BWX Technologies, Inc. Q1 FY2023 Earnings Call

Ladies and gentlemen, welcome to BWX Technologies First Quarter 2023 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, Chase Jacobson, BWXT's Vice President of Investor Relations. Please go ahead.

Thank you, Hanna. Good evening and welcome to today's 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 of 2023 earnings presentation that 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 the company's SEC filings. We will frequently discuss non-GAAP financial measures, which are reconciled to GAAP measures in the appendix of the earnings presentation that can be found on the Investors section of the BWXT website. I would now like to turn the call over to Rex.

Thank you, Chase and good evening to everyone. BWXT has started 2023 with good momentum. Earlier today, we reported strong first quarter results that were ahead of our expectations. Our recent wins highlight that BWXT is at the forefront of the nuclear industry, and it's becoming more apparent that our technologies are in high demand as our government and commercial clients seek to address their national security, clean energy, and medical requirements with nuclear solutions. First quarter 2023 revenue was up 7%, and adjusted EBITDA was up 17% compared to the first quarter of 2022 driven by solid volume, good operational performance and higher performance fees in our Technical Services business line despite ongoing labor challenges. Adjusted earnings per share grew 2% as adjusted EBITDA growth more than offset the unfavorable impact of non-operating items as we had anticipated. We are maintaining 2023 financial guidance and continue to believe we are positioning BWXT for long-term sustainable growth. While we had a strong first quarter, we are still early in the year and uncertainties persist in the macro environment. Accordingly, we still see the midpoint of our EPS guidance of $2.80 to $3 per share as the most likely outcome. I'll start out with some highlights in government operations, where there have been a number of developments that highlight how our growth investments are bearing fruit. First is the AUKUS Trilateral Security Agreement, which was jointly announced in early March by the President of the United States and the Prime Minister of the UK and Australia. Under the agreement, Australia will procure at least three and up to five Virginia-class submarines in the early 2030s. Following that, Australia will procure a new submarine class, the SSN-AUKUS, for which the final design and industrial manufacturing investment necessary to build these units will be thoughtfully planned in the years ahead. The recently announced updated 30-year shipbuilding plan indicates that the Navy anticipates building additional Virginia-class submarines in the 2030s as replacements for those that will be sold to Australia. Although this has yet to be worked into the published schedule, we believe this thinking aligns well with the Navy's long-term submarine fleet goals and BWXT will stand by for a more comprehensive planning decision-making process from the Navy, our allies, and Congress. This strong naval spending backdrop serves as a good tailwind for our Naval propulsor franchise at BWXT, but also lifts the business prospects of the two acquisitions we made almost one year ago to the day. Dynamic Controls and Cunico are both important suppliers of precision parts to the U.S. and UK navies. I visited both companies in the first quarter, and I believe they are unique and highly engineered proprietary valves, manifolds and fittings could expand our scope to both the U.S. and UK navies. Right at the moment, a strong supplier base will be most needed. While government operations performed well in the first quarter, similar to the last few quarters, staffing remains a challenge and could limit our ability to staff to the demands of our programs. The labor market remains tight, and we are intensely focused on continuing to grow our workforce. In the first quarter, we found ways to work efficiently despite hiring efforts starting a little slower than we hoped. As streamlined hiring and training processes that we implemented over the last year began to kick in and we integrate this less experienced workforce, we may see modest noise in the margin performance quarter-to-quarter over the near term. There have been multiple positive developments for BWXT in recent months outside our naval business. Specifically, in April, we announced two major contract awards. First is a five-year $428 million contract from the National Nuclear Security Administration for Phase 2 of uranium conversion and purification services, building on the pilot phase that we completed last year. We hold the only Category 1 license to handle and work with these special materials, and the award shows NNSA's confidence in BWXT's ability to manage and execute critical programs on its behalf. Second, a BWXT-led joint venture was awarded the 10-year Hanford integrated tank disposition contract by the Department of Energy. This will potentially be the largest single contract in our government services business. Also in the Technical Services group in early 2022, we transitioned onto the Savannah River Mission completion contract alongside the same team we are partnered with at Hanford. One year into this contract, we continue to receive excellent safety and contract performance scores in excess of our original forecast. Turning to our Advanced Technologies and microreactors business. We are making good progress on our $300 million contract with the Strategic Capabilities Office called Project Pele, to build and deliver the first advanced mobile nuclear reactor in the United States. The contract is largely on schedule and generating revenue. The associated capital expenditures will be complete this year. We continue to hold ourselves in a strong position on DARPA's Dreco project, the first demonstration of a nuclear thermal rocket engine in space. DARPA is expected to receive a significant increase in funding for this project based on the President's budget request for fiscal year 2024. We are also seeing a growing interest in advanced reactors for commercial applications across a number of markets. This exciting opportunity for government investments to enable nuclear commercial markets is reminiscent of the naval reactors programs in the 1950s that kick-started the commercial nuclear industry as we know it today. BWXT has a clearly established leadership position in naval nuclear applications, and we stand ready to support efforts to position nuclear to enable the global clean energy transition and for power and propulsion applications in terrestrial, space, and other domains. Moving on to commercial operations. Our core nuclear power business grew nicely and performed well in the first quarter, driven by an increase in refurbishment and life extension projects on a number of reactors in the Canadian fleet. As I mentioned last quarter, the government of Ontario announced its support for operating extensions at units five through eight of the Pickering plant and is launching a feasibility study on the potential refurbishment of these reactors, which would extend these reactors' operational lives another 30 years. Additionally, while still in the very early stages, the government is exploring the potential for new large-scale reactor deployment as it seeks to eliminate natural gas from the power grid by 2050. And we continue to see growing interest in small modular reactors and are strongly positioned as a key player given our experience in the engineering, design and manufacture of nuclear components. We formally announced our engineering contract for the reactor pressure vessel for GE Hitachi's BWRX-300 small modular reactor. Ontario Power Generation is constructing a grid-scale project consisting of up to four of these reactors at the Darlington site with the expectation to have the first of these completed and on the grid by the end of the decade. Other large utilities, including the Tennessee Valley Authority, SaskPower in Canada, Fermi Energia in Estonia, and Synthos Green Energy in Poland have publicly expressed interest in utilizing GE Hitachi's reactor as well. We are excited about the opportunities for this and other small modular reactor technologies as we execute our new build strategy as a merchant design or manufacturer and supplier for multiple developers in the market. Turning to nuclear medicine. The BWXT Medical business had a solid quarter and is tracking for over 20% organic revenue growth in 2023. We face the market as a full-service player in radioisotopes with a base of diagnostic isotopes, additional layers of therapeutic isotope manufacturing, and contract drug manufacturing, which we will touch on later. In the near term, we continue to focus on our Tech-99 product deployment. Our goal is to be fully ramped at commercial scale in 2024 with a generator product that is essentially identical or superior to those on the market today. The FDA conducted a pre-approval inspection meeting in Canada in early March, and we believe we have a good handle on the gating factors for approval of our new drug application. We are completing the work necessary to prepare for approval and commercialization with MER data. And given the installation of the target delivery system in February, we now have OPG radiated sample runs to supplement our filing depending on ongoing discussions with the FDA. This enhanced data and our in-depth exchanges with the FDA give me confidence that our team will bring this important product to market on the schedule we have forecasted and help stabilize the nuclear medicine ecosystem with this critical and foundational diagnostic tool used in thousands of procedures every year. As we continue to work towards commercializing the Tech-99 product in 2024, we also see expanded sales of key therapeutic active pharmaceutical ingredients like lutetium and actinium that support innovators and pharmaceutical companies in critical clinical trials and may ultimately give way to fully scalable quantities if their therapeutic drugs are approved. And on contract drug manufacturing, we are involved in several discussions that would meaningfully expand that component of our business beyond what we currently do today for Boston Scientific's proprietary therapeutic cancer-treating drug called TheraSphere. To sum it up, we are off to a good start in 2023 and are excited about the near- and long-term opportunities ahead of us. Despite the ongoing labor challenges that we are facing in the Core Navy business, we are on track for robust high single-digit adjusted EBITDA growth and a meaningful inflection in free cash flow this year. We are growing across the organization, providing a clear pathway to our medium-term strategic and financial targets. Let me now turn it over to Robb to discuss the first quarter financial results in more detail and to discuss our reaffirmed 2023 guidance.

Thanks, Rex, and good evening, everyone. I'll start with some total company financial highlights on Slide 4 of the earnings presentation. First quarter revenue was up 7% on a consolidated basis with government operations up 7% and commercial operations up 9%. First quarter adjusted EBITDA was up 70% to $111 million, driven by higher revenue and better margins in the government operations. This is partially offset by a lower contribution from commercial operations and slightly higher corporate expense as expected. Adjusted EPS grew 2% to $0.70 per share as the strong adjusted EBITDA growth was mostly offset by lower pension income and higher interest expense. We have an EPS bridge on Slide 5, detailing the puts and takes for the quarter. Free cash flow was a use of $43 million compared to a use of $58 million in the first quarter of 2022. We had a modest use of operating cash in the quarter in line with seasonal patterns as working capital related to our long-term government operations contracts generally build early in the year as well as higher cash taxes. Capital expenditures were down to $30 million, consisting mostly of maintenance CapEx and modest spending related to growth initiatives. Moving now to the segment results on Slide 6. In government operations, first quarter revenue was up 7% to $460 million, driven by higher naval nuclear component production and microreactor volume that was partially offset by lower long lead material. First quarter adjusted EBITDA in the segment was up 22% year-over-year to $104 million as higher revenue, favorable mix, and timing of technical services performance fees was offset by inefficiencies due to the staffing shortfall Robb discussed. In commercial operations, revenue was up 9%, driven by higher component manufacturing sales and increased field service activity in our commercial nuclear business, as well as higher BWXT medical revenue. First quarter commercial operations adjusted EBITDA was down approximately $2 million as revenue was skewed toward component manufacturing and field service refurbishment activity and less outage work compared to last year. This was partially offset by ongoing cost controls in the business. Turning now to guidance on Slide 7. We are reaffirming our 2023 guidance for the five key metrics we provided last quarter. We project revenue of about $2.4 billion, up mid- to high single-digits organically compared to 2022 results. We expect modest adjusted EBITDA margin expansion to approximately 20%, leading to adjusted EBITDA of about $475 million, up high single-digits compared to 2022, driven almost entirely by organic growth. As we discussed when we provided our detailed guidance last quarter, we expect the lion's share of EBITDA growth to come from uranium processing in our Core Navy business, including recovery of estimated costs on the manufacturing of non-nuclear components. The second driver of growth is from a full year of 2022 wins that are underway, such as Savannah River and Project Pele. And the third bucket is from a mix of new awards in our services business, such as the Hanford Tanks contract we recently announced and other wins we believe are forthcoming. Adjusted EBITDA growth in 2023 is expected to be offset by non-operational items, such as lower pension income and higher interest expenses, consistent with what we've discussed over the last couple of quarters. As such, we expect adjusted pre-tax income of around $350 million and adjusted EPS in the range of $2.80 to $3 per share. As we look forward, we remain confident in reaching our 2023 financial targets, and we will continue to push on hiring new employees and training our workforce to enhance our position for the future. This and the timing of potential cost recoveries in non-nuclear components will likely be the biggest swing factors in our guidance. Looking forward, on a quarterly basis, we now expect Q2 to essentially look how we originally thought Q1 would. Q1 outperformance was driven by naval manufacturing efficiency, TSG performance fees we expected to hit later in the year, and the timing of expenses compared to our previous forecast. We expect that Q2 will now be about 20% of the full-year EPS guidance midpoint, followed by subsequent increases in the third and fourth quarter. Otherwise, we expect the year to play out essentially as we did when we first gave guidance at the start of the year. Finally, on cash flow, we see a clear path to achieving $200 million of free cash flow as we drive more operating cash flow and manage our capital expenditures. Overall, BWXT is growing across the portfolio and is building on strategic successes and competitive positioning that enable another strong year of operational growth and position us to accelerate and achieve our medium-term financial targets. And with that, we look forward to taking your questions.

The first question is from Pete Skibitski with Alembic Global. You may proceed.

Good evening guys. Nice quarter.

Hey thanks Pete.

Thanks Pete.

Rex, maybe you could quantify some of the labor trends that you're seeing. It sounds like you're a little short in the first quarter on net hiring. Can you give us a sense how short you were? And then maybe what the goal is on a net basis, the balance of 2023?

Thanks for the question, Pete. It's good to hear from you. While I won't get into specific numbers, I can share our approach and thought process. When it comes to bringing new people into the company, we need to build a pipeline, as there are many steps involved, such as employee clearances and background checks, which I'm sure you are aware of. We focus on filling the pipeline and tracking the conversion rate from that pipeline, ensuring we get through all the necessary steps. Retention is also a crucial factor, and we need to manage any potential losses in those first two areas. I've mentioned in previous calls that we conducted a Kaizen event aimed at optimizing our pipeline and conversion processes to reduce time spent at each step and eliminate unnecessary steps. I’m happy with our progress in this regard. We’ve been filling the pipeline, and although we started a bit slower than we expected, we've recently seen an upward trend. Overall, the pipeline is full, conversion rates are solid, and retention is improving. Last year, we faced nearly double-digit voluntary turnover, but that has decreased significantly. We may be slightly behind schedule, but overall, we are in a good position.

Yes. I'll add some insights on the numbers since we monitor this daily and weekly. Peter, the statistics that stand out for us indicate that as we build our pipeline, as Rex mentioned, we're adding to the top of the funnel and moving people through quickly. We currently have a peak number of potential employees in the clearance process along with true pending starts. We are working to accommodate these two groups, which are progressing through the pipeline soon. That number has reached a couple of hundred, reflecting the progress Rex discussed regarding funnel movement and employee onboarding. We're also observing a decrease in attrition. As is typical at the start of the year, we see retirements and employees making changes before relocating, which usually occurs in the first and second quarters. Attrition has dropped from the double-digit rate we observed a couple of years ago towards mid-single-digit rates that are considered industry-leading. With this combination, we believe we can really start to turn things around. Some of our peers feel similarly optimistic about recent improvements. We're taking a cautious approach regarding how the year, particularly the second quarter, will unfold because new employees may initially introduce some inefficiency. However, if our hiring assumptions are correct, it could turn out positively for the company, although it might put some pressure on Q2. Overall, we're excited about our current position.

Yeah. Okay. That makes sense. It sounds like there's some real momentum there. And I'll just ask one last one, guys. Just on government backlog, it's been declining for four or five quarters now. Are you guys close to re-upping your next kind of three-year order? And should we expect anything different from that new order when it happens?

You can expect more of the same, Pete. We are still working through that process, so there is nothing surprising or negative happening. We have a full set of components in the next pricing agreement, and we are addressing some of the details. There are complicating factors this time, such as labor inflation, commodity inflation, and discussions around Colombia acceleration. All of these factors have made it a bit more complicated, and we will work through that with our customer to reach a conclusion in the near future.

Okay. Appreciate the color, guys. Thank you.

Thanks, Pete.

Thank you. The next question is from Peter Arment with Baird. You may proceed.

Thanks. Good afternoon, Rex, Robb, Chase. Rex, you've been pursuing a lot of these kind of service-related awards NSSA, Hanford, Savannah. Could you maybe walk us through a little bit how you expect this to kind of ramp up, or when do we hit kind of steady state on some of these contracts?

Certainly, Peter. Let me provide some context. When I joined the company in 2015, we were at a low point due to issues at Y-12 and Pantex, necessitating a rebuild of our portfolio amidst performance challenges. We shifted our focus to the environmental market, which has proven to be quite successful, with equity income from this sector nearing $50 million last year. The larger projects, such as Savannah River and Hanford, can each contribute around $10 million to $20 million in equity income, which appears below the line since we don't consolidate revenue. This acts as a boost to EBITDA, which is one reason we favor this business—it offers margin growth with minimal capital intensity, resulting in high returns on investment. Alongside the major contracts, we are also engaged in smaller projects, like the Portsmouth environmental follow-on and the OSMS contract for depleted uranium conversion in Portsmouth and Paducah, contributing a few million to about $10 million, depending on their size. Our position in the environmental remediation market is strong, and we are also preparing for recompete opportunities with the National Nuclear Security Administration for M&O contracts, beginning with Pantex this year and Y-12 the next year, followed by recompetes at Los Alamos, Livermore, and other sites. We are building a solid foundation and have promising prospects ahead.

Appreciate those details. And just one quick one related on SMRs, just Westinghouse was out with a new AP300 SMR in the last week or so. Is there any opportunity here do you see to work with them? And then maybe just any updates you want to give on kind of SMRs conversations you're having? Thanks.

Yes, Peter, as I mentioned earlier, we don’t possess our own reactor to market. Developing one takes considerable time. We have positioned ourselves at the top of the supply chain, focusing on providing design services, component manufacturing, and potentially fuel manufacturing and servicing. This allows us to support various players in the industry without having made equity investments or chosen a specific winner. While we have a public relationship with GE, we also collaborate with other companies. I view Westinghouse as one of the key opportunities for us to engage meaningfully in the growth of that market. Those promoting their own designs and aiming to build reactors discuss very large quantities. We certainly aspire to partner with them and benefit from the growth in that sector.

Yes, Peter, maybe I'll add there. We find ourselves in a unique position where because we have such a stable business in Canada, because Canada has really had the foresight to invest ahead of some of these trends as the SMR market develops, we should have excellent manufacturing capabilities. As you know, we have the stable Canadian business that we've had for years. They've been doing the refurbishment. So that's the second part of the market that we've been servicing. And then Canada has really been a leader in terms of the selection of an SMR and geo-toxics. So all those line up to sort of build backlog and capability for us ahead of some of our peers. And now Canada is also obviously taking a look at large-scale greenfields of future CANDU plants. So that's even a fourth area for us. So we're uniquely positioned in Canada given that backdrop. And so we'll help Canada as well as other SMR designers as that market develops.

Appreciate the results. Nice results.

Thanks Peter.

Thank you, Mr. Arment. The next question is from Bob Labick with CJS Securities. You may proceed.

Thanks. Good afternoon, and congratulations on all the exciting news you've announced. I wanted to start with the Tech-99 process with the FDA. It's been about six months since you announced the priority review, and I'm curious about the feedback so far. You mentioned that you're on track for a full commercial launch next year. What are the next steps, and what can we expect to hear over the next six months regarding the approval process?

Yeah, Bob, I don't think much has changed in our perspective since the last call. We're on that six to nine-month clock as we discussed. So we're kind of standing by the mailbox to see the outcome of our pre-approval inspection. So that hasn't changed. We're in a regular dialogue with the FDA. I won't be too specific about that. But we're in a good dialogue with the FDA, and it has a positive tone to it. So we're standing by for the results of that pre-approval inspection.

Okay, great. You mentioned the OPG Darlington moly as well. Can we say that you are still in a holding pattern regarding when it might go to FDA approval, or how should we think about that timeline?

Yeah. That's a good question, and that's a subtlety that we certainly need to make clear. The FDA new drug application was submitted with data for targets that we have radiated on the Missouri University Research Reactor. But because of the flux that we get in that reactor at that side on those targets, there's a limited amount of generators we can offer to the market down on the small end, a few queries. And so the OPG of radiation is where we really need to move our targets so that we can offer the full spectrum of targets. Our strategy had been to go ahead and go through the FDA process with MER and do a supplemental with targets that are irradiated at the OPG site on the Darlington reactor. And we've been having some internal dialogue and some discussions with the FDA about whether we might go ahead and supplement our filing now with targets that are irradiated and with the full spectrum at OPG, so that we could maybe move to market a little faster and get that full product offering in, say, in the first part of 2024 as we had forecasted. So that's the discussion that's going on, and we'll see how that goes. And if we could pull that off, then we would avoid a supplemental filing and we could just wrap it up. It would have some implications on the timeline for formal approval, but it might be a positive effect in terms of the full commercial offering.

Okay, great. That's exciting. I guess we'll just sit back and wait and see how it all plays out, but it sounds like in general, things are moving ahead at least as planned, if not potentially faster with OPG, is that right?

Yes. Yes, we feel we're in a good position on it, and we're standing by.

Yes, that's correct, Bob. We're focusing on Verizon as they launch a full-scale product. While we consider any deviations or data supplements, we would only pursue those if they benefit our timeline. We're in communication with the FDA to ensure we can bring this product to market where it is needed. Our goal is to navigate all the necessary steps to present the market with a fully developed product, and that’s our primary focus.

Sure. Let's shift focus and continue our discussion on SMRs. Can you provide an update on the current total addressable market and sales potential for you? I understand it's relatively small at the moment, but what is the expected revenue ramp period and opportunity for your business? A year ago, the market seemed almost non-existent, but it has significantly expanded since then. Can you outline the opportunity for this year, next year, and in a three to five-year timeframe? Without getting too specific about a single year or quarter, how do you see this developing, and what kind of opportunity do you anticipate over one, five, and ten years?

Yes, let me address that. When considering small modular reactors, we are currently engaged in design work, specifically for the BWRX-300 reactor developed by GE Hitachi. We are designing the reactor pressure vessel and are likely to design additional components for it. Our objective is to transition from manufacturing to design, which involves ordering forgings and performing machining operations at our Cambridge plant, along with exploring expansion at other sites for increased capacity. Regarding the developmental timeline for a plant, design and component manufacturing are largely concentrated at the beginning of the process. A typical cycle might span around seven to eight years for the OPG project to have the first reactor operational. Our involvement is primarily in the early stages, with some ongoing activities later on. We estimate our scope for each reactor to be about $100 million. If OPG moves forward with a series of four reactors, it provides a sense of the opportunity’s scale. The following units may be introduced a few years apart from the first, but that will depend on the utility's plans. Additionally, TBA is considering the same reactor at Clinch River and is currently conducting an environmental assessment, which I anticipate could follow the OPG project by a few years. This sequence will develop over time, similar to our Navy business, which also has a long cycle. While I can't provide a specific number today, I believe this could become a significant segment of our commercial operations in Canada in the coming years.

Okay, super. Appreciate the extra detail. Thank you.

You're welcome.

Thanks, Bob.

Thank you, Mr. Labick. Our next question is from Scott Deuschle with Credit Suisse. You may proceed.

Hey good afternoon guys.

Hey Scott.

Robb, something you touched on briefly in the prepared remarks is this assumption and guidance that you'll get an equitable adjustment on certain contracts. I think this is in your prior quarter guidance as well, but maybe just baseline us on why you think you'll get that in the timing for when you expect to receive it?

Yes. Thanks for the question. Yes. So it is true that we brought that up last quarter, and we're tracking to working with that customer, working with the Navy to get equitable adjustments, specifically in the missile tubes program. As you know, last year, we took a charge of a little bit over $10 million. And frankly, we've been at that contract for the past couple of years, different changes have been made to that contract that we've worked with our customer to just essentially expedite in the interest of standing up that capability on U.S. shores. We did all that work to make sure that that was all accomplished on time and within their plans. And so now as that contract is wrapping up, we plan to actually shift our final missile tube here in the next couple of months. We'll ultimately be wrapping that up. And so that's the time where we need to circle back on not only that charge that we took last year but the pain that we've experienced in the past couple of years of delivering on that contract. And so we're working with that customer to try to itemize those changes, trying to figure out the best way to find a solution. We find them to be very reasonable. And so that's the process that we're going through right now. We're not exactly sure of the timing. That's where we wanted a little bit of flexibility on when that hits.

Got it. And then the dialogue with the customer at this point on this specific item is trending favorably. Like there's some suggestion that they will actually give you this relief?

That's right. The discussion has always been constructive. There's a legal matter. So I'm not going to get in front of it. But I definitely feel like the communication is good. They've paid other suppliers in different instances. And so we know that they're credible parties. So yes, we plan to get something there.

Okay. And then Rex, just on Hanford Tank, maybe you can give us a sense for what protects this award from an unfavorable protest outcome because you did won this award before and it got protested and sustained. So just curious like, anything change in the government's design of the RFP or how do we evaluate responses to the RFP in a way that we can, as analysts kind of rely that this award will actually feather through to EBIT upside for BWXT next year?

Yes, Scott, I need to make a slight correction. In the previous situation, the protest was not upheld. A protest was filed, but the government reconsidered its decision and chose to withdraw the award while adding some extra scope. That's why the scope increased from the initial $13 billion award we received when it was last announced to $45 billion now. The scope changed significantly. We are also managing some complexities related to the protest for sure. It's hard to predict the outcome, but we have a strong and experienced team, which gives us confidence in our position. We are hopeful that the customer has strong conviction regarding that award. The team handling this is the same group we assembled for the Savannah River project, which successfully survived without protest around this time last year, specifically about a quarter earlier. It's not unusual for contracts of this size to go through protest periods, which typically delays the timeline by about a quarter. We are ready to handle that but remain optimistic about the final outcome.

Okay. And then just last housekeeping question for Robb. Anything to offer on second quarter cash flow expectations?

We haven't provided specific guidance on quarterly cash flows. However, Q1 was anticipated to show negative cash flow due to higher tax payments and bonus payments to our employees that we manage in the first quarter. As the year progresses, cash flow will gradually improve, especially in the third and fourth quarters, which are expected to be higher than Q1 and Q2.

Okay. Thank you.

Thank you Mr. Deuschle. The next question is from the line of Michael Ciarmoli with Truist. You may proceed.

Hey, good evening, guys. Thanks for taking the question. Nice results Rex, Just, I guess, on the labor front and within Government, what can you parse out maybe what specific programs are kind of commanding the most labor resources? Is it sort of the bread and butter Virginia class, Columbia ramping up, or is it more you need heads for some of these new awards and new programs you're working on?

It's all of the above, Mike. The focus is primarily on our Navy programs, particularly the Columbia ramp along with the two Virginias, and of course, Ford is always a key part of that. Navigating growth in this post-COVID macro environment has been challenging. For various reasons, the issues we've faced have been more pronounced on the U.S. side than in Canada. So, the emphasis has mainly been on the Navy business. Additionally, we are certainly faced with the challenge of attracting the engineering and technical talent we need, for example, with pay considerations and potential ramp-ups. It's essentially all growth-related issues, but we are managing to address them.

Got it. Got it. And then are you guys actually on time with your Virginia class? I know we keep hearing chatter from the Navy they're not delivering two per year, it's more like 1.8. But are you sort of on track on the various reactors you're working on for the various subs?

Yes, we've managed to avoid delays related to shipyard deadlines, but we must continue to work hard each day to maintain that progress.

Okay. Shifting to commercial, the margins were noted to be at a multi-year low, and I'm curious if you can provide any additional details about those margins. It seems there might be a significant profit drag associated with the Tc-99, which could be contributing to the margin pressure.

It's Robb. I'll take that one. The margin and our EBITDA results were pretty much in line with our expectations for the quarter. Historically, the first quarter tends to be a bit lower for us. This quarter, we faced a significant outage in our medical business at one of our facilities in Vancouver, which limited our ability to grow that higher-margin segment. Over the next three quarters, we anticipate a ramp-up in medical, which was not present in the first quarter due to the outage. Additionally, we had a considerable amount of refurbishment field services work this quarter, which typically has lower margins compared to other types of field services work. This is just how the calendar worked out. If you look at Q2, Q3, and Q4, you'll notice that we do have quarters with mid-teens margins, though they can fluctuate based on project and product flows and the ramping of our medical business. We're not concerned about the first quarter, and we're proud of our revenue results during this period.

Okay. Got it. And then last one housekeeping. I think I heard you, Robb. You said 2Q EPS 20% of full year. So that puts you, I guess, $0.58, $0.60, down sequentially, down year-over-year, but it sounds like you just had more of those benefits pulled into the first quarter, and obviously, everything remains on track with a little bit more of a back-end loaded ramp.

That's correct. In fact, that's how the earnings per share figures break down. This is what we projected for the first quarter. What actually occurred was that in the first quarter, we had two significant factors in our Geo business that led to strong performance. In our Core Naval business, we experienced excellent timing, favorable mix, and volume, contributing to about half of the outperformance in the geo segment. This resulted in a pull-in of performance into the first quarter, creating a gap in the second quarter due to lower volume and absorption. The other half of the outperformance in margins came from TSG performance fees that were recognized in the first quarter, which we anticipated would be spread out over the second quarter and potentially later in the year, along with effective expense management in our Advanced Technology group as we develop the microreactor program. As that business stabilizes and expands, we expect to see further growth. Additionally, our employee merit increases will take effect on April 1, presenting a headwind that is expected to grow throughout the second quarter. Finally, the onboarding of new workforce members may also pressure the second quarter. We're aiming to approach this conservatively. Overall, these are temporary improvements from the first quarter and some challenges in the second quarter, with expectations for recovery in the third and fourth quarters.

Got it. Perfect. Thanks a lot guys.

Thanks, Michael.

Thank you, Mr. Ciarmoli. The next question is from Ron Epstein with Bank of America. You may proceed.

Hey, yes, good evening, guys. A lot of stuff has been asked so far, but maybe a couple of places we can go. In terms of potential new awards coming down the pike here, what should we be looking for that you guys are looking for? And Rex, if you could speak to maybe some of the other things that are going on in terms of the resurgence of nuclear power kind of post what happened in the Ukraine and so on and so forth, that would be great.

Sure, Ron. We've been pursuing several targets over the past few years, including Savannah River, Hanford, and Pele, along with various commercial nuclear opportunities. We've had a lot of success converting these opportunities into wins and I'm very confident in the growth foundation we've established. Looking ahead, we believe the DRACO award is on the horizon and we are well-positioned for it. Additionally, there’s a contract related to uranium hexafluoride conversion services with the Department of Energy. The Portsmouth environmental remediation contract is also pending. On the medical side, we are considering supply agreements for Lutetium-177 and possibly other actinium products and active pharmaceutical ingredients. In commercial power, there are numerous small modular reactor opportunities and we have a chance to play a significant role in the Pickering refurbishment projects and new CANDU builds, should Canada decide to pursue them. We're also eyeing international nuclear new builds. There are many possibilities, and I'm excited about our ability to engage with them. Could you please repeat the second part of your question?

No, you got it there. You kind of hit everything on that. So maybe just changing gears. We've talked about recruiting people. But what have you seen in terms of labor inflation? What do you actually have to do to attract people and retain them? And how does that impact your bottom line regarding your personnel costs?

We have definitely experienced pressure in this area, and we are working to attract and retain the right high-quality workers. We will attempt to reflect those cost changes in our pricing agreements and seek backlog relief related to these changes. However, these matters still need to be resolved. Overall, I believe we are managing through this situation quite well. We have been able to control supply chain and labor costs to the extent that our results remain stable. Robb, you might want to add your thoughts.

On the supplier side, we had to be proactive. When we enter into pricing agreements, we make it a priority to secure as much material as possible due to our foresight. After reviewing our backlog, we found that over 90% of it includes supplies we have already purchased, hedged, or accounted for freight risks. So, we are in a solid position. Regarding labor, Rex is correct. We have always offered a competitive package to our employees, and we are addressing market feedback. As I mentioned earlier, we are starting to implement merit increases at various locations from April 1, and we are managing those adjustments as we move forward. We are proud of our ability to achieve significant growth in EBITDA and earnings despite the rising labor costs.

Got it. Got it. And then maybe on the capital deployment front. Are you guys looking at any M&A at all? And if you are, how does it look out there? And what are you seeing?

Yes, not much has changed in our overall perspective, which is to acquire within our core franchises. We always have some ideal deals in mind, so we keep some capacity available. If any opportunities arise on the naval side, we are prepared. There's often speculation about those assets becoming available, and we stay informed about that. Beyond that, we see growth opportunities in microreactors, nuclear medicine, and fuels. We're continually exploring creative acquisitions that could enhance those areas, primarily focusing on tuck-in acquisitions. We're not seeking to add new lines of growth. Last year, we experienced an underlying EBITDA growth of over 9%, and this year, around 8%. We are focused on an organic growth strategy, and our capital expenditures are supporting that. Our priority is on our core businesses and executing our organic growth, and if M&A opportunities arise, we will consider them, but we don't intend to take any risks in that area.

Got it. Thank you.

Thank you.

Thanks Ron.

Thank you, Mr. Epstein. The next question is from David Strauss with Barclays. You may proceed.

Thanks. Good evening.

Hey David.

So, Hanford, is that still a $55 million equity income opportunity? Is that still the right way to think about it? If this doesn't get protested, or even if it does, what impact could that have on the near-term numbers? Do you have any projections for it this year?

Yes. To clarify, the $55 million was the total joint venture amount and I can provide some insight into our perspective on it. There’s a stated figure of $45 billion, often mentioned over a 10-year period, but in reality, the performance span extends to 15 years. Additionally, it's important to note that the $45 billion encompasses areas that may not contribute to our fee or earnings directly. When we narrow this down to what we anticipate as the annual run rate, we expect it to reach approximately $2 billion for the joint venture. We will earn a percentage of that, with some portion being dependent on performance, which allows us to take a margin and ultimately distribute that with our partners. When you calculate all of this, it's evident that any of these opportunities for BWXT could translate to an operating profit of $10 million to $20 million. Based on the calculations of our significant share and decent margin, I believe we are leaning towards the higher end of that range. As we progress, it’s possible that we could exceed that amount in the coming years with strong performance.

Okay, great. That's helpful. And then I might have missed this, but how is Pele going? Are you kind of pacing to that $10 million monthly kind of revenue run rate on Pele?

Yes, it's going fine, David. And yes, we're ramping that program. I don't have a specific revenue number in my head, but it's on that order.

Yes. Thanks. It's a topic near and dear to my heart. So yes, so we've been really looking at this really in three buckets of working capital opportunities. We have the accounts receivable front. We have the accounts payable and then our unbilled, which is basically SIP offset by advanced billings. And so when we look at all three of those, we're just kind of charting that out and seeing where we could get more and more efficient. And so on the receivables side, take for instance, we're looking at billing efficiency and lining up milestones and thinking about how we're working and billing specifically related to milestones. On the AP front, we're actually surprisingly enough, we don't have a vendor portal yet, and so we're in the process of building that to get more efficient payments with some of our vendors and lining that up with our contracts. And then on the unbilled side, we're just working on optimizing workflow and being aware of as we sign new contracts, really focusing on cash. So when you all those three up, really, that's leading to operating cash flow this year, which working capital is, frankly, the heart that we can control other than the P&L, which comes through net income. And we're working hard, obviously, on that. That's what the call is all about. On the working capital side, we really see a path to getting a day, 1.5 days each year by the combination of those factors, we're in the 60s, we've been as low as the low 50s. And so if we take out 1.5 days, maybe two days per year, we're slowly going to be adding back working capital. And I think that's a good target to basically push the $300 million-plus each year by a day or two. And so we'll see growth plus that incremental step-up.

Great. Thanks a lot.

Thank you.

Thank you, Mr. Strauss. Our last question is from Tate Sullivan with Maxim Group. You may proceed.

Thank you. Can you talk about the $428 million on specialty metals contract you announced last month? And when the Phase 2 of that contract might start? And how it relates to Y-12 being down in terms of down-blending capability?

Yes, Tate. It pertains to the capability at Y-12 in that facility. It involves stockpile maintenance activity, which the DOE has referred to as a bridge contract. We are already in Phase 2 of that. In fact, we had a modest bridge contract between Phase 1 and Phase 2 to ensure continuity of our workforce and activities from one phase to the next. So, it is already in motion.

Okay. Thank you very much.

Thanks, Tate.

Thank you, Mr. Sullivan. There are no additional questions waiting at this time. So I will turn the call over to Chase Jacobson for any further remarks.

Thanks, everyone, for joining us today and for your interest in BWXT. We look forward to speaking with many of you and seeing you at upcoming investor events. If you have any questions, you can reach us at 980-365-4300 or by email at investors@bwxt.com. Thank you.

That concludes today's conference. Thank you for your participation. You may now disconnect your lines.