Q3 2022 Curtiss-Wright Corp Earnings Call
Welcome to the Curtiss Wright third quarter 2022 earnings conference call. At this time, all participants have been placed on a listen only mode and the floor will be open for your questions. Following the presentation. If you would like to ask you a question at that time. Please press star one on your telephone keypad if at any point your question has been.
Answered so you may remove yourself from the queue by pressing star two.
So others can hear your questions clearly, we ask that you pick up your handset for best Sound quality. Lastly, if you should require operator assistance. Please press star Zero I would now like to turn the call over to Jim Ryan Vice President of Investor Relations.
Thank you Gretchen and good morning, everyone welcome to Curtiss Wright's third quarter 2022 earnings conference call joining.
Joining me on the call today are chairman and Chief Executive Officer, Lynn Bamford, and Vice President and Chief Financial Officer, Chris <unk> our.
Our call today is being webcast and the press release as well as a copy of today's financial presentation is available for download through the Investor Relations section of our company website at Www Dot Curtiss Wright 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 1095.
These statements are based on management's current expectations and are not guarantees of future performance.
Detail those risks and uncertainties associated with our forward looking statements in our public filings with the SEC as.
As a reminder, the company's results include an adjusted non-GAAP view that excludes certain costs in order to provide greater transparency into <unk> ongoing operating and financial performance.
Any references to organic growth earned an adjusted basis and exclude the foreign currency translation acquisitions and divestitures unless otherwise noted.
GAAP to non-GAAP reconciliations for current and prior year periods are available in the earnings release and on our website now I'd like to turn the call over to Lynn to get things started.
Thank you Jim and good morning, everyone I'll begin our remarks today by covering the highlights of our third quarter 2022 performance and some recent events that are influencing our business and financial outlook.
Then I will turn the call over to Chris to provide a more detailed review of our quarterly financial results and updates to our 2022 guidance finally, I'll wrap up our prepared remarks before we move to Q&A.
Starting with our third quarter 2022 results sales increased 3% overall.
The strength of Curtiss Wright's combined portfolio, we delivered strong sales growth across our commercial aerospace nuclear aftermarket process and general industrial end markets. This strength was partially offset by the impact of continued supply chain challenges in our defense markets, mainly impacting the timing of revenue and our <unk>.
<unk> electronics segment.
Despite this headwind we delivered 70 basis points in overall operating margin expansion.
<unk> 18, 2% in the third quarter. This reflects the strong performance within our aerospace and industrial segment and the benefit of our company wide operational excellence initiatives, which are helping to combat rising inflationary pressures adjusted.
Adjusted diluted EPS increased 10% year over year to $2 seven.
And up 13% sequentially, which exceeded our expectations.
New orders were strong up 32% year over year to $818 million, reflecting one three times book to Bill overall with orders exceeding one time sales in each of our three segments.
Notably this was the highest level of quarterly orders since fourth quarter of 2015, which as a reminder included the last AP 1000 award, which was valued at $450 million.
It is also worth noting that our defense electronics segment achieved a record bookings quarter. This was driven by strong demand for <unk> five ISR in tactical communications equipment as we benefited from the improved pace of defense outlays during the past few months.
Our new engineered arresting systems business, which we acquired on June 30th also recorded a strong bookings quarter, including an award announced yesterday to support the United Arab Emirates Ministry of Defense.
Enabled defense, we secured several significant orders.
To support aircraft carrier and submarine platforms, including various contracts announced via press releases during the third quarter.
Outside of defense orders remained strong and commercial aerospace nuclear aftermarket and process as these markets continue their recovery to 2019 levels collectively our orders along with our strong backlog, which is now up 19% year to date provide heightened visibility.
And tremendous confidence to support Curtis wrong, great long term growth outlook.
Before I review the guidance highlights I'd like to spend the next few minutes reviewing the macro level headwinds that influenced our third quarter sales, which came in lighter than our expectations. This was principally driven by two factors the supply chain and foreign exchange.
First I will discuss the global supply chain challenges, which continue to have a considerable impact on the timing of revenues in our defense electronics segment.
While our year to date order activity is really encouraging.
<unk> and deliveries of semiconductors continues to defer our conversion of bookings to revenue, which is typically been within six to nine months. We had expected this to ease off in the second half of this year and even more importantly for supplier Decommit on critical components declined more significantly as we move through.
The balance of the year. Unfortunately, this was not the case and we continued to experience greater volatility in these areas. In addition, as we have mentioned over the past year lead times are more complex devices have extended from a typical 10% to 12 weeks to 52 weeks or even greater in some cases and all.
Also remain quite volatile.
As a result, we now expect approximately $45 million of defense electronics revenue to push out of 2022.
We have revised our 2022 guidance to reflect this more derisked scenario for the timing of revenues and the related impact on free cash flow.
Despite the delays are defense electronics.
Electronics business remains fundamentally sound, we fully expect to recover these sales and related strong profitability as these conditions subside.
This remains a timing issue with a strong but extended tale of revenues and free cash flow.
Aside from the supply chain FX headwinds due to the strength of the U S. Dollar are beginning to have a more pronounced impact on our sales performance for the first time in years. This resulted in a slightly greater than 1% impact on our third quarter sales or nearly $10 million mainly within our aerospace.
And industrial segment.
We expect these FX headwinds to continue into the fourth quarter and likely have a modest impact on our top line results. In 2023, we are closely monitoring this situation and the related impact on our business.
Next to our updated full year 2022 adjusted guidance, our sales guidance for both our AI enable and power segments remain unchanged with each reflecting mid to high single digit growth.
Regarding our defense electronics segment as I shared earlier, we are now expect $45 million in segment revenues to push out of 2022.
As a result, we have reduced our overall Curtiss Wright sales growth outlook to a range of 2% to 4% while total Curtiss Wright operating income guidance has also been reduced we continue to expect.
<unk> year over year margin expansion based upon improved profitability within our Eni segment and our overall focus on operational excellence.
As a result, we were able to maintain our prior guidance reflects 10 to 30 basis points in margin expansion. This year, despite the topline reset.
We also remain on track to achieve double digit growth in diluted EPS.
While Chris will discuss our free cash flow in more detail, we have revised our expat expectations lower based upon the timing of the defense revenues as well as the revised timing for receipt of a significant cash payment on the China, AP 1000 contract, which we now expect to collect in 2023.
To summarize.
Our guidance update we certainly had our challenges during the quarter.
And a year with the supply chain situation, but business fundamentals and underlying demand across our portfolio remained strong.
Next I'd like to provide a few updates on some recent events.
We were pleased to announce in September that we signed a preferred strategic supplier agreement with X energy for the design and deployment of their advanced small modular reactor. We were selected to provide several critical systems for the reactor, which we expect to generate in excess of $100 million in revenue per plant.
We will discuss this agreement in more detail later in our prepared remarks.
We are also excited to share the recent news that Westinghouse was selected by Poland.
Build the country's first nuclear power plant initially expected to include three AP 1000 reactors with a potential for six total reactors.
The reactor coolant pump or RCP provider for this reactor. This provides us an opportunity for new RCP orders from Westinghouse within the next three to five years to support these reactors in Poland, which are expected to begin producing electricity in 2033.
In summary, we are well positioned to capitalize on the tremendous secular growth trends across our end markets, including emerging technologies and nuclear power and an increasing global focus on defense, which will enable Curtiss Wright to deliver long term profitable growth.
Now I would like to turn the call over to Chris to provide a more thorough review of our third quarter 2022 performance and our outlook for the remainder of the year Chris. Thank.
Thank you Lynn and good morning, everyone.
I'll begin with the key drivers of our third quarter 2022 results by segment.
In aerospace and industrial we delivered another strong performance generating 9% sales growth in the quarter were up 12% when excluding the impact of FX.
Within the segments commercial aerospace market, our results reflected strong demand on both narrow body and wide body platforms.
And the general industrial market, our results reflected double digit sales growth in both industrial vehicle products and surface treatment services, where we continue to experience strong demand.
And this segment's ground defense market, we benefited from a development contract for ground missile launcher and actuation technology.
And regarding the segment's profitability, we delivered 260 basis points and year over year margin expansion, which reflected favorable absorption on strong sales and the benefits of our operational excellence and pricing initiatives as we continue to outpace any supply chain or inflationary pressures on margin.
Next in defense electronics, our performance again reflected the timing of defense revenues.
Overall, we would have expected approximately $20 million and higher revenues in the quarter as changes in supplier schedules resulted in lower embedded computing revenues in aerospace and defense as well as reduced sales of tactical communications equipment in ground defense.
Turning to the segments operating performance, our third quarter results, principally reflected under absorption on lower A&D revenues.
Next to enable and power segment sales growth of 9% principally reflected the contribution from our new arresting systems business and its sales to the aerospace defense market.
Enabled defense revenues were essentially flat in the quarter, reflecting the timing of production on both the major aircraft carrier and submarine programs.
And the power and process market our results reflected solid demand in the nuclear aftermarket supporting existing reactors, along with double digit sales growth in process, where we continue to experience very strong demand.
These increases more than offset the wind down of production on the cap 1000 program.
And regarding your segments profitability, our results reflect favorable absorption on higher organic sales as well as the benefits of our operational excellence initiatives.
To sum up the third quarter results overall Curtiss Wright's operating margin of 18, 2% was slightly above expectations up 70 basis points year over year and up.
More than 200 basis points sequentially.
Next turning to our full year 2022 guidance I'll begin on slide five with our end market sales outlook.
Based upon the macro impacts that Lynn mentioned earlier, we now expect total Curtiss Wright sales growth of 2% to 4%, which includes the contribution from the arresting systems acquisition offset by a 1% headwind from FX.
As a result, we now expect organic sales to grow 2% to 4%.
I'll begin in our A&D markets, where we reduced our growth outlook to a new range of 1% to 3%.
This primarily reflects the timing of revenues within our aerospace and ground defense markets due to supply chain delays, which we expect to slowly recover in 2023.
We also reduced our naval defense outlook slightly based on the timing of program revenues.
Wrapping up our A&D sales our guidance remains unchanged in commercial aerospace, where we continue to experience very strong order activity in support of our current and long term outlook.
And turning now to our commercial markets, where we have raised our overall sales growth guidance to new range of 6% to 8%.
This reflects a more favorable outlook for the power and process market, which we raised to a new range of 5% to 7%.
This increase is based on the strong year to date performance and increased sales within our nuclear business supporting Gen. Four advanced small modular reactors, most notably tied to our recent agreement with ex energy.
In addition, we continue to expect strong general industrial market sales growth of 6% to 8%.
As we have experienced historically, we expect the fourth quarter to be our strongest in 2022 and will reflect year over year sales increases across all of our A&D and commercial markets.
Continuing with our outlook by segment on slide six I'll begin in aerospace and industrial where we continue to project strong growth in both commercial aerospace and general industrial market sales.
Our top line guidance remains unchanged, reflecting growth of 6% to 8%. So we now expect more favorable operating income growth of 12% to 16% and operating margin to increase 90 to 110 basis points based upon the continued benefits of our operational excellence and pricing initiatives.
Next in defense electronics, we have revised our current year sales and operating income growth expectations, which we believe fully de risks our full year outlook.
Again, this very much remains a timing issue as the ongoing challenges in the supply chain are delaying the recognition of our strong order book.
Despite those impacts we maintained our operating margin guidance range of 22, 2% to 22, 4% for this segment.
And lastly in the naval and power segment, our top line guidance remains unchanged, reflecting overall growth of 7% to 8% of which 3% to 4% is organic driven mainly by an increase in the power and process market.
Our outlook also includes the contribution from the arresting systems business, which delivered solid third quarter results and remains on track to contribute $40 million in revenue this year.
For this segment, we continue to expect operating income to grow 6% to 8%, while operating margin remains strong ranging from 18% to 18, 2%.
Next I wanted to share a few comments about our research and development activities.
So we are experiencing some moderate delays from a staffing and engineering resource perspective, particularly in defense electronics.
Total Curtiss Wright's combined spending on internal and customer funded R&D is still expected to increase year over year by approximately $12 million.
It is important to note that we're constantly seeking customer funding for our growth investments and that we are directing our resources to the highest and best use.
If you recall this activity began in the second quarter with a modest change to our guidance, we shipped to development contracts as we were able to secure an increase in customer funded programs.
This shift is now taking place more broadly across the portfolio to support numerous projects, including electromechanical actuation technologies to support aerospace and ground defense and Anda and <unk> segments.
Avionics and instrumentation as well as advanced naval cost technologies within our defense Electronics segment.
And support for the new ex energy small modular reactor as well as subsea pumping initiatives enable and power.
Collectively we expect these investments in total engineering spending which are increasing year over year to enable future organic growth and also support our pivot to growth strategy.
So to summarize our outlook, we now expect total Curtiss Wright operating income to grow 3% to 6% overall still in excess of sales growth and continue to expect operating margin to improve 10 to 30 basis points ranging from 17, 1% to 17, 3%, including the headwind of the Kaplan wind down and first year <unk>.
<unk> dilution on the new arresting systems acquisition.
Continuing with our financial outlook on slide seven I'll begin with an update of our recent financing activities.
If you'll recall in July we took the opportunity to further strengthen our balance sheet and last week, we closed on $300 million in new senior notes, which as a reminder, had a blended rate of 454% on 10 and 12 year notes.
We intend to utilize these proceeds to pay down our revolver, which was used to fund our recent acquisitions.
Of note the continued increase in yields on 10 year treasuries and the timing of cash flows due to the supply chain is driving higher interest expense and as a result, we increased our interest expense guidance by $2 million.
Based on this increase and the impact from lower defense revenues, our updated full year 2022, adjusted diluted EPS guidance reflects a new range of $8 five to $8 20, which continues to represent double digit growth this year.
Turning to our full year free cash flow outlook, our revised guidance reflects a new range of $275 million to $315 million and I wanted to provide some color on the two main drivers.
First the timing of defense revenues due to supply chain challenges and our related ability to collect on those revenues as well as higher inventory levels have resulted in a lower than expected year to date free cash flow performance.
Given the expectations for timing of fourth quarter revenues, we see a related impact with collections pushing into 2023.
Second if you recall from our August update we noted that we were expecting a significant cash payment upon final delivery of our cap 1000 reactor coolant pumps to China.
And at this time and in alignment with our customers' project schedule, they're not ready to take delivery of these pumps, which would have substantially mark the completion of our contract.
We are working with the customer and are confident in a successful resolution that this payment will not likely occur until 2023.
As a result, we now expect to recognize approximately $40 million for the final cash receipt next year.
The management team remains very focused on free cash flow generation and working capital, especially as we conclude this year and plan for 2023.
It's important to note that excluding the delayed receipt as a cap 1000 payment our adjusted free cash flow conversion would have exceeded 100% of target that we've consistently achieved for the past decade.
And now I'd like to turn the call back over to Lynn to continue with our prepared remarks, Glenn. Thank you Chris before we move to Q&A I'd like to take a few minutes to share some more exciting news in our commercial nuclear power business, which represents a significant long term opportunity for Curtiss Wright and our shareholders.
September we signed an agreement with X energy to advance the design and deployment of their <unk> hundred advanced small modular reactor. The first of which is expected to begin commercial operation in 2028.
Under the contract we will be providing three of the most critical systems for this reactor.
We would not have been in this position without the tremendous collaboration of our various nuclear businesses leveraging their long standing industry expertise to secure this important agreement for Curtiss Wright.
We estimate that our content will be in excess of $100 million in revenue curve for unit ex energy plant.
As a frame of reference a typical build out to replace an expiring coal plant would likely include a pair of that synergy plans and provide Curtiss Wright in excess of $200 million in revenue.
We are also working closely with other major reactor designers to develop similar partnerships, including but not limited to expanding our existing relationship with new scale and developing new content with Terrapower GE Hitachi and Rolls Royce.
We are recognizing initial design and development revenue in 2022 related to generation four technology, which we expect to continue for the next several years as the demonstration projects are completed and anticipate that we would recognize production revenue in the middle to later part of this decade. We're also excited to see the.
Denude drumbeat of U S government support for this technology and a steadily rising pro nuclear sentiment, which should provide long term benefits to Curtis right. We've seen several pieces of important legislation released in the past few quarters, including the infrastructure Bill the inflation reduction act and even the chip.
Hips Act, all of which support the exciting existing nuclear infrastructure and the deployment of advanced reactors.
This legislation will provide billions of dollars of investment in production tax credits dedicated to preserve the operation of the existing nuclear fleet and also help fund the build out of next generation reactors.
To help frame the potential of the advanced reactor market. We point you to our recent Nei survey of its membership which includes utilities generating approximately half of the total electricity production in the U S. Today, they identified the need for more than 90, gigawatts of new nuclear power generation equating.
<unk> to more than 300, SLR plants being required over the next 25 years, many of which will be targeted to replace retiring coal plants. This represents a significant opportunity for Curtiss Wright.
Beyond the U S. There is rapidly growing interest in advanced reactor technology in Canada, the UK and eastern Europe .
In addition to power generation substantial opportunities exist for industrial and high temperature process key applications that greatly broadened the use the potential end user base.
For example, Dow incorporated recently announced their intent to deploy an ex energy plant at our Gulf Coast operations to provide carbon pre process heat and power that is expected to be operational in 2030 with.
The global drive for climate change clean energy and carbon free.
Emission goals and the strategic importance of energy independence are all generating strong support for this industry.
Overall, we see a tremendous global market opportunity for Curtiss Wright to be part of every leading SME and advanced reactor with the potential to drive above average long term growth in this market.
As I wrap up our prepared remarks today I want to emphasize that although we expect the challenging near term market conditions to continue into 2023 I remain ever confident in our strong business fundamentals and the exciting opportunities that lie ahead for Curtiss Wright.
As evidenced by a growing order book Curtiss Wright remains extremely well positioned for long term profitable growth and we expect to enter into this next year with a very strong backlog across the portfolio. This in turn will provide a significant opportunity to deliver value to our shareholders with the inquiry.
In U S defense budget environment, and the emerging growth trends driving global defense spending as clear tailwind to Curtiss Wright, we are confident in our ability to demonstrate strong long term growth across our defense businesses.
Across our commercial markets, we remain well aligned with the leading long term secular growth trends, such as electrification and commercial aerospace general industrial and perhaps even the military.
And in nuclear to help sustain sustained the 2090 plus operating reactors in the U S and hundreds more worldwide.
As well as the opportunities at our doorstep to participate in the development and eventual production of advanced reactors.
We remain focused on executing our pivot to growth strategy to maximize revenue and operating income growth. Despite.
Despite fairly significant top line headwinds this year, we remain well positioned to deliver solid operational performance in 2022 and beyond Curtiss Wright also maintains a healthy and balanced capital allocation strategy and we are focused on investing our capital for the best possible returns.
In closing the prospects for Curtiss Wright and the markets. We serve remain very healthy and we remain committed to driving solid execution and delivering long term value for our shareholders. At this time I would like to open up today's conference call for questions.
The floor is now open for questions. At this time, if you have a question or comment. Please press star one on your telephone keypad. If at any point. Your question is answered you may remove yourself from the queue by pressing star to you again, we ask that you pick up your handset when posing your questions to provide optimal sound quality.
Our first question is coming from Michael <unk> from interest.
Hey, good morning, guys. Thanks for us taking the question.
Yes.
You mentioned a lot about.
Ex energy and the opportunity there.
I think you took an equity stake can you kind of talked about some other potential similar relationships can you just give maybe some more of the details on that on the equity stake in what we see additional positions taken with some of these other companies.
Yes.
Curse.
Curse right. This is a great opportunity, we believe ex energy is really well positioned to bring very unique and safe technology into a very growing market area. So we chose to make this <unk> in a technology that we believe in we believe in the role the advanced reactors within the play in.
A safe and healthy growing energy market for the U S and beyond so it's a fairly unique in that sense.
Not necessarily forecasting investments in other providers, but.
We're proud to be able to make this investment with ex energy. So our partnership with them is is very strong and I think it's important to note that they very much wanted to have an announced relationship with Curtiss Wright given our reputation as one of the premier providers of the equipment.
That goes into nuclear power plants, and our reputation and our capabilities and expertise give credibility to them and so it's really been a very great partnership.
We absolutely are working across the industry has commented in my notes to really make ourselves part of every advanced reactor that is being developed and I couldnt be more pleased with the collaboration within Curtiss Wright I think you've heard us talk for a year and a half now without becoming a more integrated company in <unk>.
How we pursue business and market facing and this is just absolutely a premier example of how the teams are doing that and it's really energized.
The teams across our company at the opportunities that are before us.
Got it got it that's helpful. Thanks.
And just shifting to the other nuclear opportunity with Poland can you give any more color and I think you said three reactors you saw is that three reactors are planned.
24, palms, and then any any sense on I know you've kind of talked about timing, but you guys have.
Start preparing from a resource standpoint, you have all the staffing in place depending on when that order comes to fruition.
Yes, so super exciting news late breaking last week, and we really are early days with translating that with Westinghouse into exact timing we have maintained three to five years.
This surely is very solid drumbeat to shore up that timing potentially sooner, but we don't have any line of sight on that it is three plants. So the agreement is with Poland is their intent is to build six plants. The initial call.
Contract in which is what's been announced but I don't think its contracted yet will be for three plants and I'm sure our timing as Westinghouse shares up that relationship. We are working very closely to be right. There hand in hand to make them successful to move.
Through these first three and secured the second three.
Poland in again, as we said, they're very actively pursuing <unk>.
A variety of opportunities throughout eastern Europe , and we are committed to making them successful and pleased to be their partner. So it's exciting there'll probably be more news on that.
Over the coming months is as they nailed down their contract and we see how that translates to us.
Got it and then just the last one for me on the defense supply chain. It sounded like things didn't really get too much worse I guess at <unk> you guys were just anticipating some easing I mean, we had heard for a while about these fees significantly long lead times, but I mean, you kind of talked about recovery into <unk> into 'twenty three.
Should we think about this more of a second half 'twenty three recovery or how are you guys thinking about it in terms of.
Getting access to Pic chips and other products you need.
Just maybe more color there.
Sure.
Before commenting anything.
<unk>.
Really difficult guide for myself and the team to be calling down the defense electronics full guidance as we have we feel it was the prudent thing to do we value transparency as a company and felt that this is what we feel is.
Derisk the vantage point of what we can achieve in the business.
Wanted to go ahead and present that.
But we're working hard to overcome these forces and go forward and to just maybe give a little bit of color.
Outside maybe your specific question, but to kind of frame, what we see going on.
Across his teams to put in perspective.
During the course of the year, we will source roughly $30 million electrical components within the segment.
I think ill give one specific example of something we spoke to Q3 of last year about us really looking much further ahead in placing component orders.
With an anticipation of 52 plus week lead times in Q3 of last year a dose of one specific example was 6000 pump components, that's tied to $45 million of revenue in this calendar year and those those 6000 components were supposed to start delivering the end of Q4 and then through the first.
Half of this year into Q3 of this year through the first half of this year, we really had seen very few of those components and that that delay was over half of the call down that we did in Q2, where we dropped the revenue.
Dirt of defense electronics at the end of Q2 to $28 million in that one component drove that.
Those.
We had word at the time that they would rapidly increase those into Q3 and into Q4, we saw at the beginning of Q3 shipment.
Shipments begin to.
Come in at a good pace that made us feel that the guide at that time, we will be able to achieve and then late in Q3, we received the unfortunate news that we would not get any more of those components during the year and again that delay of that one component drove about a third of the $45 million call down and so.
It's just such a volatile situation and Thats, what we thought the Decommit says really.
So we've been doing a lot of great work to get ahead of our buying practices and it's hard to work with these extended lead times that we've been working on it but the <unk> just hard to.
Manage around it.
I think one of the other things you heard me talk about this the team has done a great job of really building up executive relationships and working at a senior level and the suppliers the supplier which of course I wouldn't name. Yes. It was a very solid company that has a great track record, but they were let down by part of their supply chain and really had an unexpected.
Did delay and so it wasn't.
A lack of commitment from them to deliver the parts that they had said that they were surprised and so it's just.
Three layers as to what's going on we do feel as though in spite of what we're seeing in the call down.
There's definitely a lot of predictions that the demand is going down across the industry supply is beginning to come up and there's a lot of predictions that demand going down into next year until we do expect to see the stabilization in 2023.
Surely by the back half of 2023, and we think that.
The things we've been doing over the course of this year, even the end of last year, but then refining and improving over the course of this year really should put us in.
A different place in 2023, then we are now, but we're monitoring this closely and just.
Staying very close to our suppliers and working with them very closely.
Got it that's helpful. Thanks, guys I'll jump back in the queue.
Thanks, Mike.
Okay.
Our next question comes from Nathan Jones from Stifel.
Good morning, everyone.
Great.
Just Jeff.
One follow up on the.
On the <unk> opportunity.
<unk>.
Figuring out these numbers.
300, <unk> in the U S by 2050, and Thats from half the utilities in the U S. If we double that and say 600.
The net revenue opportunity for you is the $100 million PA four of those.
Is it reasonable to size that market opportunity not necessarily the amount that youre going to get because that market opportunity that would work out to something like $15 billion through 2050 is that the kind of number that youre thinking about as the opportunity just in the U S. For me this MLR.
So let me.
Mick one like add one clarifying comment to that so that youre, 100% right in the framing of 300 is from half of the utilities it would be reasonable to assume the other half would want a similar amount there's nothing unique about the half that is members of NII.
So that is a reasonable assumption those will not necessarily all be ex energy plants. I mean, I think it's reasonable to assume that there is a variety of companies that we mentioned were working hard to have content with that will when various portions of that SLR build out.
We expect to have significant content.
Tens and tens of millions of dollars, maybe not fully a $100 million, we don't know yet with some of those so it's really too early to say I'm not signaling we won't it's just some of them were further along in our partnership with ex energy than we are with others, but significant content. So.
But yes, I mean, you can do the multiplication like that and it's it's a pretty astounding number I mean, we're trying to stay focused on what we need to do right now and we need to work really hard with these guys to make them successful in getting their reactors.
Designed in a sound manner that is cost effective that they can get online and making them successful, but yes, I mean, the future. It's just it's pretty outstanding I mean thats. The U S. Then you take eastern Europe . The U K, Canada, and then you add this process market, which I think is still a bit.
<unk>, how significant it can be and.
It's driving some fun planning exercises within Curtiss Wright I will say to think about.
Prepare for this so yeah and I would just add on to this not that we need icing on the cake I think at this point, but I would say that.
That's just electricity generation that we're really talking about I mean, there is.
There's applications, particularly for the ex energy.
<unk> and <unk> due to its high temperatures and process heat and other industrial applications hydrogen production et cetera. So there's there's more there's more beyond that market.
Okay.
Sure, it's giving you all some funding funding spread shapes in planning that stuff out.
Lynn you talked about the <unk>.
<unk> dollar having an impact on on some of the international businesses was that comment just around the translation impact or I mean, typically you say.
Very strong dollar has negative.
Activity impacts, especially in emerging markets.
Are you starting to see that actually has an impact on demand or just purely talking about translation.
I will let Chris take that yes.
We're not seeing an impact on demand I think it's natural to assume that some of the order book is being influenced by that.
Certainly that's what translates into sales, but it's a.
It's a headwind for us.
In the third quarter alone it was nearly $9 million in sales year over year, we've seen the U S dollar move fairly dramatically against the Euro GBP and CAD, which are really the top three foreign currencies that we work within and in Q2.
<unk>.
Pretty strong as well I would say roughly half if not more in some cases of that of that change occurred.
During during the most recent quarter since Q2, so it's something that we're monitoring and we expect at this point, it's going to be about a 1% headwind to revenues. This year fairly immaterial to operating income and we expect that to continue into this next year I would say that.
The group, that's probably most affected by this as you look across the three segments is really the Eni group based upon what they're doing in.
The general industrial space and the location of some of their facilities, but it's also affecting the defense electronics team as well.
Thanks, and just a final one.
There was some you guys gave some color on most of the end market trends order trends I don't think I caught anything on general industrial order trends.
Can you just maybe comment a little bit on that.
The order trends in general industrial markets.
Yes sure.
The business continues to do well and our revenue for the Q3 was up $13 million or 14% year over year.
We saw 17% growth in vehicles that was mainly on highway class eight and specialty vehicles, but the industrial automation and services is also up 6% and we continue to expect that that market is going to be 6% to 8% on the full year.
In Q2, and Q3, we saw industrial vehicle product orders return back to what I would characterize as strong 2019 levels. They were down from last year, but last year, we had achieved those historic highs backlog nearly doubled.
For this year the order activity on a year to date basis is still up 10% versus.
Fiscal year 2019, so we've got very strong backlog.
The key for this business is really managing the supply chain I mean, they've had their own challenges it's more about transportation.
Then than it has been the semiconductors issue in defense electronics, but they're doing an excellent job continue offset order book cautiously in.
And they look like they're going to be well positioned entering into 'twenty three.
Thanks, very much for taking my questions.
Thank you.
Our next question comes from Myles Walton from Wolfe Research.
Okay.
Thanks, Good morning.
Good morning, good morning, hoping to.
Drilling a little bit on the defense electronics segment and in particular recovery plan.
When you sort of have this level of demand signal, but you can't obviously accomplish it with supply I'm trying to get the pig through the Python can be.
It can take longer depending on the business and it might be shorter depending on others and so I Wonder I think one of your synch points is thermal cycling in and you also have a seasonal business. So I'm wondering does this in any way affords you a little bit more of an opportunity to smooth out the year by maybe doing a bit more.
The front end of 'twenty three versus the typical seasonal for Q hockey stick.
Yes.
Good observation, you've obviously been watching us for a while so it is.
True.
We talked at the beginning of this year.
Always historically have a stronger.
Like are heavily more heavily revenue driven in the back half of the year than the front half and we went into this year anticipating that slope to even be a bit steeper than normal on the team has done a lot of things to prepare for that I mean, even with the call down we still have a big ramp in Q4 I think the team has.
Ready for it I mean, this has been a very challenging time, but it's a great team.
Is very committed to supplying to our customers on their needs and.
Prepared for the ramp that we need to accomplish in Q4 and so on.
Yes, and it is reasonable to say.
The exact timing of the revenues that we're pushing out of this year, how they flow into 2023 is not fully settled yet, but I would think it is reasonable to think it is going to smooth.
The revenues across 2023 to have.
A less of a ramp than maybe we've historically had over past years.
But.
Yes.
It's a good point to make.
Okay, Alright, and then the other question I had was on nuclear aftermarket in particular, so obvious.
There's a lot of positive things going on and the potential for new builds in the future.
But on the aftermarket side, there was pretty positive legislation that was.
As you mentioned signaling to the current reactors.
Extended lives for.
Many years to come I'm, just curious if the order activity for life extensions has now blossomed considerably and what your outlook is for the growth rate. There I think you had a low single digit.
AGR previously at the Investor day for nuclear aftermarket and I'm just curious if there's an uptick.
Maybe I'll speak broadly and then let Chris talk about the order. So it's interesting we talk with.
Others are going well in the group that we talked very much about our ability to say, which order is normal aftermarket work and which which orders are now plant life extension and it's not always crystal clear because theyre all doing maintenance type of works in the plant, but our team definitely thinks it's early days, but we're seeing some of the <unk>.
Order increase is due to plant life extension, but we're really just at the beginning of that so I think that is just in a continued to be a good tailwind for that team over the next.
Many years has different plans to enter that their life extensions at different times. So the very beginning of that but yes, we definitely feel some of what we've seen in 2002 is tied to plant life extension and maybe Chris you and give some numbers are there, yes, I can I can do that.
You know from watching us for a while miles.
The aftermarket business can be somewhat seasonal sometimes it's weighted to the first half versus the second half and.
Yes. This year is kind of no no difference theres movement.
Q3, the orders for this business were up 4%.
But year to date, they are up 13% year over year. So we.
We expect and you have to kind of pull the AP 1000 out of the power and process markets to really look at what's happening in nuclear and within.
Within process, but that the aftermarket this year is going to grow at a high single digit rate.
Yes, there is.
Solid aftermarket ramp.
And revenue in Q3, we were up 8%.
For that market and and really the headwind there as the cap 1000 wind down.
So we continue to expect that there's going to be higher maintenance and license renewals both in the U S and Canada.
Mentioned at some our development, we are seeing some of that activity coming through our sales as we were working on these development contracts and.
With ex energy and new scale and as we look out.
Out into Q4, our expectations is that revenues are going to be up 7% year over year.
And we'll finish the year strong so we're well positioned for this next year based upon the strength of the strength of our order book and are looking forward to.
2023.
Thank you.
Thank you.
Our next question comes from Peter Arment from Baird.
Yes, good morning, Lynn Chris Jim.
Yes good.
Good morning back on the supply chain kind of discussions.
How are you thinking about in terms of just from a strategic standpoint, maybe carrying more inventory too.
No you are highly focused on free cash flow as a company but.
Just having an additional buffer stock and maybe Chris you just want to comment on working capital just thinking about that going forward from a strategic standpoint.
Sure.
It's definitely a spot on question and I think as we.
One of our competitive advantages is lead times to our competitor our customers and.
Keeping those in line with what they need to support their schedules does definitely require us to think differently than we have in the past where even the most complex components typically we're 10% to 12 weeks and so we could have much more of a just in time type of inventory management.
So we're really.
This year has really been thinking through this isn't a short term. This isn't just solve the problem and get some advanced material on order I don't think anyone sees the lead times going back down to those types of levels in 'twenty three for sure maybe in 'twenty, four but thats really speculation.
And so for sure us really thinking through how we parse.
Our our long lead items and get it in advance of those is something that is going to be a shift in the business now.
I would take Chris can add color to this but.
When you think of.
All of the parts that go into this 30 million components that I referenced earlier a lot of those have the lead times have come down it's really the complex the processor or some of the advanced memory chips the GP Gpus.
The FPGA type parts that are just still having these very long lead times and so youre not talking to dramatic amount of money to have those things pipeline.
For the business and there's ways, we worked with our supply chain to have them pipeline inventory at their costs for us and so it's not a simple answer as to what the impact is going to be but it's definitely something that new approaches. We've started taking this year to give.
Give us greater confidence in 2023 being a more stable year.
And then I think you said it well I'm not sure how much more I can really add.
So that from a financial standpoint, but I would just say that.
As we look at managing working capital in particular inventory, where we are we are carrying excess inventory right now and.
We typically build up our inventory in Q4 is our strongest output quarter, historically and it will be again here for Curtis right. So we'll burn down through a substantial portion of that inventory here in the fourth quarter.
But we will continue to be at slightly elevated levels over the prior year.
And to <unk> point, as we sharpen our focus and we adjust to these lead times the lead times for these parts settle down I think it'll be easier for us to really manage that balance and inventory.
But it's going to be something that we're going to have to work on more.
The supply chain situation subsides here in the first half of this year and hopefully into the second half of this next year. So we're really just trying to manage our working capital.
We are using every.
Component that we have at our disposal.
This quarter, we've reallocated resources to to.
Two our cash collection efforts, we've enhanced our focus on receivables that are prior to and past terms.
So we're trying to get ahead of customers to make sure that the cash is coming in and we're taking advantage of accelerating receipts through customer financing portals, where it makes sense right and the cost of borrowing is similar or better to what Curtiss Wright has on its revolver.
We'll put greater scrutiny into risk orders buffer stock and.
The team is doing some creative things and they are working with industry partners on tradeoffs right. We're all facing this situation together. So maybe there is something that we have a you need and vice versa. So.
Where are those opportunities.
And.
We're approaching IP with a lot of caution.
Stretching vendors, we started earlier this year, but.
Be careful what you do right. So we're being very very cautious on where that is taking place in order to.
Maximize cash flow in and then we will do things like evaluate taxes and our positions in payment elections.
And anything else that we can here to improve circumstance. So.
Yes.
A lot of changes going on right now and we're trying to react to the best we can to deliver on our commitments.
I appreciate all that color and just one quick follow up just Linda on the just the Poland discussion it sounds like <unk> always talked about 2033, and you've always kind of mentioned you kind of have to have like that industry standard concrete five years prior.
So your orders how it relates to that concrete.
Three to five years, but I always seemed like it seemed like it had to be sooner than that maybe you could just give us a little a little background on that mix.
Yes.
We made comment that.
That timeline was laid out.
Don't want to say ironically, because there's nothing funny about it but quite sadly for our call on February 24th which was today of the invasion and.
And that was the timeline that Poland has been speaking to so again.
The three to five we don't have any evidence to say that will be different kind of if you back that up.
Normal course of order it really implied in order in 2024, we pushed that the three to five years because they tend to typically take longer I do think it's reasonable to say.
The sense of urgency is going to change that dynamic which is the norm.
Whether it pulls it forward, we just don't have any evidence of that yet.
But I mean, there is no doubt that the fact of.
The deals the things the situation that Westinghouse is set up with having etc's and localization partners and now this announcement.
Poland moving towards its contractual commitment.
This is a fantastic pace to see them working at.
<unk>.
Clearly gives us room for optimism that things are going to pull to the left but we're waiting to see evidence of that before we.
Get out over our skis so to speak.
I appreciate it thanks, everyone.
Thank you Peter.
And once again, if you do have a question you May press star one on your telephone keypad at this time. Our next question comes from Kristine Li Wang from Morgan Stanley .
Hey, good morning, everyone.
Good morning, Chris Hey, good morning, Christine.
Alright, guys.
For your full year.
Guide, you're still assuming a pretty steep ramp for defense electronics. So when you look at the fourth quarter. It implies about a 40% Q over Q growth.
Can you talk about you talked about how you are de risked in your outlook for the full year, but for this guide have you secured the parts that you need to be able to deliver.
Are you still waiting on a portion of those components and is there risk to that outlook.
So thank you for that question Christine.
When we picked.
Very difficult as I said for myself for the leadership team for the team within defense electronics to put forward. This call down and we really analyze our approach from a variety of different angles and went through a variety of scenarios. We still have some component deliveries that were counting on in the fourth quarter. It's not like we have every component.
On hand, but we very much.
No the nature of our of our various supply chain and who has been delivering predictably, who we have good commitments from and has been steadily making those commitments deliver and who we've seen more volatility in and have really dialed in our forecast around.
Material that we feel is very reliably will be received as we progress through the Q4. So there is still deliveries needed, but we feel that we have booked.
<unk> looked at this from multiple angles and pit.
Level of forecast that we can deliver on and again.
Mentioned earlier, we've been anticipating a pretty steep ramp in the back half of the year, specifically Q4 <unk> been preparing for it we've added staff added testing equipment.
Are lined up with multiple shifts I mean, just the various things we would do and in some cases.
Pre doing work before Q4, you would even in Q3, where we could get ahead of some of the builds of cards and systems are in various things. So it's not like all of the work has to take place in Q4.
So the team feels we very carefully picked this level of forecast and believe we will deliver on it.
Thanks, and maybe taking a step back on supply chain.
Part shortages or an issue for you to deliver on product and.
This is in context of still a relatively stable geopolitical environment and if you look at the lessons learned about the difficulty with managing our supply chain and geopolitics.
Apollo geopolitical risk.
Get worse.
Are there.
Changes in how you look at your supply chain strategy. So that you can be prepared in a let's say a worsening geopolitical environment scenario.
Could still fulfill national security needs in that event.
Yes, that's an important question.
Definitely.
We've really changed our practices and approaches over the course of the year to all.
We continue looking for dual sourcing.
We've mentioned a couple of times, we've done that across the AI segment, Thats, obviously not tied to the National Security focus you are but we are absolutely working not across the defense electronics segment, where we can obviously there are some very specialized high performance chips that there is not an option for us to dual sources they are unique.
The industry and <unk>.
In those cases.
<unk> working I think the suppliers of those chips are working very hard to derisk the geopolitical.
Risks to them being able to supply those chips, but we're doing the work on our part where we can to really enhance the tools that we have we put some new tools in the back half of this year to help with inventory visibility management, allowing us to have.
<unk>.
Tools to do scenario planning and more efficient prioritization of.
Inventory risks to be able to achieve our tools. So we are continuing to just evolve how we work with our customers how we work with our suppliers.
Our attitude towards long lead material.
And to do the best we can in this environment, but.
It's not something we can completely say is solved.
Great. Thank you for the color really appreciate it.
Thank you.
Yes. Thanks.
And it appears we have no further questions I will now turn the floor over to Lynn Bamford Chair and Chief Executive officer for additional or closing remarks.
So thank you everybody for joining us today, and we look forward to speaking with you again during our fourth quarter 2022 earnings call have a good day.
Thank you. This concludes today's Curtiss Wright third quarter 2022 earnings Conference call. Please disconnect. Your lines at this time and have a wonderful day.
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