Good day, ladies and gentlemen, and welcome to the Curtiss-Wright Fourth Quarter 2018 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions]. As a reminder, today's conference is being recorded. I would now like to turn the call over to Jim Ryan, Senior Director of Investor Relations. Sir, please begin.

Thank you, Mark and good morning everyone. Welcome to Curtiss-Wright's Fourth Quarter 2018 Earnings Conference Call. Joining me on the call today are Dave Adams, our Chairman and Chief Executive Officer; and Glenn Tynan, our Vice President and Chief Financial Officer. Our call today is being webcast, and the press release as well as a copy of today's financial presentation are available for download through the Investor Relations section of our company website at www.curtisswright.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 statements are based on management's current expectations and are not guarantees of future performance. We detail those risks and uncertainties associated with our forward-looking statements in our public filings with the SEC. As a reminder, the company's 2018 results including adjusted non-GAAP view that excludes first year purchase accounting costs associated with this acquisition. Reconciliations for current and prior year periods are available in the earnings release at the end of this presentation and on our website. Also please note any references to organic growth, excluding the effects of foreign currency translation, acquisitions and divestitures, unless otherwise noted. Now, I'd like to turn the call over to Dave to get things started. Dave?

Thanks Jim and good morning everyone. I will begin our agenda with fourth quarter and full year 2018 highlights followed by a recap of our journey to achieving top quartile performance. Then I will turn it over to Glenn to provide a detailed review of our 2019 guidance and updated China Direct AP1000 financials. Finally I will return to wrap up prepared remarks with a discussion on several strategic topics including plans for capital investment in our DRG business and update on our capital allocation strategy. And lastly the establishment of new three year targets supporting our drive for long-term profitable growth. After that we will move to Q&A. Starting with the fourth quarter highlights, we delivered yet another solid quarterly performance with adjusted operating margin, diluted earnings per share, and free cash flow ahead of our expectations. The net sales increase was led by strong double-digit organic growth in the power generation market due to higher AP1000 and domestic nuclear after market revenues. Our results also reflect the contribution from our DRG acquisition in the power segment. The increase in adjusted operating income was principally driven by strong profitability in the power segment while adjusted operating margin was essentially in line with last year's strong fourth quarter. This performance resulted in adjusted diluted EPS of $1.90, a 25% increase over the prior year and includes the benefits of lower interest expense driven by a $50 million debt repayment made -- lower effective tax rate and continued share repurchase activity. We generated very strong free cash flow of $214 million in the fourth quarter resulting in a free cash flow conversion of nearly 260%. Turning to our full year 2018 highlights, we experienced sales increases in all of our end markets driving sales up 6% overall and 3% organically. Total…

Thank you Dave and good morning everyone. Moving to our 2019 guidance beginning with our end market sales where we expect growth of 3% to 5% overall with gains in all of our end markets. In the defense markets our overall sales growth reflects the continued benefit from the favorable trends in defense spending including an additional quarter of sales for DRG and our first full year ownership. In aerospace defense we expect sales growth to come from higher demand from better computing products supporting the ramp up on the F-35 program as well as higher sales on the Black Hawk, Apache helicopter programs. This growth also includes some system sales that we previously expected to recognize in 2018 as mentioned on our third quarter call. In ground defense sales growth is expected to be driven by higher sales on the Abrams tank and Bradley fighting vehicle platforms as we expect to benefit from the long awaited monetization of these programs. And in naval defense we expect sales growth to be led by the ramp up on the CVN-80 aircraft carrier program and higher Virginia class submarine revenues. Moving on to the commercial markets, commercial aerospace sales growth is projected to benefit from improved demand for actuation, the sensors equipment, and surface treatment services primarily supporting [indiscernible] platforms. Included in this guidance is a $20 million offset from a combination of reduced revenues from previous FAA directives that continue to wind down and the delay in the signing of a new supply agreement with Boeing. Otherwise core OEM growth is expected to be 9%. In power generation we expect a modest increase in revenue growth on the AP1000 program. As you will see in the updated revenue projection that will be discussed in a few minutes, we still expect 2019…

Thanks Glenn. Next an update on the integration of our DRG business which is going quite well. We continue to integrate DRG into our H.R. and finance and ERP systems and are on track as planned. Given the sophisticated and critical nature of Curtiss-Wright's technology and intellectual property we are investing $3 million in 2019 to support DRG's IP security infrastructure. To continue to grow this business we are investing the necessary capital and resources to position us and deliver long-term growth and margin expansion. Accordingly we have broken ground on a new state of the art naval facility in Charleston, South Carolina which we expect to be operational in 2020. This timing aligns with the conclusion of our two year supply agreement with Siemens. The new facility will enable us to optimize capabilities and improve our cost structure by establishing more efficient production processes. In addition we are investing $20 million for new capital equipment that will provide long overdue upgrades to critical steam turbine machinery and equipment. This new location will also provide future cost saving opportunities to our customers based on its proximity to deepwater ports in South Carolina. Combining Curtiss-Wright's existing naval defense capabilities with DRGs mission critical equipment and service centers yields a formidable force for our end customer. This capability enhancement along with increasing naval defense budgets signal a very bright outlook for Curtiss-Wright's naval defense business. Next an update on our capital allocation strategy. Since 2013 I'm proud to say that we've accomplished the following, returned nearly $850 million to shareholders through share repurchases and dividends, share count has been reduced by 8.7 million shares, we've completed two significant acquisitions for nearly $500 million and we spent $500 million on operational investments including CAPEX, voluntary pension contributions, and debt prepayments. If you recall…

[Operator Instructions]. Our first question comes from the line of from a lot of Peter Arment of Baird. Your line is now open.

Thanks, good morning Dave and Glenn. Hey, I guess thanks for all the targets and the updated information on the China Direct. I guess I just wanted to talk I guess about the new long-term targets initially. When we think about just your sales outlook in the kind of the 17% adjusted margin target, is there any way to give us a little color how you think that plays out with the individual segments?

Well Peter I'll talk to the models we prepared. We prepared several scenarios you know to get to that -- these targets. I have not broken them down specifically by segment but we've done several models with EBITDA assumptions and say 12 axis is one scenario we didn’t and if we did that we have to spend probably $210 million to $375 million on acquisitions over the next three years each year. Or between 600,000 and 1.1 billion in total in the three year period. We expect to utilize our revolver and again use our strong cash flow to pay it down. From a debt to cap we would go from 36% down to 30% in that scenario over the three year period so we feel we have plenty of room from a leverage standpoint to do what we need to do. But I don't really have that broken down by segment. Getting to our 17% margin does include our continued margin improvement initiatives that again would also help us get to that 17% but I'm sorry I don't have it by margin -- by segment.

Okay, and then just as another follow up, I guess specifically on the quarter organic growth was down again in kind of defense and it was down again in Q3 and I think you're expecting -- I'm talking about specifically defense segment. You know is it just -- do we just view this as timing associated with the projects that you're working on with the naval business or maybe just some additional color there?

I mean I talked to the person who heads up that division. I mean we haven't lost any programs. It is -- a good portion of their businesses look at them and you can try to predict when you think you're going to get the orders but the customer controls that. So you are seeing some ships in the 2019 and our aero defense is up in 2019 by 10%. So you're seeing that flow into 2019 but there is timing issue.

Okay, and then just one last one, just related to filling the revenue gap from China Direct, you mentioned that you're going to do it through increased defense revenues, just do you have a line of sight on those revenues or just based on what the projects that you have in backlog or at least on the programs of record? Thanks.

No, we have line of sight. I mean it comes from our strategic planning. I mean the CD and AD peaks agreement 2020, the JSS is going to continue. I mean we have aligned it for long term defense programs that we have a good line of sight on.

Okay, appreciate the color. Thanks Dave. Thanks Glenn.

And our next question comes from the line of Michael Ciarmoli of SunTrust. Your line is now open.

Hey, good morning guys. Thanks for taking the question and I love seeing the new target out there. Glenn maybe just to follow up, just the clarity, I don't think I heard you in that first comment, how much M&A did you say would be needed to accomplish the 5% to 7% CAGR, did you say a $1 billion.

I said between $600,000 and $1.1 billion over the three year period.

Got it, got it, okay. And just on that target I mean, the margin getting up to 17% presumably you said you don't have any more AP1000 orders in there, you've got -- not only do you have that little bit of a revenue gap which you guys have managed but presumably you're going to have a down take of some of those higher margin revenues. So I know you didn't give us any color by segment but can we sort of assume that maybe the profitability profile in power you know might have a little bit more pressure on it. And you kind of see maybe some margin expansion in the other two segments just given that the AP1000 at 23% sort of rolls off here, is that a fair way to look at that.

That is absolutely a fair way to look at that.

Okay, and then just maybe a couple of housekeeping items, I think you mentioned in the prepared remarks a delay in your agreement with Boeing. Can you just elaborate on that and if there's any potential margin pressure you might see as we sort of know what Boeing is trying to do to its suppliers, maybe just give us a little more color there?

You know we feel, Mike this day we go through this -- the contract negotiations every two to five years and we're basically in the same point that we've been at for several years. And it's been a little bit of a delay on the negotiations on it. And if anything it would mean a uptick in margins going forward. You know we've talked a lot in the past about the business that we have, with the mainstay of Curtiss-Wright is high IP proprietary type business and products niche oriented and so forth. And so we look with somewhat of a jaundice eye at some of the more let's say common parts that we might do like build a print and so forth. So that's part of the negotiations and like I said I think that going forward you'd see an uptick as a result of this kind of a delay and anything else that might be associated with it.

Okay, that's helpful. And then just back to the AP1000 maybe just two items. I know you didn't include any potential future orders but maybe Dave can you give us sort of the state of the union on what the marketplace looks like. I know Saudi Arabia has launched some pretty broad infrastructure spending plan? And then Glenn just on the gap, you talked about back filling that gap with defense but I'm just thinking about the overhead side. Well a lot of those potential revenues be able to flow through the Cheswick facility where you have excess capacity there and it sounds like you should be able to utilize that capacity but how should we think about that and I'll jump back in the queue here guys?

No, you're right. I mean a good chunk of it is obviously on the Navy side, it's going to flow through Cheswick and we have been modeling that for several years now as you know and the gap obviously become a lot more manageable as well. But yeah, a good chunk of it will come through Cheswick. But you're also going to have the fighter jets and things that come from other parts of the business as well.

And let me get to Mike's other half and that is on relative to the State of the Union if you want 1000 beyond what we said in the prepared remarks they say Everything's going good, we've got a commercial operation in all the sites that they've declared so far and there is a lot of interest. Saudi Arabia they've got several different countries basically quoting for their next iteration of power and where it's going to come from and certainly the AP1000 is one of those India still very strong and that's still I'm looking at a couple of years out at least. It is just going to take them a while and we're still working this indemnification stuff and I believe that we will get over it but that market is very big, India is, and then China remains the world's largest. We are still looking at a total of $4 billion market for the reactors coolant pumps. And then I've said in the past if we got only half of those it would be happy with that but we went in and gave you the bold statement here that we're not putting orders in for the next three year period, we're not forecasting that. And I guess that's pretty much the staple of our diet here at Curtiss-Wright as you've grown to know us and that is under promise and over deliver. And if the order comes in wonderful, if it doesn't then okay we didn’t plan on it and it's not that we're not planning on it, it is that we're just being conservative. It's not that are we are not intending for it to come in eventually, we're just being very conservative in our approach on this one. So the outlook still remains really strong for the nuclear side especially in the commercial side.

Got it, thanks a lot guys, I'll jump back in the queue.

[Operator Instructions]. Our next question comes from the line of Myles Walton of UBS. Your line is now open.

Good morning.

Good morning Myles.

Dave I was hoping you can talk a bit about the pivot on the capital deployment and any constraints that you're putting on that pivot as it relates to ROIC or hurdle rates and how those are similar or different to what you've had kind of over the last few years since you turn the spigot back on for M&A?

No, we actually haven't changed the ROI targets 10% year three, 12% by year five. And hurdle rates we're still looking it from up multiple. We liked the last tool that we bought and until what we feel exceptionally good about those one of them has been accretive from the get go, the other one with the changes that we're implementing on this new $20 million investment, that's going to bring them up to exactly where we expected them to be. So if you like the last two then you should love the next ones that we look for and hope to find. And so that's just really again the staple of our diet, it is more of the same and it's proving us right that we can do it. We earn the right to do it, we're not going to throw away that right that we earn. So I expect it to keep going. We've got -- a little -- just being a little more specifically into what we're more interested in is from a targeting perspective. It's got to be proprietary, high barriers to entry. We love customer diversification although I know it gives you guys some headaches in terms of trying to figure this out but that diversification gives us a lot of anti cyclical sort of problematic issues like recessions and stuff, solid operating margins so it's not dilutive. And then in areas embedded computing for example on the military side and some of the industrial side so we like to see ISR, we are going to continue to focus there. And a lot of opportunities and then on the industrial on our highway we have this on the project that continues to grow and ramp up with a lot of interest from our customers. Same industrial balance, we like those, chemical water market is great. We're just not interested in a pure play oil and gas, we will avoid that as we've stated in the past. And then I guess you've got some sensors in there that we continue to look for but that's once again a very niche oriented play. So we've got our feelers out there on a lot of opportunities and kind of more to come but we do expect that we will be able to achieve that.

And maybe I missed it, the 5% to 7% total sales CAGR, the implied organic is it about half that or so, is that what's…

You know it is roughly 3 to 5 and then let's say some acquisitive maybe in the range of 3ish.

Okay, okay, got it and then just maybe one last one, when you look back at the target for sales since 2013, obviously that didn't hit the mark, was that and you turned up a dial on R&D. Here I guess it's a 30 basis point headwind or so for 2019, would that have helped you do you think looking back to be turning up the dial on R&D, did you know where to invest, and then is that what you think is going to kind of move you from what's been a 1% or 2% organic growth to 3% to 5% organic growth?

Yeah, I think the turn of the dial probably three years ago on R&D is really a turning point. I would say A) because it is one of several that will move that organic side. We also started a significant focus on the organic side meaning we as I just indicated on for example some of our commercial aerospace stuff, if it doesn't meet the criteria that we have built them for -- rates relative to margins so far then we're not going to pursue that. But when it -- so we really drove a very specific approach to it but then on the R&D side I will throw out a couple things that we have worked on and spent money on. And with long-term values of -- anywhere between $3 million and $10 million the tilt sensors that we have developed these are for primarily work platforms and off highway vehicles. And that's some something that's somewhat associated with on the cab, but there's an example, the next generation flight test or the classic flight test and then now a more growing demand that we found in the last three years and certainly after we acquired TTC and then have been growing aircraft for more of a permanent fit for flight test information, a big data kind of stuff. And when you get a permanent fit that for us that really is meat on the bone because flight test now goes up in a plane and it's a bunch of planes but it doesn't go up in all the planes. So now with the next gen with a permanent fit well, that would go up in every plane. So there's an example of the one plus one would equal 3 or 4 trusted carts, cyber security, anti-tamper technology again…

Okay, well thanks for the color. Thanks guys.

And our next question comes from the line of Nathan Jones of Stifel. Your line is now open.

Hey good morning, this is Adam following on for Nathan. Kind of shifting subjects, general industrial market sales growth was driven by a solid demand for industrial valves so wondering if you can give some color on that, are you seeing any pickup in MRO spending, is there any projects that need downstream and I think your 2019 guidance also called strength there, so any color there would be great?

Yeah, it is both projects in MRO. A little bit higher internationally than domestic but it also includes subsea pump in that particular category and new industrial pumps valves category. But it's again both projects in MRO mostly international is higher than domestic and includes subsea pumping being up as well.

Yeah, it is helpful. And then just price, cost, and tariffs, you guys have managed pretty well there, maybe some raw materials are coming down a bit, maybe just talk about price cost and then also on supply chain if there's any discrete items out there that we're not really thinking about, they're harder to source maybe electronic components or something like that?

Yeah, I mean we continue to monitor the whole global power situation and have been addressing any cost issues with our supply chain including alternative sourcing or raising our prices if necessary. So based on the tariffs and active debate on what we have done we had $2 million net impact primarily in the fourth quarter of 2018 in the commercial industrial segment. For 2019 we're expecting $4 million incremental impact to the commercial industrial segment. The gross amount was originally $8 million so we've been able to essentially mitigate 50% of the impact. Most of the waves 1 and 2 of the tariffs mostly impacted our industrial valves on the CNI segment and the third wave mostly impacted the electronic components and accessories for motor motorized vehicles again also following the commercial industrial segment. From a cost standpoint the only thing we really experienced, I think we've said it before we are not hearing a preponderance of input costs are going up but we have seen shortages in some of the electronic components that are in our defense, these are capacitors and things where just supplies is greater than -- way greater than demand. So that's caused a little bit of disruption and some increased cost to expedite products and things like that. But other than that we haven't really heard a widespread cost increase in it.

Oh it is great, thank you guys.

[Operator Instructions]. Our next question comes from the line of Kristine Liwag of Bank of America Merrill Lynch. Your line is now open.

Good morning guys. For your 2019 to 2021 target what are you assuming for the AP1000 in that 5% to 7% total sales CAGR? And what are you assuming in terms of deals in that number and that 850 adjusted diluted EPS by the end of 2021?

Yeah, we are assuming no new orders on the AP1000 so just our AP1000 order right now in the target. We said for the inorganic growth we got to spend between 600,000 to 1.1 billion over the three year period to achieve our goals.

That's helpful and on the Navy, we're starting to see some operational risks in the Navy supply chain. In the past few months we've seen issues with missile tubes and even issues on the Virginia class submarine which has been in serial production for some time. It seems like experienced labor is pretty tight and maybe contributing to some of these issues. With your now higher Navy content with just your end, how do you think about managing operating risk in your Navy business? And also if there's a two carrier buy that is approved and funded, is there upsides to your Navy growth in 2019?

From the operational side Kristine we're not seeing any real hurdles in terms of manpower operationally to Cheswick and Bethlehem in Wellsville and across the different Navy sites. New York Long Island we haven't found that to be a problem and as a matter of fact if anything we've probably got excess capacity in terms of labor and because we were becoming so efficient. So that has not been a hurdle for us. We have demonstrated to the Navy on more than one occasion and in each of the sites that we are absolutely capable to handle what it is that they've given us and going forward. And then relative to the additional block by and do nothing in 2019, it wouldn't benefit 2019. What it basically does from my perspective, Glenn might want to add to this but what it basically does it gives you certainly long-term visibility of tenth year build cycle with the 5 and 5 for building a carrier. And so I would be delighted to have that happen. I think you'll probably get some purchase side -- purchase pick up there on PBM, PVB for some parts but that assumes that orders are all delivered down at the same time and which they're not yet but in any case certainly cements a longer0term visibility profile for us which we love.

I mean it's definitely going to be positive to us. We did see the Huntington Ingalls order back in January which is a good sign, a good start. But [indiscernible] should enable them to build these characters, built every three to four years. So, with our $380 million content it used to be over POC of give years. Obviously if we move that up and layer it on top of what we're doing now it's going to be positive for us but until we know the procurement pattern or the plan we can't really tell. We don't have anything in our guidance for that either as well. So that would be upside to us whenever we get the information.

That's helpful and switching gears on power when I look at the midpoint of your 2019 revenue outlook of 685 million and I look at your 2018 reported revenue of 648 million that's a difference of 37 million. But if I take out your 9 million expected growth for AP1000 that's only giving you $28 million revenue growth for the rest of the segment. I guess I would have thought that that should have been higher with the timing of Dresser-Rand since that closed midyear last year, is there anything that I'm missing?

No, no, I don't think so. It is -- there is incremental sales obviously on CVN-80 and the Virginia Subs are up. There's probably some offsets in there too that not thinking of but you do have another quarter of DRG in here as well. So I think you got a little pieces.

Great, thanks guys.

And our next question is a follow up from the line of Peter Arment of Baird. Your line is now open.

Yeah, thanks. Just a quick one and exciting subject of pension Glenn. Any kind of commentary that you can give us on updates on the pension or any contributions that you may have to make in here when you're thinking about your 2019 to 2021 targets? Thanks.

No, no major changes in our assumptions but we did make that voluntary pension contribution in the first quarter of last year, $50 million contribution and since then we don't project any further contributions for the next four years, five years probably including last year first. So no contributions on the horizon as of today.

Great, thanks Glenn.

And I'm not showing any further questions at this time. I would now like to turn the call back to David Adams, Chairman and Chief Executive Officer.

Thank you everyone for joining us today. We look forward to speaking with you again during our first quarter 2019 earnings call. have a great day. Bye-bye.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a great day.