Welcome to the Curtiss-Wright Second Quarter 2023 Earnings Conference Call. At this time, all participants have been placed on a listen-only mode, and the floor will be open for your questions, following the presentation. [Operator Instructions] I would now like to turn the call over to Jim Ryan, Vice President of Investor Relations. Please go ahead, sir.

Thank you, Carrie, and good morning, everyone. Welcome to Curtiss-Wright's Second Quarter 2023 Earnings Conference Call. Joining me on the call today are Chair and Chief Executive Officer, Lynn Bamford; and Vice President and Chief Financial Officer, Chris Farkas. 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 Relation 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 the forward-looking statements in our public filings with the SEC. As a reminder, the Company's results include an adjusted non-GAAP view that excludes certain costs in order to provide greater transparency into Curtiss-Wright's ongoing operating and financial performance. Any references to organic growth are on an adjusted basis and exclude foreign currency translation, acquisitions and divestitures unless otherwise noted. GAAP to non-GAAP reconciliations for current and prior year periods are available in the earnings release and on our website. Now I'd like to turn the call over to Lynn to get things started.

Thank you, Jim, and good morning, everyone. I will begin by covering the highlights of our second quarter 2023 performance and a brief update on our full year financial outlook. Then I'll turn the call over to Chris to provide a more in-depth review of our financial results and updates to our 2023 guidance. Finally, I'll wrap up our prepared remarks before we move to Q&A. Starting with our second quarter 2023 highlights. Sales increased 16% overall to $704 million and improved 12% organically. Our results reflected the strength of our combined portfolio as we delivered higher year-over-year sales growth in all our end markets. Underscored within this performance in aerospace and defense, we demonstrated strong 23% growth. This was principally driven by the easing of defense electronic supply chain conditions, including improvements in lead time and component availability and strong conversion on our backlog. We also achieved 20% growth in commercial aerospace as we continued to benefit from strong OEM demand. Growth in our operating income increased 18% year-over-year and exceeded our strong sales growth. This performance reflected favorable absorption on higher revenues in all three segments, and we were able to generate 30 basis points in overall operating margin expansion in the quarter despite some unfavorable mix. Diluted earnings per share of $2.15 increased 18% year-over-year and exceeded our expectations, primarily due to higher A&D sales. Adjusted free cash flow was also strong at $99 million in the quarter, generating nearly 120% in free cash flow conversion. We continue to experience very strong demand across our A&D end market and for commercial nuclear products to support maintenance, modernization and plant life extensions. As a result, our order book continues to grow at a rapid pace with new orders up 8% year-over-year. This provides great visibility and bodes well…

Thank you, Lynn. I'll begin on Slide 4 with the key drivers of our second quarter 2023 results by segment. Starting in Aerospace & Industrial, we delivered another solid performance as sales increased 8% and operating income improved 10%. Within the segment's commercial aerospace market, we experienced nearly 20% sales growth based on strong OEM demand for sensors and surface treatment services supporting the ramp-up in production on Boeing and Airbus platforms. We also experienced solid growth in actuation sales within the segment's aerospace and naval defense markets due to the timing of production on various programs. In the general industrial market, our results reflected increased sales of electromechanical actuation products and surface treatment services. In addition, overall industrial vehicle sales were flat with solid growth in the on-highway market was offset by the timing of off-highway sales. Turning to the segments' profitability. Our results reflected favorable absorption on higher sales as well as some unfavorable mix on lower margin actuation in sensors products. Next, in the Defense Electronics segment, sales increased 32%, reflecting improving supply chain conditions and the conversion of our strong order book, particularly for our tactical communications equipment in the ground defense market. We also experienced solid sales growth in aerospace defense for embedded computing on various foreign military programs as well as flight test instrumentation on the F-35 program, where we support the testing of aircraft that have completed the Tech Refresh 3 or TR-3 upgrade. Regarding the segment's operating performance, operating income increased 77%, while operating margin improved 540 basis points, principally due to favorable absorption on the strong sales growth. Turning to the Naval & Power segment. Overall sales growth of 12% was principally driven by the contribution from our arresting systems business, which continues to exceed our initial expectations due to the…

Thank you, Chris. And turning to Page 8. As we have discussed today, we are pleased with our second quarter results and we remain well-positioned to deliver another strong year for our shareholders. We're very focused on executing on our Pivot to Growth strategy to drive long-term profitable growth across the organization. The continuing strength of our order book, growing backlog and deep foundation in operational excellence provide visibility and confidence to successfully achieve our 2023 financial guidance. And I want to commend our global employee base for their continued focus and dedication to driving Curtiss-Wright's success. Of note, for the third straight year and in line with our 2021 Investor Day commitment, we expect growth in operating income to exceed our strong top line growth, while also driving double-digit growth in earnings per share. Beyond that and following the strong start to the year, we have improving confidence in our free cash flow outlook and continue to drive towards an average free cash flow conversion target in excess of 110%. The near and long-term prospects for Curtiss-Wright and the markets we serve are very healthy, and our continued investment in critical technologies and alignment to long-term secular growth trends provide a strong basis for current and future growth. While we are excited for these prospects across the full portfolio, I would like to spend the next few minutes providing some additional perspectives on our commercial nuclear business, which serves the dynamic and growing commercial nuclear industry. This is a market that has been gaining increasing interest and presents compelling value creation opportunities for Curtiss-Wright and our stakeholders. As global sentiment shifts towards decarbonization and bipartisan support strengthened in an effort to restore the U.S.'s competitive nuclear energy advantage, the industry continues to see increased government funding as well as…

[Operator Instructions] Our first question is coming from the line of Peter Arment with Baird.

Nice results. And Lynn, on the snapback in defense electronics, it sounds like the supply chain has really improved quite a bit. Maybe you could just talk about a little more color on what you're seeing there? And are you also seeing share gains as some of your competitors out there have struggled?

So it is true, we definitely -- we've been talking in the last earnings call that we will definitely began to see trends in the right direction. And you worry that it's forward -- two steps forward, one step backwards. But we really haven't seen that. But those trends have continued and the momentum continues. We monitor a lot of statistics on our supply base from on-time delivery to lead times to decommit. I mean, you've heard us talk about them. And they all continue to trend in the right direction. And the tone of the conversations with our suppliers really reveals that they are in a very different place than they were 12 months and even nine months ago. And so we feel good about it. They're making commitments. They're working with us on Poland. I think we started to talk about that last quarter, but we're seeing more of that and really getting on top of things. So we feel good about that. We're really seeing price stabilization within the supply chain to a large [stretch]. So that's been very healthy for us and supports some of our confidence in raising the margins in that group. And so we feel like we have a handle around it. It's not back to 2019 levels. A lot of people ask that. And I'm not sure really of the trajectory to that. Most of our suppliers won't say, "Oh, by 2024, we'll be back to 2019 lead times." I don't -- I think that's a little further out. But we're dealing with it and coming up with strategies to drive working capital improvements in this environment with longer lead times. So it's good and it's quite a different deal than -- if I turn the clock back 12 months ago and…

I'll just add a little more color. One more data point behind, Peter, we're guiding this year to $7.65 at the midpoint in defense electronics. The last 12 months orders as of June 30 are $945 million, and the current year run rate is $927 million. So a very strong and healthy order book, providing us with confidence as we get deeper into the year and into '24.

That's very helpful. And then just one -- last I'll follow-up on just your -- kind of all your commentary around nuclear. You kind of indicated that over the next two to four years is when you'll start to see really -- maybe it will fit your backlog. Is that the best way to frame it that this is a backlog story that will kind of emerge over the next two to four years?

I think there's -- we put it in three buckets. I think our aftermarket business is on a steady ramp. We've said we feel comfortable saying it's going to ramp at a mid-single digits going forward, which is 90% of our commercial nuclear work today. And so that is happening here and now. The work -- it's just under $10 million that we're anticipating this year on this Gen IV ARDP type of development. That is going to accelerate in '24 and in '25. I mean, that still early days with really a lot of engineering worksheets. We're not building things yet. We're going to be needing to build stuff for those advanced reactors in '25 for sure. And that's meaningful. The two to four years is really still the anticipation of an AP1000 order, which is just a flash point. I mean, if it's -- everyone knows our 16 RCP order was $450 million. And so some of these opportunities are big opportunities. And that's just a lightning bolt in for the Company. And we're making sure we're ready for it.

And we'll take our next question from the line of Louie DiPalma with William Blair.

Your navy business continues to do well. Last week, you announced how you received a $250 million add-on contract from Electric Boat and Bechtel for additional propulsion valves and control systems. Should this further increase the revenue run rate that you have been generating for your Navy platforms or at least maintain that revenue cadence? I know that you've been doing well and the comps get harder, but should we continue to see that grow and expand?

Yes. We did just increase the guidance here within our Naval defense market 6% to 8%, but that's really mainly based upon some of the things that we've been doing in staffing and the ramp-up that you're seeing on the Columbia-class submarine program this year. So I think there's some good things that are starting to happen in that regard. As you look at the $250 million of orders in that recent press release, we try to share with our investors each year the substantial volume of orders that we get and work that we get from the Navy, encompassing not only the defense electronics, but the generators, pumps and valves that we provide to the most critical programs in the fleet. So when I look at that $250 million, I think what that helps us to really do is just provides us with greater long-term confidence and the trajectory of where our naval business is headed. So that's a very positive sign. Many of those orders are multiyear in nature, but it really provides us with kind of a strong baseline on which to provide longer-term guidance.

And you and Lynn both referenced how your tactical communications equipment products are elevated orders, which I believe is your PacStar brand. Within this demand, do you assess that the strong order flow is related to Ukraine? Or is it for like other parts of the business?

So it is within PacStar, you're correct in that, which, again, is another acquisition, if you turn the clock back a couple of years, that just continues to really fire on all cylinders, and we're really -- have made some good choices over the recent years with our acquisitions. And there is some pull that is from across the NATO countries and I think driven by the war in Ukraine, but mostly it's planned readiness within the U.S. Army and Marine Corps and then executing to the plans that were before us when we chose to make the acquisition. And now I -- would you say the urgency and the commitment to those plans are solidified seeing the state of the world. Yes, probably, and the absolute recognition that -- ready warfighters are critical and the ability to deploy troops and all that stuff. So it is all connected to some degree, but it's largely the modernization. And we continue to win new programs within the Army and the Marine Corps. Our initial look -- just carrying on with that at the '24 budget is -- the thinking is most likely the Army will be flat broadly in 2024. But we dug through the line items where we gain our funding in the '24 budget. And okay, it's not [indiscernible], we don't know for sure. But from what we see so far, there's really good solid funding for where PacStar receives its funding in the '24 budget. So we feel good about that going forward.

And we'll take our next question from the line of Nathan Jones with Stifel.

A follow-up question on the defense electronics business. Maybe you could help frame where we are in catching up maybe in terms of like -- where you were in terms of past years, at the end of 2022, where you are now, where you expect to end 2023, just to help give us some color around where the supply chain is.

So I mean, we saw the significant increase in ground defense guide. And some of that is -- when we made the initial guide, we were -- that was one of the areas that was heavily hit by supply chain issues in '22. And it has really bounced back that part of the surge in Q2 in the strong ground defense. And that was -- we're shipping some of the revenues that slipped out of '22, getting caught up on those in '23. So for sure, we are catching up on those and have seen really great performance by our supply chain in that area. So maybe I'll give it to you, Chris, to turn any color on the time schedule and the other portions of questions.

Yes. So if you recall last year, I mean it was a pretty challenging environment. And we had to drop our guidance -- I think it was in the third quarter -- by roughly $15 million to $20 million. And that created some past due, right? And in the first half of '23, we've come on out fairly strong. We're seeing some of that past-due burn off. And that will create a little bit of a headwind here in the second half of the year, along with the timing of some actuation development in ground defense and TDSS work, which can be a little bit lumpy. The other thing I'll say about that, too, is as you look at that burn off, I mean, the revenue bump that you see here in the first half of the year is accentuated by the ship-and-bill nature of largely our ground defense business. I mean when you look at it, it's -- like 90% of it is ship-and-bill, which is kind of unusual. I mean, defense electronics is, I'd say, 55, 45 ship-and-bill [PoC]. But getting those parts, getting that product out the door, that helps to kind of -- that accentuated the spike in the type of accounting that we're doing there. So generally, we see the supply chain improving, as Lynn had mentioned. Some really good things. But concerns still do exist. I mean, there are certain vendors that are recovering faster than others. And we've got that as a little bit of a watch item as we move into the second half of the year. So I think when you're looking half-to-half, we would just encourage you as you're getting to the midpoint of that guidance for modeling purposes just to think about that past-due burn off. But boy, the order book is looking great and we're real optimistic about where we could go.

Just a follow-up on that. Do you expect to still have past-due by the end of the year with your current outlook for supply chain, knowing that might change? And then with the -- you talked about $945 million of orders in the last 12 months. Even with maybe some additional demand catch-up in '23, we should still be thinking about some pretty decent growth in defense electronics in '24?

So I'll take one of those at a time. And I think that we've been very fortunate in working with our customers throughout this whole supply chain matter, that they have been very, very understanding of the issues that are taking place within the industry. So as we categorize past-due, I just want to be very cautious to say that they have been working with us, modifying dates. And largely, we're not causing the customers any concerns in timing at this point. So they're really working with us well. I think -- so it's really hard to categorize exactly where we'll be in terms of past-due at year-end and -- but we are definitely working with our customers and the customer satisfaction rates are high. I think as you look at that $945 million over the last 12 months and the $927 million current year run rate, it does give us a lot of confidence. I mean, I think as you look towards the end of the year here, while we're pleased to see the defense budget moving through the Senate Armed Service Committee and some of the conversations that are happening there, I mean, we could face a continuing resolution at year-end. I don't know if that will be an extended continuing resolution. But certainly, this will provide us with a very nice bridge into this next year. And then we're optimistic about where we can go. Really love the alignment of the technologies to the defense needs and where we're headed here. It's exciting.

And we'll take our next question from the line of Myles Walton with Wolfe Research.

I was just reflecting on the guidance that you're putting together for organic growth for this year and looking back into the annals of time. I think you did it maybe once or twice back in 2006-2007 an organic growth that's anywhere close to what you're putting up. And I guess, Lynn, the Pivot to Growth must be working in that respect. And so as you put out that target for the 3% to 5% organic growth through '25, looking beyond this year, do you feel comfortably at the upper end of that range?

So honestly, I'm very proud and so fortunate to be the CEO and have the team that is Curtiss-Wright, and hence, the call out to everybody across the organization. People have really embraced the Pivot to Growth. They get it. Everybody is enthusiastic about it. It's been fun to have discussions about wanting to spend more R&D and looking to drive our operational excellence savings into more R&D funding. So it's well implanted in the Company, and it does give confidence for the growth that I think is coming for a decade and beyond. When you look at the dynamics in the markets and where our technology is, it's up to us to execute and to plan and drive customer satisfaction and those things, and we watch those things equally along with just the R&D project, then you have to be a reliable supplier. And we're not perfect in all cases, but we really absolutely attack anything where we do have any challenges. So yes, I feel that there's really great optimism. And again, not getting ahead and giving any multiyear guidance. We'll do that in '24. But the prospects for organic growth are fantastic.

And you mentioned the recent acquisitions, both PacStar and Safran arresting systems were going well. It certainly looks like that in the numbers. Can you give a comment on the M&A environment backdrop? It's been about a year since Safran.

Yes, it's -- we've looked at -- we comment on this frequently that we look at a lot of properties before we choose to find one that we can bring into Curtiss-Wright. And that has been very true -- over the past six months, I'd say, for sure there's been a lot of properties that have come across our desk and really just couldn't see a line of sight to the financials ever being accretive to Curtiss-Wright. And we were very open when we bought PacStar. Their financials were not accretive to Curtiss-Wright. So it's not like you have to be in that sweet spot on day 1, but we have to understand the value proposition of what they're taking to the market and believe that with operational excellence that we can bring to them and pricing strategies, which peers talk about frequently -- I think Curtiss-Wright has done a really good job and matured our approach to how we price products. But we can see line of sight with that. So we have dismissed a lot of properties in the first half of this year. We have properties out there right now that we have LOIs in play with that we are looking into. And so it's not that there's no properties. But I'd like to think optimistically, we bring something across the finish line in the back half of this year. But we'll see. You have to just be patient and do the process correctly and not try and enforce something. And I think that attitude, which has been in place for many, many years, has led us to really bringing in very successful acquisitions and not ones that can't ever live up to the financial returns you need to have to justify buying something.

[Operator Instructions] We'll take our next question from the line of Michael Ciarmoli with Truist Securities.

Maybe -- I don't know who wants to take this, Lynn or Chris. You talked about a very strong demand environment in AeroDefense, nuclear, but you didn't really get too granular on what you're seeing in kind of general industrial or that order book. Maybe if you could give us a little bit of detail in how you're seeing kind of demand trends in various geographies in some of those general industrial subsegments you have?

Sure. I'll take that one, Mike. And my apologies for kind of repeating myself, but I just feel it's kind of important to set the stage when we talk about the general industrial environment. And that '21 we did reach historic highs. The orders of 48% backlog doubled. Over the course of '22, the order rate slowed in G.I. It was really down 8%, but still up 9% versus pre-pandemic levels. And then this last quarter, we saw the orders down 20%. So we were kind of bottoming, I would say, at that 2019 level. But still a very strong and healthy backlog. So here in Q2, we were down again, but we were down 5%. So we see the rate of decline slowing. Some of the decline is due to the supply chain recovery and customers reducing their order rates for inventory and improved lead time. But we believe that this specific issue is starting to level out and expect improving orders in the second half of this year. Now that will be supplemented by our new power management electronics that we've talked a little bit about. And so we expect some uplift in the back half of the year. As you dig a little bit deeper on Surface Tech, and Surface Tech provides technologies. They do have commercial aerospace, the general industrial. Their order output in the G.I. space, which is more representative of kind of the current production output that we're seeing from our customers, is in a mid-single-digit growth rate. So I think that speaks well to the full year guide that we now have in general industrial, which is that 3% to 5%. There is a little bit of a minimization of the FX headwind that we're facing there. But if you look at what's happening within industrial vehicles, it's mainly on-highway, I'd say mid-single-digit growth, mostly North America. Off-highway has been kind of flat. The -- we're seeing some positives in ag, but those are being offset by construction, and that's mainly kind of a lower global construction space. And then industrial automation and services, we just had a big quarter. We had a lot of E.M. actuation sales. But we expect that to be more in the low single digits across the full year for revenue purposes, just slightly outpacing GDP. So...

Got it. Got it. That's helpful. And then maybe, Lynn, you kind of mentioned pricing a bit and maybe you can tie into what Myles was asking about organic growth being so good here. Can you maybe talk to -- I don't know if you can get specific on how much pricing is helping to contribute to the organic growth and what you're seeing in terms of your ability to get price on the newest orders that are coming in and flowing to the backlog. Anything else you could share there?

Yes, maybe try and expand on that a little bit. So I mean, you definitely know we've been talking about pricing for 2.5 years and really started talking about pricing before the realities of the inflationary situation were so evident. And so I feel good as a company that we were really well ahead of it and as part of our OGP that we rolled out in May of 2021. And the teams have taken it very seriously. And we monitor it every month in our monthly financial reviews with the teams as to what they're getting. I'd say roughly 1% of our growth rate is due to pricing. It's not an exact science in measuring it. So I wouldn't make 1.00 in your model. But that's a fair estimate to say that what's coming from pricing. And I will say we're having some more sticky discussions with some of our customers that still have ongoing LTAs, where we really need to get them to open up and change LTAs. And that's getting a little bit more challenging. We don't see it as a road block, but some of that is the things that we don't think we're going to get done to affect pricing in this current year and is reflecting a little bit some of the margin pressures in the A&I segment as some of those LTAs -- anticipating those not getting renegotiated till later in this year. And so it's continual work. But even with that, mentioning the A&I and some delays in some of the LTA negotiations, it's -- Chris and I were just talking this morning, reflecting that since the 2020 baseline, we've increased over 100 basis points in margin in that group every year. So clearly, pricing is a big part of that and it really reflects the success the team has had. And then elsewhere -- our naval and power group is a little different from what they do with their long-term contracts and such. But in defense electronics, we've maintained a very dynamic in looking at our cost basis and adjusting prices as we can. And I think it is contributing to our -- the steady increase in ability to raise margins.

[Operator Instructions]

So I guess with that, I would say...

I'm sorry?

Sorry. I was just going to say thank you, everyone, for joining us today, and we look forward to speaking with you again during our third quarter 2023 earnings conference call. And have a great day.

Thank you. This concludes today's Curtiss-Wright's Second Quarter 2023 Earnings Conference Call. Please disconnect your lines at this time, and have a wonderful day.