Q4 2022 Curtiss-Wright Corp Earnings Call
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Welcome to the Curtiss Wright fourth quarter and full year 2022 earnings conference call.
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I would now like to turn the call over to Jim Ryan Vice President of Investor Relations.
Thank you Leo and good morning, everyone welcome to Curtiss Wright's fourth quarter and full year 2022 earnings conference call joining.
Joining me on the call today are chairman and Chief Executive Officer, Lynn Bamford, Vice President and Chief Financial Officer Christopher.
Our call today is being webcast and the press release as well as a copy of today's financial presentation are 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 in 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.
These statements are based on management's current expectations and are not guarantees of future performance.
We detail 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 that excludes certain costs in order to provide greater transparency into Curtiss Wright's 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 to non-GAAP reconciliations for current and prior year periods are available in the earnings release and on our website now I would like to turn the call over to Lynn to get things started.
Thank you Jim and good morning, everyone I would like to start today's presentation by sharing how exceptionally proud I am of the team's resilience and agility to successfully navigate through numerous challenges this past year, including the supply chain rising inflation and a more difficult staffing environment.
Curtiss Wright delivered solid operational performance in the fourth quarter and hence a strong finish to 2022 as we achieved several new financial records, including full year sales profitability and new orders. These results showcase the talent of our team the strength of our combined portfolio and our execution of.
The pivot to growth strategy.
Turning to today's presentation I'll begin by covering the highlights of our fourth quarter and full year 2022 performance and a preview of our 2023 financial outlook, then I will turn the call over to Chris to provide a more in depth review of our financials.
Finally, I'll wrap up our prepared remarks with a progress report on our 2021 Investor day commitments before we move to Q&A.
Starting with our fourth quarter 2022 results sales increased 16% overall to a record $758 million.
<unk> strong conversion on backlog and higher year over year sales and all of our A&D and commercial markets.
Within A&D, we achieved 20% growth in defense led primarily by higher aerospace and ground defense market revenues and a strong contribution from the arresting systems acquisition completed last June we also achieved double digit growth in commercial aerospace reflecting continued strong OEM.
Demand outside of A&D, we once again delivered strong sales growth across our commercial nuclear process and general industrial end markets.
Growth in operating income exceeded this very strong sales growth and we delivered 140 basis points and overall operating margin expansion to achieve 21, 1% in the fourth quarter. This performance reflects higher sales in each of our three segments and the benefits of our prior year restructure.
And company wide operational excellence initiative.
As a result fourth quarter adjusted diluted EPS increased 21% year over year to $2 92.
It was in line with our expectations.
We also delivered record fourth quarter, adjusted free cash flow of nearly $300 million achieving.
Achieving greater than 100% of our full year free cash flow in a single quarter, along with robust free cash flow conversion aside.
Aside from the strong operational performance. If you recall, we were expecting a delay of a $40 million cash payment due upon the final delivery of our AP 1000 reactor coolant pumps to China anticipating a shift in timing from 2022 into 2023 through negotiations with our customer.
We received 50% or $20 million of that payments late in the fourth quarter and expect to recognize the remainder before shipping the final pumps in 2023.
Growth in new orders remained strong up 5% year over year, principally reflecting our boost and growing order book in defense electronics, and the improved pace of defense outlays as well as continued solid demand for commercial nuclear products.
Next I'll recap, our full 2022 results, where we delivered record sales continued margin expansion double digit EPS growth and record orders.
<unk> increased 4% overall to a record $2 $6 billion, despite several macro level headwinds, including the ongoing supply chain challenges within our defense electronics segment, and a 1% FX headwind based upon the strength of the U S dollar.
Operating income growth exceeded sales growth as we delivered 30 basis points and year over year operating margin expansion to reach 17, 3%.
The team achieved these record results, while overcoming the significant headwind associated with the wind down of the profitable cap 1000 program.
New orders increased 15% year over year to a record $2 $9 billion, reflecting 1.15 times book to Bill overall as a result, we conclude the year with a solid backlog of $2 $6 billion.
Another major highlight from 2022 was our continued focus on allocating capital to the highest and best use to improve shareholder value, we executed $50 million in total share repurchases in 2022, which was followed by a record annual share repurchase purchase of $350 million in.
<unk> 2021, we also increased our annual dividend for the sixth straight year.
Lastly, turning to acquisitions I would like to provide an update on our arresting systems business acquired in mid 2022, which is a great example of how Curtiss Wright is delivering value through our acquisitions.
Thus far the business has performed extremely well if not even a little better than our expectations over the past few months, we have secured an impressive volume of OEM and aftermarket contracts.
Integration is going very well and the business has proven to be a strong strategic fit within our enable and power segment expanding our overall aftermarket sales, while boosting our international military exposure with contracts awarded by UAE, France and other countries.
In 2022, this business delivered solid profitability on mid single digit annualized sales growth and is expected to contribute to cw's overall operating margin target of 17% over time.
Finally, I would like to introduce our full year 2023, adjusted guidance, where we are projecting overall mid single digit sales growth driven by increases in nearly all of our major end markets. We expect continued operating margin expansion, while making incremental investments in both internally and <unk>.
We expect to deliver solid growth in diluted EPS and generate strong free cash flow next year with the potential to reach double digit EPS growth and $400 million in free cash flow.
Business fundamentals and underlying demand across our portfolio remains strong and we entered the year with strong backlog, which bodes extremely well for Curtiss Wright's long term growth outlook. In summary, we are well positioned for continued success in 2023 and as we will demonstrate later in our remarks, we have line.
Of site to achieve the three year financial targets that we communicated at our 2021 Investor day now I'd like to turn the call over to Chris to continue with our prepared remarks, Chris Okay. Thank you and.
I'll begin with the key drivers of our fourth quarter 2022 results by segment.
In aerospace and industrial sales increased 8% overall or more than 10% on an organic basis, but excluding the impact of FX.
Within the segments commercial aerospace market. Our results reflected continued strong demand on both narrow body and wide body platforms.
And the general industrial market, our results reflected double digit sales growth driven by higher sales of industrial vehicle products and surface treatment services.
And those increases were partially offset by reduced sales in this segments aerospace defense market due to the timing of production on various programs.
Regarding the segments profitability, our results reflect favorable absorption on higher organic sales as well as some unfavorable mix on products and services, which impacted operating margin.
Next in the defense electronics segment, despite the ongoing supply chain challenges, we concluded the year with a strong fourth quarter performance.
Sales growth of 18% reflected higher revenues for embedded computing equipment on various fighter jet and helicopter programs in aerospace and defense.
As well as increased sales of tactical communications equipment in ground defense.
Turning to the segments operating performance adjusted operating income increased 33%, while adjusted operating margin increased 320 basis points to 29, 7%, reflecting strong absorption on higher A&D revenues.
Next to enable and power segment sales growth of 20% was driven by high single digit organic growth as well as the contribution from our arresting systems business.
In the naval defense market higher revenues, principally reflected the ramp up on the Columbia class submarine program. However, our results were about $10 million lower than expected primarily due to the timing of revenues on the CV in 81 aircraft carrier program, which shifted into 2023.
And the power and process market our results reflected strong demand in the nuclear aftermarket supporting the operation of existing reactors increased revenue supporting Gen. Four advanced reactors and higher valve sales in process.
These increases more than offset the wind down of production on the cap 1000 program in the fourth quarter.
And of note on a full year basis cap 1000 program revenues decreased $25 million in 2022, and we expect to recognize the remaining $5 million in revenues on this program in 2023.
Regarding the segments fourth quarter profitability, our results reflected favorable absorption on higher organic sales and the benefits of our prior year restructuring initiatives. In addition to a strong performance from our arresting systems business.
To sum up the fourth quarter results overall, we generated strong double digit growth in sales and 140 basis points and year over year operating margin expansion highlighting the strength of our combined portfolio and a solid finish to 2022.
Next turning to our full year 'twenty three guidance I'll begin on slide five of their end market sales outlook, where we expect organic sales to grow 3% to 5% in line with our long term guidance.
And we're projecting total sales growth of 4% to 6%, which includes the contribution from the arresting systems acquisition, partially offset by a small headwind from FX.
I'll start with our A&D markets, where sales are expected to increase 6% to 8%.
In aerospace defense growth of 9% to 11% reflects the contribution from our arresting systems business as well as a mid single digit organic growth for defense electronics on various fighter jet programs, which will be partially offset by lower actuation revenues within the AI segment.
In ground defense, we expect growth of 4% to 6%, reflecting higher revenues for tactical battlefield communication systems as well as increased international sales of our turret stabilization systems.
Next enabled defense our outlook for 4% to 6% sales growth principally reflects higher revenues driven by the strong ramp up in production on both the Columbia class submarine and the CDN 81 aircraft carrier programs.
So to wrap up our A&D markets and turning to commercial aerospace our outlook for 5% to 7% sales growth is driven by higher OEM production rates on narrow body aircrafts, including the 737% to <unk> hundred 20, and wide body aircrafts, including the 787% to <unk> hundred 50.
Our guidance in this market also includes a 2% headwind from FX.
Turning now to our commercial markets, where we expect overall sales to be flat to up 2%.
And powered process, we're expecting flat growth. Overall. However, this outlook includes a revenue headwind from the cap 1000 program of approximately $20 million.
Excluding that impact we expect mid single digit growth in the commercial nuclear market.
This reflects solid demand for ongoing maintenance and subsequent license renewals that extend the life of existing nuclear power generation fleet.
As well as increased sales supporting Gen. Four advanced reactors, most notably tied to our recent agreement with ex energy.
We also expect mid single digit growth in the process market, reflecting higher development revenue supporting ongoing subsea pumping initiatives and continued solid MRO demand for our valves.
Lastly, in the general industrial market, we expect growth of 2% to 4%, including a 1% headwind from FX driven by higher sales of industrial vehicle products and surface treatment services.
As we look at the combined total commercial market. It's important to note that excluding the wind down on the cap 1000 program overall commercial sales growth would be up 3% to 5%.
Continuing with our full year outlook by segment on slide six ill.
I'll begin in aerospace and industrial where we expect sales to grow 1% to 3%, including a $10 million a 1% headwind from FX.
Our outlook for this segment is driven by solid growth in both commercial aerospace and general industrial partially offset by the timing of sales in defense.
We expect adjusted operating income growth of 4% to 7% and adjusted operating margin expansion of 50 to 70 basis points to a range of 17 point out to 17, 2%, reflecting higher sales and the continued benefits of our prior year restructuring initiatives.
Next in defense electronics, we expect sales to grow 5% to 9% principally driven by this businesses record 2022 order book and cautious expectations for improved supply chain stability.
We expect adjusted operating income growth of 7% to 11% and adjusted operating margin expansion of 30 to 50 basis points to a range of 22, 7% to 22, 9% based upon the strong revenue growth.
And lastly in the naval and power segment, we expect sales to grow 5% to 7% driven by solid growth enabled defense mid single digit growth in both the commercial nuclear and process markets and the contribution from our arresting systems acquisition.
Operating income is projected to be essentially flat, while operating margin is expected to range from 17, 5% to 17, 7%, reflecting both negative mix on lower <unk> revenues and a shift to lower margin development contracts in the power and process market.
Excluding those items operating margin in this segment will be nearly flat year over year.
So to summarize our outlook, we expect total Curtiss Wright operating income growth of 5% to 8% overall in excess of sales growth and expect operating margin to improve 10 to 30 basis points ranging from 17, 4% to 17, 6%.
And I'm pleased to note that we continue to deliver operating margin expansion as we maintain our strategic focus on investments.
Our outlook for 2023 includes a year over year increase of more than $20 million in total research and development investments, including both contract and Iron D programs.
Continuing with our 2023 financial outlook on slide seven I wanted to predict some color on a few non operational items and I'll start with our pension plan.
2022 was a difficult year for most pension plan sponsors as returns were weak across nearly all asset classes. However, the fed's aggressive interest rate hikes, and the resulting impact on pension discount rates helped to mitigate the impact of the short term negative asset returns and resulted in a minimal impact on our funded status.
<unk>, our funded status percentage increased year over year.
In early 2022, we also took steps to protect the funded status of the plan by implementing a glide path investment strategy that derisked the plan and by increasing our fixed income allocation to more closely match plan liabilities as the funded status improves.
Our goal is to reduce volatility as the plan approaches the sunset of accruals.
As a result, we are now expecting a tailwind of approximately $10 million in other income for 2023 and more importantly, we do not expect to make any cash contributions through the planned sunset date in 2028.
Next we anticipate higher interest expense in 2023, primarily due to rising interest rates and the impact of our revolver, which represents a headwind of approximately $6 million or <unk> 12, compared with 2022.
And lastly, our tax rate in 2023 is expected to be unchanged as we enter the year at approximately 24%.
Turning to our EPS guidance, we expect full year 2023, adjusted diluted EPS to range from $8 65 to $8 90 up 6% to 10%.
Mainly reflecting our strong growth in operating income and an approximate 1% to 2% benefit from the below the line items.
To aid in your quarterly modeling, we expect our 2023 quarterly EPS to follow a similar cadence to last year with the first quarter expected to be our lightest, but reflecting mid single digit growth relative to our prior year first quarter adjusted EPS.
For the remainder of 2023, we expect sequential quarterly improvement with the fourth quarter being our strongest including approximately 40% of our full year earnings per share in the first half.
Lastly, turning to our free cash flow guidance.
Projecting full year, adjusted free cash flow of $360 million to $400 million of 22% to 36%.
Our outlook is driven by expectations for higher cash earnings and improvements in working capital as we burn down through our excess inventory and continue to accelerate our cash collections, particularly for those businesses most impacted by the supply chain disruption.
Our guidance also includes the collection of the remaining $20 million cap 1000, cash payment, which we expect to receive upon final delivery of our reactor coolant pumps to China.
Of note we are targeting this cash flow as we invest to support our future growth and while also facing a $25 million headwind related to the section 174 R&D tax amortization.
Based on these changes our full year 2023 free cash flow conversion rate is expected to exceed 110% based upon the midpoint of our guidance.
And now I'd like to turn the call back over to Lynn to continue with our prepared remarks Flynn.
Thank you Chris.
I wanted to spend the next few minutes, providing some updates on the changing dynamics, both positive and negative that we have faced as an organization since our May 2021, Investor day, I'll follow that up with some proof points to demonstrate how we're positioning our business and executing on the pivot to growth strategy to maintain line of sight to the three <unk>.
Year Investor day commitments articulated in 2021.
Starting on the left hand side of this slide where we have a number of positive influence that continue to help shape Curtiss Wright's long term growth.
First we've seen consistent strong bipartisan support for the U S defense budget.
Recently Congress signed the FY 'twenty, three spending bill, which appropriate $817 billion for the Dod budget, reflecting a 10% year over year growth within this legislation. There is strong support for our largest end market as naval ship building continues to receive solid funding.
For two critical growth drivers, the Columbia class submarine and Ford class aircraft carrier programs.
Outside of the U S. Since the Russian and Ukraine conflict began we have seen many NATO member countries propose a ramp up in defense spending to 2% or greater of GDP and the overall increase in global defense spending provides Curtiss Wright with improved visibility and support for our long term growth outlook across.
Our defense end markets.
Beyond the defense budget, we've seen several pieces of important U S government legislation passed including the infrastructure Bill the inflation reduction Act and the chips Act. These bills provide opportunities for growth in our industrial vehicles business through investments in highways in construction.
As well as our nuclear businesses based upon funding to support both the existing nuclear infrastructure and the build out of the next generation advanced reactors.
We have also seen rising pro nuclear sentiment globally, driven by the push for carbon free energy and the strategic importance of energy independent.
We are well positioned for long term growth in this market based upon our alignment with Westinghouse to support future AP 1000 power plants expected to be built in eastern Europe , and then numerous generation for small modular or advanced reactor developers.
Notably two of our end markets have experienced a faster than expected recovery as sales in our industrial vehicles and process markets. Each recover to 2019 pre pandemic levels, one year faster than originally anticipated in 2021 and 2022, respectively.
Of course, not everything has gone according to the plan over the past two years.
Similar to many of the companies in our industries, we have faced disruption in our supply chain, along with several macro level headwinds, particularly impacting our anr and defense electronics segment regarding.
Regarding the supply chain. These issues had a much more prolonged than expected impact on our defense electronics business.
Conditions appear to be stabilizing and while lead times on critical components are not likely to return to previous levels. In 2023, we expect that there should be some improvement as we move through the balance of the year.
On the macro front the accelerated rebound in U S economic growth following the Covid driven downturn in 2020 has led to rising inflation labor costs and interest rates as well as a strong U S dollar.
To date, we have continued to deliver on our final financial targets. Despite these dynamics.
Next in defense, although the top line budget projections had been strong if you recall last year. We faced we were faced with the delayed timing of the FY 'twenty to Dod budget. Following a 180 day, continuing resolution, which halted new program starts and slowed outlays on key programs as.
As a result, a greatly impact the timing of revenues in 2022 and delayed the recognition of our very strong order book pushing some sales into 2023 and beyond.
Looking broadly across the performance in all of our end markets. The only market that really hasn't quite lived up to our expectations in terms of targeted return to 2019 levels is in commercial aerospace. This is principally due to a slower post COVID-19 recovery on production rates in both narrow body platforms.
<unk>, the 737, and <unk> hundred 20, and even more in wide body on the 787 and <unk> hundred 50 programs.
We continue to work closely with our customers and based on current production rate projections from Boeing and Airbus. We now expect our narrow body business to recover by the end of 2024, while wide body will extend beyond 2025 overall.
Overall this is about one year later than our previous expectations.
Next I'd like to shift to the right hand side of the slide and share several favorable outcomes since our investor day, which are a function of our strategic actions to position Curtiss Wright for long term profitable growth.
We have remained committed to a disciplined capital allocation strategy as we have repurchased $400 million in shares and have added high quality acquisitions to the portfolio.
We remain focused on providing consistent returns to shareholders and finding acquisitions that are exceptional strategic and financial fit.
In addition, as noted earlier, we generated record orders this past year of $2 $9 billion, reflecting gains across the portfolio and strong demand for our products and services Inc.
Including solid contributions from two of our more recent acquisitions Pac star and the rest lean systems business.
According this growth in our order books since 2021, we have maintained a consistent focus on investments in R&D and innovation as well as collaboration across our defense and commercial businesses, which has led to a notable advancements and numerous crossover technology wins across the portfolio.
We've highlighted a number of these in our press releases, where for example, we have aired a strategic position with ex energy supporting their new small modular reactor, which was achieved through strong collaboration across many teams within Curtiss Wright.
And more recently with our win with Dianetics to provide electromechanical actuation technology, which was originally developed for commercial aerospace to the enduring shield ground defense platform.
We look forward to sharing many more examples in the months and years ahead.
In regards to the last favourable outcome listed on this slide I am extremely proud of our team's ability to drive continued operational and commercial excellence and continued operating margin expansion.
So as we reflect on our three year financial targets introduced at our last Investor day, which for reference are shown in the upper right hand corner of the slide we remain squarely on track to achieve the first four of those tight five targets and have line of sight on free cash flow conversion.
Based upon the midpoint of our 2023 guidance, we expect to grow total revenue CAGR in excess of 5% over the three year period, including approximately 3% organic growth.
Operating income is expected to grow at an 8% CAGR over that timeframe in excess of total revenue growth and we remain a top quartile operating margin performer relative to our peer group as we consistently demonstrated since 2016.
We are also on track to reach our minimum adjusted EPS CAGR target of 10% again based upon the midpoint of our 2023 guide.
Regarding our final target to achieve a 110% average free cash flow conversion, we're very close at the midpoint of our current guide yield 108% average rate of conversion.
Our team has been diligently focused on driving continued strong free cash flow generation and we have the potential to generate a record $400 million. This year. As a reminder, we have delivered more than 110% adjusted free cash flow into Europe version for nine of the past 10 years. Despite the.
The continued pressures on our free cash flow, particularly due to supply chain challenges impacting both our revenue and working capital. We're working every angle possible to achieve our conversion target and fully deliver on our entire slate of Investor day financial commitments.
In summary, we enter 2023 with strong backlog across A&D and commercial markets and are well positioned to deliver profitable growth. Yet again. This year, we are projecting growth in operating income to exceed sales growth in line with our long term guidance, reflecting the continued execution of our pivot to growth strategy.
We are also on track to generate strong growth in adjusted free cash flow, while maintaining a strong and healthy balance sheet to support our capital allocation strategy.
Looking beyond this year, the long term prospects for Curtiss Wright and the markets. We serve remained very healthy with strong alignment to babies favorable secular growth trends influencing our business in closing we look forward to generating a strong performance during our third and final year of our Investor day commitment.
And remain committed to delivering long term value for our shareholders. At this time I would like to open up today's conference call for questions.
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Thank you.
Our first question is coming from Peter Arment of Baird.
Yes, good morning, Lynn, Chris Jim Murray.
Good morning, Good morning, Peter Good morning.
Maybe just first start on the supply chain side.
Sounds like the confidence is improving.
Some of the supply chain stress is going to abate in the second half maybe if you could just provide a little more detail on just your confidence level on that thanks.
Yeah. Thank you, it's clearly an important topic for us and something we put a lot of.
Time in last year and continue this year to really analyze.
How we can predict our confidence in the supply chain and whether there are a variety of measures I think you've heard us mentioned over past calls that we very much measure of component lead time supplier on time deliver delivery vendor commitment volatility parts on allocation, just a variety of things and to be Frank.
Over the course of the back end of 'twenty, one through 'twenty two to really work in this environment that continues to have very long lead time and volatility. We are definitely hearing from our suppliers that they believe lead times will come down and some of those other metrics will reduce in the back half of the year.
Commercial demand for some of these parts.
Much out in the public.
<unk> is expected to abate in the back half of this year. So there is.
Reason for optimism, but we're not.
We're still working with a mindset that we're going to live in a pretty volatile market, but there's also.
We changed our systems I think I mentioned in the Q3 call last year that we turned on a new tool that Leverages AI technology to help us do scenario playing for.
Various predictions on.
Incoming supplies based on the volatility of the suppliers and in order patterns and things until we turn that on in the end of 'twenty two but it is really just beginning to take hold and helping us to really maximize how we can deliver in the volatile environment and so I think the bottom line is the.
The business is healthy we had a great order book the demand is there honestly we're off to a great start this year in January and February with the order book looking just to continue on being strong. So we feel very good about the business, but we really picked the guidance range of 725 to 750 to provide some adequate consideration for <unk>.
The variability we could still face in 2023.
I appreciate those details and just as a quick follow up.
Just in the nuclear space.
Think back to the 2021 period with your Investor Day, you were talking about kind of a low single digit growth.
And that was including excluding any new orders.
Orders.
But most recent commentary and today.
Presentation, Youre talking about mid single digit growth in Youtube process.
It seems like this could be end up being one of your faster growing markets. How do we expect the kind of the order flow.
Whether it's we're going to see some initial activity with Poland or some of the small module reactor activity just how should we think about either backlog or order flow. When we think about growth for this year.
So.
It is definitely an exciting part of our portfolio and one that we had optimism for <unk>.
Growth when we did the Investor day, but that has certainly expanded.
The money from the advanced reactors that were definitely.
Recognizing revenue on we continue almost half of the U S fleet has applied for the license renewals candidates in the same process that.
Thank you.
I'll, let Chris speak to what we're predicting but there is really great tailwind between the aftermarket the newbuild and another area.
Talked about we've put a focus on is not just the traditional markets, where we've had president and CEO here in the U S, Canada, and South Korea, but really trying to work more internationally across.
The eastern European block both in support of the existing reactors and then obviously working with Westinghouse for Newbuild, but also into France as they have a lot of maintenance issues in some of their fleet and so we're really trying to push the boundaries geographically to also support growth in that area.
Yes, and I will just say that more recently in Q4 orders were up 22% on the full year. They were up 15% I mean really showing just.
Solid improvement in the aftermarket.
Strong increases in outage maintenance and then of course, the new project wins that we have an advanced small modular reactors.
Entering into 'twenty, three it's going to be mid single digit growth and I think that that puts us at two years of a.
Solid growth within this market and we expect that to continue into the future and in.
Hopefully pick up here when some of these more significant.
Projects that we're working on like the AP 1000 X energy when we start to turn it over into the.
To the development and production side of that side of that contract, but that's.
That'll be beyond 'twenty three at this point in our thinking but really encouraged by the shift in change from that low single digit run rate over the past 10 years to now mid single digit or higher.
I appreciate the details thanks guys.
Yes.
Our next question is coming from Myles Walton of Wolfe Research.
Thanks, Good morning, guys.
I'm just kind of go back to the Investor day in and.
You're actually at the Investor Day, you talked about commercial strategy in particular pricing.
I think one of the interesting pieces of the result of 22 is it seems like you were able to offset inflation pretty pretty well and I'm curious is that one of the things that's tracking perhaps better than you expected or as good as you expected on the commercial strategies and in particular pricing from.
Yes, really the teams have done.
Really great job across the board and.
As much as.
The impact it would be needed to have.
Inflation ramped that in a way we didn't necessarily anticipate at the Investor day, I'm really glad the team has taken this on already and started really working in our contracts to make sure we had escalation clauses and such so it is an area that has gone very well, we do our monthly financial reviews across all of the teams and they report out.
How they are tracking towards the targets that we've set and we can really see it bringing results of the organization, which most fundamentally as seen in our ability to expand operating margin because there is no doubt that the.
Inflationary pressures on material is real.
We are working to make sure we're paying our staff at a rate that is market competitive and keeps them.
Enthused to be working at Curtiss Wright, and so that has driven some cost pressures in the organization, but with that we delivered operating margin expansion in two.
2022, we had completed our ODP assessments across every one of the businesses and had scored the teams identified best practices across the teams that various teams you'll have other very specific things that theyre doing really great that can be shared and this year is really sharing of those best practices.
<unk> and working to action plans that came out of those ODP, scoring and.
So it has been very.
A very strong contributor to Curtiss Wright and the results we've been able to achieve.
And maybe sticking to the margins for just a second the naval empower.
Trend down here in 2003, I heard mix and then the development side is the bulk of this decline in cap 1000 high margin revenue and therefore this would be the level loaded number for 'twenty four or is there any type of longer term mix shifts here.
Development side.
I think Thats fair miles.
It is the bulk of this is related to the AP 1000, MX in downturn, but we do also have a shift we.
We talked about increasing our total R&D investments for this next year, we do have an overall increase of about $14 million in ceara.
And I would say.
A sizable portion of that roughly two thirds is going to be subsea pumping development contracts in this segment and now we're seeing a little bit of a little bit of unfavorable mix as a result of that so those are really the two main drivers.
And we do have $5 million remaining on revenue on the AP 1000 contracts I don't want to say that we're completely done talking about mix on this contract as we as we look forward to fiscal year 'twenty four but that's that's.
The main driver.
Okay, and just one cleanup one on capital a couple of deployments. So I think you've got 2023 notes coming due this year.
Anticipation in the interest guidance to refi or repay and then maybe just a broader comment if you can on an M&A.
And the pipeline.
Sure I'll start off with the financing and then.
Maybe ask Glenn to talk a little bit more about the pipeline.
We do have $202 million of notes coming due this month, we actually finished the year successfully offloaded. The revolver. So we were able to build up a little bit of cash here at year end, but we'll be paying down those notes and then I think what that's going to do is it's going to put us on the revolver.
Typically Q1 is a cash outflow quarter for us anyway, but will be on the revolver to the tune of about $150 million I would say.
Average across three quarters, and we are looking at the variable interest rates and we are conservatively.
Conservatively estimating that those will climb so about 6% that might be slightly below there, but with a few more.
Movements here, we could easily be in that 6% range. So.
We.
As we look at our at our balance sheet I mean, we still feel very good about where we are and we feel great about the rates that we got on those notes that we took back in November to kind of position us for this year.
<unk>.
Absent any major share buyback programs or acquisitions.
We'll finish the year below two times debt to EBITDA.
And then I guess just to touch on the acquisition pipeline. There is definitely properties that are.
Being floated out in industry and properties that were engaged with I know you've heard us say over the years that we.
We will.
Easily start the process on 10 properties to have one come across the finish line. So I would tell you. We're actively working it there are some very interesting properties that were an early early discussions I would say, but things that I can see potentially.
Getting both that financial and strategic fit within Curtiss Wright, which is a pretty high bar for us, but I do feel confident we'll continue to find properties.
Okay. Thank you.
Thank you.
Our next question is coming from Nathan Jones of Stifel.
Good morning, everyone.
Hey, good morning, good morning Nathan.
Maybe we could just broaden the supply chain discussion.
From defense electronics to the.
Rest of the business and just provide a little more color on.
If it's improving where it's improving where it's not improving and what youre expecting from that from the rest of the supply chain for 2023.
Yes, it's a good question because we talk so much about defense electronics being the biggest impact Curtiss Wright.
I just mentioned a few minutes ago, we did our monthly financial reviews yesterday, and there is still volatility across the teams in other aspects of it specifically one thing that <unk> talked about was in the procurements of various metals, we use that.
Still have extended lead times in some of the delivery issues that we have but none of those seem to.
When we talked extended lead times and defense here, we're talking up 52, plus weeks and some consideration so the extended lead times.
May make some pressure in the quarter for example, but things that are managed within the year. So we don't see any anything else and really being materially impactful to Curtis right, but it is something the teams are definitely having to deal with so good things like freight has come has pretty much stabilized and some of those other parts of us are.
Building and delivering products those have pretty much returned to normal and more normal cost structure. So that's a good thing for us.
And then maybe if you could give us any color on price cost in 'twenty, two and what youre expecting in 'twenty. Three we are neutral to positive on a dollar basis on price cost in 2022 do you expect to be again in 2023.
Diluted to margins and then.
If you'd be willing to give us the estimated <unk> impacts of price contribution to organic growth of 23.
Sure I'll take that one.
We had some good successes as Len pointed to mainly within the commercial side.
In our commercial businesses, you know a lot of our government contracts have built in escalation clauses. So I won't I won't kind of wrap that into the discussion here, but as you look across the Ani's segment I would say that that represented approximately 1% of our of our.
Our growth rate in 2022, we were able to stay slightly ahead of the inflationary cost pressures.
And as you look at what the net impact was to our margin I would say, it's roughly 10 basis points.
And.
As we look forward into this next year.
We've already heard some good news coming out of some of our businesses on the commercial side about continued price increases that <unk> been able to secure through renegotiation of long term contract and.
We're projecting for this year that the pricing will be 1% of our growth rate as well. So I think it's just kind of a good fair.
Assessment, and whether you're talking 22 or 23.
Great. Thanks, very much for taking my questions.
Okay. Thank you.
Our next question is from Christine the walk of Morgan Stanley .
Good morning, good morning.
Lynn Chris.
Bought safran arresting business last year for about $240 million, you're already trending to be below two times leverage for future M&A. How are you thinking about small bolt on acquisitions like you've done in the past versus a more transformative opportunity I mean, it looks like there are some potential assets in the market that are chunkier inside.
As there is discussion of raytheon's.
Actuation business, there's cranes.
Industrial and aerospace assets I know you can't speak about specific deals, but can you give us an idea of how you think about small bolt ons versus larger chunkier transformative acquisitions.
Well, we're definitely open to both and Youre right. There is there's quite a few properties that are either in play or been headline to be coming to the market in the next three to six months and so there is it is an active time.
Monitoring our cost from interest rates is something that Chris My very actively talk about and it does weigh into our decision, making and something we consider carefully but.
I think you could take the principle about your cost of capital and your return on capital and.
We still challenge ourselves to meet those financial goals and maybe it raises the bar a bit for an acquisition that we would consider but.
When we find a good strategic fit even if it doesn't isn't.
Isn't accretive to our 17% overall margin in year, one we definitely don't.
Not consider it that's part of our ongoing operational excellence initiatives is to create margin dollars to cover dilution from acquisitions that but again those are ones that we are willing to do that when we're really confident of the strategic fit and the growth trajectories out of that business. So we're active I would say I think we know.
Projected to come.
I think we have good connections in the finance and banking community. So were considered and we're a reliable buyer that we.
Do the process with the company, we take it across the finish line and close on businesses. So I think in general we're considered somebody very positive to engage with.
Yeah, and I'll say, our our debt as investment grade it and consider us to be kind of a triple b plus but we've been fairly successful in the notes market with that Theres less notes, we secured more than the pricing range I would say M&A.
We have about $1 $7 billion.
Capacity available for that right now and I think when you're talking about the acquisition strategy and we look back at how we've been doing since 2017, I mean, we're pretty pleased with the way that we've been using the balance sheet and deploying that know something more transformational were to come along.
I think.
The highest we'd probably go from a debt to EBITDA perspective is three five or four but we would quickly delever that back down to a three point O and I think when you are starting to talk about more transformational acquisitions can you just have to think about financing differently right you have to explore different options between short term notes.
How much you can put on to the revolver.
And I suppose.
While we're very very focused on.
EPS growth.
The better our stock performs better that currency has on the market. So theres a lot of different ways to potentially think about pulling in businesses that are the right strategic and financial fit.
Great. Thanks for the color line, and Chris and maybe if I could do a follow up question on nuclear power.
You've highlighted the Mou that you received from some of the eastern European countries and look the war in Ukraine is dragging on longer than many anticipated I can't believe we're here lapping the first year already what are you hearing from your customers are there any indications that they could accelerate orders or where does.
Power independence rank with their competing funding priorities with either more security investments or.
Preparing for an upcoming recession should it happen.
It just seems like right historically, we've seen.
Countries take a long time to make these decisions. So any color you could provide in terms of how they are seeing priority for nuclear power would be great.
Well I think there has been.
I think it stays at the forefront of their priorities and that's definitely what we're hearing and when you think of as you said can you believe it.
Going on for a year, it's horrible and but does that not just galvanized energy independence has been an absolute necessity and so we're hearing that there was a little press. This morning that there was.
Additional movement between Poland, and Westinghouse yesterday, with President <unk> strip to Poland. So again, no indication of what that means for us, but I think those things just continue to show.
The continued drumbeat of activity across the various Bulgaria, Romania.
And there is still continued discussions with Ukraine about helping them. Once this war ends and how thats going to be return. So I feel like it's the priority level remains very consistent.
Great. Thank you for that color.
Thank you once again.
Once again, if you do have a question you May press star one on your telephone keypad at this time.
Our next question is coming from Michael <unk> of <unk> Securities.
Hey, good morning, guys. Thanks for taking the question.
Mike maybe Glenn.
Maybe just to stay on that topic I mean, do you actually expect to get a get an AP 1000 pump order this year or how are you guys thinking about order timing if at all.
So when we.
I had the call year ago, when we said, we anticipated that Poland was kind of one of the most.
On the forefront of saying their timeline, which really backed us into an order in the 2020 for 2025 time frame and we said three to five years because things as Christine was just commenting unusually take longer not less time.
That's still put an order in two years two to four years at this point in time based on that now I mean this was a little snippet news article about what was agreed to in time between Poland and Westinghouse that theyre trying to pull their program to the left and whether that.
Polls are order potential to the left we don't know that yet so I wouldn't speculate on it but I do think it just shows the consistent pushed.
Push to get these plants up and running and I think theyre similar little news bites across these other.
Companies.
We work very closely with Westinghouse they know.
We're working very hard to really think through our ability to scale operationally in these areas to build.
1000 pumps, and then layer in some of the subsea pumps and then layer in some of the advanced reactor build so we're very transparent with our customers because we want to be a really solid reliable supplier and so we'll have good line of sight to be able to make sure we're prepared.
So at this point definitely we're not predicting an order this year, so definitely not could the two to four years Paul left.
Don't know that but if we do learn of details of that we'll definitely share them. Even in our Q1 call is theres a little more color on that.
Got it Thanks, and then you actually mentioned something I wanted to touch on the subsea pumps. It sounds like youre spending a little bit more on development down. So that's good it sounds like it's a little bit of a <unk>.
Margin hedge.
Headwind this year, but can you maybe elaborate on what the expected revenue opportunity.
Is in that market and maybe just give us a little bit more color about the subsea pumps.
Yes, so the projects are going well so I mean, it is as Chris mentioned.
Sure.
Going through really the back portion of development on those pumps. This year and this really has the opportunity to be a very significant major revenue driver for Curtiss Wright in this decade, and you know as we size the market today between shell and fly Pan we think each.
One of those has a $100 million value by 2030, so and we don't intend to stop with those two companies for potential customers to this pump and so.
Just.
It has gotten less talk so I appreciate you, bringing it up but it is yet another area that Curtiss Wright has really fantastic technology provides a unique capability to our customer that is very beneficial to them and hence we've struck a very reasonable price targets with them that will make this great business for <unk>.
Just right in this decade and for years to come.
Got it got it helpful. And then just last one going back to the M&A.
Do you guys have whether it's tuck in or something more transformational.
Market in mind are you comfortable with the overall mix of the portfolio right. Now you are certainly a little bit skewed more heavily towards defense maybe.
Maybe just.
Any color you can provide on how you see the overall end markets.
Rounding out with with additional M&A.
So.
Our preference as you've seen over the past handful years has been defense I would definitely say, we are not limited to that but it is an area. We very much are focused on mission critical safety systems, the defense electronics area.
All areas that are top priorities for us but.
Well definitely as you look at our our growth trajectory across our end markets. We really do like all of our end markets and could see the potential to acquire across them.
Target that might help us build out our capability to maximize revenue on the gen. Four reactors could be interesting our industrial team continues to build out and expand the product offerings that theyre, bringing to the market and industrial vehicles. So that's not an area, we've seen a lot of potential targets, but in areas.
We would be open to so.
Really pretty broad.
Barry.
We're pleased with the trajectory we can see in our end markets and so would carefully consider a potential acquisition really across the board.
Got it perfect. Thanks, guys I'll jump back in the queue.
Alright, Thanks, Michael.
Okay.
And there are no further questions at this time I'd be happy to return the call to Lynn Bamford, Chairman Chief Executive officer for additional or closing remarks.
So thank you everyone for joining us today, and we look forward to speaking with you again during our first quarter 2023 earnings call have a great day.
Thank you. This concludes today's Curtiss Wright fourth quarter and full year 2022 earnings conference call.
Please disconnect your lines at this time and have a wonderful day.
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