X-energy. Amazon plus Google and others are positioning themselves to, you know, for to pursue SMRs for their energy-intensive data centers. Are there one or two major players in the SMR space where, you know, you're playing favorites?
Yeah. So, you know, just maybe starting with the AP1000, that's Westinghouse's Gen III+ large light water reactor that we've been partners with Westinghouse for several decades, really many decades through prior plants. But again, you know, being in the industry since its inception, so it's meaningful business to Curtiss-Wright. You know, we're engaged with them. You know, the opportunity across just Eastern Europe, and I think it will go beyond that. But, you know, sizing, you know, things that have been, you know, made public intentions to build large plants across Eastern Europe is, you know, 20-25 plants being built, you know, within, you know, over the next decade, you know, maybe a little bit longer, but, you know, in that timeframe.
You know, if we assume Westinghouse wins half of them, which I think they might win more, but if you even just assume they win half, that's $1.5 billion of business for Curtiss-Wright just to give a perspective of what that opens the door for us to have access to revenue for. So we have a great working relationship with Westinghouse. We're engaged with them and we'll support them. And, you know, there's early days, people actually even mentioned the concept of building new large plants here in the U.S. and Canada where that was forbidden for, you know, many, many years. So we'll see. But, you know, we're just, you know, taking just that Eastern European opportunity and sizing it at this point. We think that's what will be first. And, you know, the news continues to move steadily.
You know, when we talked about, you know, re-engaging with Westinghouse, settling, you know, some contractual issues we had with them back in 2022, you know, we said three to five years that we expected a first order from what we knew. Times march forward and, you know, the line of sight of that just continues to get clear. This year we've said one to three years, and, you know, Poland and Bulgaria are kind of leading the charge of who most likely will be the first site built out. You know, every time you turn around, there's just this steady drumbeat of news. You know, Poland's reaffirmed funding for their first plant.
In Bulgaria, they've signed an engineering service contract, which, you know, puts us on a timeline of, you know, really getting to ordering long lead material that very much supports that one to three-year window. It just gets more clear that that will be, you know, something that will be materializing for us in the timelines we anticipated.
Yeah. And just on the SMR space, you've had a strong relationship with, you know, X-energy. Maybe you could talk a little bit about that. I think that's been one, I think that's, you know, a strategic maneuver for you.
Yeah. So we, you know, one of the things that I think is an advantage with Curtiss-Wright is, you know, we actually have a great relationship with X-energy, but stepping back for a second, you know, we look across the breadth of who are going to build the larger SMRs, not necessarily the micro reactors per se in some of those, and, you know, are very much looking to be a meaningful supplier across that entire base of business and not, you know, being, you know, trying to focus ourselves only in on one of those.
So you know, we put forward, you know, we believe we're working towards having content on all of them, both the, you know, the SMRs that are based on more Gen III technology, Rolls-Royce, Westinghouse, NuScale, you know, to have a minimum of $20 million up to $120 million across those and the two, you know, advanced reactor technologies, which is TerraPower and X-energy. We have been the most public with our content with X-energy, you know, targeting having $120 million plus of content per reactor buildout. It was absolutely fantastic to see the announcement just a few weeks ago with between them, Amazon and Energy Northwest with both some funding into them from, you know, from Amazon and others, Citadel and some others.
And then the intent, you know, the commitment to build the first of, you know, probably three reactors, you know, on the Energy Northwest power grid. And so really just a, you know, cements the timelines that these things need to happen and gets kind of a, you know, gets some funding push, you know, with that. But, you know, very much, you know, we're engaged across all the major reactors and, you know, fully intend to make us sort of like, you don't have to pick a winner and loser, you know, by investing in Curtiss-Wright, you can invest in the belief that nuclear energy will be built and it will drive business to Curtiss-Wright.
Yeah. It's just starting actually. And an AI query I think uses 10 times the amount of electricity of a Google search. So this is really just, you know, ramping up, which is pretty material.
Along those lines, it was, you know, Amazon announced that with X-energy, which is clearly, you know, top of mind for us. But, you know, Google and Microsoft also announced things that they're intending to invest in that just shows, you know, the industry is going to change and some of that, that money is going to get behind accelerating this buildout, which is so needed and not try and drive all the funding through the utilities that don't have anywhere near as deep of pockets as these tech giants.
Yeah. The utilities are notoriously conservative. So the partnering up with the tech guys is great. Chris, I'm sure no one wants to talk about margins of the, you know, the nuclear business. So let's talk about the opportunities. I think the operating margins in nuclear, historically, it's been really attractive. I can remember back when the China direct orders happened and how we used to always be surprised how strong it was. So how should we think about the mix of aftermarket SMRs and then large new builds for RCPs?
The aftermarket business is a very profitable business for us. I mean, as Lynn mentioned, we've been in it since the inception. We've got very specialized skills and the product portfolio that we have is extensive, so it really allows us to go on in there and we're a lean organization, as you've mentioned, and price effectively, but price profitably, so that's really a strong business for us and kind of underpins this low double-digit growth rate that we're going through right now and speaks positively towards the future. When you start to think about the AP1000 business and that order coming in in the next one to three years, which, you know, I think year-end here will even change the messaging on that, it is large, profitable business, so each plant that goes into Europe is four RCPs.
And the last time we negotiated pricing on those RCPs, they were, you know, several years back, it was $28 million per RCP. So you're talking about $130 million per plant and profitable business to Curtiss-Wright. I think one of the things that we have to maintain as we go forward is we want to be the best supplier to all of our customers. So we'll know more about the margins as we enter into the next commercial negotiation. But, you know, rest assured it's something that we're very, very focused on. Right now, even though we're expanding margins for the organization for the year, we are investing, you know, greater than $20 million of incremental R&D year over year.
That's not, you know, development margins are typically a lot less than what you see in the production environment, but we're really building great product and capturing those strong growth vectors that you see across all the different, you know, SMR technologies going forward. You know, eventually that will turn into production, you know, and as you look out across the targets that we provided with, you know, low double digits through 2026, doubling the commercial nuclear business by 2028 and then that $1.5 billion of annual revenue, that'll only continue to accelerate going forward.
Right. Right. We look forward to it, obviously. How about your capacity? Given the, you know, just enormous breadth of opportunities you've cited over the next 10 years, is there a limited how much, you know, kind of nuclear exposure you can actually accommodate at your plants today? Is there a big CapEx ramp on the horizon?
Yeah. It's another great question. I mean, as you look across all of our segments, and I know we're talking a lot about commercial nuclear today because that's where the excitement is, but there's growth really across all segments and our backlog has grown in the high teens this year. So there's not a segment that doesn't have a strong underpinning as we, you know, head out into 2025 and beyond. So we spend a lot of time thinking about capacity. We think about capacity not only from, you know, a capital perspective, a facilities perspective, but we also think about the people that are required to do that going forward.
So, you know, right now I think we're in a great position to be able to execute on that strong backlog that we have, and looking out into the future, we don't see any immediate needs that would change the profile that we've had in capital expenditures, which has been about 2% of sales for, you know, quite some time and will be into the future. But we're also spending a lot of time on staffing. We're out there developing strategic relationships with top universities to get the best engineering talent to be able to support what's happening in commercial nuclear. There's a lot of trade people that are required in that process as well. So we're out there working with trade schools and increasing, you know, our focus on hiring and talent acquisition across Curtiss-Wright. It's not just about bringing new people in, it's also about retention.
We've done a lot of things over the past few years to ensure that people are not leaving as we're bringing new people in. The future's bright. I think, you know, should we find ourselves in a situation, you know, towards the end of this decade where, you know, we're talking, you know, and have a greater clarity over the $1.5 billion of annual revenue, it's possible we may have to greenfield the site. If we're in a position where we're greenfielding a site, that's going to be a very good thing for our investors because that means that there's a lot of profitable business that's heading our way. We're doing a lot in that area.
Terrific. Let's squeeze a few more in before time's up. Let's turn to defense. You recently raised your 2024 outlook in several of your defense markets, now projecting double-digit revenue growth in each, you know, at least at the midpoint. You know, help us understand where you see the opportunities for growth given that, you know, you began the 2025 budget with another Continuing Resolution, which we all know. And can this top-line momentum continue as we think about going into 2025?
Yeah. So we feel really good about where we aligned with where the defense spending is. And, you know, the top-line growth is, you know, not great, you know, not huge this year. It's coming on the back ends of some very big growth years. But we don't feel constrained by that top-line growth, that there's a lot of dynamics in our business and where we're aligned that we have really, you know, somewhat unbounded opportunities to grow. I mean, obviously we have our big naval shipbuilding content that, you know, we lay out pretty clearly to the investment community across the major platforms. But there's, you know, other things around those. We can incrementally take on new work. We work very actively in the overhaul work across the shipyards. And we have an ever-growing international presence in shipbuilding.
So, you know, as much as, you know, you can lay out, it's two Virginias a year or whatever for things, you know, we do a wide variety of things to give us the opportunity to grow, you know, in that space. And then you move out of naval and talk, you know, aerospace and ground. And ground, our tactical communications, you know, capability that, you know, came to us through an acquisition, you know, four years ago is, you know, seeing quite dynamic growth. And, you know, just the needs of the interconnectivity on the battlefield and getting information to the warfighter in a real-time meaningful way that takes all this great technology we're deploying, it's only good if you get it to, you know, down to the individual soldier to make a decision on. And we are right in the middle of all that.
So that trend across, you know, all of the, you know, branches of the government, you know, we're very critical to. And also, you know, building the systems that are able to, you know, collect the data from those sensors, you know, do the high analytics on it and turn it into actionable data. So our product, our portfolio is, you know, state-of-the-art. You know, we've talked a lot, for those of you who've heard us talk about our MOSA and SOSA compliant product offerings. You know, we're very proud. We have, you know, I feel very confident we have an industry-leading capability in that space. You know, the teams that, you know, develop products there are innovative and use their R&D dollars very wise to bring a very broad, very state-of-the-art offering to the industry.
I feel very good about where we are and the sales team that goes out there and shares those products across the world, and again, in those spaces, you know, we also benefit from increased spending across the NATO countries as we have, you know, salespeople across Europe working directly in those countries and various capabilities that, you know, are part of capturing, you know, that increased spending that's directly in-country on top of obviously buying equipment from the U.S., and so our position is great and we definitely don't feel bounded by defense spending on our ability to grow.
Yeah. You've got great growth tailwinds in your defense business, particularly defense electronics. Finally, last, we got a minute left. Let's talk about capital allocation. Recently announced your second commercial nuclear acquisition. You've done some buybacks that have been completed. Preferred balance to M&A, share repurchase. How do we think about things in 2025?
With 48 seconds left, I look forward to talking to you guys in the breakout room more about this. Historically, you know, we've got this great margin expansion that we've talked about. We've also done some really tremendous things with free cash flow. Over the past three years, we generated nearly $1 billion of free cash flow that we deployed towards high-quality acquisitions and share repurchases. We still believe that we're a bargain out there in the market, as evidenced by our most recent announcement to repurchase another $100 million of shares. At that same time frame, we averaged the last three years 108% of adjusted free cash flow conversion. We like getting our cash in before we do the work. That's kind of how we operate.
And as we look out across the next three years, we're planning on generating $1.3 billion of free cash flow. So we have a very, very solid balance sheet. We're really well positioned. We have a strong history of buying high-quality acquisitions at low prices. We're looking for critical adjacent technologies that'll help to supplement all that great organic growth that we have currently inorganically. And beyond that, we believe in returning capital to shareholders. We did $450 million the last three years. We're on a pace to do that again this year. And it's a great balance sheet to work with.
Perfect. Perfect way to end. Thank you all for joining us.
Thank you, everyone.
Thank you, Chris. Thanks, everyone.
Thank you.