Curtiss-Wright Corporation

Welcome to the Curtis Wright Second Quarter 2023 Earnings Conference Call. At this time, all participants have been placed on the listen-only mode, and the floor will be open for your questions following the presentation. If you would like to ask a question at that time, please press star 1 on your telephone keypad. If at any point your question has been answered, you may remove yourself from the queue by pressing star 2. So others can hear your questions clearly, we ask that you pick up your handset for best sound quality. Lastly, if you should require operator assistance, please press star zero. I would now like to turn the call over to Jim Ryan, Vice President of Investor Relations. Please go ahead, sir.

Thank you, Carrie, and good morning, everyone. Welcome to Curtis Strike'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 Park. Our call today's theme 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.perksright.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 and Reform Act of 1995. These statements are based on management's current expectations and are not guaranteed to future performance. We detail those risks and uncertainties associated with those forward-looking statements in our public violence of 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 in the Curtis 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 and non-GAAP reconciliations for current and prior year periods are available in the earnings release and on our website. I would 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 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 myths. 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 markets and for commercial nuclear products that 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 for our expectations in the second half of 2023 and our long-term outlook. Overall, Book to Build was 1.2 times in the second quarter, building upon our already strong backlog, which is now up 9% year-to-date and in excess of $2.8 billion. Next, some highlights of our full-year 2023 guidance. Our strong first half results combined with solid trends across our markets and expectations for continued easing of the defense electronic supply chain gives us confidence to raise our outlook for sales, operating income, and diluted earnings per share. As we'll discuss this morning, our updated guidance reflects increased sales and operating income in all three segments, mainly driven by increased profitability in the defense electronic segment. Overall, we increased our full-year sales growth to a new range of 7% to 9%, along with 8% to 11% growth in operating income. And we continue to maintain strong profitability with 10 to 30 basis points of year-over-year margin improvement. This puts us on track to deliver double-digit growth in diluted EPS this year. In addition, we increased the bottom end of our already strong free cash flow guidance to reflect higher confidence in the full year outlook. In summary, we are well positioned to deliver strong results in 2023. Now, I would like to turn the call over to Chris to continue with our prepared remarks.

Thank you, Lynn. I'll begin on slide four with the key drivers of our second quarter 2023 results by segment. Starting in aerospace and industrial, we delivered another solid performance. Its 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 as solid growth in the on-highway market was offset by the timing of off-highway sales. Turning to the segment's profitability, our results reflected favorable absorption on higher sales, as well as some unfavorable necks on lower margin actuation and 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 and 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 strong international demand for its products. And as a reminder, the sales from that acquisition are mainly reflected in the aerospace defense market. Elsewhere in the naval defense market, higher revenues principally reflected the ramp on the Columbia-class submarine and solid growth on aircraft handling systems, partially offset by reduced revenues on the CVN-74 overhaul program. In the powered process market, sales increased approximately 5% overall and were up approximately 10%, excluding the revenue headwind associated with the wind down on the Kaplan-1000 program. Our results reflected strong growth in the commercial nuclear market, supporting the operation and maintenance of reactors across North America, where we benefited from the timing of a strong spring outage season, as well as Gen 4 revenues, supporting the X-Energy reactor design. We also experienced mid-teen sales growth in the process market, driven by increased maintenance and turnaround activity, as well as the timing of customer investments to expand production. Turning to the segment's profitability, favorable absorption on the solid sales growth was offset by unfavorable mix on the Cap 1000 program, as well as enable aftermarket revenues. In addition, in partly offsetting the strong segment performance, we experienced an increase in corporate costs resulting from higher 401k expenses as we continue to hire in support of our growth, as well as higher foreign exchange transactional losses from FX volatility and spreads in the current interest rate environment. To sum up the second quarter results, overall strong growth in operating income once again exceeded growth in sales and resulted in 30 basis points in year-over-year operating margin expansion. Next, turning to our full year 2023 guidance on slide five. I'll begin with our end market sales outlook, where we now expect organic sales to grow 5% to 8%, with total sales growth of 7% to 9%, reflecting an increase in sales of nearly $80 million compared with our prior expectations. Across the entirety of our aerospace and defense markets, we now expect total sales to increase 9% to 11%. First, in the aerospace defense market, our guidance remains unchanged and we remain on track to demonstrate strong growth in the second half of 2023 based on the timing of embedded computing revenues. In ground defense, we now expect full year sales growth of 16 to 18% based on a strong and growing order book for our tactical communications equipment and noticeable improvements in component availability. Of note, our strong performance included approximately $15 to $20 million in practical communications equipment sales that were accelerated into the first half as we burned down some of the prior year's backlog at a faster pace. Next, in naval defense, where we raised our full-year outlook and now expect sales growth of 6% to 8%, primarily driven by the timing of production on the Columbia-class submarine program. Turning to commercial aerospace, and based upon the strong first half performance, we now expect sales growth of 9% to 11% due to expectations for strong OEM sales growth on narrow-body platforms. And of note, we expect this growth to be driven by higher sales of sensors and surface treatment services in the A&I segment, as well as improved demand for avionics and flight test equipment in the defense electronics segment. Outside of our A&D markets, we raised our growth outlook for the power and process market to a new range of up 3% to 5% based on the strong year-to-date performance and increased demand for both our commercial nuclear aftermarket and industrial vehicle valve products. And as a reminder, the outlook in this market includes a $20 million year-over-year revenue headwind from the wind down on the CAP 1000 program as we substantially completed this contract in the first quarter. Excluding that impact, we now expect a high single-digit full-year growth rate in both our commercial nuclear and process markets due to our strong order book, as well as higher nuclear outages and process turnarounds in the first half of this year. In the general industrial market, we now expect sales growth of 3% to 5%, primarily based upon an improved growth outlook for on-highway sales in our industrial vehicles business, as well as reduced impact from FX. As a result, we've raised our full-year growth outlook for our total commercial markets to a new range of 3% to 5%. Continue with our full-year outlook by segment on slide 6. I'll begin in aerospace and industrial, where our top-line guidance has been increased to reflect 4% to 6% sales growth, principally driven by the strong first-half sales growth in commercial aerospace. Regarding the segment's profitability, we continue to expect favorable absorption on higher sales, driving a solid increase in operating income to a new range of 5% to 9%, while a revised outlook reflects the impact of unfavorable mix experienced in the first half of this year. Overall, we continue to expect strong profitability in this segment and to deliver 20 to 40 basis points in operating margin expansion. For your modeling purposes, we expect the segment's third quarter sales to be slightly below our second quarter results and operating income to be largely on par with the second quarter due to the timing of sales and our European operations. We then expect the segment to deliver a strong finish to 2023. Next, in defense electronics, Following the strong first half performance, improving supply chain conditions, and continued strong order activity, we raised our revenue forecast and now expect sales to grow 9% to 12%. We feel very confident in this improved outlook as a significant portion of our sales are in backlog as of June 30th, and we anticipate continued improvement in the supply chain as we move through the balance of the year. Regarding the segment's profitability, we now expect operating income to grow 13% to 17% and full-year operating margin to range from 23% to 23.2%, reflecting 60 to 80 basis points in year-over-year expansion, which is 30 basis points above our prior expectations. Of note, we expect our second half results to reflect both favorable absorption and mix on strong sales growth. And lastly, enabling power. We now expect strong sales growth of 8% to 10%, principally driven by improved expectations within our enabled defense and power and process markets. Regarding the segment's profitability, we raised our operating income guidance to reflect growth of 2% to 4% and continue to expect favorable absorption on higher sales, but we maintained our prior margin outlook primarily due to unfavorable NECs. Again, for your modeling purposes, we expect this segment's third quarter sales to be largely in line with the second quarter, as well as additional margin pressures associated with the timing of higher development contracts in the power and process market. Regarding our non-segment or corporate expenses, our updated guidance reflects a slight increase in assumptions related to higher foreign exchange transactional losses experienced in the second quarter. So to summarize our outlook, we expect total Curtis Wright operating income to now grow 8% to 11% overall and excess of sales growth of 7% to 9% as we continue to deliver on the pivot to growth strategy. As a reminder, this includes an increase in internally funded R&D investments, a shift to lower margin development contracts on customer-funded programs, and the headwind associated with the wind-down of the CAP 1000 program. Overall, we expect full year operating margin to improve 10 to 30 basis points ranging from 17.4 to 17.6% as we continue to drive our operational and commercial excellence initiatives throughout the organization. Continuing with our financial outlook on slide seven, Building on our solid first half performance and expectations for strong growth in the second half of 2023, we've increased our full-year adjusted diluted EPS guidance to a new range of $8.90 to $9.15, or up 10% to 13%. As we look ahead to the second half of this year, and based on the timing of sales as previously discussed, we expect our overall third quarter 2023 sales to be slightly below our second quarter results, along with a modest improvement in operating income and diluted EPS, followed by a strong finish to the year. Turning to our free cash flow, as Lynn shared earlier, we generated nearly $100 million in the second quarter as improved working capital management and higher cash earnings drove a solid year-over-year improvement. As we look forward across the remainder of the year, our greatest challenge and opportunity in free cash flow continues to be in working capital management. And more specifically, inventory reduction as supply chain pressures continue to ease and we execute on our healthy order book. Regarding our full-year guidance, we raised the bottom end of our range by $10 million based upon improved confidence in our full-year financial outlook and our intense focus on working capital management. As a result, our free cash flow outlook now ranges from $370 to $400 million, reflecting strong growth of 25% to 36%, which still implies a free cash flow conversion rate in excess of 110% at the midpoint of our guidance. Now, I'd like to turn the call back over to Lynn.

Thank you, Chris. And turning to page eight. 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 Curtis Wright's success. Of note, for the third straight year and in line with our 2021 Investor Day commitments, 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 Curtis 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 perspective 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 Curtis Wright and our stakeholders. As global sentiment shifts towards decarbonization and bipartisan support strengthens in an effort to restore the U.S.' 's competitive nuclear energy advantage, the industry continues to see increased government funding as well as emerging domestic and international market opportunities. Thursday is very well positioned in both the U.S. and internationally to benefit from this momentum. In the U.S., as many are aware, we have been a critical supplier of commercial nuclear components since the industry's inception, with the majority of our nuclear sales today serving the aftermarket business. The U.S. government continues to increase its focus on funding and support for retaining and extending the domestic fleet of nuclear plants, and we expect this will continue to bolster demand for our solutions. Outside of the U.S., we continue to advance our position to service the global fleet of operating reactors, building upon our content in Canada and South Korea and emerging opportunities in other countries as they too need to extend the lives of their plants. On the new build front, we have a tremendous opportunity for long-term growth in two key areas. We have solid exposure to the growing list of Westinghouse AP1000 power plants, where we are a critical supplier of our highly profitable reactor coolant pumps, or RCPs, and we're only beginning to establish our footprint to serve the leading designers of next-generation advanced and small modular reactors, or SMRs. Taking a closer look at the Gen 3 AP1000, First, we would like to extend our congratulations to those involved in the successful startup of Vogel III AP1000 plant in Georgia, which recently began commercial operation and represents the first newly constructed nuclear power plant in the U.S. in more than 30 years. In addition, we are encouraged to see Westinghouse's ongoing pursuits to expand this technology by building relationships and signing MOUs throughout Eastern Europe. This includes prior agreements with Poland, Ukraine, and the Czech Republic, as well as more recent discussions to assist Bulgaria, Slovakia, Slovenia, Finland, Sweden, and more. This strong momentum implies a potential of nearly 25 plants thus far, several of which are expected to be on track to begin construction in the next 5 to 10 years. As a result, we continue to believe there is a strong opportunity for Curtiss-Wright to secure new contracts for our reactor coolant pumps within the next two to four years. Further, this excitement only builds upon our previously communicated expectations to secure more than $1.5 billion in RCP orders from Eastern Europe. With a potential long-term value well in excess of this amount, should Westinghouse be successful in its global negotiations? Aside from the AP1000, we are also working to establish relationships with all the major advanced small modular reactor designers, leveraging our long-tenured stature and deep engineering knowledge to secure new and meaningful content. Of note, two manufacturers, X Energy and TerraPower, have received funding from the U.S. Department of Energy's Advanced Reactor Demonstration Program, or ARDP. We have established a strong position with X-Energy where we have secured more than $100 million in content for each four-pack or 320-megawatt plant. X-Energy continues to announce new partners and projects. In May, Dow, Inc. selected the C-Drift Operations manufacturing site in Texas for X-Energy's first deployment of the XE-100 reactor. Construction work on that initial reactor is expected to begin in 2026 and targeted for completion by the end of the decade. In addition, last month, X-Energy and Energy Northwest announced their intent to build XC100 advanced SMRs in Washington State, generating up to a total of 960 megawatts, or the equivalent of three four-packs, with the first module anticipated to be online by 2030. More recently, we were selected by TerraPower to supply a reactor protection system for their Natrium Reactor for the demonstration plant in Wyoming. The RPS is a critical system for safely shutting down the reactor in the event of an unusual plant condition. As they advance through the initial stages under the ARDP, it opens the door for Curtis Wright to become a significant supplier of this and other technologies supporting TerraPower's future reactor. Aside from these two designs, we expect to develop similarly strong footholds with advanced SMR designers to secure meaningful content ranging from $10 million to more than $100 million per project as they seek to deliver safe, reliable, and carbon-free power. I'd like to remind you that we are recognizing both orders and revenue in 2023 for advanced SMRs, and this activity will continue to ramp up as we progress through the development and continue to secure new awards. We have a long runway ahead of us to support this arm of the commercial nuclear industry and generate meaningful returns for Curtis Wright. As we look over this decade and beyond, There are a number of opportunities for Curtis Wright within the commercial nuclear market that would build on the great base of business that we currently have and create some transformational and exciting changes to our future exposure in this industry. As we've said before, we expect to learn much more about these opportunities in 2023 and early 2024 as we approach our next Investor Day. As you can see, the activity for commercial nuclear is advancing at a relatively rapid pace We are excited to keep you updated as we continue to establish new relationships, work towards the development of these new generation technologies, and share in our customers' success. In closing, we've had a strong start to the year, and I'm pleased with Curtis Wright's momentum. Our updated guidance reflects our increased confidence, and we remain focused on delivering a successful second half of the year, which will put us on track to achieve record sales, profitability, earnings per share, and new orders. Looking beyond 2023, I'm truly excited about Curtis Wright's future and the value we can deliver to our long-term shareholders. We look forward to providing some additional insights into growth factors and new financial targets at our next Investor Day, which is currently planning for May 2024. At this time, I would like to open up the conference call for questions.

The floor is now open for questions. At this time, if you have a question or comment, please press star 1 on your telephone keypad. If at any point your question is answered, you may remove yourself from the queue by pressing star Q. Again, we ask that you pick up your handset when posing your questions to provide optimal sound quality. Thank you. We will pause for a moment to allow questions to queue. Our first question is coming from the line of Peter Arment with Baird. Please go ahead.

Yes, thanks. Good morning, Lynn, Chris, Jim. Good morning. Nice results. 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? Thanks.

So it is true. We definitely, you know, we've been talking, you know, the last earnings call, and thank you for that, Peter, that we were definitely beginning to see trends in the right direction. And, you know, you worry that it's, you know, two steps forward, one step backwards. But we really haven't seen that. But those trends have continued, and the momentum continues. You know, we monitor a lot of statistics on our supply base from on-time delivery to, you lead times to decommits. I mean, you've heard us talk about them. And, you know, 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, you know, 12 months and even nine months ago. And so we feel good about it. You know, they're making commitments or they're working with us on pull-ins. I think we started to talk about that last quarter, but we're seeing more of that. And, you you know really getting on on top of things so we feel good about that and we're really seeing price stabilization within the supply chain to a large degree so that's been very healthy for us and you know support some of our confidence in raising um the margins in that group and so you know we feel like we have a handle around it it's not back to 2019 levels a lot of people ask that and um 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 think that's a little farther 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 field than you know, if I turn the clock back 12 months ago and it just seemed like every day you didn't know what you were going to find. So we're really pleased. And, you know, I don't want to just say it's just happened easily. The team's done great work, put in new systems, put in, you know, we talked about some of the new strategies we've put in and approaches we've taken to managing it. So, you know, It has been a change in the supply chain, but I'd say it's also, you know, matched by a response from us as a company and how we have learned to manage it. So that's kudos to the teams that are all in the middle of dealing with this situation. From a market share standpoint, I think, you know, our order book says it all. You know, we have, you know, the order book is up 31% in depends electronics. Year over year, you know, they're part of our overall strong order book. And, you know, our pipeline of opportunities are putting out a significant RFP, continues to accelerate, and we feel great about where the team is. And we're getting new products out in the market and turning, you know, we're spending more R&D in that business every year. You know, as we're growing operating margins, you know, it's not coming on the backs of IRAD or customer-funded R&D, which we're seeing, you know, also, you know, increased in that group. So, really, you know, the team is doing a great job managing in this time and, you know, building for a great future for going forward.

And just to add one more data point behind that, Peter, you know, we're guiding this year to 765 at a midpoint in defense electronics. Yeah, the last 12 months' orders as of June 30th are $945 million. You know, and the current year run rate is 927. So a very strong and healthy order book providing us with confidence as we get, you know, deeper into the year and into 24.

That's very helpful. Thanks, Chris. And, Lynn, just one last follow-up on just your kind of all your commentary around nuclear. You kind of indicated that, you know, over the next two to four years is when you'd start to see really Maybe it's hit your backlog. Is that the best way to frame it, that this is the backlog story that will kind of emerge over the next two to four years?

I think there's, you know, 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 digit, you know, going forward, which is 90% of our commercial nuclear work today. And so that is happening here and now. The work, you know, it's just under $10 million that we're anticipating this year on this Gen 4 ARDP type of development. That is going to accelerate in 24 and in 25. I mean, that's, you know, with early days, you know, with really a lot of, you know, engineering worksheets, we're not building things yet. We're going to be needing to build stuff for those advanced reactors, you know, in, you know, 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 flashpoint. I mean, if it's, you know, everyone knows our 16 RCP order was $450 million. And so, you know, some of these opportunities are big opportunities. And, you know, that's just a liking bolt in for the company. And we're making sure we're ready for it.

Appreciate all the details. I'll jump back in, too. Thanks. Thanks, Peter.

And we'll take our next question from the line of Louis de Palma with William Blair. Please go ahead.

Lynn, Chris, and Jim, good morning.

Morning.

Morning. 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? Thanks.

Yeah, thanks for that, Lily. 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 7 Marine 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. Yeah, when I look at that 250, 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 multi-year in nature, but it really provides us with kind of a strong baseline of which to provide longer-term guidance.

Thanks, Chris. And you and Lynn both referenced how your tactical communications equipment products, 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 other parts of the business?

So it is within PACSTAR, you're correct in that, which, again, is another acquisition, turn the clock back a couple years, that just continues to really fire on all cylinders. And we're really, you know, 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. Now, 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 war fighters 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. And our initial look just carrying on with that at the 24 budget is, You know, the thinking is most likely the Army will be flat broadly in 2024. But, you know, we've dug through the line items where we gain our funding in the 24 budget. And, okay, it's not past this. 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.

Excellent. Thanks, Lynn. And thanks, Chris and Jim. Thank you.

And we'll take our next question from the line of Nathan Jones with Stifle. Please go ahead.

Good morning, everyone. Hey, Nathan. Good morning. Follow-up question on the defense electronics business. Maybe you could help frame, you know, where we are in catching up, maybe in terms of, like, you know, where you were in terms of past use at the end of 2022, where you are now. where you expect to end 2023, just to help give you some color around where the supply chain is.

So, I mean, we saw the significant increase in the ground defense guide, and some of that is when we made the initial guide, That was one of the areas that was heavily hit by supply chain issues in 22, and it has really bounced back. That's part of the surge in Q2 in the strong ground defense, and that was 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 behind schedule and the other portions of the question. Yeah. So if you recall, you know, last year, I mean, it was a pretty challenging environment. And, you know, we had to drop our guidelines. guidance, I think it was in the third quarter, by roughly $15 to $20 million. And that created some past due. Right? And in the first half of 23, we've come out fairly strong. You know, 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, you know, some action. Actuation development and ground defense and and TDSS work which can be a little bit lumpy The other thing I'll say about that too is you know 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 and of largely our ground defense business. I mean, when you look at it, it's like 90% of it is ship and build, which is kind of unusual. I mean, defense electronics is, you know, I'd say 55, you know, 45 ship and build POC. But, you know, getting those parts, getting that product out the door, that helps to kind of, you know, that accentuated the scope. and the type of accounting that we're doing there. So, you know, generally, you know, we see the supply chain improving, as Lynn had mentioned, you know, some really good things.

But the concerns still do exist. I mean, there are certain vendors that are recovering faster than others. And, you know, 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, you know, 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's looking great, and we're real optimistic about where we could go.

Just to 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 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 customer throughout this whole supply chain matter that they have been very very understanding of the of the the issues that are taking place within the industry so you know as we categorize past due I just want to be very cautious to say that you know they have been working with us modifying dates and And largely, you know, we're not causing the customers any concerns and 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 year end, 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 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, you know, 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 a 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. Thanks for taking my questions. Thank you. And we'll take our next question from the line of Miles Walton with Wolf Research. Please go ahead. Thanks, Kamori. I was reflecting on the guidance that you're putting together for organic growth for this year, and looking back to the annals of time, I think you did it maybe once or twice back in 2006, 2007, and organic growth, it's anywhere close to what you're putting up. And I guess, Lynn, the pivot to growth must be worth in that respect. And so, as you put out that target for the 3 to 5 percent organic growth through 2025, you know, 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 Curtis Wright and hence the call out to everybody across the organization. People have really embraced the pivot to growth, they get it. Everybody's enthusiastic about it. It's been fun to, you know, 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, you know, the growth that I think is coming for, you know, a decade in

beyond when you look at the dynamics in the markets and where our technology is, you know, it's up to us to execute and the plan and drive customer satisfaction and those things and we watch those things equally along with, you know, just the R&D projects and you have to be a reliable supplier and You know, we're not perfect in all cases, but we really absolutely attack anything where we do have any challenges. So, you know, I feel, you know, that there's really great optimism and, again, not getting ahead and giving any multi-year guidance. We'll do that in 24, but the prospects for organic growth are fantastic. You mentioned the recent acquisitions, both TaxStar and Saffron, from 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 Saffron. Yeah, we've looked at, you know, we've you know a comment on this frequently we look at a lot of properties before we choose to find one that we can bring into service right and that has been very true over the past you know six months I'd say for sure there's been a lot of properties that have come across our desk and really just you know quickly see a line of sight to the financials ever being, you know, accretive to Curtis Wright. And, you know, we were very open when we bought Backstar. Their financials were not accretive to Curtis Wright.

So it's not like you have to be, you know, in that sweet spot on day one, but we have to, you know, understand the value proposition of what they're taking into the market and believe that that, you know, with operational excellence that we can bring to them and pricing strategies, which you hear us talk about frequently.

I think Curtis Wright has done a really good job and matured our approach to how we price products, that 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 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 that, you know, optimistically we'd 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 force something. And I think that attitude, which has been in place for many, many years, you know, 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. All right. Thank you. Thank you.

Once again, if you do have a question, you may press star 1 on your telephone keypad at this time. We'll take our next question from the line of Mike Cermoli with Truist Security. Please go ahead.

Hey, morning, guys. Nice quarter. Thanks for taking the questions here. Hey, maybe I don't know who wants to take this, Lynn or Chris. You know, you talked about a very strong demand environment in aero, defense, 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, you know, a little bit of detail in how you're seeing kind of demand trends in various geographies and some of those general industrial subsegments you have.

Sure. I'll take that one, Mike. And, you know, my apologies for kind of repeating myself, but I just feel it's kind of important to set the stage when we talk about, you know, the general industrial environment. And, you know, 21, what we did reach historic highs. You know, the orders are 48%. Backlog doubled. Over the course of 2022, the order rates were low in GI. It was really down 8%, but still up 9% versus pre-pandemic levels. And then this last quarter, we saw the orders down 22%. 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. We were down 5%. So we see the rate of decline slowing. The decline is due to the supply chain recovery and customers reducing their order rates for inventory and improved lead time. But, you know, 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, you know, by our new power management electronics that we've talked a little bit about.

And so we expect some up in the back half of the year. As you dig a little bit deeper on, you know, surface tech, you know, and surface tech provides technologies to aero depth, commercial aerospace, to general industrial. You know, their order output in the GI space, which is more representative, representative of kind of the current production output that we're seeing from our customers is in a mid-single-digit growth rate. So, you know, I think that speaks well to, you know, the four-year guide that we now have in general industrial, which is that 3% to 5%. You know, there is a little bit of a minimization of the FX half. headwind that we're facing there. But, you know, as you look at what's happening within industrial vehicles, you know, it's mainly on highway, you know, I'd say mid-single-digit growth, mostly North America, often The highway's been kind of flat. 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 EM. and 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. Got it. Got it. That's helpful. And then maybe, Lynn,

And you kind of mentioned pricing a bit, maybe to even tie into what Miles was asking about organic growth being so good here. Can you maybe talk to, you know, 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 flow into the backlog, you know, anything else you could share there?

Yeah, maybe try and expand on that a little bit. So, I mean, you definitely know we've been talking about pricing for two and a half 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. It was 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 think roughly 1% of our growth rate is due to pricing. I mean, it's not, you know, an exact science in measuring it, so, you know, how it makes 1.00 in your models, but that's a fair estimate to say that what's coming from pricing. And I will say, you know, we're having some more sticky discussions with some of our customers that have ongoing LTAs where, you know, 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 roadblock, but some of that is the things we don't think we're going to get done to affect pricing in this current year, and it's reflected a little bit of some of the margin pressures in the A&I segment is some of those LTAs, anticipating those not getting renegotiated until later in this year. And so it's continual work. But even with that, mentioning the ANI and some delays in in some of the LTA's associations. You know, Chris and I were just talking this morning reflecting that, you know, since the 2020 baseline, we've increased over 100 basis points in margin in that group every year. So, you know, clearly pricing is a big part of that. and it really reflects the success the team has had. And then, you know, elsewhere, you know, our naval and power groups are a little different from, you know, what they do with their long-term contracts and such. But in defense electronics, we've maintained, you know, we're very dynamic in looking at our cost basis and adjustments. prices as we can. And I think, you know, it is contributing to our, you know, the steady increase in ability to raise margins. Very good. Perfect. Thanks for that detail, Jim. Back in the queue.

Once again, if If you do have a question, you may press star 1 on your telephone keypad at this time.

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 Curtis Wright second quarter 2023 earnings conference call. Please disconnect your line at this time.