Q1 2022 Curtiss-Wright Corp Earnings Call
Ladies and gentlemen, your conference is scheduled to begin shortly please continue to standby once again your conference will begin momentarily. Please continue to standby.
[music].
Good day and thank you for standing by welcome to the Curtiss Wright first quarter 2022 financial results Conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During this session you will need to press star one on your telephone please be advised for today's conference maybe.
Be recorded if you require any further assistance. Please press Star then zero I would now like to hand, the conference over to your host today, Jim Ryan Vice President Investor Relations. Please go ahead.
Thank you Michelle and good morning, everyone welcome to Curtiss Wright's first quarter 2022 earnings conference call.
Joining me on the call today are president and Chief Executive Officer, Lynn Bamford, Vice President and Chief Financial Officer, Christopher <unk>.
Call today is being webcast and the press release is all of the copy of todays financial presentation available for download through the Investor Relations section of our company website at Www Dot Curtiss Wright is dot com a replay of this webcast also can be found on the.
Website.
Please note today's discussion will include certain projections and statements that are forward looking as defined in the private Securities Litigation Reform Act of 90 95. These statements are based on management's current expectations and are not guarantees of future performance we.
We detailed those risks and uncertainties associated with our forward looking statements in our public filings with the SEC.
As a reminder, the company's results include an adjusted non-GAAP view of it.
Excludes certain costs in order to provide greater transparency into Curtiss Wright ongoing operating and financial performance any.
Any references to organic growth on an adjusted basis and exclude foreign currency translation acquisitions and divestitures unless otherwise noted GAAP.
GAAP to non-GAAP reconciliations for current and prior year periods are available in the earnings release and on our website.
I'd like to turn the call over to win to get things started.
Thank you Jim and good morning, everyone I'll begin our remarks by covering the key highlights of our first quarter 2022 performance and some notable events that are influencing our business.
And then I will turn the call over to Chris to provide a more detailed review of our financial results and our 2022 guidance.
Finally, I'll wrap up our prepared remarks before we move to Q&A Steve.
With our first quarter 2022 performance our results were principally driven by the timing of revenues in our defense market with overall sales below the prior year, but in line with our expectation.
This timing was influenced by the continued global supply chain disruption due to the extended lead time and good luck.
<unk> and the receipt of electronic components are first quarter defense sales also reflected the impact of the continuing resolution and the delayed timing of the Dod budget.
Outside of defense, we delivered a very strong performance generating double digit sales growth in our commercial aerospace nuclear aftermarket and process end markets, which truly reflects the merit and strength of our combined portfolio regarding.
Regarding our operational performance the team has done a commendable job of managing through the supply chain challenges along with the impact of rising inflation and other global events.
First quarter operating margin exceeded our expectations, mainly driven by better than anticipated mix in defense electronics as low lower margin revenues pushed out of the first quarter.
Diluted earnings per share of $1 31, also exceeded our expectations due to the better than expected profitability.
New orders were strong in the first quarter up 12% year over year, reflecting increases enabled defense and commercial aerospace within our A&D market and strong demand across all our commercial market.
As a result, we achieved a book to bill of more than one one times in the first quarter, which builds on our already strong backlog, while we remain cautious due to the ongoing supply chain constraints. This strong demand provides confidence in our sales outlook for the remainder of the year.
Next I would like to briefly touch upon the full year 2022 guidance, although the year is off to a slow start again, mainly due to timing our full year guidance remains intact and we continue to expect a strong performance across the board.
Chris will review in detail in a few minutes, but in terms of key highlights we are maintaining our outlook for organic sales growth of 3% to 5% driven by increases in all of our major end markets due.
Due to the ongoing supply chain challenges and delayed timing of the Dod budget, we continue to expect a greater than normal percentage of our total sales will be weighted to the back half of the year.
While we are approaching this situation with tempered optimism are ongoing discussions with critical suppliers indicate.
Ladies and acquiring electronic components will begin easing in the third quarter, particularly as it relates to semiconductors. While this is encouraging we are currently anticipating this disruption will continue throughout the remainder of 'twenty, two and likely into 2023.
Turning to our operational performance.
We expect continued operating margin expansion in 2022 aided by the benefits of our ongoing operational excellence initiatives and our efforts to mitigate challenges in the supply chain. We also remain on track to achieve double digit growth in diluted EPS and generate strong.
<unk> free cash flow.
Next I wanted to provide a brief overview of some recent industry events influencing our defense markets first.
First we were pleased to see Congress passed the FY 'twenty two defense appropriations Bill in March following a prolonged continuing resolution that delayed funding on critical new start programs.
Bill includes a strong five 5% increase over the FY 'twenty, one enacted budget, which Curtiss Wright is well positioned to benefit from <unk>.
In addition, the <unk> administration released the initial FY 'twenty three budget on March 28, requesting $773 billion for the defense department or 4% growth over FY 'twenty two enacted.
This proposed budget includes increases across all services with naval shipbuilding, receiving the highest increase over 2022 aligned with the administration's focus on the Indo Pacific region.
Notably this includes strong funding for two critical growth drivers for Curtiss Wright, the Columbia class submarine and Ford class aircraft carrier programs.
Those programs continue to drive strong demand for our nuclear propulsion equipment. The recently released 30 year Shipbuilding plan provides further confidence in the defense department's commitment to build out the naval fleet and align our forces to be prepared to face the biggest global threats.
In the ground defense market the budget targeted to continue funding for the Army's top modernization priorities, while in the aerospace defense there was support for various helicopter and unmanned platforms.
I'll also remind you the Curtiss Wright has one of the broadest portfolios of defense electronics products, our alignment to and technical leadership in the open standard aspect of Moshe enables us to help modernize military platforms rapidly and cost effectively.
Turning to the international front the war in Ukraine has further increased the focus on defense spending around the world as well as energy independence for Ukraine, and many neighboring countries in Europe since.
Since the conflict began we have witnessed many NATO countries proposing a ramping up defense spending to 2% or greater of GDP.
And overall increase in global defense spending provides Curtiss Wright with improved visibility and support for our long term growth outlook across our defense end market.
Now I would like to turn the call over to Chris to provide a more thorough review of our first quarter 'twenty two performance and our outlook for the remainder of the year.
Right.
Yeah. Thank you and good morning, everyone I'll.
I'll begin with the key drivers of our first quarter 2022 adjusted results by segment.
Starting in aerospace and industrial where we delivered another strong performance as sales and operating income increased 8% and 34% respectively. While operating margin increased 260 basis points.
Looking deeper into the segment sales growth within its commercial aerospace market, we experienced double digit growth in sales primarily on narrow body platforms, including the 737 and <unk> hundred 20.
Within the industrial markets our results principally reflected increased sales of industrial vehicle products, most notably serving off highway platforms.
I also wanted to highlight the segments aerospace defense market sales, which while flat overall included increased sales of our surface treatment services to help extend the life expectancy of the F 35 fighter jet platform.
This aligns with our recent press release, which highlights the use of our technology to support the military is Premier fighter Jet program and represents one of the many unique commercial defense crossover technologies within Curtiss Wright's portfolio.
Turning to the segments operating performance our results reflected favorable absorption on strong sales and the benefits of our operational excellence initiatives.
Next since essentially Iconix, our performance principally reflected the timing of defense revenues due to the continued challenges within the global supply chain as well as the delayed signing of the FY 'twenty two defense budget.
As a result, we experienced reduced sales of our embedded computing in tactical communications equipment as certain revenue shifted out of the first quarter.
Turning to the segments operating performance, while we experienced under absorption on lower sales and negative product mix operating margin of 16, 3% was actually better than anticipated as a portion of lower margin system sales shifted out of the first quarter.
This in turn allowed us to exceed the first quarter operating margin target of 14% that we provided in February .
Next to enable and power segment, our results reflected lower enabled defense revenues, mainly due to the timing of production on the Ford class aircraft carrier and the wind down of production on the cap 1000 program.
However, those impacts were nearly offset by double digit sales growth in both nuclear aftermarket and process as these markets continue to strengthen with the tailwind from the economic recovery.
It's particularly encouraging to see the uplift within the nuclear aftermarket growth rates, which are also being helped by the U S government's renewed support to maintain the existing fleet of operating reactors.
Turning to the segments profitability, our results reflected under absorption on lower sales as well as a shift in mix on the lower cap 1000 program revenues.
To sum up the first quarter results overall operating margin was 12, 7%, which was slightly above expectations and mainly due to the timing of revenues.
We expect the first quarter to be the low point in the year, followed by solid sequential improvement in profitability throughout the remainder of 2022.
Turning to our full year 2022 guidance I'll begin on slide five with our end market sales outlook.
We continue to expect total Curtiss Wright organic sales growth of 3% to 5% unchanged from our initial guidance provided in February with contributions from all of our end markets.
Within this guide we expect our A&D markets will grow 2% to 4% and represent two thirds of our full year 2022 company sales.
In addition, due to the timing and availability of electronic components, we expect a greater than normal percentage of our defense end market sales to be weighted to the second half of the year with the most pronounced shifts to take place within aerospace and ground defense.
Elsewhere, we continue to expect the commercial aerospace will be our fastest growing end market in 2022, with 9% to 11% sales growth driven by strong growth in OEM sales as this market continues its recovery to prior peak levels.
We remain encouraged by the continued recovery in passenger traffic activity along with the expectations for steady increases in narrow body production rates, both in 2022 and over the next few years.
Outside.
<unk> of our A&D markets, our commercial market sales growth remains unchanged at 4% to 6%.
These markets continue to benefit from a healthy and growing order book. Most recently illustrated by the strong one two times book to Bill recorded in the first quarter.
Continuing with our outlook by segment on slide six I'll begin in aerospace and industrial where our top line guidance of 4% to 6% sales growth remains unchanged.
We continue to project solid growth in operating income and margin driven by strong growth in both commercial aerospace and general industrial market sales, while also reflecting the benefits of our operational excellence initiatives.
Next in the Defense Electronics segment, we continue to expect sales to grow 2% to 4% led by modest growth in aerospace and ground defense.
And as stated on our prior earnings call, while sales and profitability for our defense electronics businesses are typically weighted to the second half.
We do expect a more pronounced shift in sales to the back half of 2022.
And lastly in the naval and power segment, we expect sales to grow 2% to 3% driven by solid growth in naval defense, most notably on the CV in 81 aircraft carrier and Columbia class submarine programs.
We also anticipate mid single digit growth in both the nuclear aftermarket and process market.
We continue to expect that operating margin will be essentially flat, but strong ranging from 18, 1% to 18, 3% as we overcome the significant headwind associated with the wind down of the cap 1000 program.
So to summarize our outlook, we expect total Curtiss Wright operating income to grow 3% to 6% overall on a 3% to 5% increase in sales.
Operating margin is expected to improve 10 to 30 basis points, ranging from 17, 1% to 17, 3%, including an $8 million increase in R&D investments and the aforementioned cap 1000 headwinds.
To aid in your quarterly modeling based on the shift in sales to the back half of the year. We now expect second quarter 2022 sales and operating margin to be in line with our second quarter 2021 adjusted results followed by a strong second half performance.
Continuing with our financial outlook on slide seven while we are maintaining our full year 2022 diluted EPS guidance, we did make a couple of minor offsetting changes in the components below operating income.
First we increased interest expense by $1 million.
We also updated our share count, making a slight reduction to reflect the latest estimates on the full year.
And as a result, we continue to expect double digit growth in our full year 2022, adjusted diluted EPS ranging from $8 five to $8 25.
Reflecting both the contributions from our growth in operating income and our ongoing share repurchase activity.
Again to aid in your quarterly modeling, we expect the first quarter EPS to be our lightest followed by sequential quarterly improvement in the fourth quarter being our strongest with a higher than normal weighting to the second half.
Turning to our full year free cash flow outlook, our guidance remains unchanged for the range of 345 million to $365 million.
During the first quarter, while we typically experienced an outflow of cash these levels were slightly elevated due to lower net earnings driven by the timing of defense revenues and higher inventory levels in response to the supply chain.
Our reported results also reflect the Westinghouse legal settlement payment of $15 million, which we have excluded from our adjusted results.
Looking out to the remainder of 2022, we expect to ramp up as the year progresses in line with our historically strong second half performance.
And finally, we expect to deliver on our long term adjusted free cash flow conversion target of 110% again in 2022.
Now I'd like to turn the call back over to Lynn to continue with our prepared remarks Glenn.
Thank you Chris in summary, we remain confident in our outlook to generate $3 to 5% sales growth. This year driven by increases in all A&D and commercial markets and to deliver strong operational excellence. The Curtiss Wright team continues to do a great job managing through the ongoing.
Supply chain disruption.
We expect continued operating margin expansion, including our investments in R&D and the cap 1000 headwinds and remain firmly on track with our expectation for double digit EPS growth, which as a reminder is in line with our long term guidance.
We expect our free cash flow to remain strong and we are on track to achieve our 10th consecutive year of greater than 100% free cash flow conversion.
We remain committed to a disciplined capital allocation strategy prioritizing acquisitions as a strategic accelerator under our pivot to growth strategy supplemented by continued share repurchase and operational investments.
Earlier this year, we announced the acquisition of SaaS brand arresting systems business, which positions Curtiss Wright to become a leading global supplier and aircraft recovery systems. As previously stated the business generated about $70 million in revenue in 2021 and has demonstrated a solid pace.
Revenue growth over the past few years, we expect this business to align with our long term organic sales growth rate of 3% to 5%.
This transaction is presently on track to close by the end of the second quarter and as a reminder, we are not including its financials within our guidance at this time.
In closing I remain confident that we are well positioned to deliver strong profitable growth in 2020 to advance the one Curtiss Wright vision and deliver on our pivot to growth strategy to drive long term value for our shareholders.
Before we turn to Q&A I want to take a moment and express our heartfelt concern and sympathy for the Ukrainian people, we hope for a swift and peaceful resolution to this tragic conflict with Russia.
As you would expect we have ceased all business activities in Russia and are in full support of all the global sanctions.
We will continue to force our App.
Focus our efforts on supporting Ukraine defense and energy independence through our domestic partners and NATO allies, we and our employees across Curtiss Wright understand the critical importance of our products.
At this time I would like to open up today's conference call for questions.
Thank you if you have a question at this time. Please press Star then one on your Touchtone telephone. If your question has been answered or you wish to remove yourself from the queue. Please press the pound key.
And our first question comes from the line of Peter Arment with Baird. Your line is open. Please go ahead.
Yes, good morning lending Chris Thanks for your time.
Hey, Linda.
You talk about just the.
The chip shortages and overall supply chain, we've heard from other companies that there.
Resulting in carrying more working capital higher inventories, obviously reflected a little bit out in the first quarter, but just your thoughts on that going forward.
Yes, it's definitely something that's top of mind and we were anticipate talking about this morning. So thank you for the question and joining us.
Yes, I mean as you heard us say it definitely impacted our Q1, pushing some revenues out I think one of the things that we've really come to dial in with our supply chain over the past.
Couple of quarters that we've been talking about this for.
Three four quarters at this point about really needing to get ahead of our purchasing and such and placing much longer lead time on orders than we would've traditionally.
Done starting even in Q2 of last year that we saw first a lot of lead times push out to 'twenty, six plus week and over the past handful of months, we've seen some of those lead times extend to almost a year and even greater in some cases as a.
With that and all the orders we placed we're anticipating a real increase in deliveries beginning in the back half of Q2 and early Q3 to really support that ramp up of revenues in the back half of the year that Chris talked about.
We're sitting on a lot of pent up demand and we're making sure we're doing what's necessary.
As the supply begin coming in more rapidly that we're really poised to.
Ramp up our production and turn those into products and get them out the door and I think the team has done a good job of that.
Talking about this and one thing I would say that we've come to understand is as this was new to us.
So new to our suppliers and as they work to make commitments to us their ability to be more clear and firm and those commitments has increased over the past several months and so we do feel an increased level of confidence in the commitments. We have in that increased deliveries coming again later this quarter and the bigger.
<unk> of Q3 and feel good about that and believe we have staged the table for that.
Chris mentioned briefly on the impact on our working capital in Q1, and maybe I'll turn it over to Chris maybe make any other comments he would have on working capital.
Yes, I mean, we typically start off here, a little bit higher than where we ended up.
Full year from a working capital perspective, I mean, there's a lot of payment holds and things that happen at year end and we typically floods that cash back into our supply base and.
And in the inventory in Q1, as we look to ramp up deeper into the year. So.
There is certainly we're used to a normal Q1 outflow.
We did dip down and free cash flow year over year, approximately $77 million I'll say $20 million in last year's Q1 was probably a little bit abnormally high due to the timing of advances and things that came in.
But we are we're carrying a little extra inventory right now and we're really positioning ourselves for these semiconductors and other critical components to come in here at the end of Q2 and Q3. So that we can we can deliver so we're heavily focused on working capital. We're heavily focused on free cash flow a little bit slow to start the year, but that will improve as product starts to move out the door.
I appreciate that and just as a follow up.
Glenn you mentioned in your overview about.
The recent D&B budgets.
Enacted and obviously, we've seen what the fiscal 'twenty, three and the fit up looks like.
How do you view that when you compare it.
To your long term targets that you've established thinking about how Curtiss Wright's position. It seems like there would be potentially an upward bias to your long term growth targets.
I would think well to start out we're really pleased with what we saw come out to be appropriated in the 'twenty two budget and what the initial 23 budget is it really aligns to where we have very strong positions across various platforms. Obviously the navy.
Has very solid funding had the biggest increase in the 'twenty three proposed budget I think there is.
Beliefs, there'll be top ups to it yet.
Yet to come.
And then the focus on the high tech aspects of warfare with.
Enhanced C five ISR and electronic warfare types of products is very much a good spot for US again, we were relieved to see that.
The army is usually the Goto group.
<unk> paying for things and there were some trimming on some vehicle programs, where we do have content, but more importantly, the.
Where <unk> received their funding with the network modernization and soldier lethality those continued to be top priorities in the army with very strong commitment to maintain the ramp rates and the execution on those programs. So overall good.
Could there be some upside I think there is a chance to that I mean for now we're sticking by our 2023 guidance, but.
There is a lot of reasons to be very optimistic about the growth that we are going to be able to achieve.
Through 2023, but definitely beyond that as you look at.
Where things are going in the commercial nuclear market as a U K U S.
It takes form and where those subs are going to be built that's a great place for us.
Obviously, none of that is no AP 1000 orders some of the ongoing small module reactor with none of that is dramatic.
A dramatic and the Timeframes as we see it but great tailwind that are coming behind us.
Just.
You mentioned, one data point that we actually just recently had a visit from the Royal Australian Navy and one of our significant plants to consider what it takes to produce the products that we produce for.
The nuclear submarines and it was a very positive visit and.
So I just feel ever more optimistic that youll all of these trends.
Trends in the industry are going to lead to really good growth for Curtiss Wright.
Thanks for all the color. Thanks, so much.
Thank you Peter.
Thank you and our next question comes from the line of Nathan Jones with Stifel. Your line is open. Please go ahead.
Good morning, everyone.
Good morning, good morning.
While it might be a bit.
These tasteful to talk about given it's capitalizing on the misery of others. We are here to talk about the impact on the business and there are clearly lots need to be.
Several positive outcomes from the Russia, Ukraine for Curtiss Wright's business. So I'm, hoping we could talk about your thoughts on that.
The three I think of.
<unk> increased weaponry being shipped to Ukraine shall.
Curtiss Wright has content on some of that in the medium term you probably say significant increases as you mentioned.
European Defense spending if not global defense spending on the back of these.
And then the third one being.
Waning off Russian oil and gas and the potential for that to add.
Nuclear capacity to the global grid, you've already started to hear about some of the western European countries are reconsidering their anti nuclear position.
So maybe you can talk about how those could impact the business in the short medium long time.
Thanks.
Thank you for that.
And you're right not to talk about it only from a business.
Viewpoint, because it is a very had situation but.
Tend to like to make it focus on the importance of what we do as a business in the safety of our world and that comes both from defense products and energy independence products. So you are right on touching on both sides of that also you are correct from a.
Weaponry weaponry being rapidly shift over there there really is no that is not business for Curtiss Wright Thats, not an area, where we have any products.
So that is in that immediate short term, we're not seeing that however.
As you mentioned.
The buildup in increase in spending in Europe is very much something that will drive business to Curtiss Wright and that will come both directly from sales in Europe to the major vehicle manufacturers as well as other systems directly into those businesses and then for military sales through U S suppliers, who has declined.
Products over there and Neil kind of the one that's been the biggest in the headline is the F 35.
How many countries have said that they're going to buy F 30, fives, but theres been a lot more than that Theyre seahawk helicopters are being talked about <unk> seen some UAV.
130 days, I mean, a whole variety of Av products coming through the U S that we have content on I think we've talked a couple of times.
And one of our most significant areas of business directly in Europe is on ground defense vehicles around high power stabilization equipment, and then various electronic subsystems and displays that are embedded into the vehicles either wheeled or tracked.
And those are the areas that <unk> over the past couple of years have been pretty lackluster in our business that we can clearly see a change in and we put out.
A press release yesterday or the day before yesterday I think.
About a partnership with Orion.
Brian the <unk> joint.
<unk> venture and.
Some business going forward that I think I've mentioned, a couple of times that our relationship and business partnering with Ryan Mattel has continued to grow over recent years and we wanted to put that out as one indication of that that program was intended before Ukrainian more to be.
<unk> built out, but Europe's had a long history of starts and stops on intending to build out.
Vehicles, and I think we're not going to see so many stops anymore. I think we will see the starts and the commitment and they're moving rapidly on that and we have quite a few other programs with Ryan metallic.
To be able to make press releases on over the next six to 12 months on other big programs that we'll be doing with them. So again I do I do.
Do think we're well positioned with the business that's going to be driven through whats going on in Europe , and then lastly, we talked when we did our Q1 earnings result, it was.
Quite sadly ironic on the day of the Russian invasion into Crane on February 24th in here.
Talked about the build out in our in our presentation, then of what was already being pretty committed to across eastern Europe for build out of nuclear power and.
Had Ukraine listed on that and I still think we downloaded it and our $1 5 billion potential but.
From what we're hearing is I think what we're seeing in Ukraine, I think it will be part of that and maybe even.
Provide some upside to that but.
Again. These all of these things are slow theyre not going to drive revenues I don't anticipate in 2022.
But I think we'll we'll see movement in these areas in 2023, both both in defense and in in energy build out with some of the nuclear power plants and again Thats I think first and foremost.
Going to be the AP 1000, and there's lots of public statements and partnering with Westinghouse has done a great job of getting over there.
Building up the relationships building out the local network of in country workers and companies that need to be part of the building of these plans and getting that started so.
All good all good things and.
I would say just the intensity of our engagements in the sense of urgency that we started over the past couple of months. It doesn't mean something happens in a week or a month, but.
You can feel.
Galvanized Asian that this is going to happen and Youre right. Its bidding courage you to see.
Here are some of the talk the U K a.
A couple of months ago about reconsidering its position towards nuclear energy a few other companies and the other aspect of our nuclear business is.
Having the U S reactor fleet.
<unk> continued to have shutdowns and you had mentioned in the past a couple of plants that have said, they're not going to shut down anymore and I think I read just earlier this week that even in California that said, they're reconsidering shutting down their last nuclear power plant, which is.
We all know the position, California so.
I think thats a pretty strong.
<unk> of the World has seen that nuclear power has to be part of carbon free footprint and then energy independence. Both of those are pretty driving forces in the world right now.
One follow up on the nuclear side of it and specifically thinking about western Europe .
Maybe then reconsidering.
Their position on nuclear power.
Very very long.
Curation things.
If you're starting somewhere in the UK from zero furnace Janesville.
That kind of planning time construction time, and if you started.
From zero, how long would it be until this REIT was realizing revenue from something like that.
So we've given the example of what Poland has stated because they've been I think been more specific than what they expect timeline and again. This was a this was a timeline put port but before February 24. So you have to imagine they're doing everything they can think of to shorten that timeframe, but.
They stated that of the plants they intend to build they would like the first one to be online in 2023, which.
333, sorry.
Important packing 2033.
Backs them into.
Having the concrete ready for that plant in 2028, which backs then into needing to have orders placed on the key component suppliers of which Curtis rate would be one in 2024. When we gave our guidance. We said in February of this year three to five years same frequently things.
What happened exactly to schedule I would think if there is any time in the world things are going to happen to schedule.
Not better it would be now and so it's kind of that if you want to plant in 10 years, you need to be moving on with getting products on ordered in and starting to do things. So I'm sure that painful that people looking to.
Break their dependence on Russia talking about a 10 year cycle is long, but that's why I also think.
The SME.
Go into production, but it's going to be a combination of both.
And necessity is the mother of invention and Theres, a big necessity right now so we'll see.
People can't find ways to do things a lot quicker.
Everybody things 10 years seems like a pretty long time, so for something Thats been built we know how to do it we have successful plants working in the world.
And we will absolutely lean forward going to be part of the solution to.
Help the world.
<unk> itself dependence on Russia, I mean, that's just so important.
Thanks, very much for the color Linda I'll pass it along.
Thank you Nathan.
Thank you and our next question comes from the line of Michael <unk> with <unk> Securities. Your line is open. Please go ahead.
Hey, good morning, guys. Thanks for taking my questions here.
Sure.
Are you guys.
Called out that the margins were in line with your expectations and I'm just looking at it I mean, I don't think <unk> had a defense margin this low for several years and even the potential organic declines.
Low as far as I can go back so.
And you've been talking about the margins benefiting from some some low mix slip out I mean is there is there anything else you're kind of seeing there or you can kind of give us more color I mean, we've obviously got some.
Substantial cost headwinds as you.
We're going to try and ramp these margins, but any more color you can kind of shed.
Is it really just volume on those margins and I know you usually have a low.
Start to the year anyway, but these seem to be at.
Emily level.
Yes.
These are really unusual times, Mike I mean, I feel like we were talking about this the other day back in 2020, when the pandemic hit I mean people stopped providing guidance and we tried to re initiate as soon as we can to try to help guide people through the circumstance in this supply chain issue that everyone's facing right now.
We're particularly facing within defense electronics extremely dynamic so what we've been trying to do which we haven't normally done in the past is provide you and the rest of our investors with additional information to help you understand what we're seeing on a quarterly basis. So you saw.
Last time on the call.
Yes.
<unk> tried to provide the guidance from a few different angles here to let you know what we're seeing and when we were in February we did expect that sales would be would be down.
And.
Overall as we look at the reported revenues for.
And defense Electronics, I mean, they were fairly in line with what we had expected I'd say closer to.
Plus or minus $2 million.
At that time in February we also said that we expected those segments to be down around 14% and yes, we realized that those are lower margins than those businesses have seen in quite some time, but at that point. We explained it is really two things one the volumes were going to be down in Q1, mainly in defense electronics, mainly.
Because of what was happening in the supply chain.
But then also the continued push of lower margin system sales out from Q4 into Q1, we.
We did expect that we were going to have a little bit of a different next year in Q1 with those lower margin system sales, but they continue to push out so was it better than expected. Yes. It was we came in.
Above 16% and the defense electronics segment, but it's not something that we would characterize as anything else and just timing and moving out into a future quarter now as we look at what happened within naval empower.
Last year in the first quarter, there was a small favorable naval contract adjustment nothing very big but we also knew.
With the timing of the cap 1000 program of production here in the first quarter on that very profitable program that we would be down and those margins came in fairly.
Fairly well in alignment with what we're expecting so we're sharpening the pencil.
To give you the best look that we can.
Considering what's happening in volume and absorption considering what's happening here within mix.
Few of our businesses and we hope that that helps you guys. As you approach Q2, and the rest of the year.
Got it what about.
Just can you give us a little bit more color on kind of the cost equation and inflation and maybe.
Take us through.
Some of your contracts I know it seemingly varies by contract or contract tight, but you certainly have some some commercial off the shelf products, which.
Assuming you can get the price increases there right away, but are you seeing.
Some some pricing pressure on some of your longer duration firm fix that you are having to absorb right. Now are you having discussions with customers just I guess just broadly how much how much risk is in your in your contract.
Portfolio in terms of being able to pass through these price increases.
So.
As you stated is all of the above because I mean being the diverse busy.
Business, we have.
Yes.
Contracts that we take revenue over time, we have units of delivery, we have LTE as the bill out years and some of our more commercial.
Businesses. So it is a variety.
We absolutely have made this a focus over the past nine months for sure of really putting some new measurement tools to understand our cost structure. So we're we're anticipating cost increases and getting ahead on the <unk> I think the area. We've seen the most success and this is across the <unk> segment. The team has done.
Really nice job.
Being agile and passing that on I would say in general our customers have been pretty cooperative and understanding I mean, theyre not liking it but they understand it and working with US we've even had some customers where we've had LTA and place that went out a few more years that didn't have.
Flexible enough.
<unk> in them to work with us to change those indices to allow us to flex more so but I mean, it's true you cant this isn't to say youre going to do it and all of a sudden in three months, you're realizing all this new pricing. It is it takes.
It's realized incrementally over time as you burn through your backlog, where you've already taken.
Taking contract when we're not trying to do anything like go out and change.
Pricing on products that we have under contract currently maybe shipments under LTA, but.
It's a big focus and I think I think the price increases have started to settle down a little bit I think we know where we are and so we're doing the work to planning around that I mean, the other aspect of the cost structure really is the labor cost and that continues to be a dynamic situation.
As we have.
Quite a few open heads and go the higher across our organization and the teams are managing it again.
Credit throughout our business units for handling the situation, but I'd say the supply chain and the materials is more impactful, but we're also watching the labor pretty closely.
Got it and on those just on firm fixed prices, even something like the Columbia, Virginia Class I mean, do you have to wait to your next.
Opening of that contract or next task order and you've got to absorb the costs on those or is there any flexibility in the short term.
Yes, I think it is.
And it's important to note that all of our businesses are going down the path of improving pricing I mean, everybody is really giving that a hard look so it certainly is going to be more difficult and it's going to take longer time to make changes on those those longer term naval contracts than it is in maybe some of the shorter cycle stuff that you see on the commercial.
Syed.
But the conversations are happening.
And the negotiations and the communication with the customers as frequent and ongoing and where opportunity presents itself, Mike whether it's through an escalation provision that might be contained within the contract given the unique situation that we're all facing right now with the inflationary.
The inflationary environment.
Were those where we can find flexibility, we will find flexibility and I agree with Glenn I think the team has done a good job so far.
Perfect. Thanks, a lot guys I'll jump back in the queue.
Thanks, Mike.
Thank you and our next question comes from the line of Myles Walton with UBS. Your line is open. Please go ahead.
Thanks. Good morning, I was wondering if I could just touch on the sales cadence here for the rest of the year I think.
I think Chris you talked about similar sales into Q2 last year and that would imply a 9% sequential move.
If you do that and obviously would have to be in large part driven by our defense electronics. It would seem like the backdrop would be getting a lot better from a supply chain perspective.
Is that sort of the way it all holds together that youre seeing that kind of sequential improvement in terms of supply and deliveries.
Getting back to normality.
Yes.
At the risk of even going deeper into the soft guidance that we've been providing.
Here I mean defense electronics is truly heavier weighted to the back half of the year I mean, we said it on February that we could see 40% to $50 million of sales moved from the first half to the second half and the majority of that was going to be within our defense markets and defense electronics.
So as you look at what we're what we've given for soft guide in our prepared remarks from Q1 to Q2.
If you look at defense Electronics, we would expect the sequential growth between Q1 and Q2 of this year to be.
At a high single digit growth rate right. So.
As well as a modest improvement in operating income.
When those deliveries start coming in for those critical components in defense electronics, I think thats, when youre really going to start to see some things take off but we are as you look across the full year and the full portfolio, we will see steady sequential improvement in both sales and operating income for the remainder of the year.
Okay, because it would seem like you that $40 million to $50 million that you just referred to that happened in the first quarter effectively $40 million was what happened in the first quarter.
Well.
Yes, I would say I think as you look at the first quarter year over year, you did you had about a.
A $40 million drop in Q1 defense electronics year over year. It did see a drop with enable and power and that was primarily we had the AP 1000 program and a little bit of enabled defense timing, but were offset by about a $13 million improvement on the commercial side. So we will see sales.
Improve in the second quarter.
It's going to be at a high single digit rate, but the rest of that recovery for defense electronics is going to be Q3 Q4.
Supplement what Chris has said with I think this is where it's important to for Chris and I that we look at the company as a corporation as a whole and as we look to deliver the financial results that are expected we have a very.
<unk> diversified portfolio that has different stresses on it in different areas and we will deliver the results that we're predicting.
By managing the portfolio as a total.
Okay, and maybe on that question Lynn portfolio and M&A backdrop, obviously.
This upfront deal here closing in the near term, but just curious what the pipeline is looking like.
Over the medium term.
So I mean, there are definitely interesting properties in the pipeline I think we remain true to what we said a couple of times I think last year. We made mention that we looked at double digit numbers of properties that we chose not to act on and.
Maintaining that tempo I would say in the beginning of this year, but there is still <unk>.
Absolutely properties in the pipe of various sizes and across various segments of the business and so.
I remain optimistic that we will continue our cadence of being able to bring to deploy the majority of our capital toward acquisitions, but again, when we find those strategic and financial fits not forcing it.
Thanks.
Thank you.
All right. Thanks, Thank you.
Again, if you have a question at this time. Please press Star then one.
And our next question comes from the line of Cristina <unk> with Morgan Stanley . Your line is open. Please go ahead.
Hey, good morning, everyone.
Hey, good morning, good morning Christy.
Following up on Peter's earlier question, we've seen meaningful step ups in defense spending levels. Both in the 'twenty two spending bill on the 20th request.
Your first establish a 5% growth target last year through 2023, the outlook for defense was much dimmer on a lot less clear with.
The opportunity for the program as you've highlighted.
This growth look more like high single digit and what has to firm up for you to feel confident to change your outlook.
So.
We love seeing what we're seeing in the in the spending and it is absolutely good for our business I think what we've seen is if.
If you take half of our defense business is naval what we've seen is a.
Sherine and.
A firming up of the business that we anticipated would be in the naval budget. So it's still great to have it be CA committed to in a bipartisan manner, but it doesn't there isn't necessarily anything in that spending that's a radical step up in that area. It's across some of our group.
The confidence in what we're seeing for the packs are spending could that go higher I think theres a chance I think we have pockets of our business.
Could go higher and I think there is some reason for optimism.
Youll see our orders were a bit tamped down across some of our defense markets. In Q1, we've seen a nice shift in even early in Q2, I think with the CR being put behind us and I.
I guess, it's a little hard to anticipate how the pace of order flow through those increase budgets and so I think we want to see a little more evidence of that before we begin to speaking to any optimism and a credit of course, we're optimistic and hopeful that the 23 budget actually gets passed on time this year.
Yes.
Happened in September that will provide greater clarity and we don't just go back to another long CR. So.
<unk>.
But.
<unk> answered a lot of.
We have a lot of reasons to make ourselves optimistic about where we're taking Curtiss Wright over the next handful of years.
Great that's really helpful and maybe following up on.
Nuclear power plants, right I'm thinking about eastern Europe , you've highlighted the opportunity for the $1 $5 billion of Mou's.
There is a clear focus on energy independence.
And then finally recognition that nuclear power has a role to play in clean energy right.
But at this time, if you look at Russia, and what they were doing in Ukraine. It seems like there is a slight increase in operating risk of nuclear power plants as we saw them fire. Upon some of these facilities in Ukraine.
Does this balance in your view, how much would you weigh the positives of the opportunity from clean energy to energy independence versus the potential.
Potential headwind from this increase.
Operating activity in the region.
And how does this change your view on that $1 $5 billion opportunity.
So I don't think it impacts the $1 $5 billion opportunity, but you are absolutely right to point out.
Some of these initial events were happening.
It definitely makes you take a breath and hold your breath for a second but I think that is where I mean, there must be energy independence or cannot be dependent on Russia, and so if you start with that as a starting point.
Nuclear is going to be a part of that and what do you need to do you need to have the defenses across Europe be ever stronger that.
These types of activities are 410 building forward until that that threat has taken away. So I don't think its going to take away the move towards nuclear I think it's going to.
I think we will see more countries joined NATO over the next short period I don't think its going to take years and then the ramp to that committed spending.
It gives us a much stronger Europe I think is the way that that.
Potential risk is balanced.
And I would only add that the AP 1000, we've said it in the past it has entirely passive safety system, so not saying that anything in this world, there's really a waterproof but.
If youre certainly going to go in that direction, you want entirely passive safety systems for them.
Of that reactor good point.
Great that's really helpful and if I could add on one more.
Pivoting back to the U S. On this nuclear theme it seems like the U S nuclear Renaissance. It didn't play out a few years ago is finally, starting to gain some traction and Lynne you highlighted that life extension of the nuclear power plant.
In California can you quantify the opportunity for this domestic aftermarket.
And what's embedded in your outlook and.
How much could we see.
As you know I mean.
A lot of these plants are what 50 60 years old.
Sending them.
How large of an opportunity and how quickly could you see.
Some of these play out.
So.
It is going to be an important growth driver for Curtiss Wright.
I've tried to.
Get my hands and quantify what the revenue per reactor that would do these plant life extension and it really is is varied from single to double digit millions based on what kind of maintain maintenance schedules they've made what type of equipment they have inside it.
Is varied across the reactors.
And then also there is a lot of a lot of choices that the reactors will make from do they do the minimum to get the plant life extension or do they take the opportunity to modernize it move to more digital systems that.
Needs less manpower as everybody is trying to figure out how to do things more efficiently and less dependent on labor that can really make them, even richer opportunities for us as they go through that but thats something thats been figured out right now.
I don't really think we can put a number on it but.
Yes.
It's definitely an important trend and maybe you have heard us mentioned about a third of the U S. Nuclear power plants have made either early pay their through their paperwork filing paperwork or have indicated they are starting the process and I think there's a really strong belief that that's going to sweep across the majority of the rest of them I think.
Theres still.
Maybe one one or two maybe a small handful of reactors that were too far down the path towards closing I'm, not saying, we will never be another reactor closed in.
In the U S. But we saw this for in Illinois.
Probably six months ago say that they werent.
Clothes, having governor Newsome make this statement publicly.
He is not going to say something like that.
It's not going to be popular in California necessarily.
So yes it is.
We feel good about what it's going to drive yeah, and I would just I would just offer E. Because many of you who've been following us for a very long time and as we've looked at the nuclear aftermarket with all of those plant shutdowns that have been taking place there.
<unk> has been low single digit growth.
We're really encouraged by what we're currently seeing.
Within the nuclear aftermarket.
Last year was.
A good increase in orders up 10% year over year Q1, we were up 7%.
Continuing to support those strong.
Stronger mid single digit aftermarket growth rates that we have here for 2022.
And it's not just the nuclear aftermarket that increase in funding from.
From the <unk> to support our strategic plan and the investment in Gen. Four technology. So theres. Some theres. Some good things that are happening here and I think.
While it may be difficult to put our finger precisely on what that means for Curtiss Wright. It certainly means opportunity above where we were.
Great. Thank you very much.
Thanks Christine.
Thank you and our next question comes from the line of Christopher <unk> with.
Your line is open. Please go ahead.
Hi, Good morning, Lynn, Chris and Jim Thanks for taking the question just real quickly getting back.
Are you doing.
Just getting back to the topic of M&A really quickly.
As the recent increase in interest rates had any impact on the amount of leverage that you might be willing to take on to finance potential acquisition or a series of acquisitions.
No I think we like where we are and where we're positioned within our balance sheet I think.
<unk>.
The balance sheet continues to be strong we're continue to be focused on finding the right properties to invest in and it was one set a little bit earlier that is our number one priority.
But as we move forward. We will also think about returning capital to shareholders and making sure that we put our best foot forward to maintain an appropriate balance.
I want to kind of maybe go off topic, a little bit here I mean, it is really an interesting time here with what's happening with <unk>.
<unk> interest rates and how thats impacting many businesses.
Just from an inflation perspective, but it is really a good time to kind of take a look at your.
You financing vehicles within the Corporation and we're certainly doing that so with what's happening in the environment right now we're looking at our current revolver, which expires at the end of 2023 and is this the right time to kind of maybe sees an opportunity to add a little bit more capacity.
About maybe going out into the bonds market.
It's a good time to be proactive in thinking about how you are financing your business and keeping your eye on the future.
Great helpful Thats It from me thanks.
Thank you.
Thank you and I'm showing no further questions at this time I would like to hand, the conference back over to Lynn Bamford for any further remarks.
Hi, Thank you for all the thoughtful questions.
Joining us today, and we look forward to speaking to you in another three months.
This concludes today's conference call. Thank you for participating you may now disconnect everyone have a great day.
Okay.
Okay.
Yes.
[music].
Sure.
Yes.
Yes.
Yeah.
Yes.
Yes.
Yes.
Yes.
Yes.
Okay.
Okay.
Okay.
Okay.
Yes.
Okay.
Okay.
Okay.
Yes.
Okay.
Okay.
Yes.
Okay.
Okay.
Sure.
Okay.
Okay.
Yes.
Okay.
Yes.
Yes.
Yes.
Sure.
Okay.
Yes.
Okay.
Yes.
Okay.
Yeah.
Okay.
Okay.
Sure.
Yes.
Okay.
Okay.
Yes.
Yes.
Yes.
Yes.
Yes.
Okay.
Yes.
Okay.
Okay.
Yes.
Yes.
Okay.
Sure.
Thanks.
Yes.
Yes.
Yes.
Okay.
Okay.
Okay.
Okay.
Yes.
Sure.
Yes.
Yes.
Okay.
Sure.
Okay.
Okay.
Yes.
Yes.
Sure.
Yes.
Okay.