Ladies and gentlemen, thank you for standing by, and welcome to the Curtiss-Wright First Quarter 2020 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Jim Ryan, Senior Director, Investor Relations. Thank you, sir. Please go ahead.

Thank you, Cassandra, and good morning, everyone. Welcome to Curtiss-Wright's First Quarter 2020 Earnings Conference Call. Joining me on the call today are Dave Adams, our Chairman and Chief Executive Officer; Glenn Tynan, our Vice President of Finance; and Chris Farkas, our newly named Chief Financial Officer. Our call today is being webcast and the press release as well as a copy of today's financial presentation is 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, including the impact of a pandemic, such as COVID-19 in our public filings with the SEC. As a reminder, the company's results include an adjusted non-GAAP view that excludes first year purchase accounting costs associated with acquisitions, onetime transition costs associated with the relocation of the DRG business, and the restructuring costs in 2020. Reconciliations for current and prior year periods are available in the earnings release at the end of this presentation and on our website. Any references to organic growth exclude 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. Good morning, everyone. I'll begin today with a review of the operational impacts of COVID-19 on our business, highlighting some of the critical actions we've taken in response to this pandemic. Then I'll provide some highlights of our first quarter and lastly, introduce our latest succession planning success story. Chris will then provide a detailed review of our first quarter performance and outlook as well as our strong balance sheet and liquidity position. Finally, I'll return to wrap up our prepared remarks as we head into Q&A. On behalf of Curtiss-Wright, our thoughts and prayers go out to all who have been affected by the COVID-19 pandemic. Since this crisis began, our number one focus has been taking the necessary steps to ensure the health and safety of our global workforce. On behalf of our entire organization, I want to thank our employees for their perseverance and willingness to adapt in these challenging times. As an organization, we have been closely following the CDC guidelines, practicing social distancing and working from home where appropriate across all of our facilities. While the majority of our manufacturing sites worldwide are operational today, several have been impacted over the past two months, due primarily to customer-driven delays as well as government-mandated closures. As we discussed on our February earnings call, our operations in China were experiencing a minor disruption from COVID-19, and I'm happy to report that those operations are currently up and running at 100% capacity. Currently, the majority of Curtiss-Wright's operations around the world have been granted essential business status, which will help us navigate through this downturn. A bright spot within our portfolio is the continued Defense business, which provides significant insulation to our overall sales and profitability from the impact of this pandemic. Together our team is…

Sorry didn't take it off mute. Thank you, Dave, and good morning, everyone. Over the course of my career, it has been a privilege to lead a tremendous team focused on developing world-class finance and IT organizations, building and sustaining a strong balance sheet and driving significant free cash flow generation. Over the years, I have built and enjoyed extensive relationships with our employees, our management team, the Board of Directors as well as the investment community. I will surely miss the regular interaction with all of you. Chris and I have worked closely together for more than 10 years as he assumed increasing levels of responsibilities at Curtiss-Wright. I look forward to working with him over the coming months to support his transition into the CFO role. From an IR standpoint, Chris has been an active participant in our investor conferences and meetings throughout the past 2.5 years, and I am pleased that many of you have had the opportunity to get to know him. I wish him the best in his new role and have absolute confidence that he will continue to be a key driver in Curtiss-Wright's success. Now I'd like to turn the call over to Chris to provide a more thorough review of our first quarter performance and our outlook for 2020. Chris?

Thank you, Dave and Glenn, and good morning, everyone. I'm excited to lead our world-class finance organization and to work with the outstanding leadership team and Board to continue to execute on our long-term goals and deliver sustainable value for our stakeholders. Turning to our first quarter results. I'll begin with a review of our end market sales. Overall, we experienced a 26% increase in sales to our defense markets, 20% of which was organic. Meanwhile, sales to our commercial markets declined 11% as conditions began to worsen late in the quarter due to COVID-19, though the overall sales impact was not material. There are a few items I'd like to highlight on this slide. First, in naval defense, we experienced solid revenue growth on both the CVN-80 and CVN-81 aircraft carrier programs, as both are anticipated to ramp up in 2020, following strong orders in 2019. Shifting to the commercial markets. Sales in the commercial aerospace market were down slightly, reflecting customer production slowdowns and plant closures, which began to impact our performance late in the quarter. This was partially offset by the steady production of actuation equipment on the 737 MAX program. In General Industrial, our performance reflects a combination of market-specific drivers and a general drop in economic activity due to COVID-19. And in industrial vehicles, which includes products serving the on-and-off highway markets, sales were expected to be down, mainly due to reduced demand in the on-highway market. Finally, in our surface technologies business, which is most closely linked to global GDP growth, demand was essentially flat earlier in the quarter, but began to weaken as the quarter progressed. Next, I'll discuss the drivers of our first quarter operating performance, which is a reminder, is presented on an adjusted basis. In the commercial/Industrial segment, our results…

Thanks, Chris. Next, I'd like to review some of the cost containment and cash preservation actions that we began implementing in the first quarter. We expect these actions will enable Curtiss-Wright to emerge as an even stronger company once this pandemic subsides. First, I'll outline some of the procedures in place to protect our profitability. We immediately focused on reducing our operating expenses, particularly cutting discretionary spending across the organization. We are implementing furloughs from the corporate office to the operating units across the globe. And as is typical and unfortunate in these types of environments, we are implementing workforce reductions where necessary to align to future market demands. Next, in terms of our plans to preserve free cash flow and improve liquidity, we are aggressively managing working capital and have suspended all nonessential capital expenditures. Additionally, we are closely monitoring potential benefits resulting from changes in legislation, including tax deferral and seizing government contracting opportunities. The final set of actions is driven by Curtiss-Wright's strong financial and operational discipline, which has allowed us to remain active in terms of shareholder distributions thus far in 2020. As the share price began to decline, we executed an opportunistic share repurchase program in March to provide a cushion as we face certain reductions in sales and profitability. In addition, as a testament to our ability to maintain strong free cash flow in the face of adversity, we have maintained our quarterly dividend payment. In summary, Curtiss-Wright remains well positioned to weather this challenging environment. We enjoy a diversified business mix with defense markets approaching 50% of our total sales. Our outlook in defense remains positive and is supported by a solid backlog and order growth. Our commercial markets will no doubt be impacted by the reduced pace of economic growth, and we are implementing the necessary cost containment measures to reduce that impact to our profitability and free cash flow. We have a strong and healthy balance sheet and continue to seek profitable acquisitions to bolster our top line growth. We expect to maintain a very solid free cash flow level in 2020 with a targeted adjusted free cash flow conversion rate of at least 100% despite any potential impacts from COVID-19 on our operations. As we progress through the next few months, we expect to gain additional insight into our operations, customers and suppliers and will reinstate our guidance when the timing is appropriate. Overall, we are confident that Curtiss-Wright is taking the prudent actions required today to continue to deliver long-term profitable growth for our shareholders. At this time, I'd like to open up today's conference call for questions.

[Operator Instructions] Your first question comes from the line of Peter Arment, [Robert W. Baird].

Hey, good morning, Dave, Glenn, and Chris.

Good morning.

Good morning.

Congratulations, Glenn and Chris to both of you. Glenn it's been great to work with you all these years. So you will be missed.

Thank you.

Thank you.

So Dave, just on the cost containment efforts, can you maybe just think – walk us through what you think might – is this – a lot of this will be temporary in terms of your effort to – when you take these actions? Or do you think that you'll be able to keep some of these cost takeout measures on the other side of COVID-19.

So I think generally, as I indicated on the narrative there, we're spending the $28 million to gain, what will – we consider to be at least $20 million, which we had stated in the last call. And as Chris indicated, it's possibly going to be more than that. There's going to be some of it that sticks, I believe, and so it will be a longer-term prospect in that as we've sort of rejiggered our recession planning playbook, which we did institute, and we took that into consideration last year. And started working to that angle with consolidations and so forth. Now you get to a part where you have furloughs and/or RIFs, some of those will be – certainly, the furloughs will reinstate those we can anticipate in over a period of time, certainly, the RIFs, some of them will be coming back, I'm sure. But for the most part, as we rejiggered that recession playbook and the $28 million spend, we had to take into consideration what further actions we could take, given the indeterminate time frame that we're dealing with this pandemic, should it resurface again toward the end of this year or every year as someone describing it as a possibility. So I'd say, Peter, it's not easy to quantify, but I would think that some of them will be more permanent and others will be on a more temporary basis as we get this thing geared back up again and industry will start coming back, and we're able to hire some of those people back.

Okay. That's helpful. And then just quickly on defense, you had 20% organic growth, really impressive. I know you're not giving guidance, but originally, I think Defense was talked about being up 8% to 10% for the year. Was this due to timing more or less in this quarter? Or was it – or is there a potential upside just given how strong the – your position is in the navy defense?

I'll just – I'll give you a brief top level answer and let Chris follow-up with some more specifics. It's been extremely strong on the naval shipbuilding side, as you know. And orders continue to look really strong in that regard. We've had some – we've won, for the most part, those that are – most of it is sole source. But for those that are not sole source, we've done a very good job of securing those long-term pieces as well. And then our embedded computing group has done exceptionally as well as the shipbuilding side. So across the board, it looks great. I mean the defense sector, we're happy to be where we're at with it. And that's why we really like the mixed market industrial base that we have. And it served us well and will continue to – with regard to the longer-term outlook and maybe what's pushed it in the more immediate time frame. Chris, do you want to add anything to that?

Yes. I would just say that Q1 is – there is some timing that's going on there. Again, we are maintaining a very positive outlook for growth in defense for the full year within aero/defense. We'll see growth from the sale of actuation equipment as well as embedded computing products across key platforms such as the F-35, various helicopters and UAVs. Within our naval business, we have a very strong backlog and DoD support. As you know, we're entrenched on the 80/81 programs, the Columbia class and Virginia class submarine programs. And we'll have a $50 million contribution from the 901D business this year as well. We may have some headwinds in the timing of foreign military sales within our ground business, but it's still very early in the year, and we'll need more time to kind of sort that out.

Thanks for all the color. I will jump back in queue. Thanks.

Thanks Peter.

Your next question comes from Nathan Jones of Stifel.

Can you hear me?

Yes. Yes.

Okay. So I'll have my congratulations to Dave. Sorry not to Dave, to Glenn. I'm retiring you early Dave. Maybe if I could ask. I mean you're obviously looking at pretty good defense markets here. I think the power market will – segment will probably be in the middle and commercial/Industrial, will probably be the worst if they are, stay at least in the second quarter and probably for the year. Is there any additional color you can give us or bands you can give us on the expectation for 2Q revenue between the segments to get to that down 25% to 30% in aggregate?

Yes, I want to be clear. I mean the 25% to 30% is really the decremental margins that we're expecting on reduced revenues. And we are, as you said, expecting the second quarter to be our weakest quarter. I mean, mainly driven by headwinds in commercial aero, industrial vehicles, valves and surface treatment services. However, we are expecting higher naval defense orders on aircraft carriers and submarines for the second quarter. For the full year, as I said, we're maintaining a positive outlook for the defense markets, naval defense. We have a strong backlog, but we will face headwinds in those same markets, commercial markets on the full year.

May be I can phrase that correctly. You guys have said you think revenue in the second quarter will be down 25% to 30%. I was wondering if you could give us any color or any ranges on how that breaks down between the segments?

Yes. I mean, we're not – we won't be able to provide specific information at this point in time regarding the expectations for sales decreases, but the two main drivers for the second quarter will be within commercial aero, and they will be within general industrial. Headwinds in the commercial aero market, we're expecting wide-body to be hit harder than narrow body. The CW has a greater weighting towards narrow-body products. Our actuation group is still producing at 52 per month on the 737 MAX. So we have stability there. And sensors and surface treatment services will be down but producing in line with Boeing estimates. And then in general industrial, I mean, the headwinds are driven by the overall market. And as you know, it's more GDP sensitive.

Okay. Fair enough. I wondered then if maybe you could talk a little bit about – as we're starting to reopen economies now, you're starting to hear more about government news every day, which of your businesses do you think will be quicker to recover versus which do you think are going to be slower to recover or more secularly challenged here?

I think, generally, the its surface technology side. I look at it that way, as I've indicated for years that, that's our weather vane. And when things go down, they tend to go down first right there. And if we look back probably six months ago, nine months ago, maybe we were seeing a little bit of a challenge in terms of our outlook with regard to particularly business emanating from Europe. And that was sort of a precursor of what we all thought was recession. And then obviously, the COVID just has hit everybody by surprise, that was a slamming-of-the-door kind of deal. But I would think that with a short-cycle business that, that is, we would see that starting to pick up early on as inventories start to increase in some of the factories out there. They need some of the products that we do upfront because it goes from raw material to a manufactured part and then directly into our surface technologies businesses, which will apply coatings or shot peening or whatever is necessary. And so it's a very early step in that process. So I would just – my conjecture is that, that would be the case. I don't know what else I might add to that. Chris, do you have anything that you would add to that?

No, I think that covers it, Dave. I mean we've got our short-cycle businesses, and they tend to be within the Commercial/Industrial segment. We'll see the rebound there first.

Okay, thanks very much for taking my questions.

Thanks, Nathan.

Your next question comes from the line of Michael Ciarmoli of SunTrust.

Hey, good morning guys. Thanks for taking the questions, Glenn, pleasure working with you over the years. It's been in a while. So congrats, try and keep the blood pressure down this fall watching the Giants. And Chris, Congrats.

Thank you.

It's nothing like taking the reins with a lot of market tailwinds here. I guess just on commercial aerospace, I just want to make sure I understand this for – just for modeling. The 737 MAX, so you're in a good position now where you can keep shipping under this new contract at a rate of 52 per month, but how should we think about next year? I mean if Boeing is only going to do 100 – I mean, you might – they might have enough inventory for all of 2021 and probably some of 2022, and I think you guys have about 190,000 of content. So should we think about realistically, maybe $120 million whole next year on the MAX? Assuming – I mean, even best case if Boeing is only doing 31 a month at some point next year. It still seems like they're going to have a lot of inventory there?

Well, we take this forecast, particularly with the commercial aerospace as being a part of a portal and one that we access in terms of the need and driven largely by that. But so we take it. Basically I'd say I was going to say one day at a time, but might be even one quarter at a time as that portal does change. And we haven't gone out that far. We don't have to at this point. So I've talked about this for a long time that with that business, when the contract comes back up for discussions and whether or not we see value in it is really the revenue associated with it is largely dependent upon that. So depending on where that is and then where the need is, then we'll readdress it when that comes around. But right now, we're just – we're not at that point. We feel fortunate that we are under contract to ship these at the rate we are for the balance of this year. And then I think some might leak over into next year. But in any way, it's something that we haven't forecasted or projected at this point.

Got it. But it is 52 a month for the rest of this year, and that's pretty ironclad?

Yes.

Okay. And then maybe just on the short-cycle businesses, the surface treatment. Can you guys just maybe even give us some color as to what maybe the trends in ordering activity looked like in April and even quarter-to-date, maybe diving into some of those – the auto exposed end markets, kind of what you're seeing out there?

Yes. I mean, I can't really comment too much on April Mike, I mean, it is going to be – orders are going to be in line with our estimates for revenues and margin, which it will be our weakest quarter. Though the impact to Q1 was very immaterial. I would say, as we got deeper into the quarter, maybe within the last 2 weeks or so, we started to see some weakness in order patterns that were coming out of general industrial and within our surface treatment businesses. But we've seen some drops in global GDP. The surface technologies business has content across most of our markets. But there are concentrations in commercial aerospace and there are concentrations in general industrial. So we really can't offer much more than it will be our weakest quarter.

Okay. Last question on free cash flow. Inventory up sequentially from the fourth quarter. Should we think about inventory destocking being a source of cash as you go through the year? Or just maybe if you could maybe decompose the kind of what you're trying to do with working capital to drive some cash flow.

Yes. I'd be happy to, Mike. Back in the first quarter of last year, I think we were at about $447 million in inventory, and we've only increased $2 million year-over-year, and we were expecting back in February that we ramp our sales growth up 4% to 6%. So our inventory position is actually pretty good, I think, year-over-year, when you look at the quarters, but we have taken several actions to preserve liquidity on the full year. I mean besides the cost containment actions that Dave spoke to you about, within our – I'll break it down by component within accounts receivable, we've reallocated resources within our shared service centers to focus more on collections. We've implemented COVID-related credit risk assessments that kind of evaluate companies not only by their creditworthiness, but also the geography in which they operate in. We are experiencing some pressure for short-term extension of payment terms with our customers, but we're managing and demanding value in return. On the inventory side, we did do some pull forwards with defense suppliers, and we implemented DPAS, DX priority ratings to create stability, where we felt it was appropriate. But as you look across our overall inventory, particularly on the commercial side, we're scrutinizing risk orders and buffer stock in response to the expected changes in volume. For accounts payable, we're stretching vendor payment terms where appropriate, and we're absolutely reinvigorating our supply chain finance efforts. We've suspended nonessential purchases and CapEx. And David mentioned, we are utilizing other government programs such as the CARES Act and the federal acquisition regulations to improve cash flow. We're increasing our progress payment rates from 80% to 90%. We're seeking advanced funding on military programs. And we're deferring tax payments where we had the ability to, such as in social security, federal, state or foreign tax payments.

Perfect, good color. Thanks guys. I will jump back in the queue.

Thanks, Mike.

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

I didn't know if you guys are blocking me out. Remember your first roadshow 18 years ago. It's been a long time, congratulations.

Thank you. appreciate it.

You gave color on some of the softness by end markets. And I guess, I know you don't have a crystal ball like nobody else. But I'm curious, in your first quarter, what you observed in your industrial businesses, how did they fare up to what you were baseline assuming at the start of the year? That is how much of the COVID impact started to hit you in March? And then maybe if you can just give any real-time data points you'd want to share as you looked at the April results so that we can better triangulate the near term?

Yes. We really aren't going to provide much on April at this point. We just other than we are expecting it to be our weakest quarter. I mean, things are changing rapidly here. And we're managing through the environment. I mean the impact to Q1 from what had happened with COVID was fairly immaterial. I would say that the impact on sales was less than $10 million across our commercial and industrial businesses. It hit us very late in the quarter. As we look at Q1, it was $1.34 of EPS. We were 3% up versus the prior year. We did have higher defense revenues. That was mainly driven by the defense segment and the strength of our position on naval and defense aero contracts. A small headwind in FX transactional losses and a little bit of tax headwind in front of us as well. Our effective tax rate for Q1 was 26.6% versus the 20.9% year-over-year. But overall, I think we had a very good first quarter. Didn't really see much of the effects hitting us. And we are starting to see those impacts, and that's reflected in our forecast for Q2.

Okay. And then I guess the other side of it is, as it relates to the commercial nuclear aftermarket, pretty big size in a relative proportion. I'm less familiar as to how that kind of responds economically. Usually, it's not terribly economically sensitive, but I understand the COVID and the social distancing aspect. Is there any way to think about how we should think about the downside there?

We were – within the power generation market coming into this year, we were initially expecting modest declines based upon the timing of international projects and some of the things that we saw this last year. Related to COVID, we will have some headwinds. And the social distancing is causing some delays in international orders and project scope reduction at some of our – the plants that we service. But very early in the year to say anything further on that at this point. When we look at the CAP1000 program, while we haven't seen any delays to date, there could possibly be a slowing effect on the cadence of revenues based upon potential delays in the receipt of approvals from China, but it's way too early to tell. We'll have to see how the year progresses.

Okay. All right. And then the last one on cash flow. So the CARES act from a tax perspective and maybe getting tax refunds on lookbacks, the progress payments from the DoD. Are either of those two going to be material helps to you for 2020? Or is it more just what you already described in terms of managing normal working capital dynamics in the downturn?

Yes. I wouldn't say that the progress payment rate increase is really going to be material to our free cash flow. I'd estimate that impact of less than $5 million across the corporation. If we defer the tax payments out of 2020, there'll be more significant effect on the deferral of social security.

Okay. Alright, well thanks again.

Thanks, Myles.

I am showing there are no further questions at this time. I would now like to turn the conference back over to Dave Adams, Chairman and Chief Executive Officer.

Thanks, Operator. And thank you all for joining us today. Stay healthy out there, and we look forward to speaking with you again during our second quarter 2020 earnings call. Have a great day. Bye-bye.