Q3 2023 Curtiss-Wright Corporation Earnings Call
Hum.
[music].
Yeah.
Okay.
Welcome to the Curtiss Wright third quarter 2023 earnings conference call.
At this time, all participants have been placed on a listen only mode and the floor will be opened for your questions. Following the presentation.
He would like to ask a question at that time. Please press star one on your telephone keypad.
If at any point. Your question has been answered you may remove yourself from the queue by pressing star too so.
So others can hear your questions clearly, we ask that you pick up your handset for best sound quality.
Lastly, if you should require operator assistance. Please press star Zero I would now like to turn the call over to Jim Ryan Vice President of Investor Relations.
Thank you Rachel and good morning, everyone welcome to Curtiss Wright's third quarter 2023 earnings Conference call. Joining me on the call today are a chair and Chief Executive Officer, Lynn Bamford, and Vice President and Chief Financial Officer, Chris Parker.
Our call today is being webcast and the press release as well as a copy of today's financial presentation available for download through the Investor Relations section of our company website at Www Dot Curtiss Wright Dot Com a replay of this webcast also can be found on the website.
Please note today's discussion will include certain projections and statements that are forward looking as defined in the private Securities Litigation Reform Act of 1995. These.
These statements are based on management's current expectations and are not guarantees of future performance.
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 and a Curtiss Wright's ongoing operating and financial performance.
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 I'd like to turn the call over to Lynn to get things started.
Thank you Jim and good morning, everyone I will begin by covering the highlights of our third quarter 2023 performance and a brief update on our full year financial outlook, which we are updating to reflect stronger expectations for revenue earnings and free cash flow generation, then I will turn the call over to Chris to provide a more in depth.
Few of our financial results and updates to our 2023 guidance.
I'll wrap up our prepared remarks before we move to Q&A.
Starting with our third quarter 2023 highlights sales increased 15% overall to $724 million and improved 14% organically as we demonstrated higher year over year sales growth in all our end markets.
Our A&D market grew 18% year over year as we benefited from the continued easing of the supply chain and defense electronics, which drove strong increases in both aerospace and ground defense as well as mid teens growth in commercial aerospace.
We also experienced widespread growth in our commercial nuclear process and industrial market, which Chris will cover in more detail shortly.
Operating income grew 17% year over year and exceeded our strong sales growth, while operating margin expanded 30 basis points.
Underscored within this performance with strong profitability and defense Electronics segment as we continue to overcome the dramatic impact of last year's supply chain challenges. We continued to benefit from steady improvement in lead times and component availability within defense electronics, providing further confidence in it.
Our full year outlook.
Diluted earnings per share of $2.54 increased 23% year over year, while adjusted free cash flow was up 59%, resulting in 140% and free cash flow conversion.
We were also pleased with the continued growth in our order book up 3% in the quarter and now up 8% year to date, leading the way with our defense electronics segment, which achieved a record bookings quarter exceeding the previous record set in the last years third quarter. This activity was driven by continued.
Demand for embedded computing and tactical communications equipment.
In addition in our naval and power segment, we continue to experience strong demand for commercial nuclear products to support maintenance modernization and plant life extension as well as advanced small modular reactor designs overall book to Bill was 1.2 times in the third quarter building upon our already.
Strong backlog, which is now up 12% year to date and in excess of $2.9 billion.
Next to some highlights of our full year 2023 guidance, our growing backlog and strong performance to date, along with favorable trends across all our end markets provides us with confidence to raise our sales outlook again this positions us to deliver 8% to 10% topline growth with increased sales project.
And all three segments.
Overall strong profitability remains unchanged with expectations for 10 to 30 basis points and year over year margin improvement, reflecting the balance of the combined portfolio whereby a reduction in the neighbouring power segment's profitability was offset by strong a stronger outlook in defense electronics.
As a result diluted EPS is now expected to grow 11% to 13%, which as a reminder, keeps us on track to exceed our long term targets. In addition for the second consecutive quarter. We increased the bottom end of our already strong free cash flow guide to reflect the year to date performance.
And higher confidence in the full year outlook in summary, Curtiss Wright remains well positioned to deliver another strong performance in 2023.
Now I would like to turn the call over to Chris to continue with our prepared remarks.
Thank you Lynn.
On slide four we have the key drivers of our third quarter 2023 performance by segment I'll begin.
In aerospace and industrial where overall sales growth of 3% was in line with our expectations.
Within the segments commercial aerospace market, we experienced double digit growth in OEM sales supporting the ramp up in production on Boeing and Airbus platforms.
Notably on the Airbus <unk> hundred 20, <unk> hundred 50 programs.
We also experienced higher sales in the general industrial market driven by solid growth in Ian actuation products and surface treatment services.
Partially offsetting those increases was a decline in exploration sales within the segments Aerospace and ground defense markets due to the timing of production on various programs.
Turning to the segments profitability favorable absorption on higher sales was offset by unfavorable mix and the timing of development contracts principally for actuation products.
Nextgen Defense electronics segment sales increased $55 million or 34%, reflecting continued supply chain recovery and the conversion of our strong order book, which drove increases in our aerospace and ground defense markets.
No and included within that strong performance approximately $10 million in tactical communications equipment sales were accelerated into the third quarter from the fourth quarter as we burn down some of our backlog at a faster pace.
Elsewhere in ground defense, we experienced increased sales of embedded computing equipment, most notably on the Stryker platform, which is another example of the strong demand from our customers for most of the compliance solutions.
Okay.
Within aerospace defense, we experienced strong sales growth for embedded computing equipment on various domestic and foreign military programs as well as flight test instrumentation on the F 35 program.
Okay.
Regarding the segment's operating performance operating income increased 54%, while operating margin improved 330 basis points, principally due to favorable absorption on the strong sales growth.
Also included within those results was a year over year increase of $4 million in strategic I R&D investments to enable our future organic growth.
Turning to the naval and power segment overall sales growth of 12% was essentially in line with our expectations and reflected growth in both our A&D and commercial end markets.
Within the segments Aerospace defense market are arresting systems business continues to perform extremely well based upon the strong global demand for our products.
In the naval defense market, our results reflected higher revenue supporting the ramp up on the Columbia class submarine and solid growth on the Virginia class subs, partially offset by the timing of production on the Cvs in 81 aircraft carrier program.
And the power and process market sales increased approximately 10% overall and reflected mid teen sales growth when excluding the revenue headwind from the wind down of <unk> production.
Yeah.
These results reflected continued strong demand in our commercial nuclear market supporting the operation and maintenance of existing reactors as well as higher development revenues, mainly supporting the ex energy advanced reactor design.
We also experienced strong sales growth in the process market driven by increased refinery maintenance and turnaround activity as well as higher subsea pumps at all and then revenues.
Turning to the segments operating performance favorable absorption on solid sales growth was partially offset by unfavorable mix from the cap 1000 program.
In addition, as you look at the segments profitability our results reflect a small number of naval contract adjustments, reflecting the continued training and development of new hires to support our ramping growth.
Yeah.
To sum up the third quarter results overall strong growth in operating income once again exceeded growth in sales and resulted in 30 basis points and year over year operating margin expansion.
Next turning to our full year 2023 guidance on slide five.
I'll begin with our end market sales outlook, where we now expect organic sales to grow 7% to 9% with total sales growth of 8% to 10% up $30 million or 1% compared with our prior guidance.
Across the entirety of our aerospace and defense markets. We now expect total sales to increase 10% to 12%.
Taking a closer look at the aerospace defense market, we've increased our expectations for full year sales growth to a range of 11% to 13% based on strong demand for arresting systems equipment and higher embedded computing revenues in defense electronics.
Next in ground defense, we now expect an even more favorable full year sales growth of 23% to 25% driven by the continued strong demand for our tactical communications equipment and using in the supply chain.
Of note based on the accelerated receipt of materials and timing of revenue that shifted into Q3, we expect sales in the ground defense market to decline sequentially in the fourth quarter.
Next to naval defense, while we expect a solid 5% to 7% outlook for year over year growth, we've reduced our outlook slightly mainly due to the timing of production on the CVR on 81 aircraft carrier program as we now expect some revenues to shift out of 2023.
Before we wrap up our defense markets I wanted to highlight an area, where we've received a number of questions over the past year since the start of the Ukrainian conflict and commitment by NATO countries to increase defense spending as a percentage of GDP.
As anticipated we've steadily seen an increase in strong contribution and direct foreign military sales as we progressed through the year.
Collectively across Curtiss Wright, we now expect these sales to grow approximately 15% year over year.
And the notable drivers of the spending included higher sales of avionics flight test equipment, and arresting systems and aerospace defense.
Turret drive stabilization systems on ground defense platforms and aircraft handling systems, our naval vessels.
Given the rising threat environment and alignment of our technologies to domestic and foreign defense priorities. We continue to see this as an opportunity to drive solid long term revenue growth in this area.
Okay.
Turning to commercial aerospace based upon the year to date performance. We are now increasing our expectations as sales to grow 14% to 16% driven by strong OEM sales growth on both narrow body and wide body platforms.
Outside of our A&D markets, we raised our growth outlook slightly for the power and process market based on the continued strong demand for both our commercial nuclear and industrial valve products.
And as a reminder, the outlook in this market includes a $20 million year over year revenue headwind from the wind down on the cap 1000 program as we substantially completed this contract in the first quarter.
Excluding that impact we expect a high single digit full year growth rate in our commercial nuclear market as well as a low double digit growth rate in the process market, reflecting higher nuclear outages in process turnarounds as well as a ramp in development of advanced SM ours.
Overall across our total commercial markets, we continue to expect full year sales growth of three 5%.
Continuing with our full year outlook by segment on slide six.
I'll begin in aerospace and industrial where we increased our range of sales slightly to reflect the strong demand in commercial aerospace and continue to expect solid sales growth of 4% to 6%.
Regarding the segments profitability, we maintained our full year outlook, reflecting strong growth in operating income and 20% to 40 basis points and operating margin expansion.
We continue to expect the segment to deliver a strong fourth quarter and finish to 2023.
Next in defense Electronics, we raised our revenue forecast again, and now expect sales to grow 12% to 14% based upon the strong year to date performance continued improvement in the supply chain and record level of order activity.
Regarding the segments profitability, we now expect operating income to grow 18% to 21% in full year operating margin to range from $23 five to 23, 7%, reflecting a 110 to 130 basis points and year over year expansion, which is 50 basis points above our prior expectations.
Okay.
As noted earlier based on the segments stronger than expected third quarter results. We expect sales to decrease sequentially in Q4, but still demonstrate strong profitability with an operating margin of approximately 30%.
And lastly, enable and power we increased our range of sales slightly to reflect the aforementioned changes in end markets and continue to expect strong sales growth of 8% to 10%.
Regarding the segments profitability, while we anticipate favorable absorption on the overall increase in sales we reduced our operating income guidance to now reflect flat to 3% growth and trimmed our prior margin outlook by 40 basis points, primarily due to the timing and efficiency on a small number of naval contracts.
While the impact of the contract adjustments was immaterial to overall Curtiss Wright guidance, we see this as an opportunity going forward, which Lynn will address further in my closing remarks.
And lastly in regard to the segment's margins our outlook continues to reflect margin pressures associated with the timing of development contracts in the power and process market and unfavorable mix on lower cap 1000 revenues.
Regarding the increase in non segment, our corporate expenses, our updated guidance reflects an increase in assumptions related to higher than anticipated foreign exchange transactional losses in 2023, which we now expect to fully offset lower year over year pension costs.
So to summarize our outlook, we continue to expect total Curtiss Wright operating income to grow 8% to 11% overall in 2023 and excess of sales growth.
As a reminder, this outlook includes a year over year increase of more than $20 million and our total engineering spend on both internal and customer funded programs and remains in line with our initial guidance provided earlier this year.
Despite that offset we expect to drive 10 to 30 basis points in full year operating margin expansion as we continue to deliver on our 2021 day Investor day commitments.
Continuing with our financial outlook on slide seven and building upon our solid year to date performance and expectations for a strong finish to the year. We have increased our full year adjusted diluted EPS guidance to a new range of $9 to $9 24 up 11% to 13%.
And lastly, turning to free cash flow, we delivered a strong performance through the first nine months of 2023 that puts us back in line with our more historical cadence.
As a result, we raised the bottom end of our range by $10 million to reflect improved confidence following increases to our full year financial outlook and our intense focus on working capital management.
Our adjusted free cash flow outlook, now ranges from $380 million to $400 million, reflecting strong growth of 29% to 36% and is also within striking distance of our record of nearly $400 million achieved in 2020.
Our updated guidance continues to imply a free cash flow conversion rate in excess of 110%.
Now I'd like to turn the call back over to Lynn.
Chris and turning to slide eight.
As we have discussed today, we achieved strong third quarter results and remain on track to deliver another outstanding year for our shareholders. It's worth reiterating that we expect to deliver these strong results, while maintaining our commitment to incremental investments in R&D, which further strengthens our ability to sustain organic growth well into the future.
Sure.
As I reflect upon the challenges that we and many defense companies are facing today ranging from supply chain to staffing.
Incredibly cloud proud of the accomplishments of the team.
Our ability to pivot to deliver strong growth and the effort, we put forth to accomplish our 2021 investor day commitments when leading in a growth environment amidst a dynamic global market. There are always challenges to be faced.
For example, the events of the pandemic led to the unfortunate turnover of nearly 15% of our workforce within these types of challenges we have consistently found opportunity to advance both financial and operational excellence with the goal of improving Curtiss Wright's overall efficiency and resilience.
We've continued to focus on enhancing our processes programs and systems to ensure that the team is fully engaged and supported as we've reshaped. The workforce. We have done so with increased efficiency, while driving record high sales.
As we prepare to meet the strong demand ahead of US we've added back about half of those jobs lost during the pandemic that make many of which are engineers.
We continue to see encouraging trends in employee hiring retention and turnover and this remains critical as we continue to ramp up our focus on new projects and opportunities, which will drive our growth well into the end of this decade.
Further we are committed to continuing to refine our processes as we onboard employees and implement new training programs to ensure we develop the future generation of Curtiss Wright's workforce.
As I near the end of my third year as CEO of Curtiss Wright and look out across the portfolio to our future. It is clear that we are well positioned to continue to capitalize on the tremendous secular growth trends driving our A&D and commercial end markets.
Before we wrap up I'll highlight a few of those avenues for growth.
In defence and increasing global focus on security and our position as a trusted proven supplier provides confidence in our ability to deliver strong long term growth across our defense businesses.
As you can see by our performance. This year, we're certainly benefiting from the strength and alignment of our portfolio to the FY 'twenty, three spending bill, which appropriated $817 billion or 10% year over year growth for the Dod budget.
Although we are faced with the current continuing resolution and delayed signing of the FY 'twenty four spending bill we remain in an elevated U S defense budget environment with the proposed legislation calling for at least 3% topline growth in FY 'twenty four.
We see continued opportunities to support our efforts enabled shipbuilding the expansion of our most of the product offering in defense electronics as well as ground modernize modernization to name just a few.
The trends driving global defense spending most notably by the U S and its NATO allies are expected to remain a strong tailwind for Curtiss Wright and the industry.
In commercial aerospace growth in the global passenger travel the need to replace the aging commercial fleet and our drive to expand our capabilities on existing and new platforms is expected to provide continued growth for years to come.
Further the emergence of electrification in aerospace and defense provides yet another opportunity to expand Curtis Wright's technological reach.
Building upon our relationships and new product introductions addressing the electrification of vehicles in the general industrial market.
As I look to commercial nuclear emerging technologies and nuclear power and the tremendous efforts that exists worldwide to truly impact global de carbonization and energy security and provide a long runway of opportunities for Curtiss Wright. This includes opportunities to support large scale AP 1000 reactors and <unk>.
As well as the large volume of advanced small modular reactors expected to be built to supplement the existing nuclear reactors or replace existing coal plants.
All of which will be needed to meet the tremendous global demand for energy.
The level of activity for commercial nuclear continues to advance at a relatively rapid pace and we remain aligned as a strategic supplier to support our customers' needs.
Finally, I'm pleased to share that just this week Bulgarian government announced that they have approved the construction of their first AP 1000 reactor, which is anticipated to be operational by 2033, followed by a potential second reactor expected to go online two or three years. After the first one.
This is exciting this exciting news follows Poland earlier selection of the AP 1000 reactor and their recent signing of an engineering service contract with Westinghouse for the construction of the first three potentially six AP 1000 reactors.
Those initial reactors are expected to be operational in the early 2000 <unk>.
Bulgaria News provides yet another positive endorsement for the AP 1000 technology, while also reaffirming Curtiss Wright's opportunity to secure multiple contracts for our reactor coolant pumps within the next two to four years.
In closing I'm pleased with our continued momentum and the healthy outlook for the near and long term prospects for Curtiss Wright and the markets. We serve across every Avenue, we are diligently investing in our employees and in critical technologies today to support our future, which will enable Curtiss Wright to delay.
For long term profitable growth and tremendous value for our shareholders our employees and our customers.
Based on our strong outlook in 2023, we continue to maintain a line of sight to the three year Investor day commitments established in 2021, providing confidence that our pivot to growth strategy is working we look forward to providing a recap of our results and performance against our three year targets.
In February followed by our May 2024, Investor Day in New York.
Thank you and at this time I would like to open up today's conference call for questions.
Okay.
The floor is now open for questions. At this time, if you have a question or comment. Please press star one on your telephone keypad.
If at any point. Your question is answered you may remove yourself from the queue by pressing star two.
We ask that you pick up your handset when posing your questions to provide optimal sound quality.
You.
Our first question comes from Peter Arment with Baird. Your line is open.
Yes, thanks, good morning, everyone.
Hey.
And congrats on the nice nice results I've learned when you think about the nuclear business.
Just thinking back to the days when we had the big China direct order and you look at the kind of.
Outlook over the next several years I know.
How do you think about in terms of sizing the opportunity certainly seems like there's just a lot more going on more opportunities whether you look at the AP 1000, or you look at us and Mars, how would you frame it.
So the potential is actually very significant and you know we're very encouraged to see the steady drumbeat of this.
Wide group of opportunities for RCP pumps to keep you know across all of the frontier Theres multiple countries and we talked about Bulgaria in Poland on the call here, but your Crane, Romania, Czech Republic, even in the U K, Slovenia, Slovakia, Finland, and Sweden are all.
You can find press on all of them that they are taking steps to move forward with building.
Significant new nuclear power some of those are still in a competitive position, but you know Westinghouse clearly continues to begin you know continue to win across that market given the track record and the great safety profile of the AP 1000 nuclear power plant.
We think there is potentially room for 50 to 100 Rcp's and this is you know well into over $1 billion and potentially north of $2 billion of business for Curtiss Wright and you know, it's a pretty consistent.
Timeline. The you know the countries seem to be targeting on getting these plants online in the very early 2000 <unk>. So.
The significance of bringing some meaningful orders to Curtiss Wright <unk>.
<unk> to what we saw with the China direct order or even more is coming in the next two to four years and we're making sure we're prepared to be a great partner to Westinghouse and ready to ramp up and to do that so it's it's fairly dramatic when it comes it's going to be.
And the amazing Flashpoint for Curtiss Wright and the timeline, we said three to five years you know at the beginning of 'twenty. Two we're now saying two to four years and things consistently are just moving forward. Then you know it's not as if a year passes and the timeline still remains three to five.
Good that this is moving in a very meaningful direction.
Yes.
I appreciate that and then just on your overall defense business are you seeing any kind.
Replenishment activity.
A lot of activity that we're sending over to Ukraine, and given everyone's kind of interest in what's going on in Middle East are you guys seeing any impact in your order environment.
Yeah, we are not.
Not not heavily to be transparent.
Not in munitions and the type of subsidy has been very much replenished. However, we are in a lot of the equipment that is very much needed and whether that's from tactical communications types of equipment.
<unk> seen some order trends there too many of the missile defense systems, where we have significant content. So.
It's a little it's it's not the quick reaction stuff that is being asked for but definitely you know Chris spoke to the increase.
Trends and what are the other areas you outside of the defense electronics.
Tend to think about but clearly our new ESCO acquisition.
75% of their business is outside the U S. There has been an absolutely.
Mark the doors off kind of year and a lot of that is.
Countries throughout Europe trying to assure there.
Positioned for readiness and their equipment is essential for that so clearly that is the position there has been driving orders into our <unk> business.
Thanks, and just one quick last one Chris.
You guys continue to generate obviously very strong free cash flow are you still seeing opportunities, whether it's working capital days or how should we think about just working capital profile going forward.
Yes, I'm pretty pleased with the performance and what we've been able to accomplish here to date I mean, just even looking at Q3 and that high free cash flow that we generated which I think if you look back over the past five years is stronger than than most.
But year over year, we were able to reduce our working capital as a percentage of sales in the third quarter by approximately 300 basis points.
With the increase in sales and what's happening across the organization to support the ramp in growth it really didn't come through collections.
Collections is certainly an opportunity for us on a throughput basis, but.
We've got a lot to close out here a year and it really came through lower inventory. So I think we're starting to make some progress youre going to see that in the throughput of the product and as.
As we get to year end here, we're expecting to finish in that 24% range, showing 200 basis points of year over year improvement a lot of that will be burning off this great collections opportunity that we have in front of US now an inventory burn burned down I don't know that will be quite as aggressive as we have done in the past with payables stretching were pretty pretty tough with our supply.
Here's this last year and I think given our situation here.
It's good to two.
Maybe not be quite so aggressively but yes. There is opportunity ahead of us I mean, I think we still have more opportunity as we head into 2004 to burn down inventory to get this working capital as a percentage of sales back in line with some of those historical best that we're heading back in that 2019.
<unk> frame so.
More to come.
I appreciate the details thanks.
Thanks Peter.
Our next question will come from Kristina <unk> with Morgan Stanley. Your line is open.
Hey, good morning, everyone.
Good morning, good morning.
So on <unk> just wanted to go back in terms of the timing for the AP 1000 order, if Bulgaria and Poland both want to have.
The power plant online in the early 2000, <unk> I mean, it seems like you should have ordered our reactor coolant pumps.
Like now.
Just wanted to understand a little bit more on timing and regarding the progress of your discussion with them.
B you know late 'twenty, three or even in 2020 for order.
So.
We have a great relationship with Westinghouse we have regular.
Irregular market update meetings with them and work very transparently on you know what they're seeing what they're bidding etcetera and so you know.
They under you know as I think as the orders.
They begin to have more security in the number of opportunities they're going to have that there they're trying to build plants.
In early 2030 timeframe I think it does put pressure for us to make sure. We can build the number of reactor coolant pumps to be in line with them to date.
What we've shared the two to four years is still the discussion we're having with Westinghouse. So this isn't really you know if this is a very clear discussion with Westinghouse and what they indicate but I know we feel as we see the potential for orders in the number of plants being desire to build and know what that means for reactor coolant pumps.
We know that the order back in 2015 was for 16 RCP.
<unk> Poland in the first Bulgaria plant up 16, RCP. So that's an order of that same magnitude and you know it took us that was initially anticipated to be a five year bell curve of delivery. So that has us putting pumps out you know over a five five year plan turned into seven year, but.
So I mean, where everybody is very aware of this and you know really just at this point, we don't want to speculate on it being earlier, but it clearly as you know.
The world evolves and Theres more commitment AP 1000 plant I would say it does put pressure on them trying to hold off and they're obviously these are very costly pumps and they're trying to control cash flow and all the things every company does but you know at some point that tradeoff will move to getting us started earlier, but that.
It's still a TBD.
I see and then if I, if I recall right. The RCP for Edp, one thousands of ethane facility, where you guys built the RCP for submarines.
You know the two Virginia is plus you've got Columbia class as well.
Which is incremental capacity.
Can you remind us what the capacity is for an annual build I mean, you've also had your Romania and a few other countries.
Who has put an interest in <unk> 1000, and then sometimes right when it ran its course.
Should all of these orders come through what's your ultimate capacity that you could build.
If these orders all come in and they all want to.
Having a.
Plant opening in 2030.
So we do have a lot of capacity to ramp up in our test with plant with adding shifts and adding staff to the current shifts running two full shifts and even potentially a third shift. So we are well positioned with the capital equipment, we have to flex up.
I mean, obviously every that always has a limit one of the things we are very much in the process of evaluating is as you know.
Broadly our content across the various S. EMR platform jewelry, very notably talked about all our contact with ex energy as their you know their line of sight on their customers continues to grow and be positive weather.
We would need to do some footprint expansions you later in this decade, and so that work is ongoing to.
Consider if that is going to be needed, we're not there yet, but it's definitely something we're considering whether just like we built the plant in Summerville Curtiss Wright's not afraid to make you know.
Capital investments when you can see line of sight on important meaningful business and this clearly is for us so.
We're not worried about what we can produce out of the facility and chest week as.
As of now, but there might be some expansion in the back half of this decade.
I would just also add to that.
Those contracts are typically frontloaded with cash right. So I think if there is any type of capex spike at this point, we wouldn't expect it to be significant but we would expect the cash flows on those contracts to to fully.
To help us ramp up in those circumstances, and obviously, it's very profitable business. So we think people will be really happy with anything that we do in that area.
Great. Thank you.
Keep it to two.
Thanks Christine.
We will take our next question from Nathan Jones with Stifel. Your line is open.
Good morning, everyone.
Hi, Nathan good morning.
Yes.
Just wanted to start off with.
Digging a bit more into the margin for a follow up.
Margin expansion in 2023.
Up 20 basis points on 8% organic growth.
It's.
Not huge operating leverage and I know, there's a number of puts and takes I'd like to do today is a little bit more.
Maybe you could comment specifically on some of the headwinds like cap 1000 winding down I know you talked about additional R&D investments.
So maybe unpack that for us a little bit more and then talk about what may or may not repeat in 2024, as we're thinking about the margin protocol okay.
Yes, I think when you look at Curtiss Wright from an overall level. When you look at the absorption that we're getting on the sales. This year, it's fairly in line with what we said we experienced historically, which is in that 25% to 30% range I think at the midpoint of our guide right now we would say about 27% of incremental margin.
But as we've talked about a number of times throughout the year.
We have so many great opportunities to invest not only through higher R&D, but also contract R&D to continue this great growth trajectory that we're on.
So when you look at just the incremental I R&D year over year, that's $5 million.
And as we look at the total R&D, which includes contract R&D and we've talked a little bit about things like advanced naval Cots, and subsea pumps and the various.
Development contracts that are going on within the Eni segment across the actuation Division.
Going to be spending in excess of $20 million of R&D. This year and that puts a little bit of pressure on margin. So I think as we go to capture these.
These great growth sectors that were on and push ourselves and our growth for the future it's important to maintain that.
That investment and then beyond that we have had a reduction in AP 1000 year over year, we've talked about the profitability of that contract I won't get into the to the numbers again on that but that's a $20 million year over year headwind that we're facing within the naval and power segments. So I think 10% to 30 basis points year over year.
Year, if you pull back the sum of these items you know theres a lot going on in the organization not only from a pricing perspective and in commercial.
Push forward commercial excellence, but also operational excellence to support that investment that we're doing for the future.
So if we stripped out all of the kind of discrete things that are going on your position is that you're still in that kind of 25% to 30% core absorption core incremental margins on growth.
Yes.
And.
I mean, the cap 1000 headwind is going to decline year over year going into 2024, just because the contracts Rodriguez of revenue to decline off of.
You guys have made a commitment to continuing to invest in growth.
Should we expect further headwinds to the margin line, obviously I understand that theyre getting paid back in growth.
In 2020 fall from increased investment there just how should we think about the puts and takes there with regard to 'twenty four.
Yes.
We are certainly still on the journey and what we've set out to accomplish it in Investor Day, I mean, there's a lot that goes into answering the question as to where youre going to be in 2024 were still actively engaged in our strategic planning process in evaluating some of these investment opportunities that stand in front of US. This next year, but let me specifically because you brought it up.
I mean, as you look at enable and power.
Margins going forward I think the positives here that we've got a real solid enabled defense outlook, including a ramp here on the Columbia class submarine.
We've got this.
New business integration.
With our arresting systems business that is going very well, we're seeing Fms sales growing we have we should have no AP 1000 headwind. This next year I mean boy it would be nice if something happened a little bit sooner than those orders.
Still forecasting two to four years, but we know that will be an accelerant when it hits.
We will have a tailwind and a benefit from this small naval contract adjustment that we had here in the third quarter. So.
We will get through this the strategic.
Planning process here in the fourth quarter, you know, we're going to look at these R&D investment opportunities that are in front of us in advanced SM or subsea advanced enabled tech type technologies and absent investments in R&D or other other factors I mean, we will get to that incremental 25% to 30% as we have in the past so.
That's how I would I would look at that.
That's helpful. Thanks, I think are important for people to understand.
What they call looks like so thank you very much for taking the questions.
Thank you Nathan.
Okay.
Our next question comes from Pete Osterlund with Truest. Your line is open.
Hey, good morning, I'm on for Mike Chipotle. This morning, Thanks for taking our questions.
Yes.
First just wanted to ask on the book to Bill for the quarter. I was wondering if you could provide some more detail on what that looked like by segment or by end markets just trying to get a sense for how strong orders were in defense electronics and as they're already markets you would call out where order trends are showing any signs of relative weakness. Thank you.
Yeah. So there's a lot to unpack in that question. So let me start off and say the total Curtiss Wright level, we were approximately a one two times book to Bill and that's on a very strong sales growth of 15%.
As you look across the three segments aerospace and industrial was about a one times book to Bill the defense electronics.
It was one three times book to Bill and Thats really the third consecutive quarter for that segment.
With very strong book to bills I mean, they were one two times in Q2, one four times back in Q1.
Last 12 months of orders $983 million so.
Some very strong things happening there on top of very solid sales growth and enable and power segments and about one two times.
The book to Bill is a little bit stronger in the defense markets.
Still at about a 1.1 time in commercial Aero.
The commercial markets are really kind of a balanced rate and we're seeing some very strong growth that's taking place in orders up 15% and our nuclear submarket.
We're seeing mid single.
<unk> digit growth here in Q3, and the process markets, but.
Yes.
Above that on a year to date basis.
We've talked a little bit about the industrial market and what we're seeing there in the past I think the positive is that while we've been in.
A fairly steady decline on a very strong order book since the highs of 2021 here in Q3, we flattened out a little bit as we had projected we're dealing we're dealing with a little bit of slack in our and our customers.
Inventory that seems to be balancing out we've got some new product introductions are things that are going to help that going forward and commercial aero continues to be very very strong.
So no concerns in that regard continue to produce and expect to produce in alignment with the trajectories that Boeing and Airbus have laid out for their critical platforms.
That's perfect. Thanks for that detail and then just one follow up on a naval defense.
Have you seen any signs of increased activity or conversations around August and do you have any updated expectations around timing for when that could potentially be additive to that business.
So there is definitely a lot of activity happening in the background around August and figuring out how those submarines are going to be built and replaced.
A lot of it we're not really at a free hand to speak to but yes.
We said you know kind of over the past year that the plan for office is not very clear what it is becoming more clear I can say that for sure that.
And we continue to know what's going to be a very good.
Tailwind for Curtiss Wright in our in our business, but really the timing and the details is not something we can probably speak to.
Alright understood I'll leave it there thanks for taking the questions.
Once again, if you do have a question you May press star one on your telephone keypad at this time.
We'll take our next question from Myles Walton with Wolfe Research Your line is open.
Hi, Good morning. This is Greg Goldberg on for Myles Walton I, just had a quick cleanup on S Tomorrow I think.
Previously you mentioned contact right content on ex energy commented, we are in discussions with Hitachi and Rolls Royce. So I don't know maybe any updates on those discussions and maybe expectations for design revenues into into 'twenty four and beyond.
So.
Been very public on where over $100 million of content on the four unit.
Plans for X energy, Yeah, we continue to work with them and explore other systems that we can build I would tell you I don't know if you saw our press release, we put out maybe a month or so ago.
Four.
Major <unk>.
Control system that we've won with Terrapower. So that was something we could go out go ahead and put out into.
And to the public and so those are the things that we're okay to talk about at this point in time, but the activity is very steady across the board in all the major FMR reactors and were really hoping that as we move to our Investor Day next may. So our goal is you know obviously, we have to comply with.
What our customers want but hopefully a lot of this will become a little bit clearer, we will be able to really talk about some of the where were we said across the various reactors by that investor day. So.
That's your teams to try and make you really want to come to our Investor day.
Great.
One more quick one anything on M&A, just broad Colorado.
Expectations in a year and what Youre seeing right now.
So we have quite a few very interesting properties in the pipeline.
I wouldn't see there well I guess, there's a chance it could be something yet coming by by year end, but our.
Our pipeline is very healthy and I feel optimistic then in 'twenty. Four you know, we'll be able to have at least one announcement of.
A really good solid property that matches.
Both the strategic and financial filters that I talked about I will say that you know as we've said years in the past we surely have evaluated a lot of properties this year.
Paul to some very large ones, but considering.
The cost of capital right now, it's a pretty high bar to want to make sure.
The fit is really good to forecast all of those things are really solid and we passed on quite a few properties. This year, but we have some we're very optimistic about.
Yeah, and then just to that point I mean, just relative to financing I mean back in June 22, we completed that Eas acquisition, and then we paid down $200 million of notes in Q1, and I'm really pleased to report that based upon that strong free cash flow generation and we've shown you.
Year to date, we exited the third quarter off the revolver. So those borrowing rates that are approximately 6%. So.
With a strong fourth quarter finish will be putting some cash onto the balance sheet here.
Too much but certainly preparing ourselves for any of these opportunities that present themselves as we move into 2024.
Yeah.
Great. Thank you.
Thank you.
Once again, if you do have a question you May press star one on your telephone keypad at this time.
We will take our next question from Louie Dipalma with William Blair. Your line is open.
Lynn, Chris and Jim Good morning.
Good morning, good morning.
Congress on Newport News in.
Electric boat have referenced how the submarine industrial base remains.
Very fragile specific with the.
Virginia class has.
This impacted.
You at all and.
In the context of how.
The contractors are ordering long.
Lead time materials is there the potential that.
Your Navy business.
Spans as Virginia class production expense.
So one thing we talked about back in our Investor day back in 'twenty, one and continues to be true is that we're a very solid supplier across the submarine programs and.
Have a great reputation within the customer base or our.
Our ability to deliver on the submarine programs and so we're always making it clear that we're interested in expanding our content across those programs as potentially other supplier scale and we have instances of that over during the period and continue to have.
Very proactive discussions with.
Those customers that you referenced around that topic.
It's something that you know again I guess twice on this call say something we're not really that free to speak about the specifics, but the other area associated with that is.
You know there has been money made made available in the defense budget and then there is money in the.
The current Plaza, that's being debated in Congress to support Israel, and Ukraine that Theres actually money in there for the submarine supplier base that we're considering.
How it might apply to us that you know was to make sure. We are doing those things as things like August.
And Colombia ramped to about a year and they want to potentially ramp up Virginia that were were really prepared to do that so we're very proactive about considering how we can pursue those funds to be a really solid portion of that supply base into those important submarine programs.
Thanks Lynn.
Across your industrial and defense segments are you still seeing any supply chain headwinds I know that several of your competitors have referenced a new reality in terms of the supply chain on the defense side.
But it seems you've been able to manage better than most but if the supply chain improves like should that lead to like better output.
And potentially higher margins.
So there are the supply chain is you know and it's interesting I was talking to some of the team members just to get their latest perspective on it you know earlier this week and.
Is it the supply chain is nowhere near at the point. It was in 2019 and that really is as you just kind of referenced.
There is no clear line of sight on when the supply chain would perform at that level again, it is largely stabilized.
I'm very proud of how we have responded the teams that are right in the middle of this have responded and implemented new systems, new tools, new approaches to be successful with the supply chain. The way. It is in its current state and so I think we are being successful and it isn't just the supply.
<unk> is completely back to normal with how we've responded as a business and you can see that.
Where we were hit the hardest was independent electronics and you can see that with the 12% to 14% growth. We're now projecting that segment. This year, but just put a little color on it.
Broadly when we think statistically of what's going on in the supply chain, we look at a lot of different metrics across it and.
And what's considered our long lead parts, which we consider anything over 40 weeks.
It's pretty much stability in the lead times and some improvement on the on time delivery of those parks, but there's still components that are out there at 52 weeks in some even greater of lead time and there was nothing left that long 26 weeks would've been.
The longest we would've seen prior to the pandemic. So there's still that and I will say that recently within the lead times have components that are less than 40 weeks somewhat some under 20. Some in the 20 to 40 kind of category. We've seen some volatility in the lead times in those components in some.
Are those going back up from how they had come down prior so it's it's still a dynamic environment that the team is having to deal with the areas where we see.
Some of the lead Time's creeping back up is really around some of the older legacy processors and memory components example.
Our.
Were brought to the market. Many many years ago that dynamic is true in our industrial businesses also is where.
They have largely seen their lead times come back from the 52 weeks down to 10% in 2014, but they still have.
Some issues with where they have legacy parks, new part of our value proposition out of our defense electronics team is its a combination of we bring state of the art products to the market with the latest technologies across processors Gpus FPGA is all of the various ways you can do computing.
But we also work with our customers to keep producing the same products that they build systems on for many many years 10 15, even up to 20 in some cases years until we have a lot. We're very dependent on some of those legacy processors and are working very hard to do that so.
The team is managing it I'm not foreshadowing any kind of.
Change or problems going forward I think we've got systems to manage it but we're still dealing with a situation that isn't.
Isn't the way it used to be.
Yeah, and I'll just comment really quickly on the margins there Louie I mean, I think as you look at.
23% to 2023, 5% to $23 seven on the margins I mean, we've been here before you come back up and see it in 2020 in 2019.
A lot of what I had said earlier on the call.
Regarding our forward outlook in 'twenty, four and it's really going to depend on where those investment opportunities are in defense electronics.
But we will manage as we have historically the entire portfolio to continue to provide that.
Incremental margin expansion.
That's good thanks for all the detail greatly appreciate it.
And.
I guess one final one it appears that I I J a infrastructure Bill funding is.
Hopefully set to increase next year at least that's what.
Some of the companies had been.
Saying on their third quarter earnings calls can you remind investors do you have any significant exposure on your industrial side and even a little on your federal side.
As it relates to the I R J.
So we do we do.
Not directly we're not out building bridges and things, but we do have tentacles that a lot of that funding is a good tailwind from Curtiss Wright and the weather that we have a significant footprint across construction vehicles and so as there is building.
The various infrastructure that it's directly funding that's driving.
Increases in those areas that will come through the Curtiss Wright with our content across both those types of customers inside of there. The bills. There are also you know investments for the civil nuclear fleet that is very much helping a lot of these plants go from their 60 to 80 year life extension.
<unk> and Chris talked about what we're seeing in our aftermarket sales very very strong performance out of that team and there's no doubt that some of that is clearly being driven by the money that's available in the infrastructure Bill and then broadly their support for.
Various types of electric vehicles, we know obviously do you know, we're not focused on automobiles or anything along those lines, but you know large trucks buses school buses that type of equipment, where theres funding for that is another place that we will we will see the tailwind.
From that so we do it is it is supportive of Curtiss Wright's business broadly.
Great. Thanks, Lynn and thanks, everyone.
Thank you. Thank you.
There are no further questions in the queue I will turn the floor over to Lynn Bamford Chair and Chief Executive officer for any additional or closing remarks.
Well I'd just like to say, thank you to all of you for joining us today and we look forward to speaking with you again during our fourth quarter 2023 earnings call.
In 2024, so have a great day.
Okay.
Thank you. This concludes today's Curtiss Wright's third quarter 2023 earnings Conference call. Please disconnect. Your lines at this time and have a wonderful day.
Hmm.
Mhm.
[music].
Okay.
Hum.
Yes.
Okay.
[music].
Hum.
Okay.
[music] Hum.
Hum.
Hum.
[music].
Hum.
Hum.
Okay.
Okay.
Okay.