BWX Technologies, Inc. Q1 FY2022 Earnings Call

Ladies and gentlemen, welcome to BWX Technologies First Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. Following the company's prepared remarks, we will conduct a question-and-answer session and instructions will be given at that time. I would now like to turn the call over to our host, Mark Kratz, BWXT's Vice President of Investor Relations. Please go ahead.

Thank you, Matt. Good evening, everyone, and welcome to BWXT's first quarter earnings call. Joining me are Rex Geveden, President and CEO; and Robb LeMasters, Senior Vice President and CFO. On today's call, we will reference the first quarter earnings presentation, which is available on the Investors section of the BWXT website. We will also discuss certain matters that constitute forward-looking statements. These statements involve risks and uncertainties, including those described in the safe harbor provision found in the investor materials and in our SEC filings. We will frequently discuss non-GAAP financial measures, which are reconciled to GAAP measures in a separate presentation. It can also be found on the Investors section of the BWXT website. I would now like to turn the call over to Rex.

Thank you, Mark, and good evening everyone. Earlier today, we reported solid first quarter 2022 results. Revenue increased to $531 million and adjusted EBITDA was $94.4 million, reflecting consistent operational and financial performance, despite encountering some challenges from COVID-19 absences early in the quarter. Additionally, BWXT continued to advance several strategic growth initiatives. I would like to provide an update on these before handing the call over to Rob for financial details. As mentioned in the earnings date announcement and elaborated in our earnings release, we are nearing the final stage of qualifying the Tech-99 generator production line. We dedicated much of the last two months to conducting a thorough series of hot chemistry runs to test and optimize the manufacturing line in support of our application to the FDA. This testing last month led to achieving process qualification acceptance of our radiochemistry system. In the coming weeks, we will perform end-to-process qualification runs, leading up to the first of three registration batches that will produce the final data set for the FDA package. I want to express my gratitude to the team at BWXT Medical for their dedication and commitment to this project. This pioneering initiative has been extremely challenging. While such challenges are somewhat typical for a project of this complexity and scale in the nuclear industry, the team has exhibited remarkable resilience and dedication to this new product. The journey has taken longer than we expected, but we are introducing a groundbreaking product with highly appealing attributes into an exciting market. We view the Tech-99 product line as a foundational portfolio product for BWXT Medical, and throughout this process, we continue to see a compelling business case and significant value creation. In the Government Operations Services business, we completed the contract transition for Savannah River, which occurred towards the end of the first quarter. We have now entered the fee-bearing period and look forward to executing this important mission for the Department of Energy. In March, we delivered the final design for the Pele transportable microreactor to the Department of Defense and we are standing by for a decision on contract award for the demonstration phase. We applied our best efforts and remain confident that our approach to the demonstration phase underscored by BWXT's history and credibility in reactor and fuel manufacturing combined with some of the most advanced nuclear technology innovations will win the day. As these advanced reactor programs mature, we have begun to consider incremental investments not only in technology and people, but also physical space for instance and consideration for a small divestiture in 2020. We acquired a nuclear qualified facility adjacent to our main plant in Lynchburg, Virginia. We've begun to make improvements and intend to outfit that facility to house the bulk of new microreactor work should BWXT prevail in these strategic future opportunities. Finally, as we noted in today's earnings release, we recently closed a small, but strategic acquisition that expands and enhances our core mission in global security. The acquisition consists of two businesses: Dynamic Controls and Cunico, which supply highly engineered proprietary valves, manifolds and fittings for global shipbuilding, which complements our core naval nuclear manufacturing business. The acquisition enables BWXT to participate more fully in the U.S. and U.K. Navy supply chains with strong incumbent OEM and aftermarket positions on several important naval platforms including Virginia, Dreadnought, Astute and Ford Class vessels. These businesses we believe provide a beachhead for international operations that expose us to growth with allies whom we view as increasingly important in light of recent threats to global security. Dynamic Controls and Cunico exhibit the business characteristics we see in the rest of the BWXT portfolio. They have been sole source/critical suppliers since the 1980s and share many unique differentiators, including high consequence of the design and manufacturing to exacting quality standards, long-term visibility and insensitivity to global CapEx and GDP cycles. Lastly, on the transaction, we continue to see global supply chain and labor shortages. We also see this as an acquisition of talented employees, who have experience relevant to our core business. By and large, BWXT has been insulated from much of this global pressure, particularly on labor shortages. Our voluntary turnover remains low relative to other industries as we have a strong culture, long visibility into our backlog and a future built on growth and opportunity. This was a challenge during COVID as virtual work is really not possible for most of our workforce. And our employees likely benefited by remaining connected to our culture and the critical mission they serve. In that vein, the Navy released an updated 30-year shipbuilding plan in April. Most assuring is that there are no changes to the acquisition plan for nuclear-powered vessels over the next five years. Interestingly, the Navy has produced three alternative procurement schedules that extend for the balance of the 30-year plan. While each option has some variability, there is no change to the Columbia class ballistic missile submarine procurement schedule as it remains the Navy's top acquisition priority. The alternatives presented have some suggested procurement changes related to aircraft carriers, attack submarine quantities and a new class of cruise missile submarines to be procured following Columbia. We continue to consult and work closely with naval reactors to understand the path the Navy is planning. The feedback we've received so far is that there is no change to the strategic baseline for the long-range business forecast as we look to ensure BWXT is positioned to serve the needs of the US Navy. The President's budget request for government fiscal year 2023 was also released in March, followed by the release of the future years' defense program documentation through 2027. In addition to status quo for naval reactors, BWXT programs were widely supported in the President's request. The Department of Energy's request has solid funding levels for uranium processing projects, including a ramp in funding for the uranium conversion and purification services and sustain funding for uranium downblending. The DoE budget also supports the funding for the new Savannah River contract on which we recently transitioned. Advanced nuclear reactors also continue to receive support with budget requests for the three major areas in which BWXT is involved. For space, NASA received a funding request for both vision surface power and nuclear thermal propulsion and the DoD is increasing funding for space-based nuclear systems as well. In the DoE, the President requested that the advanced reactor demonstration program continue to be funded. And lastly, the strategic capabilities office request for the transportable nuclear reactor project, Pele, is in line with the transition from design to demonstration later this year. With that update, let me turn it over to Robb.

Thanks, Rex, and good evening, everyone. Let's start with total company results on Slide four of the earnings presentation. First quarter revenue was solid at $531 million, up about 0.5% compared with the first quarter last year, driven by growth in Government Operations, which was partially offset by a decline in Commercial Operations. As expected, first quarter adjusted EBITDA was down year-over-year to $94.4 million, which was driven by a reduction and recoverable CAS pension income and slightly lower operational performance. First quarter earnings were $0.69 per share, up about $0.01 from operations and more so by lower recoverable CAS pension income. We also had fewer foreign exchange gains reported in other income. These headwinds were partially offset by a lower share count. As typical with our first quarter, we had modest operating cash use. This quarter we utilized about $5 million of cash in operations, compared with $98 million provided by operations in the prior-year period. The majority of that difference was due to a single $88.7 million cash receipt that occurred in the first quarter of 2021 that normally would have been collected before the end of 2020. CapEx on the other hand was down significantly to $52 million in the first quarter of 2022 as we begin to wrap up major capital campaigns for the Navy business and the Tech-99 generator commercialization line. This resulted in a free cash flow use of $58 million for the first quarter of 2022. We have detailed a first quarter EPS bridge on Slide five, and now I will now move to segment results on Slide six. In the first quarter, Government Operations generated $432 million of revenue, up 2% driven by long-lead material production in the naval reactors business, higher volume in uranium processing and higher volume in advanced technologies related to microreactors work. These increases were partially offset by lower missile tube revenue as we complete the remaining contractual obligations. First quarter Government Operations adjusted EBITDA was down 3% year-over-year to $84.7 million, driven by lower recoverable CAS pension income and fewer positive contract adjustments, due in part to lower productivity in the naval reactors business. The business was impacted early in the quarter by inefficiencies related to COVID-19 absences during the Omicron variant surge. Excluding pension, segment adjusted EBITDA would have been up year-over-year in line with revenue. In Commercial Operations, revenue was $100 million for the first quarter, down 7%, driven by lower commercial nuclear power field services, which were higher in the first quarter last year due to a particularly large outage project. This was partially offset by higher fuel handling in the commercial nuclear power business and higher BWXT Medical revenue year-over-year. First quarter Commercial Operations adjusted EBITDA was down 5% to $10.7 million as lower revenue was partially offset by a more favorable product mix. Turning now to guidance on Slide seven. While first quarter performance was above what we expected or perhaps slightly better, we do see a modest interest expense headwind building through the remainder of the year. We have updated our interest expense expectation to a range of $35 million to $39 million versus our prior range of $30 million to $35 million. We look forward to seeing how the second quarter operations progress and calibrating the remaining risks and opportunities for the remainder of the year. So with our performance to date and given we are only through the first quarter of the year, we are reiterating guidance and still feel that the midpoint of our EPS guidance and three consensus is aligned with where we will finish 2022. As we discussed in the last earnings call, we see second quarter EPS stepping up sequentially, driven by the transition of the Savannah River contract and a seasonal increase in outage services work for commercial power. As the year unfolds, we anticipate that EPS will continue to build ratably thereafter. Switching gears to the acquisition. As Rex mentioned, we view this addition to BWXT as strategically important as it will enhance and expand our core naval nuclear business. It is very rare that we find businesses with attributes similar to that of our core business and in this case it is right in the bull's-eye. These two businesses provide BWXT with an expanded global installed base with life of platform components on every nuclear-powered submarine used by the U.S. and U.K. navies. The addition of Dynamic Controls and Cunico are factored into the reiteration of our outlook as the financial impact of the acquisition falls within the initial guidance ranges. So let me give you some of the specifics on the deal. We purchased these businesses for $50 million and the two acquired entities have a combined annual revenue of about $20 million, so less than 1% of BWXT's total revenue, but are expected to grow nicely over time. Because of the proprietary critical nature of the products, these businesses generate about 20% EBITDA margins similar to BWXT's core business. When you consider depreciation and amortization, which we did not plan to non-GAAP given the size, the deal will be slightly positive at OP income level this year. After years of growth, we expect the deal to be very modestly accretive to EPS in 2023 and beyond. Lastly, I want to close my remarks with some observations I’ve made over my first six months as CFO and aspirations we have moving forward. As I've made my way deeper into the organization, I continue to be impressed by the culture of continuous improvement. This is clearly evidenced in the Navy business and is the core principle we inherited from Admiral Rickover that remain today. It is part of the BWXT DNA. And really, when I think about honing the business, I think about leveraging that culture and capability more broadly. For me, particularly in the finance organization, we will continue to elevate our performance and financial analysis, planning and communication of working capital, investment decisions and forecasting, just to name a few. One of my other top priorities is to focus on driving free cash flow conversion, which we laid out as an important component of our medium-term guidance. A major element of that target is ensuring that our working capital is managed as efficiently as possible, both in the near term with enhanced analysis and optimization, but also through longer-term structural changes that could benefit the company's use of cash. However, the largest near-term driver of generating more free cash flow is CapEx. As CapEx transitions to more of a maintenance level, our first opportunity to achieve this would naturally be in 2023. We believe the next couple of years will show a return to a more normalized level of spending with only modest growth capital to turbocharge our strategic initiatives. Well, we haven't fully committed to any of these new investments, we continue to see the most likely targets of any future growth CapEx to be in space, defense reactors or nuclear medicine manufacturing. In any case, we see such investments at tens of millions each that would be spread across a couple of years. We will be transparent in sizing these and explaining why we find these to be compelling ROIC projects. Our nearest term opportunity would be facilitating for the Pele terrestrial microreactor, and we see such an investment to be less than $30 million of incremental capital beyond the amount we are spending in our normalized CapEx. My final area of focus has been to enhance our transparent communication with investors, analysts, and other stakeholders. Most recently, BWXT was named one of the world's 100 most transparent companies by Transparency Global, and we embrace that award, believing it is present in the foundation of the BWXT culture. So our goal is to continue down this path, making improvements along the way to maintain the trust of our customers and shareholders. With that, let me hand it back to Mark.

Thanks, Robb. That concludes today's prepared remarks. Operator, please go ahead and open the line for questions.

Thank you. We will now begin the question-and-answer session. Our first question will come from Pete Skibitski with Alembic Global. Please go ahead.

Hey, good evening, guys. Now, it's pretty thorough, but I have a few questions. Rex, you guys touched on the labor force. But I just want to make sure, do you guys have any issues with hiring during the quarter and any issues with either material or labor inflation in ways you can kind of quickly pass along to the customer?

Pete, I'd say that the situation has generally been pretty good for us, because of the factors that we noted in the call. We do have a business with a highly visible backlog and people that are interested in long-term careers are attracted to the business. That said, it is a pretty tight labor market, and we’re starting to see some challenges around that. I think we're addressing those aright. I would tell you that probably the most acute challenge we had is around getting radiopharm techs in the Canadian market to support our work there; that's been probably one sort of local challenge. But generally speaking, we've been in pretty good shape. Our voluntary turnover has been remarkably low in this environment, and I think we're up to meeting the hiring challenge.

Okay, sounds great. And then on a couple of the incremental opportunities, Pele and then there's the DARPA DRACO program and any sense of how big this Pele demo award could be? And then on DRACO it seems like they're kind of reopening up to full competition. Are you guys going to kind of play at a higher level in that or going to attempt to play at a higher level in the recomplete?

Yes, so on the first on the former, Pete, the Pele program. As I've said from the beginning on these, the technology and design basis would be contract awards in the tens of millions, and that's what we've shown historically. I think these demonstration programs are in the range of a few hundred million is a good way to think about the scale on those opportunities. And then in terms of the DRACO opportunity itself, yes, certainly DARPA has reopened that competition. We expect to play there; we expect to be competitive, and I think it's an exciting opportunity for us.

Okay, that's great. One last one for me, just the bookings in the Commercial Segment were really strong this quarter. What’s that an indication of? I'm just curious and I was curious about the sub-unit within Commercial in particular?

Yes, so it's a broad set of things. It’s Robb, thanks for the question. It's a broad set of really initiatives across the Canadian space for all of our customers. I wouldn't call anything out specifically; it's really just generally a pretty strong environment for us. And so, we're seeing a lot of work in all of our facilities up there.

Okay, pretty good visibility to revenue guidance at this point given that commercial?

Yes, that's right. We had provided guidance specifically for that segment or tracking quite well within that range. We see some good signs that will be with us for a couple of years. Good outlook there.

Thanks, Pete.

Our next question will come from Jon Tanwanteng with CJS Securities. Please go ahead.

Hi, this is Bob Labick from CJS, I'm not sure anyway.

Hi, Bob.

Can you hear me? Hi. I'm curious about that. Thanks for taking my questions. I want to discuss the Tech-99 generator; I'm very excited about the progress being made. Could you provide some insights into what the final stages are, what you are currently working on or adjusting? Is it related to purity, the amount of curious per batch in the generator, the illusion time, or are there other final tweaks? And Rex, I know you've addressed this before, but could you reiterate the timeline? What potential hurdles do you foresee before submission? Please walk us through the upcoming weeks or months, whatever the timeline may be.

Yes. Sure, Bob. Thanks for the question. We had hoped to submit to the FDA in the first quarter, but we encountered a few issues during that time. Some of these were fairly standard challenges. We faced staff shortages and COVID surges at our Kanata and Cambridge plants in late March and into April. Additionally, as I mentioned in response to Pete's question about the workforce, we've struggled with hiring and retaining radiation technicians in that area. We aimed to manage about three hot runs a week, but we've only been achieving around two, which has caused some delays. We've also dealt with equipment supply chain issues, similar to what many companies are experiencing. What's ahead of us is that we have completed the qualification of the radio cam line and are currently going through the qualification of the radiopharm line. We will conduct three or four runs of that before moving into the reference batches for the FDA. We expect the majority of this activity to ramp up this month, which will be followed by compiling our data and submitting it to the FDA. Therefore, we are targeting the second quarter for this to be achieved.

Yes, I want to mention that we are planning to make the filing and, as discussed previously, we are strongly considering an expedited review with the FDA. This means ensuring that all our information is flawless. From an outside perspective, I can say that at BWXT, our culture emphasizes thorough preparation. We aim for perfection in our submissions, and we've been working hard to refine everything for an ideal submission. We are focused on ensuring all details are perfectly aligned, even beyond what we initially anticipated a few months ago, to guarantee the quality of our product. As we enter this space, we want to ensure a strong start, so we are committed to exceeding expectations.

Got it. Okay, great. I understand you have to address the regulatory areas. But how is the product performing compared to your expectations six to twelve months ago? Is it meeting your performance goals, or are there still modifications needed? What does the performance look like?

Yes, so the performance, I've never had concerns about the product quality, Bob. We have always thought we’d introduce a product that's as good or better than anything on the market, and we believe that to be the case. And so, it's really not about tweaking for product quality, it's really more about tweaking for production efficiency, I guess is the way I would put that. So, you've got to go through these qualification runs and you have to have everything run perfectly. Robb was kind of alluding to this because once you get into qualification runs, those become runs of record for the FDA. And so we've been quite careful about that, about making sure that the process is exactly right. Product quality and risk of FDA approval have never been a concern for me.

Sure. I have another question regarding the segment related to the government. Can you provide any updates on the outstanding bids for the former NSG or TSG? I understand that Savannah is now fee-bearing, which is positive. I heard there was a protest regarding Y-12 Pantex, and I'm unsure of its current status. Any updates on other former NSG operations and bids would be appreciated.

Yes, so the big three that we talked about over the last year or so is the Savannah River Integrated Mission Cleanup Contract. Obviously, we prevailed in that one and we are in the execution phase on it. Y-12 Pantex was the largest of the opportunities from a revenue scale perspective; that one was in protest and is now in a phase with the DoE called corrective action and the DoE has not completed that phase. And so we're kind of standing by to see what the outcome of it is. The net result of all that is we're still competitive. We're still in the hunt on that one. And then the final one, that we've talked a lot about, is the Hanford Tank's Disposition Contract, which is to clean up the liquid waste in the Hanford Tanks. That one has been submitted; we've gone through orals on it, and the government is in their evaluation phase and I think we would expect an announcement on the award around the end of the year. There are some other smaller ones, but those are the big three that we're keeping our eyes on. We feel competitive for all of them.

Super. All right, thank you so much.

Thank you.

Our next question will come from Pete Osterland with Truist Securities. Please go ahead.

Hey, good evening on for Mike Ciarmoli this evening. Thanks for taking our questions. So first just had a follow-up on Tech-99. Do you have an updated estimate for the remaining start-up costs associated with it? And have there been any changes to either your growth outlook or sales expectations for the nuclear medicine business as a whole over the next few years versus what you originally discussed at last year's Investors Day?

This is incrementally increasing cost related to getting the FDA application done, but nothing that's meaningful to the business. I would say our views of how much market we can get and our competitive position in the market have not changed materially. We still feel very strong about that product.

Great, thanks. And then switching gears, do you have any updates you can share on the OpEx opportunity? Have you spoken with the customer? And do you have a sense of what timeframe that could be for any potential sales related to OpEx?

Not much to say on that one. We're not in the middle of that negotiation that's happening at the government level. And so, I'd say there’s not much to offer there and certainly no timeframe to go. Other than to say that at the beginning of this process, the Australians, the U.K., and the U.S. said there would be an 18-month study phase, and we're probably eight months into that timeline. So, I would expect to hear something around the beginning of next year.

Great. Thanks for taking the questions.

Thank you.

Our next question will come from Peter Arment with Baird. Please go ahead.

Good afternoon, Rex and Robb. Hey, Robb, can I just return to your earlier comments? I would like some clarification on how long you expect the priority review or at least that part of the updation to last. I previously thought it was under a year, but could you clarify that?

Yes, we've generally said; I mean, each application has its own timetable. But generally, we've been told by a set of consultants that generally you should expect about six to nine months for that review.

Okay. That's great. And then just unrelated, Rex, just on the supply chain. It seems like just about every company out there is talking about it maybe. And I'm sorry if I missed this in your opening remarks, but what are you guys seeing? You've been pretty good so far throughout this whole challenging time. But any new updates there would be helpful?

Yes, not much there, Peter. I would say that on the naval reactors business, nuclear operations, it's been pretty good. We're generally in long-term relationships with our supply chain there; that's been very stable. It's been stable on the commercial nuclear side in Canada as well, really no disruptions or problems there. The one place we've seen it are the hiccups around the Tech-99 program where we've had something like, I mean, just as an example, the digital probe would fail and something you can normally get the next day would end up taking a couple of weeks, 2.5 weeks. And so we've had some of that kind of effect show up in the medical business. But for the most part, we've avoided any big consequences of the supply chain disruptions.

Okay. And just if I could sneak one or more and just on the M&A. So, it seems like a pretty unique and good fit from what you're doing there. Maybe can you talk about, is there other types of pipelines out there for you to do things like this or was this just a unique opportunity?

Yes, I believe so, Peter. There are similar assets available, though this one is relatively small. We hope to expand it in the future. The idea was to invest in something that shares characteristics with our core business, which is challenging to grow because we already lead that market segment for the products we manufacture. The strategy was to support a venture that includes highly engineered products with a high average selling price. Notably, about 80% of this business is primarily derived from sole sourcing. And so, if we can find that set of characteristics, then I think we're a buyer, and certainly if it is just close to the core business, as this one is, this one is really right there when you're making check valves and seawater manifolds, which are cannot fail systems. Then it really is in our sweet spot. The particular nuance here is that this is not nuclear work. It's critical naval component work, but it's not nuclear work except for we do have some exposure to commercial nuclear power in that business with some valves they sell into that market. So, very interesting fit to our business. The financial characteristics also fit, and we'd like to see a pipeline of assets that look like this, but hopefully on the larger scale.

Yes, we think it's possible to just to add a little color around it financially too. It's a pretty unique asset, as Rex described. We bought it inside; you can do the math of sort of the EBITDA, we bought this within our own traded multiple, which is pretty unique. So all the synergies and all the possibilities of using this as a platform both internationally as well to expand our TAM, as well as just general synergies between the two businesses are all kinds of on us. So we feel pretty excited about the purchase price. We think it could lead us to other acquisitions down the road. We are going to definitely be conservative, integrate it, see how it goes before we move on to other alternatives. But we think we're a good buyer in this market. We actually believe that the price that we put on the table was inside other offers. It was a sole proprietor, and our vision of how we connect the dots between our business in international and just general non-nuclear work acquiring precision manufacturing businesses like that sort of spoke to that. That's all provider, so we're pretty happy with the overall financial as well as where this could take us strategically.

Appreciate the color. Thanks.

Thanks, Peter.

This concludes our question-and-answer session. I would like to turn the conference back over to Mark Kratz for any closing remarks.

Thank you for joining us today everybody. If you have further questions, you can reach us by phone at 980-365-4300 or email at investors@bwxt.com.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.