Curtiss-Wright Corp (CW) 2005 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the quarter 2, 2005 Curtiss-Wright Corp. earnings conference call. My name is Nika, and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of today's conference. [OPERATOR INSTRUCTIONS] As a reminder, this conference is being recorded for replay purposes. I'll would now like to turn the presentation over to your host for today's conference, Mr. Martin Benante, Chairman and Chief Executive Officer. Please proceed, sir.

Thank you, Nika. And good morning, everyone. Welcome to our 2005 second quarter earnings conference call. Joining me on the call today is Mr. Glenn Tynan, our CFO, who will begin our forum today.

Thank you, Marty. If you do not have a copy of the earnings release, which was issued yesterday, please call Ms. Deborah Torrey, at area code 973-597-4712 and she will be happy to e-mail or fax a copy to you and add you to the Curtiss-Wright distribution list for all future press releases.

Before we begin, we will make certain forward-looking statements on today's call. Such as statements about the Company's confidence and strategies or expectations about the results of operation, future contracts, or market opportunities. While we believe that our operating plans are based on reasonable assumptions, we cannot guarantee that we will meet any expectations that might arise from these forward-looking statements, or their underlying assumptions.

Such forward-looking statements are made pursuant to the Safe Harbor provisions of the Security Reform Act of 1995. And involve risks and uncertainties that may produce results or achievements that are materially different from those expressed or implied during this discussion. Such risks and uncertainties include those factors that generally effect the business of aerospace, defense, electronics, marine, and industrial companies. Such factors, as well as further information relating to our business, are detailed in the Company's Annual Report on Form 10-K, for the fiscal year ended December 31, 2004, and subsequent reports filed with the Securities and Exchange Commission.

For our agenda today, Marty will open our discussion with an overview of Curtiss-Wright's second quarter 2005 operating performance. Then I'll review our segment performance and financial position. And finally, Marty will conclude our discussion with an update on our 2005 guidance. And then after that, we will open the call for questions. Marty?

Thank you, Glenn. I am pleased to report that in the second quarter 2005 sales increased 27% over the prior year to 283 million. Including 12% organic sales growth from our base businesses. Our strong sales growth was driven by improved commercial markets, including oil and gas, power generation, and commercial aerospace, and the continued integration of our strategic acquisition.

Our operating income for the first -- second quarter of 2005, increased 31% over the prior year to 33 million, including 24% organic growth from our base businesses. All three of our operating segments generated strong organic operating income growth during the second quarter, primarily due to higher volume in our commercial markets, and improved margins due to favorable sales mix and previously implemented cost reduction initiatives.

In our Metal Treatment segment, the commercial aerospace production rates have generated solid increase in revenue and profitability. In addition, we have also more than offset the decline in automotive production rates with expansion in new automotive programs. In Motion Control, we are positioned on Boeing and Airbus platforms to continue benefiting from increased production rates. In particular, we have significant contracts on the Boeing 737, which is currently experiencing highest new order growth rate. And as airlines begin to catch up on deferred maintenance, we have and will continue to partner with the airlines to capture new repair and overhaul programs. In addition, we experienced increased it demand for our industrial sensors, and controller products.

In Flow Control, we are seeing an increase in global demand by the energy markets as the industry increases their investment for maintenance, capital expenditures, and new projects. In the process industry, higher demand for our DeltaGuard coker valve is resulting from increased spending on plant expansions, upgrades and additions. Currently, there are 43 delayed coker unit projects underway, representing more than 5 billion in total investment value at petroleum refineries in North America alone.

The surge in project spending is due to three factors. A need to process heavier grades of crude oil, the desire to implement safety systems, such as an automated process, which minimizes hazardous operations, and also, mandatory maintenance and end of life cycle replacements. Our DeltaGuard coker valve addresses all of these issues, and as a result, we have captured 12% of the worldwide market thus far. And 100% of known new installations worldwide since it's introduction almost four years ago.

As a result of our strong operating performance, consolidated net earnings increased 25% to 17.9 million, or $0.82 per diluted share, from 14.3 million or $0.67 per diluted share in the second quarter of 2004. This strong performance was achieved despite increased pension costs, and higher than anticipated interest expense. Finally, new orders received in the second quarter were 285 million, up 37% compared to the second quarter of 2004.

As we indicated in our last call, many of our new military programs or all of our military programs are progressing through the procurement cycle and we expect a ramp up in the second half of the year. In addition, in the second half of the year we expect a continuation of the strong commercial market demand experienced during the first half of the year.

Now I'll turn the call over to Glenn to discuss our segment performance and our current financial position.

Thank you, Marty. In our Flow Control segment, sales for the second quarter of 2005 of 114 million were up 33% over the prior-year quarter, due to strong organic growth of 12% in contributions from the 2004 acquisitions. In our base business we experienced strong demand for our coker valve product and higher sales of our JP-5 valve to the U.S. Navy. These increases were partially offset by lower sales of pump products to the U.S. Navy, due to the timing of customer-driven delivery schedules.

Operating income for Flow Control increased 47% compared to the prior year due to the increased volume and stronger margins in the oil and gas, and power generation markets, increased volume to the U.S. Navy and the implementation of cost control initiatives. Partially offsetting the margin improvements was work -- ongoing work on developmental contracts which traditionally carry lower margins.

In our Motion Control segment, sales of 118 million in the second quarter of 2005, increased 29% over last year, due to solid organic growth of 14% in contributions from our acquisitions made since March 31, 2004. Organic sales growth resulted from higher sales of OEM and spares products, and increased repair and overhaul services to the commercial aerospace market, higher sales of industrial sensor products and higher sales of embedded computing products to the defense aerospace market. Partially offsetting these increases were lower sales of F-16 spares and lower sales of tilting train systems in Europe, due to the expiration of this program in 2004.

Operating income for our Motion Control segment increased 27% in the second quarter 2005, over the prior-year period. The increase was driven primarily by higher sales volume and cost reductions. Offset partially by increased developmental contract work, which generates lower margins.

In our Metal Treatment segment, sales for the second quarter of 2005 of 51 million increased 14% over 2004. The improvement, all of which was organic, was driven by higher global shot peening revenues from both the aerospace and automotive markets. Operating income increased 23% over the prior year, primarily as a result of the higher sales volume.

Now I will review our liquidity and financial position. Our free cash flow, defined as "cash flow from operations, less capital expenditures" was approximately $30 million in the second quarter of 2005. Year-to-date, depreciation and amortization was approximately 24 million, and capital expenditures were approximately 22 million. Our balance sheet remains strong with working capital of 273 million, and total debt outstanding of 404 million, as of June 30th, 2005. For a total gross debt-to-book capitalization of 40%.

I will now turn the call back over to Marty. Marty?

Thank you, Glenn. We're very pleased with our second quarter performance, which was driven by strong performance from our base businesses, and the early gains from successful acquisition integration programs. In particular, strong demand in our commercial markets and improved margins led to significant organic growth in each of our operating segments. We anticipate an even stronger second half of the year as our defense programs ramp up and commercial markets continue to improve.

I'd like to address our 2005 full-year guidance. We're increasing our 2005 full-year guidance to reflect improved market conditions and incorporation of our 2005 acquisitions. We expect revenues to be in the range of 1.1 billion, to 1.15 billion. Operating income in the range of 135 to 145 million. And earnings per share in the range of $3.30 to $3.50 per share. This guidance reflects our expectations of 15 to 20% growth in revenue and operating income, and 10 to 15% growth in earnings per share. Earnings per share guidance is based on estimated fully-diluted shares outstanding of 22 million shares for the full year of 2005. We look forward to continue to generate solid profitable growth in 2005 and to provide our investors with superior returns.

At this time, we'd like to open up the conference call for questions.

[OPERATOR INSTRUCTIONS] Our first question comes from the line of Jay Khetani of SG Cowen. Please proceed.

Good morning, Marty. Good morning, Glenn.

Good morning, Jay.

Hi, Jay.

On MIC, what are your expectations for that business from here? Are we seeing an increased level of activity driven by build rates? Typically Q3 is kind of flattish versus the second, and then you get another step-up in the fourth. Or are there stronger demand trends that are -- that should continue to accelerate MIC's growth from here?

Jay, I think you're going to see the same thing for MIC. A little bit of slower third quarter and a larger pick-up in the fourth quarter. I think the hidden value there is going to be in the fourth quarter. How much of the aerospace ramp up is actually going to be seen in 2005 for the increases in 2006.

And is -- there had been some mix issues with regards to roll off of some laser peening work that had depressed margins a little bit in the back half of '04, and I guess to a degree in the first quarter. Is that laser work mostly completed such that as we look at margin opportunity in MIC going forward, it's really just the pure incremental margin of the growth in the shot peening area?

We are -- our laser peening is taking a little bit longer to have companies go through their qualification work. We expect the -- again, additional orders for laser peening this year and on into next year. It still contributes, it has a good margin. It's less than what we anticipated, but obviously, well for the first quarter, I did indicate that -- or actually the end of last year, that we did not factor in the increase Boeing at that time. So the laser peening, although is moving slower, still shows the same promise that it has, except this year it will be a little bit more depressed, that's all. It's certainly more than last year, but less than what we anticipated.

Sure. And from the level you experienced in the second quarter as we think about just the rest of the year, it should remain about where it is, in other words, we're not looking for a sequential decline from here?

No. No. As a matter of fact, it should increase going out to next year.

Okay.

This year.

Thanks. Could you just run through if there are any changes with regard to segment operating margin targets for the year from what you had established previously?

No. No. We still anticipate 11.5 to 12 for Flow Control and Motion Control, and between 17 and 18% for MIC. There could be a smidgen off here or there, but we expect on the whole entire corporation to be there. So no, we don't expect any changes.

Okay. And last question, the F-16 spares work sounds like it didn't come in in the quarter. Any reason to think that this is something that could slip as far out as '06 or is it --?

No, no, no. We said that we will have shipments in the fourth quarter of this year. I think sometimes when we talk about F-16, we continually go back to the fact that we didn't have the spares sales in the first quarter as we did last year. But we do have the F-16 spares, we have it in backlog and it will be going out. So that's not a problem.

Okay. Thank you.

All right, Jay, thank you.

Thanks, Jay.

Your next question comes from the line of Myles Walton of CIBC World Markets. Please proceed.

Good morning.

Good morning, Myles.

I had a question as it relates to guidance, which you've increased. I just wanted to know if you could break that out for us in terms of offsetting trends. Obviously, Indal in there, better performance in this quarter. I think you're expecting a little lighter in this quarter. So just, I guess, maybe there's some pull forward. A little lower tax rate. And then also you talked about the higher interest rates. So if you can just kind of get the puts and takes there, that would be helpful.

Myles, it's Glenn. Let me first talk about the tax rate. We did have a little issue with the State of Ohio in the second quarter that lowered our rate for the quarter. But as far as the full-year rate, still at 37%. It's not going to have a change to us.

Okay.

The -- obviously everybody knows the interest rates, a good chunk of our debt is still variable based, and we aren't seeing an increase in rate. I think the second quarter is a fairly good indication of interest for the rest of the yea, assuming we don't increase our borrowing as well, as you know.

Yes.

So there's nothing real big material there going on, other than, we don't know what the rates are going to do per se. Yes.

The second quarter was above where you guys were kind of thinking it would come in. I guess you're looking for, kind of an in-line second quarter and then a strong second half. Is it correct to assume that you came in a little above plan for Q2?

Yes, we did.

Okay.

We are seeing improved demand in oil and gas and also in power. Obviously, it's optimistic.

Okay. Okay. And then given the upward pressure on the Boeing and Airbus delivery schedules, likely higher production rates there than we expected maybe a few months ago. How are your capacity issues? Are there any additional investments beyond what you've currently made that you think you'll have to do to kind of accommodate those newly anticipated production rates?

No, because we had the same production rates back in the late '90s and we met those production rates. There was -- the Boeing 737 was up to 28 chipsets a month prior to it coming down. So we were able to meet those production rates. We haven't missed a shipment to Boeing in 15 years.

Okay. Great. And then the cash flow in -- free cash flow in the quarter sounded good. I think you said 20 million; is that right?

30 million.

30 million, even better. And the cash flow for the year is still looking to be 55 to 60?

Yes.

Okay.

It's the way -- it times that way for us. Again, we are similar to our sales and profitability models. It kind of gets better as the year goes on, the fourth quarter is always our best.

Finally, I guess the integration costs. You gave it to us in the first quarter. I wonder if you could give us what it flowed through in the second quarter?

It was about $200,000.

Okay.

Our integration cost reductions, I should say, is also in line with what we also indicated. That we would see an improvement of about 1.5 million to maybe 1.8 million the second half. So, our costs are in line, also our anticipated profit improvement for the second half is also in line.

Okay. Great. Nice quarter.

Thanks.

Thank you.

Your next question comes from the line of Eric Hugel of Stephens Inc. Please proceed.

Good morning, guys. Good quarter.

Good morning.

Good morning, Eric. How are you doing?

Just -- Marty, can you just repeat. You said that your second quarter was ahead of your expectations, correct?

No. The first quarter was ahead of our expectations.

Second quarter -- you said second quarter was a little light of your expectations?

No. No.

Let me say -- the second quarter was there anything -- I mean very strong quarter, I mean, from the comments that you made on your first quarter conference call on where you expected your second quarter to come in, which was basically maybe sounded like a couple of cents higher. It sounded like that the second quarter was pretty strong. I'm just trying to get a sense of, was there anything sort of pushed forward from the back half of the year that would sort of -- that versus your plan that would account for the strength?

Some was pushed forward from the back half of the year, but we had improved sales in oil and gas and also power. So, we see our oil and gas especially doing well and continue to be much stronger over the second half of the year. But a lot of it is in line from what we've talked about for the second half of the year, that it would be stronger than the first. We did indicate that the third quarter would be sequentially better the third and fourth quarter. Right now the way we look at the third quarter, it will be in line with the second or slightly below and then the fourth quarter will make up the rest of the difference. What happened in our third quarter is that our DVG contract shifted from the third quarter to fourth quarter. It's just a timing situation.

But there was nothing really that -- nothing major that shifted out of third quarter or fourth quarter into second quarter?

No. No.

Okay. Now is there anything that you were expecting in the quarter -- or is there anything that you were expecting in the second half that sort of slipped out into 2006?

No.

Okay. Because I'm just sort of kind of wondering, I mean, you discussed on your -- on last quarter's conference call that based on your plan that your -- the results that you delivered were sort of $0.12 to $0.14 ahead of your expectations.

Right.

It looks like Q2 was nicely ahead of your expectations based on your comments you made last quarter. I mean, I'm just sort of wondering in my head if there was nothing pushed forward and there's nothing slipping out of the year, why -- I mean, is it just sheer conservatism why you're only raising guidance by $0.5?

Well we are a conservative Company as you well know, Eric. The thing is, we've also -- are seeing some increased medical costs. We had increased interest expense. We're halfway through the year. We see good demand where we are today. Let's just put it that way.

Okay. Can you -- I guess you talked about your margin expectations for all the segments. Can you go through what your revised revenue expectations are by segment?

Our revised estimates by segment is about 450 for Flow Control, which is the same. 480 for Motion Control and 195 for Metal Treatment.

And Indal is -- remind me, in Motion Control?

Yes, they are.

Okay. Great. Thanks a lot, guys.

Thank you, Eric.

Our next question comes from the line of Peter Arment of JSA Research. Please proceed.

Good morning, Marty and Glenn.

How are you doing?

Very good. A lot my questions have been asked. But maybe I could just address a different way from Eric's comments about Q2. Maybe you could just give us a little more insight on the predictability of your business. Do you get any end of the quarter surprises in terms of -- in terms of revenues or earnings that brought this quarter in so strong? Maybe you could just walk us through a little bit of that?

The thing is some of the unpredictability, if you will, we talked about having a cost reduction program of profitability improvement. There is always some risk there. We're doing very well there. We always had cost reduction programs. We're doing well there. And it's our management requirement to improve their cost structures and try to push things forward from quarter-to-quarter. So I think you're just seeing what we normally have done in the past. It's just that it looks a little bit more significant this quarter compared to last quarter.

Ok. Just a combination of factors, nothing -- no one thing you can point to.

No. No. Just the combination of things.

Okay.

Obviously we've had better sales than we anticipated.

Glenn, just quick on that the tax rate. What's your assumptions for the second half of the year?

I don't have the exact figure. It's still 37% for the year.

37% for the year.

Yes. I mean the issue that affect us in the second quarter isn't going to be material in the full year.

Okay.

So, you do the math, whatever it is in the second half.

Okay. And Marty in your opening comments you mentioned regarding the coker valve. And I'm -- I think I wrote this down incorrectly. You mentioned a $5 billion market opportunity. Could you go over that again? It certainly seems like it's a big opportunity for you.

It was $5 billion of new facilities being constructed in the United States alone.

Okay.

That's something new. We really haven't put new facilities in. But I think it goes to show you the strong demand for processing heavy crude oil. And, obviously, that's where our delta valve units would go into. In the last call, I indicated that there were some 600 coker plants in the world. And there was an additional 100 coming on in the next decade. And you're starting to see that actually starting to come through.

So 100 out of the new facilities?

That's correct.

And you've delivered roughly about what, 70 to date out of that 600?

We have 83 that we've either installed or received contracts for.

Okay. Great. Nice results, guys.

Thank you.

Thanks, Peter.

Your next question from the line of Robert Stallard of Banc of America Securities. Please proceed.

Good morning.

Good morning, Rob. How are you doing?

Great, thanks. And you?

Good.

I was wondering if you could give us an update on your thoughts on your M&A strategy. As Glenn noted, the balance sheet is looking pretty secure at this point. Are you looking to maybe spend more time on integrating what you have already or are you looking for more acquisitions?

As I indicated in the last call, we're always looking for good acquisitions. And I also indicated that they would probably come slower. Not because of the balance sheet, but because of the availability of companies. There is still a lot of activities, but not the kind of companies we're looking to buy. So -- I think that the acquisitions will probably slow down as we go forward.

Okay. I was wondering if you could comment on your the nuclear side of your business. How that has progressed in the quarter. And also your updated outlook for future orders in that area

The thing is is that we've done well. We expected that we would have a negative growth this year in the commercial power area. We're actually almost 6%, 7% above last year organically. So we've had some strong sales. We've had a lot of quoting activity also. Not only for domestic, but also foreign. Last time our conversations we talked about Westinghouse being one of the three companies that are currently competing for the next four plants in China. Also we have quoted other activities for China outside of that requirement. So there's been very strong quoting on our part and hopefully some of that will -- you'll start to see the fruits of it in the very near future.

Great. And just finally, you announced an order this morning on the submarine front. Is that incremental to what your current -- previous expectations were? And how do you see that contract panning out in terms of revenues?

No, we don't. That's part of the system that we provide.

Great. I see. Just like a follow-on order.

Yes.

Great. Okay. Thank you so much, guys.

Thank you, Rob.

Your next question comes from the line of Jim Fong of Dabelli & Company. Please proceed.

Good morning. Good quarter, guys.

Good morning. How are you doing?

I guess just getting back to the coker valve. What's your market share now? You've had like did you say 83 you've either shipped or have contracts for. Just trying to get some metrics in terms of when I look at the next 100 plants coming up, what kind of market share you can pick up?

Currently, the market share is 12%.

Okay.

But obviously, with an additional 100 on top of the 633 worldwide cokers that would be obviously less that we expect to capture all those new installations.

I guess 633.

Worldwide.

Worldwide right now. And then there's another 100 coming on board then right?

Correct. Over the next decade.

How many coker valves are in each plant? Is it just one or several of these?

Well, there are normally more than one in a plant. But we supply a bottom coker valve and the top half also.

Okay. Like two then? Okay. And then what's the revenue -- how much do you sell these coker valves for?

For a good piece of change.

Millions of dollars. Tens of millions?

I wish -- I wish that was the case. We would be reporting much different numbers if that was the case.

Okay. But it's significant?

Yes, it is.

All right. I'll just move on. Can you give me a flavor of the military programs that you see coming on in the second half that went through procurement? Just sort of the larger programs. Want to get a flavor for what they are.

We have, as far as the submarines and aircraft carriers, we have more valve and pump deliveries in the second half. But mainly, the increase in our military deliveries is going to be in Motion Control.

Okay.

We have a 28% increase in the second half of the year. That's going to include new production, spares, F-16, engine increase sensor sales. Also the DVG contract that I indicated that's moving from our third quarter to our fourth quarter, that's a rather large contract.

How big is that contract?

Anywhere between $6 to $8 million.

Oh, okay. So that got shifted from -- so you say that got shifted from the third to the fourth?

That's correct.

Okay so -- good. Lastly, are you doing anything with industrial gas turbine? Are you kind of exposed to that through --?

We are now currently working with most of the industrial gas turbine companies. Not only for shot peening, but for laser peening.

How big a business is that for you?

Right now the shot peening is not that great.

Okay.

Even though we do business with all of the companies. But laser peening one day could be significant.

Okay. Great. Thank you.

Thanks, Jim.

Thanks, Jim.

Your next question comes from the line of Chris Donaghey of SunTrust Robinson Humphrey. Please proceed.

Hi, good morning. Very good quarter, guys.

Good morning, Chris.

Good morning, Chris.

Is there any way you can quantify the impact of the oil and gas market on this quarter and what the outlook is for the rest of the year?

Previously we indicated that our gas and oil from year-to-year that we would have 25% growth from last year to this year. And 16% organic growth. Currently we're looking at a 36% growth and a 26% organic growth in the oil and gas segment.

Okay. And can you give us an update on what's going on with the laser peening business? New lasers, new applications, things like that?

Right now we have our four lasers in place. We have No. 5 which is a module head to help form the 8380 wing. Right now our mobile laser, we don't have a contract for, but we're doing an awful lot of development work. Again, I indicated that it's going slower. The qualification process is going slower than we anticipated. But we're working on new engine parts for Pratt and Whitney. We have Airbus we're looking at. Different ring structures and also wing skins. The more accurately bend them. We have some high-stressed gears in automotive that we think will be coming on this year. And also some additional laser peening for aerospace bars.

Okay.

We anticipate orders this year in those areas and then in 2006 we have quite a few programs that we think will be coming online.

Okay. And I know one of the newer areas that you had been targeting for that service was going to be in the medical device area. Can you provide any update there?

Right now that's moving slower. We don't see that as one of our -- within the next six months to a year. We're still working with them.

Okay. Great. Thanks, guys. Again, good quarter.

Thank you.

Thank you, Chris.

We have a follow-up question from the line of Eric Hugel. Please proceed.

Hey, guys. Glenn, just to clarify on the tax rates. Are you saying we should be looking for both the third and fourth quarters at 37? Because if you kept the full year at 37, that would imply a higher tax rate for the last two quarters

Yes. You should imply 37% for the year.

For the year, so you're going to have a higher tax rate than 37% for the third and fourth quarters?

If you that's what you need to get to 37% for the year, yes.

Okay. Just wanted to clarify. This is the first quarter of organic growth, based on how calculate it for Dy-4 [ph] and fish strand [ph] would be in there. Can you sort of break out in the embedded computer systems if you can. I'm assuming those are -- I guess there are some other businesses that you bought before. But can you give us a flavor for what the organic growth rate was in the embedded computer area?

You mean for the quarter or what we anticipate?

I guess for the quarter and for what you're anticipating.

Well, the anticipation really doesn't change in embedded computers. We're looking at 19% total growth, 11% organic growth. We're pretty much on that. I don't know if we have that broken out for the quarter. But one thing we like to talk a little bit about organic growth is, we've had a little bit of a mixture between our peers and how they look at organic growth. And also somewhat on our analysts. Like I'd like Glenn to walk you through organic growth for the Corporation as a whole.

As you know, painfully we've explained several times how we currently do our organic growth. If you go back to -- we'll use 2004 as an example. Our reported organic growth was about -- on a consolidated basis up 7% for sales, and 13% for operating income. Many investors and analysts alike have asked -- have pointed out that companies do it differently than us. For instance, they consider acquisitions only acquisitions for 12-month period. The first 12 months of ownership. Beginning with the 13th month, they go into the organic growth calculation. So we've gone back and re-calculated under that methodology. And for 2004, the sales growth from 7% would have been 12%. And the organic -- I'm sorry operating income growth instead of 13% would have been 18%.

And if you go back to 2003, the sales growth of 6% would have been 25%. And the OI growth, which is basically flat, would have been 10%. So those are the comparable differences between the two methodologies.

In 2005, based on -- we're currently projecting about an 8% overall organic growth for the year on the alternative method, it would be 21%. And the operating income organic growth of 16%, under the current method would be 30% under the alternative method.

Okay. Eric, did you have another question. Hello?

Our next question comes from the line of Steve McBoyle of Lord Abbett. Please proceed.

Yes. Good morning. Congratulations.

Good morning.

Hi, Steve. How are you doing?

Good. Actually, Marty, I was kind of hoping you'd say that you anticipated the quarter was going to be 12 to 14% higher relative to your budget. We're having lots of fun here.

That's for sure.

Maybe just to drill down on the coker opportunity a little further. I think in the past you've alluded to this being a -- if it's 600. A $600 million opportunity. I'm curious, was that a size of the market only when you were doing the bottom or would that also incorporate the top. And --

We've indicated in the past that it's a $1 billion opportunity if you look at the tops and the bottoms.

And the top presumably sells more than the bottom, price point?

No, the bottom sells for more. Because the tank is tilted upside down and all of the pressure is put on the bottom.

And would you envision customers when they order a bottom, that it's logical that they order a top?

Eventually they do. We've noticed that we sell the bottom first. Companies get familiar with it. And then, obviously, they actually have quite a bit of a lifecycle cost improvement. Then they come back and they order the top. Because the top also has safety concerns and also a process improvement.

And to the extent you have a 12% share today. Is there any product functionality argument that could be made as to why you may benefit from a higher incremental share as the market evolves?

I think that as time goes on, this product will catch more headwind. There are a lot more corporations that are looking at it.

And I think Chevron has been a big driver to date. Have you seen other large customers decide to do complete plant retrofits or any interesting industry discussions along those lines?

Right now the only thing interesting is that we may sign an agreement with Conoco. That may be in the third or fourth quarter, where we would do all of their plants. Exxon and some of the other companies are plant by plant. But they're corporate office, if you will, does indicate to their operating units that they can do business with Curtiss-Wright as far as ordering a Delta Valve is concerned. We've now convinced the corporate office that there are benefits. Then they let the plants make them -- their decisions plant by plant.

Just to understand, Conoco would be a new customer that would move forward on a plant-by-plant basis? Or more of a Chevron-like rollout?

More than likely like a Chevron-like rollout.

Okay. Great. You alluded to the cost production program. I don't know if you actually had quantified the dollars that you anticipate taking out and some of the buckets that may be involved. Is that something you can do?

Last time I indicated that we thought the costs would be approximately $1 million. 750 in the first quarter, 250 in the second, it ended up being a little bit less. We expected that out of that we would have a $3 million yearly savings of which we would see 1.5 in the second half. I did indicate that we were streamlining our six companies and integrating them where we were taking manufacturing and putting them through centers of excellence. So it's purchasing, it's manufacturing, it's figuring out our sales channels. There are about eight different buckets that these cost reductions are coming from.

Okay. So that generally sounds to the extent that there was a potential risk in terms of the timing of those benefits. Sounds like you're executing the plan?

Yes. We feel very confident about it.

The guidance includes Indal. Are there any other acquisitions --

No.

-- unannounced that may be included.

We've announced them all.

I meant smaller in size that may not have been announced.

We actually announce everything that we buy. No, there's nothing in there.

Great. Congratulations.

Thanks, Steve.

You have a follow-up question from the line of Jay Khetani. Please proceed.

Yes. Just one quick question. You had walked through, I think on the fourth quarter call, your expectations for all in organic growth by each of your end markets. You've given us a couple of those pieces. Would you mind refreshing that for us at this point?

Yes. I think last time we indicated that defense electronics would be 23% total increase with a 16% organic. That came down a little bit to 15 and 12. Total electronics remains the same at 14% total growth, 10% organic. Embedded computers remains the same at 19% increase over the year, and 11% for the year. Commercial aerospace was 13 and 13 last time. We're inching up there. And oil and gas is 25 and 16. It's now 36 and 26.

So commercial aero is now what?

We didn't recalculate that. We know we're above 13 and 13.

Okay. And the organic number here is on what methodology? The revised that Glenn talked about?

No. No, the old --.

The old way.

Okay. Okay. Thanks.

Okay.

[OPERATOR INSTRUCTIONS] And at this time, there are no further questions.

Okay. With that, I'd like to thank everybody for joining us today. And obviously we look forward to our third quarter conference call in October. Thank you.

Thank you.

Once again, ladies and gentlemen, we thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.