Curtiss-Wright Corporation (CW) Q3 2023 Earnings Call Transcript

Curtiss-Wright Company (NYSE:CW) Q3 2023 Earnings Convention Name November 2, 2023 10:00 AM ET

Firm Members

Jim Ryan – Vice President, Investor Relations

Lynn Bamford – Chair & Chief Govt Officer

Chris Farkas – Vice President & Chief Monetary Officer

Convention Name Members

Peter Arment – Baird

Kristine Liwag – Morgan Stanley

Nathan Jones – Stifel

Peter Osterland – Truist

Greg Dahlberg – Wolf Analysis

Louie DiPalma – William Blair

Operator

Welcome to the Curtiss-Wright Third Quarter 2023 Earnings Convention Name. At this all contributors have been positioned on a listen-mode. And the ground can be open on your questions following the presentation. [Operator Instructions].

I might now like to show the decision over to Jim Ryan, Vice President of Investor Relations.

Jim Ryan

Thanks, Lisa, and good morning, everybody. Welcome to Curtiss-Wright Third Quarter 2023 Earnings Convention Name. Becoming a member of me on the decision right this moment are Chair and Chief Govt Officer Lynn Bamford and Vice President and Chief Monetary Officer Chris Farkas.

Our name right this moment is being webcasts and a press launch in addition to a replica of right this moment’s monetary presentation out there for obtain via the Investor Relations part of our firm web site at www.curtisswright.com. A replay on this webcast additionally could be discovered on the web site.

Please observe, right this moment’s dialogue will embody sure projections and statements which can be forward-looking as outlined within the Non-public Safety Litigation Reform Act of 1995. These statements are based mostly on administration’s present expectations and aren’t assured to future efficiency. We element these dangers and uncertainties related to the forward-looking statements and our public filings of the SEC.

As a reminder, the corporate’s outcomes embody an adjusted non-GAAP view that excludes sure prices in an effort to present higher transparency within the Curtiss-Wright’s ongoing working and monetary efficiency.

Any references to natural development are on an adjusted foundation and exclude overseas foreign money translation, acquisitions, and divestitures until in any other case famous. GAAP to non-GAAP reconciliation for present and prior yr intervals can be found within the earnings launch and on our web site.

Now, I might like to show the decision over to Lynn to get issues began.

Lynn Bamford

Thanks, Jim, and good morning, everybody. I’ll start by overlaying the highlights of our third Quarter 2023 efficiency and a short replace on our full-year monetary outlook, which we’re updating to mirror stronger expectations for income earnings and pre-cash stream era.

Then, I am going to flip the decision over to Chris to supply a extra in-depth evaluation of our monetary outcomes and updates to our 2023 steerage. Lastly, I am going to wrap up our ready remarks earlier than we transfer to Q&A.

Beginning with our third Quarter 2023 spotlight, gross sales elevated 15% total to $724 million and improved 14% organically as we demonstrated larger year-over-year gross sales development in all our finish markets.

Our A&D markets grew 18% year-over-year as we benefited from the continued easing of the provision chain and protection electronics, which drove sturdy will increase in each aerospace and floor protection, in addition to mid-teens development in industrial aerospace. We additionally skilled widespread development in our industrial nuclear, course of, and industrial markets, which Chris will cowl in additional element shortly.

Working earnings grew 17% year-over-year and exceeded our sturdy gross sales development whereas working margins expanded 30 foundation factors. Underscored inside this efficiency was sturdy chance in protection electronics segments as we proceed to beat the dramatic affect of final yr’s provide chain challenges.

We proceed to learn from regular enhancements in lead instances and element availability inside protection electronics, offering additional confidence in reaching our full yr outlook.

Diluted earnings per share of $2.54 elevated 23% year-over-year, whereas adjusted free money stream was up 59%, leading to 140% in free money stream conversion. We had been additionally happy with the continued development in our order guide, up 3% within the quarter and now up 8% year-to-date.

Main the best way with our protection electronics phase, which achieved a report reserving quarter exceeding the earlier report set within the final yr’s third quarter. This exercise was pushed by continued sturdy demand for embedded computing and tactical communications gear.

As well as, in our naval and energy phase, we proceed to expertise sturdy demand for industrial nuclear merchandise to assist upkeep, modernization and plants extensions, in addition to superior small modular reactor designs. General, book-to-bill was 1.2 instances within the third quarter, constructing upon our already sturdy backlog, which is now up 12% year-to-date and within the extra of $2.9 billion.

Subsequent is a few highlights of our full yr 2023 steerage. Our rising backlogs and robust efficiency right this moment together with favorable developments throughout all our finish markets gives us with confidence to lift our gross sales outlooks once more. This positions us to ship 8% to 10% prime line development with elevated gross sales projected in all three segments.

General, sturdy profitability stays unchanged with expectations for 10 to 30 foundation factors in year-over-year margin enhancements reflecting the stability of the mixed portfolio, whereby a discount within the naval and energy phase profitability was offset by a stronger outlook in protection electronics.

Consequently, diluted EPS is now anticipated to develop 11% to 13%, which as a reminder retains us on monitor to exceed our long-term targets. As well as, for the second consecutive quarter, we elevated the underside finish of our already sturdy free money stream information to mirror the year-to-date efficiency and better confidence within the full yr outlook. In abstract, Curtiss-Wright stays well-positioned to ship one other sturdy efficiency in 2023.

Now, I wish to flip the decision over to Chris to proceed with our ready remarks.

Chris Farkas

Thanks, Lynn. On slide 4, we’ve the important thing drivers of our third quarter 2023 efficiency by phase. I am going to start in aerospace and industrial, the place total gross sales development of three% was according to our expectations.

Throughout the second industrial aerospace market, we skilled double-digit development in OEM gross sales supporting the ramp-up in manufacturing on Boeing and Airbus platforms, most notably on the Airbus A320 and A350 applications.

We additionally skilled larger gross sales within the normal industrial market pushed by strong development in EM actuation merchandise and floor remedy providers. Partially upsetting these will increase was a decline in actuation gross sales inside the phase’s aerospace and floor protection markets as a result of timing of manufacturing on varied applications.

Turning to the phase’s profitability, favorable absorption on larger gross sales was offset by unfavorable combine within the timing of improvement contracts, principally for actuation merchandise.

Subsequent, in protection electronics phase, gross sales elevated $55 million or 34% reflecting continued provide chain restoration within the conversion of our sturdy order guide, which confirmed will increase in our aerospace and floor protection markets.

Of observe, and included inside that sturdy efficiency, roughly $10 million in sensible communications gear gross sales had been accelerated into the third quarter from the fourth quarter as we burned down a few of our backlog at a quicker tempo.

Elsewhere in aerospace and floor protection, we skilled elevated gross sales with embedded computing gear, most notably on the Stryker platform, which is one other instance of the sturdy demand from our clients for our MOSA compliant options.

Inside aerospace protection, we skilled sturdy gross sales development for embedded computing gear on varied home and overseas navy applications, in addition to flight take a look at instrumentation on the F-35 program.

Relating to the phase’s working efficiency, working earnings elevated 54% whereas working margin improved 330 foundation factors, principally attributable to favorable absorption on the sturdy gross sales development. Additionally included inside these outcomes was a year-over-year enhance of $4 million in strategic IR&D investments to allow our future natural development.

Turning to the naval and energy phase, total gross sales development of 12% was basically according to our expectations in mirrored development in each our AMD and industrial finish markets.

Throughout the phase’s aerospace protection market, our arresting techniques enterprise continues to carry out extraordinarily effectively based mostly upon the sturdy international demand for our merchandise. Within the naval protection market, our outcomes mirrored larger revenues supporting the ramp-up on the Columbia-class submarine and strong development on the Virginia-class subs, partially offset by the timing of manufacturing on the CVN-81 plane service program.

Within the energy and course of market, gross sales elevated roughly 10% total and inflected mid-teen gross sales development when excluding the income headwind from the wind-down of CAP1000 manufacturing.

These outcomes mirrored continued sturdy demand in our industrial nuclear market supporting the operation upkeep of present reactors, in addition to larger improvement revenues primarily supporting the X vitality superior reactor design.

We additionally skilled sturdy gross sales development within the course of market pushed by elevated refinery upkeep and turnaround exercise, in addition to larger subsea pump improvement revenues. Turning to the phase’s working efficiency, favorable absorption on strong gross sales development was partially upset by unfavorable necks from the CAP1000 program.

As well as, when you have a look at the phase’s profitability, our outcomes mirror a small variety of naval contract changes, reflecting the continued coaching and improvement in new hires to assist our ramp and development.

To sum up the third quarter outcomes, total, sturdy development in working earnings as soon as once more exceeded development in gross sales and resulted in 30 foundation factors in year-over-year working margin growth.

Subsequent, turning to our full-year 2023 steerage on slide 5. I am going to start with our in-market gross sales outlook, the place we now anticipate natural gross sales to develop 7% to 9% with whole gross sales development of 8% to 10% of $30 million for 1% in contrast with our prior steerage.

Throughout everything of our aerospace and protection markets, we now anticipate whole gross sales to extend 10% to 12%. Taking a more in-depth have a look at the aerospace protection market, we have elevated our expectations for full-year gross sales development to vary from 11% to 13% based mostly on sturdy demand for arresting techniques gear and better embedded computing revenues and protection electronics.

Subsequent, in floor protection, we now anticipate an much more favorable full-year gross sales development of 23% to 25% pushed by the continued sturdy demand for our tactical communications gear and easing within the provide chain.

Of observe, based mostly on the accelerated receipt of supplies and timing of income that is shifted into Q3, we anticipate gross sales within the floor protection market to say no probably within the fourth quarter.

Subsequent, in naval protection, whereas we anticipate a strong 5% to 7% outlook for year-to-year development, we cut back the outlook barely, particularly as a result of timing of manufacturing on the CVN-81 plane service program as we now anticipate some revenues to shift out of 2023.

Earlier than we wrap up our protection markets, I needed to spotlight an space the place we have obtained various questions over the previous yr for the reason that begin of the opening battle and dedication by NATO international locations to extend protection spending as a share of GDP.

As anticipated, we have steadily seen a rise in sturdy contribution in direct overseas navy gross sales as we progress via the yr. Collectively throughout Curtiss-Wright, we now anticipate these gross sales to develop roughly 15% year-over-year.

And the notable drivers of this spending embody larger gross sales of avionics, flight take a look at gear, and arresting techniques in aerospace protection, turret drive stabilization techniques on floor protection platforms, and plane dealing with techniques on naval vessels.

Given the rising menace setting and alignment of our applied sciences to home and overseas protection precedence, we proceed to see this as a possibility to deal with strong long-term income development on this space.

Turning to industrial aerospace, based mostly upon the year-to-date efficiency, we are actually rising our expectations of gross sales to develop 14% to 16% pushed by sturdy OEM gross sales development on each narrow-body and wide-body platforms.

Exterior of our A&D markets, we raised our development outlooks barely for the ability and course of market based mostly on the continued sturdy demand for each our industrial nuclear and industrial valve merchandise.

And as a reminder, the outlook on this market consists of the $20 million year-over-year income headwind from the wind down on the CAP1000 program as we considerably accomplished this contract within the first quarter.

Excluding that affect, we anticipate a excessive single-digit full-year development charge in our industrial nuclear market, in addition to a low double-digit development charge within the course of market, reflecting larger nuclear outages and course of turnarounds, in addition to a ramp in improvement of superior SMRs.

General, throughout our whole industrial markets, we proceed to anticipate full-year gross sales development of three% to five%. Persevering with with our full-year outlook by phase on slide six, I am going to start in aerospace and industrial the place we enhance our vary of gross sales barely to mirror the sturdy demand within the industrial aerospace and proceed to anticipate strong gross sales development of 4% to six%.

Relating to the phase’s profitability, we maintained our full-year outlook reflecting sturdy development and working earnings in 20 to 40 foundation factors in working market growth. We proceed to anticipate the phase to ship a powerful fourth quarter and end to 2023.

Subsequent, in protection electronics, we raised our income forecast once more, and now anticipate gross sales to develop 12% to 14% based mostly upon the sturdy year-to-date efficiency, continued enchancment within the provide chain, and record-level order exercise.

Relating to the phase’s profitability, we now anticipate working earnings to develop 18% to 21%, and full-year working margin to vary from 23.5% to 23.7%, reflecting 110% to 130 foundation level in year-over-year growth, which is 50 foundation factors above our prior expectations.

As famous earlier, based mostly on the phase’s stronger-than-expected third quarter outcomes, we anticipate gross sales to lower sequentially in This autumn, however nonetheless show sturdy profitability with an working margin of roughly 30%.

And lastly, in naval and energy, we elevated our vary of gross sales barely to mirror the aforementioned adjustments in finish markets and proceed to anticipate sturdy gross sales development of 8% to 10%.

Relating to the phase’s profitability, whereas we anticipate favorable absorption on the general enhance in gross sales, we decreased our working earnings steerage to now mirror flat to three% development and trimmed our prior margin outlook by 40 foundation crops, primarily as a result of timing and effectivity on a small variety of naval contracts.

Whereas the affect of the contract’s adjustment is immaterial to total Curtiss-Wright steerage, we see this as a possibility going ahead, which Lynn will regulate additional in her closing remarks.

And lastly, in regard to the phase’s margins, our outlook continues to mirror margin pressures related to the timing and improvement contracts within the energy and course of market, and unfavorable combine on decrease CAP1000 revenues.

Relating to the rise in non-segment or company bills, our up to date steerage displays a rise in assumptions associated to higher-than-anticipated overseas trade transactional losses in 2023, which we now anticipate to totally offset decrease year-over-year pension prices.

So to summarize our outlook, we proceed to anticipate whole Curtiss-Wright working earnings to develop 8% to 11% total in 2023 in extra of gross sales development. And as a reminder, this outlook features a year-over-year enhance of greater than $20 million in our whole engineering spend on each inside and customer-funded applications and stays according to our preliminary steerage supplied earlier this yr.

Regardless of that offset, we anticipate to drive 10 to 30 foundation factors in full-year working margin growth as we proceed to ship on our 2021 investor date commitments. Persevering with with our monetary outlook on slide seven, and constructing upon our strong year-to-date efficiency and expectations for a powerful end to the yr, we’ve elevated our full-year adjusted diluted EPS steerage to a brand new vary of $9 to $9.20 for up 11% to 13%.

And lastly, throughout the free money stream, we delivered a powerful efficiency via the primary 9 months of 2023 that places us again according to our extra historic cadence. Consequently, we raised the underside finish of our vary by $10 million to mirror improved confidence following will increase to our full-year monetary outlook and our intense deal with working capital administration.

Our adjusted free money stream outlook now ranges from $380 to $400 million to reflecting sturdy development of 29% to 36%, and can be inside hanging distance of our report of almost $400 million achieved in 2020. Our up to date steerage continues to suggest a free money stream conversion charge in extra of 110%.

Now I might like to show the decision again over to Lynn.

Lynn Bamford

Thanks, Chris, and turning to slip eight. As we’ve mentioned right this moment, we achieved sturdy third-quarter outcomes and remained on monitor to ship one other excellent yr for our shareholders.

It is price reiterating that we anticipate to ship these sturdy outcomes whereas sustaining our dedication to incremental investments in R&D, which additional strengthens our potential to maintain natural development effectively into the longer term.

As I mirror upon the challenges that we and lots of protection firms are going through right this moment, starting from provide chain to staffing, I am extremely pleased with the accomplishments of the crew. Our potential to pivot, to ship sturdy development, and the trouble we put forth to perform our 2021 Investor Day commitments.

When main in a development setting amidst a dynamic international market, there are all the time challenges to be confronted. For instance, the occasions of the pandemic led to the unlucky turnover of almost 15% of our workforce.

Inside a lot of these challenges, we’ve persistently discovered alternative to advance each monetary and operational excellence with the purpose of bettering Curtiss-Wright total effectivity and resilience.

We proceed to deal with enhancing our processes, applications, and techniques to make sure that the crew is absolutely engaged and supported as we have reshaped the workforce. We’ve achieved so with elevated effectivity whereas driving report excessive gross sales.

As we put together to satisfy sturdy demand forward of us, we have added again about half of these jobs misplaced throughout the pandemic, a lot of that are engineers. We proceed to see encouraging developments in worker hiring, retention, and turnover, and this stays vital as we proceed to ramp up our deal with new initiatives and alternatives which can drive our development effectively into the tip of this decade.

Additional, we’re dedicated to persevering with to refine our processes as we onboard staff and implement new coaching applications to guarantee we develop the longer term era of Curtiss-Wright workforce.

As I close to the tip of my third yr as CEO of Curtiss-Wright and look out throughout the portfolio to our future, it’s clear that we’re well-positioned to proceed to capitalize on the large secular development developments driving our A&D and industrial finish markets.

Earlier than we wrap up, I am going to spotlight just a few of these avenues for development. In protection, an rising international deal with safety and our place as a trusted confirmed provider gives confidence in our potential to ship sturdy, long-term development throughout our protection companies.

As you possibly can see by our efficiency this yr, we’re actually benefiting from the strengths and alignment of our portfolio to the FY 2023 spending invoice, which appropriated $817 billion, or 10% year-over-year development for the DOD finances.

Though we’re confronted with the present persevering with decision and delayed signing of the FY 2024 spending invoice, we stay in an elevated U.S. protection finances setting, with the proposed laws [ph] calling for no less than 3% top-line development in FY 2024.

We see continued alternatives to assist our efforts in naval shipbuilding, the growth of our MOSA merchandise providing in protection electronics, in addition to floor modernization to call only a few.

The developments driving international protection spending, most notably by the U.S. and its NATO allies, are anticipated to stay a powerful tailwind for Curtiss-Wright within the trade. In industrial aerospace, development in international passenger journey, the necessity to substitute the getting older industrial fleet, and our drive to broaden our capabilities on present and new platforms is anticipated to supply continued development for years to return.

Additional, the emergence of electrification in aerospace and protection gives one more alternative to broaden Curtiss-Wright’s technological attain, constructing upon {our relationships} and new product introductions addressing the electrification of autos within the normal industrial market.

As I look to industrial nuclear, rising applied sciences in nuclear energy and the large efforts to exist worldwide to actually affect international decarbonization and vitality safety present an extended runway of alternatives for Curtiss-Wright.

This consists of alternatives to assist large-scale AP1000 reactors in Europe, in addition to the massive quantity of superior small modular reactors, anticipated to be constructed to complement the present nuclear reactors or substitute present coal crops, all of which can be wanted to satisfy the large international demand for vitality.

Degree of exercise for industrial nuclear continues to advance at a comparatively speedy tempo, and we stay aligned as a strategic provider to assist our clients’ wants. Lastly, I am happy to share that simply this week, Bulgaria’s authorities introduced that they’ve authorized the development of their first AP1000 reactor, which is anticipated to be operational by 2033, adopted by a possible second reactor anticipated to go surfing two or three years after the primary one.

This thrilling information follows Poland’s earlier choice of the AP1000 reactor and their current timing of an engineering service contract with Westinghouse for the development of the primary three of doubtless six AP1000 reactors. These preliminary reactors are anticipated to be operational within the early 2030s.

Bulgaria’s information gives one more optimistic endorsement for the AP1000 know-how, whereas additionally reaffirming Curtiss-Wright alternative to safe a number of contracts for our reactor coolant pumps inside the subsequent two to 4 years.

In closing, I am happy with our continued momentum and the wholesome outlook for the close to and long-term prospects for Curtiss-Wright and the markets we serve. Throughout each avenue, we’re diligently investing in our staff and in vital applied sciences right this moment to assist our future, which can allow Curtiss-Wright to ship long-term worthwhile development and large worth for our shareholders, our staff, and our clients.

Primarily based on our sturdy outlook in 2023, we proceed to take care of line of sight to the three-year Investor Day commitments established in 2021, offering confidence that our pivot to development technique is working. We stay up for offering a recap of our outcomes and efficiency towards our three-year targets in February, adopted by our Might 2024 Investor Day in New York.

Thanks. And at the moment, I wish to open up right this moment’s convention name for questions.

Query-and-Reply Session

Operator

The ground is now open for questions. [Operator Instructions] Thanks. Our first query comes from Peter Arment with Baird. Your line is open.

Peter Arment

Sure, thanks. Good morning, everybody. Hey, congrats on the good outcomes. Lynn, when you consider the nuclear enterprise. Simply considering again to the times once we had the large China direct order and also you have a look at the type of outlook over the following a number of years, I do know – how do you consider by way of sizing the chance? It actually looks like there’s simply much more happening and a number of alternatives, whether or not you have a look at the AP1000 otherwise you have a look at SMRs. How are you framing it?

Lynn Bamford

So, the potential is definitely very important, and we’re very inspired to see the regular drumbeat of this large group of alternatives for RCP pumps to maintain throughout all of the fronts. You already know, there’s a number of international locations. We talked about Bulgaria and Poland on the decision right here, however Ukraine, Romania, the Czech Republic, even within the UK, Slovenia, Slovakia, Finland, and Sweden are all, you will discover press on all of them that they’re taking steps to maneuver ahead with constructing important new nuclear energy.

A few of these are nonetheless in a aggressive place, however Westinghouse clearly continues to start – proceed to win throughout that market, given the monitor report and the nice security profile of the AP1000 nuclear energy plant. Right this moment, we predict there’s probably a room for 50 to 100 RCPs, and that is effectively into over a billion {dollars}, and probably north of $2 billion of enterprise for Curtiss-Wright. And it is a fairly constant timeline that the international locations appear to be focusing on on getting these crops on-line within the very early 2030s. So the importance of bringing some significant order to Curtiss-Wright is just like what we noticed with the China Direct order, or much more is coming within the subsequent two to 4 years, and we’re ensuring we’re ready to be a fantastic associate for Westinghouse and able to ramp up and to do this.

So it is pretty dramatic when it comes. It is going to be a tremendous flash level for Curtiss-Wright. And the timeline, we stated three to 5 years. Initially of 2022, we’re now saying two to 4 years, and issues persistently are simply transferring ahead. It is not — as if a yr passes, and the timeline nonetheless stays three to 5. We really feel good that that is transferring in a really significant path.

Peter Arment

Admire that. And simply in your total protection enterprise, are you seeing any type of replenishment exercise? I do know there’s plenty of exercise that we’re sending over to Ukraine and giving everybody’s type of curiosity of what is going on on within the Center East. Are you guys seeing any affect within the order setting?

Lynn Bamford

We’re not closely to be clear, that you’re not in munitions and the kind of stuff that’s being very a lot replenished. Nevertheless, we’re in plenty of the gear that may be very a lot wanted, and whether or not that is from tactical communications kinds of gear, positively seeing some order developments there to most of the missile protection techniques the place we’ve important content material. So it is just a little, it isn’t the short response stuff that’s being requested for, however positively Chris spoke to the elevated developments.

And one of many different areas outdoors of protection electronics, we have a tendency to consider, however clearly, our new ESCO acquisitions, say 75% of their enterprise is outdoors of the U.S. They’re having a completely knock the doorways type of yr and plenty of that’s, , international locations all through Europe making an attempt to guarantee their positions for readiness and their gear is crucial for that. So clearly that’s the place there was driving orders into our ESCO enterprise.

Peter Arment

Thanks. And only one fast final one, Chris. You guys proceed to generate clearly very sturdy free money stream. Are you continue to seeing alternatives type of, whether or not it is working capital base or how do you consider simply working capital profile going ahead?

Chris Farkas

Sure. I am fairly happy with the efficiency and what we have been in a position to accomplish right here right this moment. I imply, simply even taking a look at Q3 and that top, , free money stream that we generated, which I believe when you look again over the previous 5 years is stronger than most. However year-over-year, we had been in a position to cut back our working capital as a share of gross sales within the third quarter by roughly 300 foundation factors, and with the rise in gross sales and what’s taking place throughout the group to assist the ramping development, it actually did not come via collections.

Collections is actually a possibility for us on a throughput foundation, however we have rather a lot to shut out right here in year-end. It actually got here via decrease stock. So I believe we’re beginning to make some progress. You are going to see that within the throughput of the product. And as we get to year-end right here, we’re anticipating to complete in that 24% vary, exhibiting 200 foundation factors of year-over-year enchancment. A whole lot of that can be burning off this nice assortment of alternative that we’ve in entrance of us now and stock burn down. I do not know that it will likely be fairly as aggressive as we’ve been previously with payable stretching We had been fairly powerful with our suppliers this final yr, and I believe, given our state of affairs right here, it is good to perhaps not be fairly so aggressive.

However, sure, there may be alternative forward of us. I imply, I believe we nonetheless have extra alternatives as we head into 2024 to burn down stock and to get this working capital as a share of gross sales again according to a few of these historic bests that we had been hitting again in that 2019 time-frame, so, extra to return.

Peter Arment

Admire the small print. Thanks.

Lynn Bamford

Thanks, Peter.

Operator

Our subsequent query will come from Kristine Liwag with Morgan Stanley. Your line is open.

Kristine Liwag

Hey, good morning, everybody.

Chris Farkas

Good morning Kristine.

Kristine Liwag

You already know, so Lynn, I simply wish to return by way of the timing for the AP1000 order. Is Bulgaria and Poland each wish to have the ability plant on-line within the early 2030s? I imply, it looks like they need to need to order the reactor coolant pump proper now. So, simply wish to perceive just a little bit extra on timing and relating to the progress of your dialogue with them. Might this be a late 2023 or perhaps a 2024 order?

Lynn Bamford

So, we’ve a fantastic relationship with Westinghouse. We’ve an everyday market replace conferences with them, and we work very transparently on, what they’re seeing, what they’re bidding, et cetera. And so, they beneath – I believe within the orders, they start to have extra safety within the variety of alternatives they will have that they are making an attempt to construct crops in that early 2030 timeframe. I believe it does put stress for us to verify, we are able to construct the variety of reactor coolant pumps to be according to them thus far. What we have shared the 2 to 4 years remains to be the dialogue we’re having with Westinghouse.

So, this is not actually – it is a very clear dialogue with Westinghouse and what they point out. However I do know we really feel as we see the potential for orders and the variety of crops being desired to construct and know what which means for reactor coolant pumps. We all know that the order again in 2015 was for 16 RCPs between Poland and the primary Bulgaria plant. That is 15 RCPs, in order that’s an order of that very same magnitude. And it took us – that was initially anticipated to be a five-year bell curve of deliveries. That has us placing pumps out over a five-year plan became seven-year. However, so, I imply, all people may be very conscious of this and actually at this level we do not wish to speculate on it being earlier, nevertheless it’s clearly as, , the world evolves and there is extra dedication to AP1000 crops.

I might say, it does put stress on them making an attempt to carry off. And so they’re clearly and these are very pricey pumps and so they’re making an attempt to regulate money stream and all of the issues each firm does. However in some unspecified time in the future that trade-off will transfer to getting us began earlier, however that’s nonetheless a TBD.

Kristine Liwag

I see. After which, if I recall proper, the RCP for the AP1000, the identical facility the place you guys constructed the RCPs for submarines. With the 2 Virginia’s plus you have obtained a Columbia-class as effectively, which is incremental capability. Are you able to remind us what the capability is for an annual construct? I imply, you have additionally had Romania and some different international locations who’ve put an curiosity in AP1000. I imply, generally, proper, when it rain, it pours. Ought to all these orders come via, what’s your final capability that you may construct if these orders all are available, and so they all wish to have a plant opening in 2030?

Lynn Bamford

So, we do have plenty of capability to ramp up in our take a look at with plans with, , including ships and including workers to the present ships, working two full ships, and even probably a 3rd ship. So, we’re well-positioned with the capital footprint we’ve to flex up. I imply, clearly, every part, that all the time has a restrict. One of many issues we’re very a lot within the means of evaluating is, as, , broadly, our content material throughout the varied SMR platforms, we very notably talks about all our content material with X-energy. As their line of sight on their clients continues to develop and be optimistic, whether or not we would wish to do some footprint expansions later on this decade.

And so, that work is ongoing to contemplate if that’s going to be wanted. We’re not there but, nevertheless it’s positively one thing we’re contemplating whether or not, similar to we constructed the plant in Somerville, Curtiss-Wright will not be afraid to make capital investments when you possibly can see line of sight on vital and significant enterprise, and this clearly is for us. So, we weren’t nervous about what we are able to produce out of the power in Cheswick as of now. However there may be some growth within the again half of this decade.

Chris Farkas

And I might simply additionally add to that that. These contracts are sometimes entrance loaded with money, proper? So, I believe if there may be any sort of CapEx spike at this level, we would not anticipate it to be important, however we’d anticipate the money flows on these contracts to totally assist us ramp up in these circumstances. And clearly, it is a very worthwhile enterprise, so we predict folks can be actually pleased with something that we do in that space.

Kristine Liwag

Nice. Thanks. I am going to preserve it at two.

Lynn Bamford

Thanks, Kristine.

Operator

We’ll take our subsequent query from Nathan Jones with Stifel. Your line is open.

Nathan Jones

Good morning, everybody.

Lynn Bamford

Hello, Nathan.

Chris Farkas

Good morning.

Nathan Jones

I might similar to to start out off with digging a bit extra into the margin profile and the general margin growth in 2023, up 20 foundation factors on 8% natural development, its not big working common. And I do know there’s various places and takes. So I might wish to dig into these just a little bit extra. So, perhaps you may remark particularly on a number of the headwinds like, CAP1000 winding down. I do know you talked about extra R&D investments. So, perhaps unpack that for us just a little bit extra after which speak about what could or could not repeat in 2024 as we’re serious about in margin profile on the market?

Chris Farkas

Sure, I believe once you have a look at the Curtiss-Wright from an total stage, once you have a look at the absorption that we’re getting on in gross sales this yr, it is pretty according to what we have stated, we have skilled traditionally, which is in that 25% to 30% vary. I believe on the midpoint of our information proper now, we’d say about 27% is incremental margin. However, as we have talked about various instances all year long, we’ve so many nice alternatives to speculate not solely via IR&D, but in addition contract R&D to proceed this nice development trajectory that we’re on.

So, once you have a look at simply the incremental IR&D year-over-year, that is $5 million. And as we have a look at the overall R&D, which incorporates contract R&D, and we have talked just a little bit about issues like, superior naval COTS and subsea pumps and the varied improvement contracts which can be happening inside the A&I phase throughout the actuation, I imply, we will be spending in extra of $20 million of R&D this yr, and that places just a little little bit of stress on margin.

So, I believe as we go to seize these nice development elements that we’re on and push ourselves in our development for the longer term, it is vital to take care of that funding. After which past that, we’ve had a discount in AP1000 year-over-year. We have talked concerning the profitability of that contract. I will not get into the numbers once more on that, however that is a $20 million year-over-year headwind that we’re going through inside the naval and energy phase. So, I believe at 10 to 30 foundation factors year-over-year, when you pull again a few of these gadgets, there’s rather a lot happening within the group, not solely from a pricing perspective and industrial to push ahead industrial and industrial excellence, but in addition operational excellence to assist that funding that we’re doing for the longer term.

Nathan Jones

So, if we stripped that the entire type of discrete issues which can be happening, your place is that you just’re nonetheless in that type of 25% to 30% core absorption, core incremental margins on development?

Chris Farkas

Sure.

Nathan Jones

And, I imply, the CAP1000 headwind goes to say no year-over-year going into 2024, simply because the contracts working out of income to say no off of. You guys have made a dedication to persevering with to spend money on development. Ought to we anticipate additional headwinds to the margin line? Clearly, I perceive now they’re getting paid again at development in 2024 for an elevated funding there. Simply how ought to we take into consideration the places and takes there as we go into 2024?

Chris Farkas

Sure. We’re actually nonetheless on the journey and what we got down to accomplish right here in Investor Day. I imply, there’s rather a lot that goes into answering the query as to the place you are going to be in 2024. We’re nonetheless actively engaged in our strategic planning course of and evaluating a few of these funding alternatives that is been in entrance of us this subsequent yr. However, I imply, particularly, as you introduced it up, I imply, as you have a look at naval and energy margins going ahead, I believe the positives listed here are that we have got an actual strong naval protection outlook, together with a ramp from the Columbia-class submarine. We have this new enterprise integration with our resting techniques enterprise that’s going very effectively. We’re seeing FMS gross sales rising. We should not don’t have any AP1000 headwind this subsequent yr.

I imply, boy, it might be good if one thing occurred just a little bit sooner on these orders. We’re nonetheless forecasting two to 4 years, however we all know that can be an accelerant when it hits. And we’ll have a tail finish and a profit from this small naval contract adjustment that we had right here within the third quarter. So, we’ll get via this strategic and planning course of right here within the fourth quarter. We’ll have a look at these R&D funding alternatives which can be in entrance of us within the superior SMR, subsea, superior naval tech-type applied sciences, and absent investments in R&D or different elements, and we’ll get to that incremental 25% to 30% as we’ve previously. In order that’s how I might have a look at that.

Nathan Jones

That is useful. Thanks. I believe it is vital for folks to grasp what the decision appears like. So thanks very a lot for taking the questions.

Lynn Bamford

Thanks. Nathan.

Chris Farkas

Sure, thanks.

Operator

Our subsequent query comes from Peter Osterland with Truist. Your line is open.

Peter Osterland

Hey, good morning. I am on for Mike Ciarmoli this morning. Thanks for taking our questions. The very first thing I needed to ask, on the book-to-bill for the quarter, I used to be questioning when you might present some extra element on what that seemed like by phase or by finish market. I am simply making an attempt to get a way for a way sturdy orders had been in protection digital and if there are any markets you’ll name out the place order developments which can be exhibiting any indicators of relative weak point? Thanks.

Chris Farkas

Sure, so there’s rather a lot to unpack in that query. So let me begin off and say, on the whole buy charge stage, we had been roughly 1.2 instances book-to-bill, and that is on very sturdy gross sales development of 15%. As you look throughout the three segments, aerospace and industrial was a couple of one instances book-to-billion. The protection electronics was 1.3 instances book-to-bill, and that is actually the third consecutive quarter for that phase. With very sturdy book-to-bill, I imply, they had been 1.2 instances in Q2, 1.4 instances again in Q1. Final 12 months of order is $983 million, so some very sturdy issues taking place there on prime of very strong gross sales development.

After which, the naval and energy phase about 1.2 instances. The book-to-bill is just a little bit stronger within the protection markets. We’re nonetheless at about 1.1 time in industrial aero. Business markets are actually type of a stability, proper? And we’re seeing some very sturdy development that is happening in orders of 15% in our nuclear sub-market. We’re seeing mid-single digit development right here in Q3 within the course of markets, however excessive above that on a year-to-date foundation. We have talked just a little bit concerning the industrial market, and what we’re seeing there previously. I believe the optimistic is that whereas we have been in a reasonably regular decline on a really sturdy order guide for the reason that highs of 2021, right here in Q3 we flattened out just a little bit as we had projected.

We’re coping with just a little little bit of slack in our clients stock. That appears to be balancing out. We have some new product introduction, however I believe that’s going to assist that going ahead. And industrial aero continues to be very, very sturdy, so, no issues in that regard. We proceed to supply and anticipate to supply an alignment with the trajectories that Boeing and airbus laid out for his or her vital platforms.

Peter Osterland

Good. Thanks for that element. After which only one follow-up on naval protection. Have you ever seen any indicators of elevated exercise or conversations round AUKUS? And do you’ve got any up to date expectations round timing for when that would probably be additive to that enterprise?

Lynn Bamford

There’s positively plenty of exercise taking place within the background round AUKUS and determining how these submarines are going to be constructed and changed. A whole lot of these had been not likely within the pre-hand to talk to, however, we stated, , type of over the previous yr that the plan for AUKUS will not be very clear. Properly, it’s turning into extra clear. I can say that for positive. And we proceed to know it’ll be an excellent tailwind for Curtiss-Wright in our enterprise, however actually the timing and the small print will not be one thing we are able to freely converse to.

Peter Osterland

All proper, understood. I am going to depart it there. Thanks for taking the query.

Lynn Bamford

Thanks.

Operator

[Operator Instructions] We’ll take our subsequent query from Myles Walton with Wolf Analysis. Your line is open.

Greg Dahlberg

Hello, good morning. That is Greg Dahlberg on for Myles Walton. I’d simply had a fast cleanup on SMR. I have been beforehand talked about content material on X-energy, commented right here in discussions with Hitachi and Rolls Royce. So, perhaps any updates on these discussions and perhaps expectations for design revenues into 2024 and past?

Lynn Bamford

So, we have been very public on, we’re over $100 million content material on these four-unit plant for X-energy. We proceed to work with them and discover different techniques that we are able to construct. I might say, I do not know when you noticed a press launch we put out perhaps a month or so in the past, for a serious management system that we have gained with TerraPower. So, that was one thing we might exit – go forward and put out into the general public. And so, these are the issues that we’re okay to speak about at this cut-off date, however the exercise may be very regular throughout the board on all the key SMR reactors, and we’re actually hoping that as we transfer to our Investor Day subsequent Might, our purpose is, clearly, we’ve to adjust to what our clients need, however hopefully plenty of this can turn out to be just a little bit clearer and we’ll have the ability to actually speak about a few of the place we sit throughout the varied reactors by that Investor Day. So, that is your key to attempt to make you actually wish to come to our Investor Day.

Greg Dahlberg

Okay. Nice. And yet one more fast one, something on M&A simply broad colour on expectations within the yr finish, what you are seeing proper now? Thanks.

Lynn Bamford

So, we’ve fairly just a few very fascinating properties within the pipeline. I would not see their, effectively, I suppose, there’s an opportunity it may very well be one thing but coming by yr finish, however our pipeline may be very wholesome and I really feel optimistic that in 2024 we’ll have the ability to have no less than one announcement of actually good strong property that matches each these strategic and monetary filters that I talked about. I’ll say that, as we stated years previously, we certainly have evaluated plenty of properties this yr. Small to some very massive ones, however contemplating the price of capital proper now, that is fairly excessive bar to, wish to make certain the match is de facto good to forecast all these issues are actually strong and we have handed on fairly just a few properties this yr, however we’ve some we’re very optimistic about.

Chris Farkas

Sure. After which simply to that time, I imply, simply relative to financing, I imply, again in June of 2020, we accomplished the EAS acquisition after which we paid down $200 million in notes in Q1. And I am actually happy to report that based mostly upon that sturdy free money stream era that we have proven year-to-date, we exited the third quarter off the revolver, so, these borrowing charges are roughly 6%. So, with a powerful fourth quarter end, we’ll be placing some money onto the stability sheet right here, not an excessive amount of, however actually getting ready ourselves for any of those alternatives that current themselves as we transfer into 2024.

Greg Dahlberg

Nice. Thanks.

Lynn Bamford

Thanks.

Operator

[Operator Instructions] We’ll take our subsequent query from Louie DiPalma with William Blair. Your line is open.

Louie DiPalma

Lynn, Chris, and Jim, good morning.

Chris Farkas

Good morning.

Louie DiPalma

Congress and Newport Information and Electrical Boat have referenced how the submarine industrial base stays very fragile, particular with the Virginia-class. Has this impacted you in any respect? And within the context of how the contractors are ordering lengthy lead time supplies, is there the potential that your Navy enterprise expands as Virginia-class manufacturing expands?

Lynn Bamford

So, we talked about again in our Investor Day again in 2021, and proceed to be true is, we had been a really strong provider throughout the submarine program and had a fantastic repute inside the buyer base or our potential to ship on the submarine applications. And so, we’re all the time making it clear that we’re occupied with increasing our content material throughout these applications as probably different suppliers fail, and we’ve cases of that over throughout the interval, and proceed to have very proactive discussions with these clients that you just referenced round that subject.

It is one thing that, , once more, I suppose twice on this name, its one thing we’re not likely that free to talk about the specifics of, however the different space related to that’s, there’s been cash made out there within the protection budgets, after which there’s cash within the present plus up that is being debated in Congress to assist Israel and Ukraine. There’s truly cash in that for the submarine provider base that we’re contemplating, the way it may apply to us. Make certain we’re doing these issues as issues like AKUS comes and Columbia ramps to a couple of yr and so they wish to probably ramp up Virginia that we’re actually ready to do this. So we’re very proactive about contemplating how we are able to pursue these funds to be a very strong portion of that offer base into these vital submarine applications.

Louie DiPalma

Thanks, Lynn. And throughout your industrial and protection segments, are you continue to seeing any provide chain headwinds? I do know that a number of of your opponents have referenced a brand new actuality by way of the provision chain on the protection aspect, nevertheless it appears you have been in a position to handle higher than most, but when the provision chain improves, like ought to that result in, like, higher output and probably larger margins?

Lynn Bamford

So the provision chain is, , and it is fascinating to speak to a number of the crew members, simply to get their newest perspective on it earlier this week. And the provision chain is nowhere close to on the level it was in 2019. And that actually is, as you simply type of referenced, there is no clear line of sight on when the provision chain would carry out at that stage once more. It’s largely stabilized. I am very pleased with how we’ve responded the groups which can be proper in the midst of this have responded and applied new techniques, new instruments, new approaches to achieve success with the provision chain the best way it’s in its present state.

And so I believe we’re being profitable, and it is not simply that the provision chain is totally again to regular. That is how we responded as a enterprise. And I imply, you possibly can see that, the place we hit the toughest was in protection electronics. And you may see that with the 12% to 14% development we’re now projecting in that phase this yr. However just a bit colour on it. Broadly, we predict statistically of what is going on on within the provide chain, we have a look at plenty of totally different metrics throughout it. And what’s thought-about our long-league elements, which we take into account something over 40 weeks, there’s just about stability within the lead instances and a few enchancment on the on-time supply of these elements. However there’s nonetheless elements which can be on the market at 52 weeks and a few even higher of lead time. And there was nothing that was that lengthy, 26 weeks would have been the longest we’d have seen previous to the pandemic. So, there’s nonetheless that.

And I’ll say that lately inside the lead instances of elements which can be lower than that 40 weeks, some beneath 20, some within the 20 to 40 type of classes. We have seen some volatility within the lead instances in these elements and a few of these going again up from how that they had come down prior. So, it is nonetheless a dynamic setting that the crew is having to cope with. The areas the place we see a number of the lead instances creeping again up, it is actually round a number of the older legacy processors and reminiscence elements, instance, which can be dropped at the market many, a few years in the past. That dynamic is true and our industrial companies is also the place they’ve largely seen their lead instances come again from the 52 weeks all the way down to 10 to 14, however they nonetheless have some points with the place they’ve legacy elements.

And a part of our price proposition out of our protection electronics crew is, with the mix of we deliver state-of-the-art merchandise to the market with the most recent applied sciences throughout processors, GPUs, FPGAs, all the varied methods you are able to do computing. However we additionally work with our clients to maintain producing the identical merchandise that they construct techniques on for a lot of, a few years, 10 to fifteen, even as much as 20 in some instances, years. And so, we’ve rather a lot – we’re very depending on a few of these legacy processors and are working very exhausting to do this. So, the crew is managing it. I am not foreshadowing any type of change or issues going ahead. I believe we have techniques to handle it, however we’re nonetheless coping with a state of affairs that is not the manner it was.

Chris Farkas

Sure, and I am going to simply remark actually rapidly on margins there, Louie. I imply, I believe as you have a look at 23 to twenty, 23.5 to 23.7 on the margins, I imply, we have been right here earlier than. You may again up and see it in 2020 and 2019. A whole lot of what I had stated earlier on the decision relating to our ahead outlook in 2024, it is actually going to rely on the place these funding alternatives are in protection electronics. However we are going to handle as we’ve traditionally all the portfolio to proceed to supply that incremental margin growth.

Louie DiPalma

That is good. Thanks for all of the element. Significantly appreciated. And I suppose one remaining one, it seems that IIJA infrastructure invoice funding is hopefully set to extend subsequent yr. No less than that is what a number of the firms have been saying on their third quarter earnings calls. Are you able to remind traders, do you’ve got something to think about publicity in your industrial aspect and even just a little in your federal aspect because it pertains to the IIJA?

Lynn Bamford

So we do, circuitously, we’re not out constructing bridges and issues, however we do have tentacles that plenty of funding is an effective tailwind from Curtiss-Wright and whether or not that is – we’ve a big footprint throughout development autos. And in order there may be constructing of the varied infrastructures that it is straight funding, that is driving will increase in these areas that can come via to Curtiss-Wright with our content material throughout these kinds of clients. Within that, the payments there are additionally investments for the civil nuclear fleet that may be very a lot serving to plenty of these crops, go from their 60 to 80-year life extensions. And Chris talked about what we’re seeing in our aftermarket gross sales, very, sturdy efficiency out of that crew.

And there is no doubt that if a few of that’s clearly being pushed by the cash that is out there within the infrastructure invoice. After which broadly, there’s assist for varied kinds of electrical autos. We do not clearly do, , we’re not centered on vehicles or something alongside these traces. However massive vehicles, buses, faculty buses, that sort of apparatus the place they’re funding for that’s one other place that we’ll see the tailwind from that. So, we do – it’s supportive of Curtiss-Wright’s enterprise broadly.

Louie DiPalma

Nice. Thanks, Lynn, and thanks, everybody.

Lynn Bamford

Thanks.

Chris Farkas

Thanks.

Operator

There are not any additional questions within the queue. I am going to flip the ground over to Lynn Bamford, Chair and Chief Govt Officer for any extra or closing remarks.

Lynn Bamford

I might similar to to say thanks to all of you for becoming a member of us right this moment. We stay up for talking with you once more throughout our fourth quarter 2023 earnings name in 2024. So have a fantastic day.

Operator

Thanks. This concludes right this moment’s Curtiss-Wright third quarter 2023 earnings convention name. Please disconnect your line at the moment and have an exquisite day.