Curtiss-Wright Corporation Q1 2023 Earnings Call

May 4, 2023

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Welcome to the Curtiss Wright first quarter 2023 earnings conference call.

At this time, all participants have been placed in a listen only mode and the floor will be opened for your questions. Following the presentation.

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I would now like to turn the call over to Jim Ryan Vice President of Investor Relations. Please go ahead.

Thank you Darren and good morning, everyone welcome to Curtiss Wright's first quarter 2023 earnings conference call.

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 develop.

Available for download through the Investor Relations section of our company website at Www Dot Curtiss Wright.

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 995. These statements are based on management's current expectations and are not guarantees of performance.

These 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 metrics.

Certain costs in order to provide greater transparency into Curtiss Wright ongoing operating and financial performance.

References to organic growth on an adjusted basis.

Excluding foreign currency translation acquisitions, and divestitures otherwise known as.

GAAP to non-GAAP reconciliations for current and prior year periods are available in the earnings release and on our website.

I would like to turn the call over to Linda to get things started.

Thank you Jim and good morning, everyone I will begin by covering the highlights of our first quarter 2023 performance and a brief update on our full year 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 before we move to Q&A.

Starting with our first quarter 2023 highlights we are off to a great start sales increased 13% overall to $631 million and improved 11% organically.

Our overall results reflected strong conversion on our backlog and higher year over year sales and all aerospace and defense and commercial markets, starting with our A&D markets. We were encouraged to see some stability in the electronic component supply chain, which play a strong role in driving 13% growth in <unk>.

Sales in the first quarter. Those results also reflected the contribution from the arresting systems acquisition completed last June .

As you have seen in some of our recent press releases. This business continues to secure new orders for military aircraft arresting systems equipment and its integration into Curtiss Wright is going very well round.

Rounding out A&D, we achieved mid teens growth in our commercial aerospace, reflecting strong OEM demand.

Turning to our commercial market, which increased 12% year over year, we delivered strong sales growth across our commercial nuclear process and general industrial end markets.

Growth in our offering operating income up 15% year over year exceeded our strong sales growth and we delivered 20 basis points in overall operating margin expansion in the quarter.

This performance reflected favorable absorption on higher sales and our continued dedication to driving commercial excellence and improved supply chain management, Although we did face some unfavorable mix on operating margin.

Diluted earnings per share of $1 53.

<unk> increased 17% year over year and exceeded our expectations, primarily due to higher sales.

Adjusted free cash flow reflected a strong year over year increase of 18%. Despite the typical first quarter outflow of note I'm pleased to report that this included the second and final cash payments tied to that.

Delivery of our AP 1000 reactor coolant pumps to China as noted during our February earnings call. We expected to achieve this key milestone prior to shifting the final four pumps as we wind down on this contract in 2023.

Chris will provide some additional color on the key drivers of our first quarter free cash flow later in our prepared remarks.

No.

New orders were also strong in the first quarter up 13% year over year, reflecting increases in defense electronics and commercial aerospace within our A&D market and strong demand across the majority of our commercial markets, particularly for industrial valve and commercial nuclear products.

As a result, we achieved a book to bill of more than one one times in the first quarter, which builds on our already strong backlog now at $2 7 billion and provides great visibility and confidence in achieving our 2023 sales outlook.

Next I would like to touch upon our full year 2023 guidance.

While we are encouraged by the strong start to the year, we have elected to maintain our overall guidance at this time and continue to project mid single digit sales growth driven by increases in nearly all of our major end markets.

I'd like to briefly highlight some considerations and two of those markets.

First in defense, which represents more than 55% of Curtiss Wright's total 2023 sales we are closely tracking the major metrics correlated with the ongoing recovery in our defense electronics supply chain, such as lead times and customer Decommit and we remain cautiously optimistic for steady improvement throughout.

The year next and general industrial while conditions appear to be a bit more favorable for Curtiss Wright. Following a strong first quarter. We continue to remain cautious in our guide to the full year given the current economic environment.

Despite those dynamics, although confident in our outlook for the full year sales growth of 4% to 6% and expect continued operating margin expansion in 2023. It is important.

To note, we will expand our margins, while increasing both internally and externally funded research and development as we balance our current commitments and continued to invest in Curtiss Wright's long term profitable growth. We also remain on track to deliver solid growth in diluted EPS and generate strong free cash.

Flow in.

In summary, Curtiss Wright remains well positioned for continued success in 2023, driven by the strength of our combined portfolio and our execution of the pivot to growth strategy.

Now I would like to turn the call over to Chris to continue with our prepared remarks, Chris. Thank.

Thank you Lynn.

I'll begin with the key drivers of our first quarter 2023 results by segment.

In aerospace and industrial sales increased 6% overall and grew 8% on an organic basis, when excluding the impact of FX.

Within the segments commercial aerospace market, we experienced double digit sales growth driven by strong OEM demand, most notably on Airbus narrow body and wide body platforms.

And the general industrial market, our results reflected high single digit growth driven by increased sales of surface treatment services as well as industrial vehicle products serving on highway platforms.

As expected those gains were partially offset by reduced sales in this segment aerospace defense market due to the timing of production on various fighter jet programs, including the F 35.

Turning to the segments first quarter profitability, our results, mainly reflected favorable absorption on higher sales and the benefits of our commercial excellence initiatives, which continue to help offset inflationary pressures persisting in early 2023.

Absolute defense Electronics segment overall sales growth of 13% principally reflected the conversion of our strong order book, which drove higher sales of tactical communications equipment ground defense market.

That increase was partially offset by lower first quarter revenues for embedded computing equipment on various helicopter and UAV programs in aerospace defense.

Regarding the segment's operating performance operating income was flat despite higher sales principally due to the timing and availability of electronic components, and the resulting impact on mix as well as a year over year increase in R&D investments.

Despite the impacts from timing and mix and as I'll review in more detail later in our prepared remarks, we remain confident in achieving the segment's full year sales and strong profitability.

Next to enable and power segment overall sales growth of 18% was driven by low double digit organic growth as well as a solid contribution from our resting systems business.

And as a reminder, the sales from that acquisition are mainly reflected in the aerospace defense market.

Elsewhere and enabled defense market higher revenues, principally reflected the ramp up from the Columbia class submarine and Cvs in 81 aircraft carrier programs.

And the power and process market our results reflected mid single digit growth in commercial nuclear aftermarket supporting the operation and maintenance of existing reactors and strong MRO valve sales in process.

Turning to the segments profitability, our results again, principally reflected the strong sales growth and resulting favorable absorption.

So some of the first quarter results overall, we generated strong double digit growth in both sales and operating income, which resulted in a 20 basis points year over year operating margin expansion highlights the strength of our combined portfolio and continued focus on commercial and operational excellence.

Next turning to our full year 2023 guidance on slide five.

I'll begin with our end market sales outlook, where we continue to expect organic sales to grow 3% to 5% in line with our long term guidance and unchanged from our initial guidance provided in February .

And overall, 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 will start with a few comments regarding our aerospace and defense markets, where we expect sales to increase 6% to 8%.

Of note and despite the slow start to the year. We continue to expect that aerospace defense will be our fastest growing end market in 2023 with 9% to 11% sales growth.

This reflects the contribution from our arresting systems business as well as a mid single digit organic growth for defense electronics based upon the expected gradual recovery in the supply chain.

In ground defense, while we were pleased with the strong first quarter performance for our tactical Communications equipment. We continue to project full year growth of four 6% as we proceed with some conservatism and leather supply chain environment.

Enabled defense and commercial aerospace our estimates remain unchanged and we are confident in the long term visibility that these markets provide to our portfolio.

Outside of our A&D markets, our commercial market sales growth also remains unchanged at flat to up 2%.

And as a reminder, in the power and process market, while we're expecting flat growth. Overall. This outlook includes a revenue headwind from the wind down on the <unk> thousand program of approximately $20 million.

Excluding that impact we expect mid single digit growth in both the commercial nuclear and process markets and we anticipate those sales will be weighted to the first half of the year in 2023 due to the timing of outages and turnarounds.

Finally, as we look at the combined total commercial market. It's important to note that excluding the $20 million cap 1000 headwind overall commercial sales growth would be up 3% to 5%.

Continuing with our full year outlook by segment on slide six I'll begin with aerospace and industrial where our top line guidance remains unchanged and reflects 1% to 3% sales growth, including a $2 million or 1% headwind from FX.

Looking at the segments profitability, we continue to project solid growth in operating income and margin, reflecting favorable absorption on sales and the benefits of our ongoing commercial excellence initiatives.

Next in defense Electronics, we continue to expect sales to grow 5% to 9%.

And we now expect revenue to be less backend loaded than what we experienced in 2022 and more in line with our historical cadence as we look forward with increased confidence following the solid first quarter performance.

In addition, we remain on track to our full year outlook for operating margin expansion of 30 to 50 basis points supported by our strong and healthy backlog and expectations for supply chain improvement as we move through the balance of the year.

Lastly, and naval empower our guidance of 5% to 7% sales growth remains unchanged.

Favorable absorption on higher sales profitability in this segment will be impacted by both negative mix on lower cap 1000 revenues and a shift to lower margin development contracts in the power and process market.

However, 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 to grow 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%.

Continuing with our financial outlook on slide seven.

We've maintained our full year adjusted diluted EPS guidance, ranging from $8 65 to $8 90, or up 6% to 10% principally reflecting our strong outlook for operational growth.

Building upon our solid first quarter performance, we expect sequential quarterly improvement throughout 2023, and we project approximately 40% of our full year adjusted earnings per share to be recognized in the first half and expect the fourth quarter will be our strongest.

Lastly, turning to our full year free cash flow outlook, our guidance remains unchanged with a range of $360 million to $400 million of 22% to 36%.

And as Lynn shared earlier in Q1, despite the typical outflow of cash we experienced the solid year over year improvement in adjusted free cash flow in part due to the collection of the final cap 1000 payment.

Also during the quarter, while we saw a healthy collection levels beyond the cap 1000 payments. These were largely mitigated by cash outflows due to the timing of year end payables and higher first quarter tax payments.

As we look forward across the balance of the year, our greatest challenge and opportunity remains in inventory reduction and supply chain conditions begin to ease and we execute on a very healthy order book.

Given our first quarter performance and continued focus on working capital management, we remain confident in achieving our full year free cash flow guidance, which as a reminder, yields a free cash flow conversion rate in excess of 110%.

Now I would like to turn the call back over to Linda to continue with our prepared remarks, Glenn Thank you Chris.

As we have discussed today Curtiss Wright is well positioned to deliver strong results in 2023, our A&D and commercial markets. Each generated a book to bill in excess of one one times in the first quarter, adding to our growing backlog, while providing visibility and confidence to achieve our 2023 financial guidance.

Looking beyond this year strong top line growth of 4% to 6% the long term prospects for Curtiss Wright and the markets. We serve remain very healthy I.

I'd like to review a few of those areas, which we expect to positively influence our near and long term sales outlook.

Curtiss Wright is well aligned to benefit from the multiyear growth in defense markets driven by the strong by Port artisan support for the U S defense budget.

Following the signing of the FY2023 Dod budget in December, which reflected 10% year over year growth. We have continued to generate a very strong and healthy order book.

More recently, the President's FY 'twenty four.

CIT request of $842 billion reflected an increase of approximately 3% over the FY2023 enacted amount within this legislation we are well aligned to benefit from the song support for growth in used aircrafts and navy platforms as well as the modernization of the U S Army and Marine Corps.

Fighting vehicles.

Initial indications suggest that the final appropriated budget will likely grow to a higher level to minimally cover inflation, while addressing the continued rise in global threats. However, we understand the likelihood that we could be faced with another potentially lengthy continuing resolution before the FY 'twenty for budget isn't.

<unk>.

Should that occur Curtiss Wright is well positioned to deliver on a growing order book and healthy backlog and when combined with our expectations for further stabilization in the defense electronics supply chain. It should provide some insulation from any temporary funding delays.

Regarding the U K U S joint submarine program, while the decision to supply up to five Virginia class submarines to Australia with lower than initial expectation, the resulting increase in funding combined with emerging ramp in Columbia submarine production is expected to drive sustained naval defense.

Revenue growth for Curtiss Wright well into the next decade beyond that the expectation for an overall increase in global defense spending from our NATO allies supports our long term growth outlook across our defense end markets.

Next in commercial aerospace, we continue to remain aligned with our customers and the expected production rate increases from Boeing and Airbus over the next several years should drive steady growth for Curtiss Wright.

We're also well positioned for long term growth in our commercial nuclear businesses supporting the drive for carbon free energy and energy independence.

This includes nuclear innovation and safety within the existing nuclear infrastructure.

And the build out of next generation advanced reactors, which continue to receive strong development funding in.

In addition, we remain enthusiastic about the growing list of potential new Westinghouse AP 1000 power plants expected to be built in eastern Europe .

Guarding our industrial markets, we maintained strong alignment to the favorable long term secular growth trends, including the push for commercial vehicle electrification.

Along those lines, we recently secured a large contract with a leading truck OEM to provide power management in electronics that will support safe and efficient electrical vehicle performance. This represents another great example of our commitment to provide customized solutions for on an halfway.

Highway commercial EV and hybrid vehicles.

Turning to our profitability, we expect growth in operating income to once again exceed sales growth. This year, which is in line with our long term guidance, reflecting the continued execution of our pivot to growth strategy.

We continue to drive our commercial excellence programs throughout the organization with expectations that these efforts will contribute at least 10 basis points in margin expansion in 2023 and support our overall increase of 10 to 30 basis points.

Also as mentioned previously our 2023 outlook includes a year over year increase of approximately $20 million in total research and development investments, including both contract and internally funded R&D programs.

Curtiss Wright continues to deliver overall operating margin expansion, while making these strategic investments to fuel future organic growth.

Turning to our healthy balance sheet, our adjusted free cash flow remains strong as we expect to generate north of 110% free cash flow conversion in 2023.

The high interest rate environment has made capital allocation and the pursuit of high quality acquisitions more challenging the team remains disciplined and focused on allocating our funds to the highest and best use including organic growth and operational investments.

In closing we continue to have line of sight to the three year Investor day commitments issued in 2021, we remain solidly on track to achieve total revenue CAGR in excess of 5% over the three year period operating growth in excess of total revenue growth, implying solid margin expansion.

Janssen double digit EPS growth. We are also tracking close to our average free cash flow conversion target at the midpoint of our current guide yields three year average of conversion rate just shy of the 110% I can assure you. The team is working diligently to mitigate the ongoing supply chain pressures.

On our free cash flow and in an effort to achieve each and every one of the targets we established.

Overall I remain confident that Curtiss Wright is well positioned to demonstrate strong profitable growth in 2023 and deliver on our pivot to growth strategy to drive long term value for our stakeholders at this time I would like to open up todays 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.

At any point. Your question is answered you may remove yourself from the queue by pressing star two.

Again, we ask that you pick up your handset when posing your questions to provide optimal sound quality. Thank you.

Our first question is coming from.

Christine <unk> with Morgan Stanley .

Please go ahead.

Hey, good morning, everyone.

Good morning, Kristine good morning.

Hey, just following.

Hang up on Poland and nuclear reactors. There are some reports last month that suggest that the U S may be gearing up to land, Paul and $4 billion for 20 small nuclear power reactors. How does this embrace of small nuclear power reactors affect the outlook for AP 1000 sales to Poland is.

This complementary is this competing and then also you know Portland previously indicated its deal with Westinghouse could cost $20 billion do you see any risks around financing for this project and can you give us an update on how you view this opportunity.

So let me start out really talking about.

Very strongly the perspective is that the build out of <unk> is completely complementary to the build out the vap, one thousands and it's not a it's not an either or power outputs are fairly different and so we're in AP 1000 is needed it's a much better and a more economical fit than the multiple FMR. So.

We're not we don't see them as competing in any way, we see them as very complementary and that was from what I understand of the announcements you're referring to of the SME buildout in Poland.

Always framed as in complement to the plan for six large reactors that they stated over a year ago. So that's.

That's good I think the funding of these we're seeing initial indications from the IMF that they are working to make funding available.

Across eastern Europe , and so I think there are still things to be worked out with that things to be worked out with the regulatory agencies in Poland, but I think we continue to see pieces of progress with legislation out of our government for ways for the U S to be very ready to help help these countries.

Accomplish their goals and reach energy independence.

Thanks for the color and if I could ask a second question on supply chain can you provide more details our metrics regarding where we are how the problem has evolved and what we need to see.

For inventory pressures to alleviate.

So yes, so the area, which really has remained the most problematic through 'twenty. Two is obviously the defense electronics segment and the complex components in there that we use electronic components elsewhere across the organization, but largely those teams have mitigated.

The pressures from the supply chain and continue with Redesigns on components that are more available and Thats just not an option that's available in the complex electronics going into defense platform. So that remains the focus of our of our effort as we analyze the supply chain and as I have to say there aren't other pressures with.

Raw materials in some cases and other things, but things were very much I'm very proud of the teams are managing their way through those some of the things we're seeing in the electronics.

We monitor when you've heard us talking about essentially the middle of last year component lead times supplier on time delivery, our ability to pull in or push out.

Vendor commitments and number of parts on allocation et cetera, just a variety of things and across the board I don't want to say it was dramatic in Q1, but we absolutely saw the trending in the right direction across those various measurement and much stronger commitment out of.

Key suppliers that have had these lead times that have gone up to 52 weeks in excess is really being way more specific about when they're going to start bringing those down say the 26 weeks is still not to 2019 levels were 10% to 14 or 16 would have been like the longest we would've seen but to a much more <unk>.

Manageable rate and begin to.

Yes.

Just beginning to see the quoting and the acknowledgements with those kind of the lead times, but something thats less.

Measurable, but from talking to the teens just last week is when we're calling up suppliers and asking them that we're missing one part, though the board could could we get some some component pulled in several weeks that the.

The tone from 2022 was look we have nothing to work with we can accommodate this to starting to have a much more engaged conversations and then being able to work with us and accomplish specific needs. So we can really feel it beginning to change.

In.

Our engagement with the supply base so.

Cautiously optimistic we feel our guide in the defense electronics segment, a little bit wider than normal 725 to 750 accounts for some of the variability that is still out there. It's not like every part comes in on time.

So really strong with us that's a good guide and we will be able to achieve that in the year.

So that's really I guess, Chris get anything you'd add on the supply chain or I mean.

Specifically Christine on the <unk>.

Targeting a $50 million reduction in inventory by year end.

We have specific inventory or inventory burn down plans for the businesses that are most impacted by the supply chain headwinds and we're closely monitoring those plans on a monthly basis.

It really requires enhanced focus on our forecasting planning and purchasing processes really to make that type of shift and we've invested in supply chain and analytical tools that provide us with more real time visibility.

Foundations for managing and adjusting inventory levels, and where we don't have the tools, we are improving our focus to align material deliveries with a new orders and shipment demand more closely so.

And a higher level and across our entire business I think a strong order book is really just going to provide us with a lot of opportunities to burn down that inventory at a faster pace. So we feel good about what we can do there and its contribution to cash flow.

Great. Thanks for the color guys.

Thank you.

The next question comes from Peter Arment with Baird. Please go ahead.

Yes, good morning, Matt Link Christian.

Hey, Chris on the defense electronics, the margin guidance. After the first quarter kind of implies kind of a mid <unk> operating margin for the rest of the year Big.

Step up that you've obviously you guys have that kind of performance before so maybe just maybe you could talk a little bit of a walk us through some of the factors that give you confidence in that guide. Thanks.

Yes sure.

First its really important to know what happened here in Q1.

As we've talked about on past calls, it's really that the changes in <unk>.

<unk> volumes on a quarterly basis can have a disproportionate effect.

On the quarterly margins versus the full year margins across the full year. The overall incremental margins are typically 25% to 30% and thats absent increases in R&D investment mix or other items in the first quarter, we faced some pretty significant changes in mix based upon the availability of electronic components and we saw some improvement.

In some areas of the business and I think you can see that impact in ground defense.

But last year as we were talking about on these calls it only takes a small fraction of components to basically hold up a fairly decent chunk of revenue. So in general I would say higher margin cots revenues decreased and lower margin systems revenues increased I mean, there were.

While the while the revenues were up in total we had a few businesses that faced lower component related output, which also created some pockets of under absorption and then beyond that in Q1, we increased our R&D $1 million year over year. So.

For 2023, and we expect Q1, and our typical cadence will be our lowest revenue quarter for defense electronics.

As that revenue improves as we get deeper into the year.

The absorption will improve and we expect the full year incremental margins to be within our typical range. So a lot of that's related to the supply chain diving deep in understanding the material that we have and the commitments that we have vendor understanding vendor stability and promises and commitments and we feel pretty good.

About that right now.

That's very helpful color and then just switching over Lynn nuclear aftermarket was up nicely can you maybe talk about some of the trends you're seeing in the plant life extensions and how that's kind of impacting your business and then really how sustainable you see this growth. Thanks.

Yes so.

I mean that is exactly what it is.

<unk> commented before that it's our teams don't always have exact line of sight, whether something is just traditional maintenance work or additional maintenance work because they are starting to work associated with the plant life extension it sort of blends together, but we're definitely having dialogue with our customers that the.

The commitments to extend these these reactors from the 60 to 80 years is driving that growth and honestly I think it's sustainable well well well into the next decade and even the back end of next decade, it's really early days in it.

There is only about a third of the plan of the 90 plants in the U S have already achieved their their licensing extensions and more will keep going into that through the middle and the back end of this decade as they reach their license period. So really early days I think that trend.

Is very sustainable.

Excellent.

Thank you Peter.

The next question comes from Myles Walton with Wolfe Research. Please go ahead.

Thanks, and good morning.

I was hoping to.

Just go back to defense electronics for one second for clarification.

Great to read that FX was actually a benefit to margins in the quarter. So the.

So the year on year.

Clients closer to 300 basis points.

And I understand mix can be super.

Volatile here, but.

I also think it's a little bit of a volume based business and some of your embedded computers.

Markets does that is that not where the growth came from and therefore, we didn't see the benefit.

No that's really it wasn't a big impact on the quarter I mean, we basically.

We did see some.

Very very slight on the sales in Q1, I mean, it was less than a $1 million and.

Within operating income the impact was fairly insignificant as well so nothing really of note that youre going on that way I mean, it really all boils down to just the timing of availability of components and how that affected different different businesses I mean, our higher margin cots revenues decreased in our lower margin systems revenues increased.

And there are a few other there are a few other businesses that just didn't get the output that they needed to to kind.

Kind of.

Make their absorption and that will improve as we get deeper into the year.

Okay I was just.

But in your press release that showed up.

The FX impact operating and come back and circle around with Jim and then.

Maybe then on the industrial business any signs it sounds like you had good order flow sort of across the board can you give us anymore.

Sort of under the covers looked at with the industrial order pipeline looks like and any signs of slowdown or customer behavior that shows some hesitation.

Yes, broadly, we still feel confident about what we're seeing.

In our industrial order pipeline and very.

Very much though this is a watch item for us and something we're trying to stay very close with our customers.

What we're understanding and some of those order trends is that as we're being able to lower our lead times people are our customers are adjusting their order patterns a bit to burn down some inventory and do that but nothing concerning maybe.

A little bit of Q2, sluggishness and then back to the levels. We've been seeing in Q3 and Q4, and then take another major area or in our industrial order patterns is around our surface technologies business, they're continuing very strongly and so.

It will definitely a watch item, it's part of our our cautionary thinking in maintaining our guidance for the year is what is to come in that area, but today, we still feel really solid with the with the forecast we have out there for the full year.

Okay alright, thank you.

Thank you.

Winter, Chris maybe just back to supply chain.

Can you maybe parse out I think you said you were optimistic on the.

Aero defense portion of supply chain, but.

The caution.

Around growth in ground defense with also based on supply chain can you just maybe reconcile that are totally different products that you're pulling through and you've got better line of sight or what's the dynamic there.

Yes, they are slightly different products Mike.

Support those different markets so ground defense.

So it's not like a semiconductor youre dealing with more routers and switches and things along that.

<unk> limestone.

In that regard good good volume coming in inventory here that.

And we were ready to convert on that that strong backlog for the business I think within the aerospace side of the business I mean, you're seeing that's really where you have some some higher margin cost revenues there is a greater alignment there.

So system right I don't want to get too detailed into the mix but.

There were some there was some component availability issues, but based upon what we're seeing coming in the door.

That we have planned here for the year the increased confidence that we're getting out of the supply chain I think we feel we feel confident that that's going to pick up as we get deeper into the year and then that will also help with that that margin mix.

Okay. Okay, that's fair.

And then you mentioned August five.

Have you guys.

Then any funding there yet I was kind of under the impression that maybe trying to get back to two per year I know, Australia is throwing out some total cost estimates with some big contingency funding, but I haven't seen any progression there.

Can you give us a little bit more as.

So what youre seeing on Orca.

If and when do you think some of that.

Into revenues for you guys.

So it has the information flow has been a bit slow and even though the announcements were made in March they left a lot of head scratching to be Frank as to how this was going to play out and no. We have not seen any funding flowing from that yet. We're just beginning to have engagements I mean, the interesting thing when.

The August announcement was made.

It was.

For three with Optionality to on Virginia class subs, I mean, we're pretty steadily producing that the two Virginia class subs a year.

So that's good and steady for us, but they also put forth a reasonable amount of money in the bill first strengthening the supply base and so that money will probably be some of the first money. That's spent and we're still waiting to have some meaningful engagements on that to understand the color of that so.

Maybe 'twenty four 'twenty five but I mean this whole thing.

The current talking is it's moving pretty slowly to be Frank, but I think theres still figuring out some things underneath the seams in one day.

Show up and be more near term than it seems but no no no funding flowing yet for us.

Okay. Okay.

And then just the last one for me.

Strong growth in commercial Aero in the quarter I think you called out the Airbus platforms, but based on the kind of full year outlook.

It looks like we're going to see I guess, some some growth deceleration there even though we've got.

Obviously, there is still supply chain risk, there, but boeing ramping up even even Airbus anything kind of just conservatism in there or anything youre seeing was there any pull forward.

Kind of satisfy some of this increased demand or any color on commercial aero.

I mean, we had a really good start in commercial Aero.

In the first quarter I mean again, the order book is up 24% for the year.

Strong orders both in our short cycle and long cycle businesses. So we've got a lot of confidence in the current outlook.

Sales in Q1 were up 16% and it was mainly strong growth across aerospace and industrial to a lesser extent, some contributions and be with avionics and FTE.

But we continue to ramp with Airbus and Boeing.

As we look across the full year and we do have some conservatism nice to your point for the.

The supply chain and really just understanding what things trying to think about what the customer could do right in managing their supply chain and how that affects us.

Yes.

The.

Forecasting a growth of 5% to 7% and seven to nine when excluding FX that's really.

Good OEM growth rate high single digits low double digits, excluding FX and then the aftermarket for US is really not a traditional aftermarket and that business is going to be relatively flat year over year.

Okay. Okay. That's helpful. Perfect. Thanks, guys I'll jump back in the queue.

Thanks, Mike.

The next question comes from Tony Bancroft with Gabelli. Please.

Please go ahead.

Everyone. Thanks for taking my question.

Got it actually I had a question about the.

Pretty good.

Performance for the rest of the gear acquisition.

Anything else that sort of maybe outside your core sort of what you guys do core wise it <unk> seem like its done very well in a lot of sense.

Are there are there other acquisitions like that out there and just maybe if you could give us a review of the pipeline sellers' expectations, maybe go over that thank you.

Thank you for that question.

Honestly, we are really really pleased with what we're seeing out of our racking systems business and we've been making pretty steady.

Steady drumbeat of announcements of really.

Double digit millions of multiyear wins, besides us to carrying across the globe.

Is.

Really driving healthy growth in the business that are 22 revenues for them more around $75 million and we're definitely anticipating.

Mid single digit minimally for their year over year growth and so.

You really really pleased in there.

Are the type of acquisition that is really a sweet spot for Curtiss Wright that it can really take advantages of being part of Curtiss Wright through our supply chain through our lean initiatives, but also our our sales channel and our business development reach and so they can bring things to us we bring things to them.

And they grow stronger as part of Curtiss Wright and so that is the type of acquisition.

We obviously added Karen night, which was a much smaller business, but brought a key technology to us. So it's not like this very narrow filter that will take acquisitions through but we definitely started seeing the pipeline of acquisitions pick up.

This year with proper they already passed on.

Five to eight acquisitions this year, because as we've reviewed them they don't meet our strategic and our financial filters. We just wouldn't see that we can get them to a financial spot mostly has been the issue.

To be accretive to the types of performance that we demand out of our businesses and Curtis right and so but that doesn't mean, we won't find them. We're always something you may have heard us talk about in the past.

We're very active in the banking community so as books come along that might be relevant to us.

<unk> seen is a steady acquirer in those books reach our desk for consideration but.

Equally even.

To a greater extent work with our teams to target private companies that are family held with the P/e and really try and convince the ownership to go into a more exclusive process with Curtis right. So there is a good number of properties out there like that that we're working on and so I feel confident with.

Be able to maintain kind of our steady drumbeat of acquisitions going forward.

Very helpful. Thank you great quarter.

Great. Thanks, Jim I appreciate it.

Thanks.

The next question comes from Nathan Jones with Stifel. Please go ahead.

Good morning, This is Adam Farley on for Nick.

Tim I wanted to.

Morning, I wanted to follow up on the strength of new orders.

<unk> run some pretty good color here, but are there any end markets that are suddenly relative acceleration or deceleration much to call out.

Now.

Through April as order growth continue the kind of a similar emergence of the previous quarter.

Yeah, I'll take that one so the book to Bill in Q1 was pretty solid. It was it was just above one one time sales.

Just as a reminder, our Q1 sales were up 13% so the order book.

Exceeded that.

Net sales conversion, our orders were up $85 million in total.

The backlog is up 3% year to date and.

We continue to see positive order trends in aerospace and defense in particular, aerospace and ground and higher commercial markets as well in both process and nuclear.

Thank you.

As you think about Sustainment and what we sit with what we've seen consistently commercial aerospace orders.

Growth rates are high.

As you look at what we've been seeing within the process and nuclear markets and those those order books are growing in the teens I think some good some good things are happening there we talked a lot last year about the defense electronics business in the between the continuing resolution and the slow start to the.

Anyways, we hit a record order book last year in Q3, and Q4 was just slightly off of that.

As we enter into the year here for defense Electronics, our order book.

Is up 47% year over year and that business continues to sustain those order levels that were near those Q3 Q4, a record high so.

I think a lot of.

A lot of positivity and then when I had mentioned that.

When you step back and you take a look at what's happening within the industrial vehicle markets and you take a look at the Gi markets.

Our economic bellwethers continuous percent good signals that surface tech business order growth rates across all the markets that has served were high single digits low double digits for Q1.

So thats a big confidence booster in then I think that business here other thing Thats important to note is backlog is so strong.

The order book in 'twenty, one and 'twenty, two that even with a little bit of order degradation here in Q1 back down to 2019 pre pandemic levels.

We feel like we're in a good space for that business as we look out in the year and then when you look out even further.

I'm not going to provide a guide for 'twenty four at this time, but we are doing some things like new product introductions in the product the power management space and that supporting trends in vehicle electrification and some of those those product launches have ltvs in excess of a $100 million over the next five years. So theres. Some theres some exciting stuff that we're working on.

<unk>.

From a development perspective.

Beyond that we just continue to listen to many of our industrial companies the customers who have had similar strong starts to the year.

Largely remain cautiously optimistic and some are even beginning to see signs of the infrastructure Bill funding have a slight boost on demand so.

Feel pretty good about the order book and looking all around it.

Okay. That's great. Thank you for taking my questions.

Thank you.

And the next question comes from Myles Walton with Wolfe Research. Please go ahead.

Thanks for taking the follow up and I apologize if you did say this but.

I think you alluded to 40% was the composition of EPS in the first half on the last quarter call and obviously you had also guided the first quarter to be up just mid single digits near mid teens. So is it purely a pull forward from the second quarter that Youre youre sort of seeing in the course of the year and also.

Within the first quarter, if you can point in particular to the areas of Cypress Your plan. Thanks.

Yes, So I think you should take a look at the first quarter and the results did come in a little bit better than expected miles I mean, we've been trying to take a more cautious approach to what's been happening here given the availability of electronic components. So it was a very strong year over year performance for the defense Electronics group.

We're pleasantly surprised with the.

The overall results in.

And what we have there.

Yes, I think.

With where we are in now from an order book perspective, and what we're seeing within defense electronics.

We're certainly feeling more confident on the year right, but given how radically things can change in that business based upon the ability of us taking a conservative position I think when you go back and you take a look at this last year and how things kind of shook out from an EPS perspective, and you look at the half to half split I mean, we were.

Curtiss-Wright Corporation Q1 2023 Earnings Call

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