Curtiss-Wright Corporation

Welcome to the Curtis Wright fourth quarter and full year 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. 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 that 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.

Thank you, Jamie, and good morning, everyone. Welcome to Curtis Wright's fourth quarter and full year 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 Barkis. Our call today's 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 curtiswright.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. To detail those risks and uncertainties associated with the forward-looking statements and our public filings to the SEC. As a reminder, the company's results include an adjusted non-GAAP view that excludes certain costs in order to provide better transparency into 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. The 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. Curtis Wright delivered a solid operational performance in the fourth quarter and a strong finish to 2023. For the second consecutive year, we achieved several new financial records as we continued to execute our pivot to growth strategy. We generated double-digit growth in sales and earnings per share in 2023 as we benefited from the underlying demand within our core portfolio. We achieved these results while maintaining our commitment to incremental investments in R&D, and we generated significant growth in orders, which are proof points that our strategy to build momentum in our organic growth is working. Overall, we delivered another outstanding year for our shareholders, and I look forward with confidence to Curtis Wright's future. Turning to today's presentation, I'll begin by covering the highlights of our fourth quarter of full year 2023 performance and a brief preview of our 2024 financial outlook. Then I'll turn the call over to Chris to provide a more in-depth review of our financials. Finally, I'll wrap up our prepared remarks with a recap of our performance and the notable achievements against our 2021 Investor Day commitments before we move to Q&A. Starting with our fourth quarter 2023 highlights, sales of $786 million increased 4% year over year and exceeded our expectations due to a stronger than expected performance in the defense electronics segment, which continues to benefit from a healthy backlog and easing in the supply chain. Our performance was once again led by growth in our aerospace and defense markets, as we benefited from 20% growth in commercial aerospace, along with higher tactical communications equipment revenues in ground defense. We also experienced solid growth in our commercial nuclear and process markets. Adjusted operating income grew 2% year over year to a quarterly record of $163 million and resulted in a strong operating margin of 20.8%. Diluted earnings per share increased 8% year-over-year to a quarterly record of $3.16, while free cash flow was $270 million, resulting in a 221% free cash flow conversion. Next, I'll turn your attention to the right-hand side of the slide and recap our full-year 2023 results, where key metrics including sales, operating income, earnings per share, free cash flow, and orders were all records for the company. Sales increased 11% overall to more than $2.8 billion, driven by 10% organic growth. as well as a better than expected contribution from the arresting systems business acquired in the mid-2022. We delivered continued operating margin expansion reaching 17.4% in 2023, which included more than $20 million in incremental strategic investments in research and development to further position us for future organic growth. Of note, for 2023, total R&D investments included both internal and customer-funded projects exceeded 6.5% of total sales. We also overcame the significant headwind associated with the wind-down of the profitable CAP 1000 program. Diluted earnings per share of $9.38 increased 15% year-over-year, while adjusted pre-cash flow was $413 million, a reflection of our strong growth in earnings and working capital management. Growth in our order book was exceptionally strong in 2023, up 5% year over year to a record $3.1 billion, reflecting 1.1 times book-to-bill overall, and solid demand across the majority of our A&D and commercial markets. Of note, we generated double-digit bookings in our defense electronic segment, driven by strong demand for embedded computing and tactical communications equipment, as well as higher growth in our naval and power segment for both commercial nuclear and process equipment. As a result, we concluded the year with a backlog of $2.9 billion, up 9% year over year. With this strong performance, we exceeded expectations for nearly all of our three-year targets set at our 2021 investor day, including sales, operating income, EPS growth, and delivering close to 110% average free cash flow conversion. I'll provide greater detail on our performance against our long-term targets later in the call. Overall, I'm exceptionally proud of the team's continued dedication to deliver consistent, profitable growth and a tremendous performance this past year. Finally, I would like to introduce our full year 2024 guidance, where our successful pivot to growth journey continues. Overall, we are projecting mid-single-digit sales organic growth as we continue to benefit from our steadily growing backlog and the strong alignment of our technologies to favorable end-market trends. We intend to continue our pursuit of investing for growth by making incremental investments in both internally and externally funded research and development. We expect to generate solid growth in diluted EPS and free cash flow this year with the potential to reach double-digit EPS growth and up to $435 million of free cash flow at the high end of our guidance ranges. In summary, Curtis Wright remains well-positioned to deliver another exceptional performance in 2024. Now, I'd like to turn the call over to Chris to continue with our prepared remarks.

Thank you, Lindsay. On slide four, I'll review the key drivers of our fourth quarter 2023 performance by segment. I'll begin in aerospace and industrial, where overall sales growth of 7% is at the high end of our expectations. Within the segment's commercial aerospace market, we experienced a strong 20% growth in OEM sales, supporting the ramp up in production across narrow-body and wide-body platforms. This performance is partially offset by the timing of actuation development programs across the segment's A&D markets. In the general industrial market, improved demand for our new power management electronics supporting the on-highway market was essentially offset by lower off-highway sales to the construction market. And turning to the segment's profitability, our results reflected favorable absorption on higher sales and a strong operating margin of 18.5%. Next, in the defense electronics segment, our results exceeded our expectations and were slightly ahead of last year's record fourth quarter results. This performance was principally driven by better than expected sales growth in our ground defense market, resulting from continued stability in the supply chain and the conversion of our strong order book. Of note, we experienced higher sales of tactical communications equipment, as well as increased sales of embedded computing equipment, most notably on the Stryker platform. Within aerospace defense, despite higher sales for flight test instrumentation on the F-35, our fourth quarter results were impacted by the timing of the vetted computing sales supporting C5ISR programs, principally on the Black Hawk helicopter. Regarding the segment's operating performance, we delivered a strong 28.8% operating margin, reflecting favorable absorption on higher A&D revenues, mainly offset by higher strategic R&D investments. Turning to the naval and power segment, overall sales growth of 3% was slightly ahead of our expectations. Starting in the naval defense market, our performance reflected higher revenues supporting the Columbia-class and Virginia-class submarine programs. However, our results were partially offset by the timing of production revenues on the CVN-81 aircraft carrier program. Within the segment's aerospace defense market, our results reflected continued strong global demand for our rusting systems equipment. In the power and process market, sales grew at a low single-digit pace overall, but reflected high single-digit growth when excluding cap and thousand production revenues. This performance was principally driven by higher growth in the process market due to increased valve sales supporting refinery maintenance and turnaround activity, as well as higher subsea pump development revenues. In our commercial nuclear market, we experienced higher development revenues, mainly supporting the X-energy advanced reactor design. And turning to the segment's operating performance, favorable absorption on solid revenue growth was offset by unfavorable mix on lower cap 1,000 revenues and increased margin pressure related to both SMR and subsea pump development contracts as we continued to advance these critical growth initiatives. To sum up our fourth quarter results, overall, we generated solid absorption on the stronger than expected top line performance, resulting in record fourth quarter operating income and a solid finish to 2023. Next, turning to our full year 2024 guidance, I'll begin on slide five with our end market sales outlook, where we expect organic sales to grow 4% to 6% driven by growth in all of our end markets. In aerospace defense, growth of 5% to 7% principally reflects higher embedded computing revenues in defense electronics on various fighter jet and helicopter programs, as well as flight test instrumentation on the F-35 program supporting the Tech Refresh 3, or TR-3 upgrade. Next, in ground defense, our outlook for 4% to 6% sales growth reflects continued strong demand for our tactical communications equipment and higher electromechanical actuation revenues supporting ground missile launchers within the ANI segment. We expect those increases to be partially offset by the timing of turret stabilization systems and lower sales on ground combat vehicles. In naval defense, our outlook for 3% to 5% sales growth principally reflects higher revenues driven by the ramp up in production on both the CVN-81 aircraft carrier and Columbia-class submarine programs. We expect those increases to be partially offset by reduced year-over-year production revenues on the CVN-80 aircraft carrier program. I also wanted to highlight the expected contribution of foreign military sales, or FMS, across these markets, as increased global spending on defense continues to positively influence our performance. In 2024, we expect mid-single-digit growth in FMS to be driven by the alignment of our technologies to support global defense priorities, which follows a strong 20% growth in FMS in 2023. Turning to commercial aerospace, Our outlook for 10% to 12% sales growth is driven by higher OEM production rates on narrow-body aircraft, including the A320, and wide-body aircraft, including the 787 and A350. We're also beginning the year with some conservatism in our guidance relative to the 737 MAX based upon the FAA's recent pause in Boeing's production ramp. Wrapping up our aerospace and defense markets, we expect total sales to increase a healthy 5% to 7% in 2024. Outside of our A&D markets and the power and process market, our outlook for 3% to 5% sales growth principally reflects increased demand for our commercial nuclear aftermarket products and includes a 1% headwind related to the completion of the Kaplan 1000 program early in 2023. Within our commercial nuclear market, we expect a mid-single-digit full-year growth rate, principally reflecting strong demand supporting the ongoing maintenance and subsequent license renewals that extend the life of existing nuclear reactors. In the process market, we expect growth to be mainly driven by higher subsea pump development revenues supporting the newly announced Petrobras contract. In addition, following very strong 20% growth in valve sales in 2023, we expect these sales to be essentially flat in 2024 with higher MRO sales being offset by the timing of large capital projects. And lastly, in the general industrial market, we expect growth of 1% to 3% driven by higher sales of industrial vehicle products, notably due to increased sales of our power management electronics and increased sales of surface treatment services. Wrapping up our total commercial markets, we are targeting full-year sales growth of 2% to 4%. Continuing with our full-year outlook by segment on slide 6, I'll begin in aerospace and industrial, where we expect sales to grow 3% to 5%, principally driven by double-digit growth in commercial aerospace and low single-digit growth in general industrial. Regarding the segment's profitability, we expect operating income growth of 5% to 8% and operating margin expansion of 20 to 40 basis points to a range of 16.6% to 16.8%, reflecting higher sales and improved product mix in power management electronics, partially offset by incremental R&D investments. Next, in Defense Electronics, we expect sales to grow 5% to 7%, principally driven by this business's record 2023 order book, reflecting solid growth in our A&D markets. Regarding the segment's profitability, we expect operating income to grow 3% to 6%, and full-year operating margins to range from 23.1% to 23.3%, which includes a $5 million or 50 basis point headwind from internally funded R&D investments. And lastly, in naval and power, we expect sales to grow 4% to 6%, driven by solid growth in our naval defense, commercial nuclear, and process markets. Regarding the segment's profitability, operating income is expected to grow 2% to 5%, while operating margin is expected to range from 17% to 17.2%. While we anticipate favorable absorption on the overall increase in sales, our outlook reflects margin pressures associated with the shift to development contracts for both advanced small modular reactors and subsea pumps, as well as a $3 million internally funded R&D project increase, which will collectively create a 50 basis point headwind on our projections. So to summarize our outlook, overall, we expect total Curtis Wright operating income to grow 4% to 7% in excess of sales growth and operating margin to improve 10 basis points at the midpoint of our guide, ranging from 17.4% to 17.6%. This outlook reflects at least 25% incremental margins across the consolidated portfolio, as well as a year-over-year increase of more than $20 million in our total engineering spending on both internal and customer-funded programs, equating to a record pace of investment and ahead of last year's 6.5% of sales. To aid in your quarterly modeling of sales and operating margin, We expect first quarter 2024 sales to grow by mid-single digits relative to the first quarter of 2023, followed by sequential quarterly improvement. Regarding our first quarter 2024 profitability, starting with the A&I segment, we expect that operating margin will be in line with the first quarter 2023 results. Within the naval and power segment, as discussed, the ramp-up in development cost is expected to drive profitability below our first quarter 2023 results, followed by a steady improvement in segment operating margin over the course of the year. And lastly, we expect our defense electronics segment to demonstrate strong growth in profitability in excess of last year's first quarter results. In summary, at the overall purpose right level, we are expecting modest improvement in year-over-year first quarter operating margin on solid organic sales growth. Continuing with our financial outlook on slide seven and starting with our EPS guidance, we expect full year 2024 diluted EPS to range from $10 to $10.30, up 7% to 10%, mainly driven by our strong growth in operating income. Our guidance also reflects higher interest income as well as lower borrowing based upon our strong free cash flow generation and healthy balance sheet as we prepare for greater capital deployment in 2024. To aid in your quarterly EPS modeling, we expect our 2024 quarterly EPS to follow a similar cadence to last year. We expect the first quarter EPS to reflect low teens growth relative to the first quarter of 2023 and to generate approximately 40% of our full-year earnings per share in the first half. For the remainder of 2024, we expect sequential quarterly improvement, with the fourth quarter being our strongest. And lastly, turning to our free cash flow guidance, we are projecting full-year free cash flow of $415 to $435 million, up 0% to 5%. Growth in cash flow from operations is driven by expectations for higher cash earnings and our intense focus on working capital management, while capital expenditures are expected to increase $10 million at the midpoint of our guide as we continue to invest in support of our future organic growth. And as a reminder, We recognize the remaining $5 million in revenues and $20 million in cash on the CAP 1000 program in the first quarter of 2023 as we essentially completed the contract. While the revenue will no longer be a substantial headwind for us, we do expect the $20 million cash headwind to impact our first quarter and full year 2024 comparisons year over year. Absent this headwind, our 2024 free cash flow guidance would reflect strong growth of 5% to 10%. And finally, our 2024 free cash flow conversion rate is expected to be near 110% based upon the midpoint of our guidance and in line with our recent strong performance. Now, I'd like to turn the call back over to Lynn. Thank you, Chris.

And turning to slide 8. As I reflect upon the past three years, our pivot to growth strategy, and the Investor Day commitments established in 2021, I'm pleased with our team's execution and our overall financial performance. I'd like to spend the next few minutes revisiting the four key messages from our 2021 Investor Day, as shown on the top of the slide, and discuss how our accomplishments have translated into meaningful results for Curtis Wright, providing confidence that our strategy is working. First, our commitment to accelerating Curtis Wright's top-line growth, both organically and through acquisitions. As discussed throughout our prepared March, we have maintained our commitment to incremental R&D investments and supplemented this target spending with an intense and dedicated focus on innovation and collaboration across our three segments. We've also discussed the alignment of our technologies to key secular trends, which has propelled organic growth in all of our markets over the past three years. In addition, our top-line growth has been underpinned by a very disciplined approach to capital allocation, and we have grown through acquisition as a means to enhance our customer offering and the strategic accelerator of top-line growth. Closely following the strategic and financial criteria that we laid out in 2021, we have added some very complimentary businesses, such as the arresting systems business acquired in 2022, which has expanded our market share and international presence. Second, our focus on the customer. Where we have been leveraging the critical mass of one Curtis Wright through our sales channels and technologies to provide better value to our customers, expand relations, and build upon the content on key platforms, such as the inclusion of our critical commercial nuclear technologies on several advanced small modular reactor designs. In addition, our continued execution provides our customers the confidence and courage right to drive increased funding and investment for key projects, which we expect to contribute to our future organic growth. Third, our focus on advancing our strong track record of operational and financial excellence. This has led to continued top quartile operating margin performance relative to our peers. We have made great strides advancing the Operational Growth Platform, or OTP, by combining our strong performance in operational excellence with new opportunities in commercial excellence and strategic pricing and the development of new systems and tools to improve Curtis Wright's overall efficiency. These efforts have created underlining margin expansion to support our ramp up in R&D investments or to cover first-year dilution from acquisitions as we invest significantly for our future. And last but not least, our focus on simplifying the business model. This started with the new segment structure released in 2021 aimed at reducing the perceived complexity of our business mix and diverse end market exposure. Since then, we've improved the clarity of our messaging regarding our strategies to leverage inherent synergies and crossover technologies that exist throughout our portfolio and continue to illustrate why these technologies remain a part of Curtis Wright today. We've communicated these efforts through a number of channels and offered continuous proof points to ensure the benefits of our combined portfolio were well understood. With that in mind, and shifting to the bottom of the slide, I'm proud to say that the team has successfully achieved nearly all of our major targets issued in 2021, starting with the top line, where we projected a total revenue TAGR ranging from 5% to 10%, with organic growth ranging from 3% to 5%. As you can see, we firmly achieved those goals by generating a 7.4% CAGR for total revenue, along with a 4.7 organic CAGR. Operating income grew at 9.6% CAGR over the three-year period and exceeded our strong sales growth, while operating margin expanded 110 basis points over the period to a record of 17.4% in 2023. As a result, we maintained top quartile financial performance compared with our peers. Deluded EPS grew at 12.5% CAGR over the three-year period, well in excess of the 10% minimum target, benefiting from the solid operational performance and continued share repurchases. Regarding our final metric, we have generated more than $1 billion in adjusted free cash flow over the past three years, despite the impacts of the pandemic and the very challenging supply chain environment. Those factors left us just shy of achieving our target as we delivered an average free cash flow conversion of 108% over the three-year period. As a reminder, aside from 2022, we have consistently delivered greater than 100% adjusted pre-cash flow conversion for the past decade. Our initial 2024 pre-cash flow conversion guidance maintains this strong pattern of performance. In closing, our journey continues. Based on a healthy outlook for the near and long-term prospects for Curtis Wright and the continued momentum in the key markets we serve, we are primed to deliver a strong performance yet again this year. We enter the year with a very healthy balance sheet and remain committed to growing diligently through strategic acquisitions while continuing to provide solid returns to our shareholders through consistent share repurposes. Finally, I wanted to make a few comments about our upcoming Investor Day, which will take place on Tuesday, May 21st in Midtown New York City. We're excited to once again host an in-person event where you will not only have the opportunity to hear from me and Chris, but several members of our senior leadership team, including the general managers responsible for various A&D and commercial businesses. We look forward to providing a more thorough recap of the success of our Pivot to Growth strategy and the past three years of performance against our prior Investor Day targets. We also intend to discuss our long-term strategy and organic growth initiatives and establish new financial targets as we drive this business forward. In addition, we're pleased to announce that we will be hosting what we anticipate being a very engaging and educational commercial nuclear panel. Joining us will be three highly knowledgeable and respected industry experts to cover several facets of the nuclear industry from the aftermarket to advances in small modular reactor technology. We are excited to provide a deeper dive into an industry where the momentum has never been stronger and one that will surely fuel Curtis Wright's potential for long-term growth. Please look out for the formal registration within a few weeks, and we hope that you will join us. This represents one of the many exciting events taking place at Curtis Wright in our 95th year as a public company, as we look forward to delivering tremendous value for our shareholders, our employees, and our customers. Thank you, and at this time, I would like to open up today's conference call for questions.

Thank you. 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 2. Again, we ask that you pick your handset up when posing your question to provide optimal sound quality. Thank you. Our first question is coming from Miles Walton with Wolf Research.

Thanks. Good morning. If I look back at the 2023 outperformance on revenue, it looks like the ground defense was actually probably the largest single contributor. If you can correct me if I'm off on that. And it even looked like you had momentum carrying you into the fourth quarter above where you were thinking. So just looking at the 2024 outlook, could you talk maybe about ground defense specifically, but more broadly, the areas of upside and downside risk on your end market growth rates?

Yeah, thank you for that. And maybe I'll speak a bit at a high level, and then Chris can put a little financial detail behind that. So I'm really pleased with what happened this past year. very strong demand for our tactical communication system sales. It was really, you know, the primary driver in that outstanding growth. But it is more broad than that. You know, we're looking to move towards the initial volumes, towards Endor and Shield, and our current stabilization capability that, you know, is produced over in Europe that we've talked about as, you know, being aligned with some of the increased foreign military capabilities. uh, spending as countries move towards funding their NATO commitment. So really, you know, a lot of different pockets across the organization driving that. And I'll have maybe Chris to speak to what we're expecting here in 24.

Yeah, sure. You know, it certainly was a significant part of what we had this last year, Miles. And, you know, across 2023, I mean, we saw a fairly strong improvement in the supply chain, right? And that acceleration of material continued as we got deeper into 2023, which, you know, contributed towards our beat in sales here at year end. For 24, we're entering the year with a very strong order book, and we're not expecting lead times to improve. We expect continued stability in the supply chain and on-time delivery from our suppliers, which will continue to strong growth in tactical comms. For 24, we expect that business is going to grow at a mid-teens pace, and it's been on a mid-teens pace since we bought the PacStar acquisition several years back. Within the defense electronics segment, though, we do have a few things that are going to offset that growth rate. And one is the timing of sales to international TDSS. And we spent a lot of time earlier this year talking about the opportunities that were emerging in the European theater with international TDS and some of the programs we were working on, such as the Challenger. And, you know, those programs can be a little bit lumpy and there's timing. And then beyond that, there are We had talked a little bit about how the Stryker program had benefited our ground defense market this year with some of the modernization that was going on there for that ground vehicle. So this helped to boost 23. I'll say those kind of more lumpy ground defense items are not going to exist here in 2024, but it's still a very healthy growth rate in tactical comms as we look forward. And then, as Lynn had mentioned, just briefly outside of the defense electronics segment, We've got this CM actuation on the Enduring Shield platform, which was a development contract for us a little over a year ago, and now that's starting to kind of transition into production. So we'll see a little bit of benefit there to a much larger extent than the things I've talked about within the ANI segment sales.

Okay. And then maybe could you comment on the M&A pipeline? It's been a bit since the last larger deal, and just curious as the leverage has come down here with the size of that you're looking at as well as in-market preferences as well.

Yeah, I mean, you know, definitely, you know, we looked at a lot of properties in 23 and didn't find one that we felt really matched the criteria. And I'll tell you, when I do reflect on how the ESCO business and the PacStar business are contributing to our growth, I mean, Chris just talked a little bit about the PacStar acquisition, you know, it really reinforces why you remain – very diligent in not acquiring for acquiring's sake. But with that said, I will say that the acquisition pipeline right now is as healthy as I can remember it being for many years. And it's not just there's acquisitions. There's always properties coming available. These are properties that we see as being potentially very strong strategic fits for Curtis Wright and rounding out product capabilities and customer access in markets that are very important and critical to our growth. Several of these we've had pre-looks at and know they will be coming to the market. Any chance we can have them be exclusively with Curtis Wright, we always have a keen eye to pursue that. Whether we accomplish that or not is TBD. We are in due diligence with a fairly small property right now that I anticipate we will close on. It's not meaningful really from a revenue standpoint, but a critical piece of technology. So that might be something coming out in the near future. But the other properties we're looking at that are in the pipeline will significantly move the needle revenue and profitability-wise for Curtis Wright. And we feel that they can become part of Curtis Wright and over a couple years continue to you know, be accreted to our overall margin expansion. So the acquisition pipeline is really great, and, you know, some of that is, you know, with our current cash position, knowing that and the cost of capital to borrow is, you know, we've given ourselves a bit of a pause of how we're using the cash we have on hand to make sure we're ready to act and, you know, can do it in the most affordable way for Curtis Wright.

That's great. Thanks so much.

Thank you.

We'll go next to Nathan Jones with Stifel.

Good morning. This is Adam Farley on for Nathan Jones. Hey, good morning. I was wondering if we could first start with some of the increased R&D spend. Can you talk about where the investments are being made, expected commercialization, and maybe expected impact on growth for the future? Sure.

Sure, I'd love to take that question. So I'm pleased to say that we have, you know, really opportunity across all three of our segments that we have products and technologies that are very much aligned to healthy end market trends that we feel passionate about the investments we're making. You know, just to restate what you heard, we increased our total engineering spend in 23 by $20 million, and we're targeting another $20 million increase 2024 those are some significant investments that are really um very laser focused at driving organic growth that we know will be profitable organic growth going forward and so kind of just walking across the segments you know we spend most of our irad and defense electronics we continue um to look to drive increased ir and d spending in that segment again this year you know with very much a focus around you know building out our MOSA and SOSA COTS product offering, which is just really the open standard approach that our DOD is demanding as, you know, being the key criteria in system selection and just continuing to gain force across all branches of the government. So that's kind of the most notable from IR&D, but right behind it in the A&I segment, you know, our building out of our power electronics capability, and we've talked about that as, you know, our bringing new products to market in this area is really what's underpinning our ability to put forth growth in this industrial area that is not seeing a lot of natural growth in the market, but it's really our new product injections and bringing new products and winning new customers that is driving that. So that's another area of the IR&D. Think of some of the CR&D increases. Also up in the ANI segment, a lot of electromechanical actuation capabilities. We're still executing on our first one with Airbus for electromechanical actuation. It is going very well. And then the 4DMS opportunities for new and additional programs with Airbus, which is just going to provide great growth for Kurdish rights going forward, but also some of that same electromechanical actuation on a variety of defense platforms. We talked about Enduring Shields, some of the other ones we can't really speak about openly, but the capability that that team has is pretty unique and outstanding, and we're finding homes for it both across commercial and defense markets. And then last but not least in our naval and power segment, there's a lot. If you read the presses across naval platforms, there's a lot of work going on for next generation platforms across many critical platforms. Curtis Wright is a thought leader with our Navy in these spaces and doing advanced work to help position our technologies and content on those future platforms. That's one area. And then, obviously, the work, you know, we've been very much highlighting around our investments we're making along with customers to assure that we have strong positions across all the SMR platforms. So, you know, we've talked openly about a few of those announcements with Xenergy and TerraPower. But I assure you that we are active with all the major providers that are building out. We'll have future, you know, next generation SMRs. And so that's all, I think, really, you know, some of the top areas. But, you know, these are exciting investments. And, you know, we are really great about what it's going to do for Curtis Wright for decades to come.

That's really, really helpful, Giselle. Thank you. I'll leave it there. Thank you.

We'll turn next to Peter Arndt with Baird.

Good morning, Lynn, Chris, Jim. Hey, Lynn. Maybe just to pick up on the R&D question, just where do you see you are in kind of like the baseball analogy of like, I mean, it feels like defense electronics and kind of the investments that you're making there on an IRAD perspective, you know, would be, you'd be further along just given your market position and where you are, whereas I would think that the kind of the investments you're making in naval power, particularly tied to the commercial nuclear, is probably still earlier innings and that might linger. I guess I'm just trying to wonder whether we see this as a further headwind as we get into 25 and beyond, things like that.

Very reasonable question. I think we're really proud in the defense electronics space. I think we're very proud of the product offering we have in industry today. We have a couple, actually quite a handful of really major developments that will hit the market in this calendar year that I say, to some degree, I appreciate your point. You know, we will be very solidly into delivering what we need to do to have the state-of-the-art product offering. Always in this area, though, there's new technologies coming to bear that are, of interest by our defense department for finding different applications. And we're also always, you know, our goal isn't to just have next generation on, you know, the current platforms we have, but to really broaden our product offering to be able to attack more and more of the market. I mean, we've talked, I think, our last investor day that, It's hard to exact in size, but the belief for us is that the total spend just in the U.S. on ruggedized electronics is somewhere north of $40 billion. And as proud as we are of the size of our defense electronics team, which is still under $1 billion, there's a heck of a lot of electronics content out there that we can go after with maybe doing customer-funded projects that are spins of our own technologies we've invested in. And so I don't think we're going to see a rapid acceleration in that space, but I think we surely don't want to let our foot up off the pedal as we really become such a dominant player. And, you know, without going too deep into it, but, you know, there's some issues going on in the industry across some of our competition. And when you have those kinds of situations, it's the perfect time to strike. and we're making sure we're aggressive to get in with customers and to provide solutions where some of those opportunities begin. So a good point in the SMRs and even in some of these naval platforms is that these are going to carry on for a handful more years. And I think we talked about anticipating everywhere you turn, everyone's trying to have – their first new platforms beyond the grid producing power, 2030, 2031, 2032. There's lots of examples, whether it's new AP1000 plants or the AP300s over in the UK or wherever. We are going to move through development work for the next couple of years with that, but that should be turning to prototyping work and early production work in this decade, towards the back half of this decade. You know, I don't want to say the design work will go away, but you don't redesign an SMR every year. And so I think as we do work through some of this development work right now, you know, tied to these next-generation reactors, we will see that slow down as we move through the next couple of years.

That's a super helpful call on that. Thanks. How do you see, not to take any thunder from your investor day where you're going to spend all this time on nuclear, but how do you see the bookings environment right now in terms of, I guess, the timelines?

I missed what you said. How do I see the what environment?

The bookings environment in terms of the, you know, kind of SMR and some of the other projects that you're working on in commercial nuclear, you know, going forward.

So it seems steady. You know, as these, you know, companies secure their funding and move through their contracts that, you know, we just continue to work with them. You know, we saw a pretty nice surge in 2023. I don't think we're going to see a big surge in 2024 over top of that. I will say, though, where the order book does remain very strong compared to these next-generation reactors is in the aftermarket work. And, you know, talking with some key individuals in that business yesterday, you know, really, you know, celebrating how strong the order book is already out of the gate this year. And then, obviously, you know, the needle-moving activity of when the first AP1000 RCP pumps come out. you know, obviously is, you know, unlike any other type of orders we really get across this organization. So I'd say the SMR development is more steady than expanding.

Great. I'll leave it there. Thanks again. Nice results.

Thank you, Peter.

We'll turn next to Michael Ciamoli with Troost.

Hey, good morning, guys. Nice results. Thanks for taking the questions. Chris, maybe just the housekeeping modeling first. I think I heard you correct. First quarter, 24 earnings are going to be up low teens. I guess you gave the margins for each segment, but I guess it implies defense electronics would be somewhere maybe 18% or so. Do we have that right? Did I hear that correctly?

well i didn't provide an exact number but we definitely said that defense electronics margins were going to be um very strong here in the first quarter so i think you know okay uh i think you're thinking in the right in the right direction for sure okay okay got it i just want to make sure i heard eps load teams

And then maybe just on to the last question, kind of disruption in that defense electronics marketplace, some of your competitors. Are you guys looking to move into any different market segments like higher-end radar processing or some of that subsystem? Or are you kind of sticking to your knitting and maybe taking some of the opportunities in your sweet spots?

So I think we're going to protect the core always as a priority, but kind of talk at a high level without tipping our hand of some strategic investments we're making. It's part of always pushing the window of what types of products we can bring to bear in the market. And we've talked about an area for focus for investments is around the topics of encryption and cybersecurity and anti-camper. And so that is an area that I will say openly that we are continuing to focus on and, you know, is a critical capability that we can bring there in the markets that will allow us to grow market share. And I believe that it's that. Okay.

Okay, okay. And then, yeah, Lynn, not to kind of, you know, make you spill the beans here on the upcoming investor day, but you guys have done a tremendous job with margin expansion. But if I – I guess I'm just trying to figure out, you've got the R&D investment. You've got, I guess, some of the initial dilutive development work for SMRs. I mean, should we think about the sort of operating model being mature here for the next, you know – kind of couple years, you know, and maybe even just color on on when some of these these SMR development programs might might flip to margin accretion. And I guess this is also thinking absent any big high margin 81,000 orders that would come in that would clearly, you know, you guys haven't modeled for that. But just thinking about kind of steady state business, should we think about some just some normal margin pressure with some of these bigger development programs?

Yeah, so, I mean, you know, obviously, you know, we're projecting modest margin expansion next year. I don't want to at all project that that is the new normal and there isn't more opportunity long-term outside of that. I mean, we're doing a significant amount of work in developing the SMRs and you know, even the subsea pump that, you know, we had the Petrobras press release last week. You know, when you're getting paid development work from your customers, you're not making margins that are going to be accretive to the corporation. And, you know, the Petrobras, you know, development work is significant. Shell and Taipan continue to go on. And so we have all that going on. Those projects will turn production revenue, all of them, in this decade and later this decade, and really have the ability to provide meaningful margin expansion is the low margin work goes away and is replaced with very solid margin production work. And then I think if we can drive the type of growth we think is the art of the possible in our defense electronics team, which delivers very accretive margins to Curtis Wright, that continues to provide uplifts across the organization. And I will comment that a couple of the acquisitions we're looking at – you know, the devil's in detail and go through due diligence, but some of those have very healthy looking margin profiles. So right now, you know, the guide for 24 is doing the right things in this year, you know, to really secure a fantastic future for Curtis Wright. But, you know, again, we will continue to look at top quartile and challenge ourselves to be in the top quartile. We do talk about that openly inside of the company with, You know, everyone that, you know, we have a goal, you know, quite a few years ago of getting to 17%. But that was then. And, you know, top quartile margins continue to go up amongst our peer group. And so we need to continue to challenge ourselves to do that. So I know that you weren't expecting me to say, yes, here's our new two-year margin target. But hopefully that puts some color on the thinking.

It does. It does. Last one and I'll get out of the way. Bookings look like the weakest level since first quarter 22. I know you called out off highway just in general being weaker. Anything to read into that timing or even if you could parse through the bookings a little bit more strength weaknesses in there?

Sure. Let me take that one, Mike. So in the fourth quarter, we continued to see positive order trends across commercial aerospace and commercial nuclear, both fairly strong quarters for us. But we definitely faced some softness in aero and ground defense. We saw pressure in A&D from, if you turn back to the fourth quarter of this last year, we had a few large multi-year orders. And the main decline year over year was actually within Defense Electronics for us. We were down about $45 million. So that was really the timing of some of those large multi-year orders, but also the continuing resolution. Within Defense Electronics, I mean, we had these F-30, FTI orders that we, on the F-35, we talked a little bit about that earlier this year in a press release. But we also had large multi-year orders outside of defense electronics in the arresting systems business, and then also a large multi-year laser peening contract on the F-35 within the A&I segment. As we look at ground defense and tactical communications, we saw this this last year, but that direct connectivity that they have to the government customer, you know, they feel these CRs a little bit harder than most. So sometimes you get a rush to get ahead of those orders into Q3 before things hit. And, you know, but I will say, you know, year over year, Q4 to Q4 within that business, very similar levels. So nothing there that would kind of, you know, concern us. And then I think, you know, on a positive note, I mean, as you look forward into 2024, you know, We had a very strong January. Our order book was up $70 million over the prior year, January, and $40 million of that within defense electronics. So I know the NDA got signed here in December. People are feeling a little bit more confident in their spending. Obviously, we've got the CR that's still kind of an overhang. But I think, you know, in 2024, we feel good about the guidance that we're providing in sales. And, you know, if there's any watch areas for us here from the market perspective, it's really just in the general industrial space and maybe a little bit in process and balance. But, you know, those are more economically sensitive and prudent to be cautious as you approach this. Got it. Perfect. Thanks, guys.

Thanks, Mike.

We'll go now to Louis DePalma with William Blair.

Louis DePalma Lin, Chris, and Jim, good morning. Good morning. Good morning. There's been higher volumes for many of the end market ground defense and aero defense platforms that you are providing content to associated with the elevated geopolitical tensions and higher commercial aero demand beyond the higher volumes, were you able to increase the scope of content that you are providing to the different platforms in 2023? And are there expectations for market share increases and scope increases for the next several years based on your research and development investments? Thanks.

Thank you for that. Broadly, the content stays relatively stable on the platform. So that's a starting point. Now, we're always looking to change that, and there are tech refreshes. There's been a lot of tech refreshes in ground vehicles over the past years, and they will work consistently chasing those which are opportunities for new content on those platforms. And there's a lot of special operations provisions and new capabilities added to older fighter jets. So as much as the F-35 is relatively stable, they're cutting in TR-3, that's a growth area for us because we have all our support we provide for the testing of those aircraft. You know, we look to grow our content across those production platforms as they, you know, you know, have new and incremental, you know, capabilities that they're looking for, but the default is they're stable.

So I don't know if that answers your question, but... Yeah, no, I was thinking also along the lines of the Columbia-class and Virginia-class submarines in which the supply chain has repeatedly been described as fragile and you seem to be executing very well on those platforms. So I was thinking perhaps there's the potential for you to add content from other suppliers that may be struggling to handle the demand.

Those are not decisions that the Navy would make. on a very rapid-fire basis. I mean, they, these are very stable platforms that they want stable suppliers. But, you know, we are a solid supplier across those submarine platforms and stay in close contact with our customers that if there is opportunity to, you know, take over, you know, supplying the capability, you know, that we're there to explore new opportunities. They don't come very often, but our reputation, you know, across the Virginia and the Columbia class program would afford us to be that person or that company, I think, if relevant opportunity came available. But I'd be cautious to speak to anything specifically if that's not really how the Navy runs itself, you know, on a normal basis.

Great. And one final one. You spoke very enthusiastically about the Enduring Shield program. I believe you are partnering with Dynetics slash Leidos for that. Is there significant growth for that program in 2024? Good. I'll let you in.

Yeah, sure. So we are, as I mentioned, transitioning out of a development contract and into production this year. And, you know, it's a significant program for us. I mean, it showcases REM actuation technology and ground defense applications and you know, leading edge ground defense applications. So we're very proud of what's happening there. Overall, I think as you look at the increase year over year, the contribution to the A&I segment, I'd put that somewhere in the range of about, you know, $5 million. You know, but, you know, despite the size, it's enough to kind of move the ground defense market. And, you know, there's some other things that are happening there clearly to offset what we're seeing. But it's an exciting program, and, you know, we're excited about its future.

Yeah, I think, you know, when you put in perspective, quite sadly, some of the things going on around the world and the ever-visible critical role that these types of systems play play for countries where, you know, there's active conflicts, you know, I think our enthusiasm isn't, you know, tied only to 2024. It's more what we know is going on and, you know, the long-term potential for where this capability will be deployed around the globe to provide protection. That is, you know, some of the excitement.

Great. Thanks, everyone. Thank you.

Once again, if you do have a question, you may press star 1 on your telephone keypad at this time. We'll turn next to Christine Luag with Morgan Stanley.

Hey, this is Justin. I'm for Christine. Thanks for taking the question.

Hey, Justin.

Just a quick one on AP1000. There was some reporting earlier this week, it looks like the Polish government might be reevaluating the feasibility of the 2033 target. I know you laid out a framework for when to expect an order to materialize, but just any updates on this at this point, sort of around timing expectations?

No, not at this point in time. I know there's some press, but really broadly, things have gone very well in Poland, and they're making steady progress. I think from our perspective and working closely with Westinghouse, we don't see any change out of what we're expecting.

I will say, though, that we've learned enough in time regarding these large orders and these large projects that there's a lot of people and a lot of things that need to get aligned to get them off the ground. And that's why we provided this range when we said, hey, this is the timing for our next order. I think you could back into the initial production timelines and schedules that they provided. And, you know, the order initially we were looking at, it should have been in our hands immediately. But these things do take a little bit of time. They're moving through some, you know, engineering contracts. And, you know, we still continue to hold to the timeline that we initially established.

Okay. Makes sense. I'll stick to one. Thanks.

Thank you.

At this time, as there are no further questions standing by, I'd like to turn the floor over to Lynn Bamford, Chair and Chief Executive Officer, for additional or closing remarks.

Thank you, everybody. And I look forward to speaking with you again at our Q1 earnings call and hopefully seeing all of you at our investor day. Thank you.

Thank you. This concludes today's Curtis Wright Earnings Conference call. Please disconnect your line at this time and have a wonderful day.