BWX Technologies, Inc. Q3 FY2024 Earnings Call

Ladies and gentlemen, welcome to BWX Technologies Third Quarter 2024 Earnings Conference Call. 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, Ron. Good evening, and welcome to today's call. Joining me are Rex Geveden, President and CEO; and Rob LeMasters, Senior Vice President and CFO. On today's call, we will reference the third quarter 2024 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 all of you. This afternoon, we reported strong third quarter results that were ahead of our expectations. We delivered 14% organic revenue growth which, combined with solid operational performance, led to 19% adjusted EBITDA growth and 24% adjusted earnings per share growth. Given our strong year-to-date performance and despite weather-related challenges stemming from Hurricane Helene and other events, we are raising our 2024 adjusted earnings per share guidance to about $3.20, the high end of the previous guidance range, and we are maintaining our free cash flow guidance of $225 million to $250 million. As we look to 2025, we expect another record year with continued growth in Government Operations, complemented by accelerating growth in Commercial Operations. Our preliminary 2025 outlook is for mid- to high single-digit revenue, EBITDA, and earnings per share growth compared to 2024 with expectations for at least 10% free cash flow growth. Before I jump into our quarterly results and market outlook, I would like to spend a few minutes on our special materials portfolio and the acquisition of A.O.T. announced today. Special Materials is a strategically important line of business for BWXT and one that I would suggest is underappreciated by some investors. The foundation of our special material portfolio is our Navy fuel business in East Tennessee. Through this business line, BWXT is the only commercial enterprise in America to hold a Category 1 NRC license, which permits BWXT to handle special nuclear materials. We have leveraged this credential to develop unique infrastructure and retain some of the top radiochemistry talent in the world to execute high-value national security programs for the Department of Defense and Department of Energy. Over the previous decade, we have built a portfolio of businesses around our Navy fuel franchise, including the expansion of our down blending product line, growing our business in specialized nuclear fuel elements for university and government research reactors, securing a contract that converts scrap material into usable HALEU for advanced reactor fuel, and standing up a new production line to purify and process uranium metal and oxides for the NNSA. Further, over the past few months, we have announced two new important contracts that strengthen this portfolio. In September, we announced that BWXT was the sole award of a contract to study the build-out of a national security uranium enrichment capability. And in October, the DOE announced that BWXT was one of several companies selected to provide HALEU deconversion services that will be a lynchpin and fuel fabrication for advanced nuclear reactors. Simply put, we have one of the broadest sets of capabilities in the uranium fuel processing cycle and our customers place immense trust in BWXT to support national security missions and novel civil applications. Building off that foundation, today we announced the acquisition of A.O.T. from L3Harris. Based in Tennessee, A.O.T. is a former Aerojet business that is the sole manufacturer of depleted uranium and other specialty finished metals used in a variety of defense applications. From a strategic viewpoint, A.O.T. is a bull's-eye. It is a natural extension of our special materials portfolio and fits perfectly with BWXT's unique business characteristics, customer base, and special materials handling and processing capabilities. End users of A.O.T. products are mainly the Department of Defense and Department of Energy, including the National Nuclear Security Administration. Sales in this business are expected to be about $40 million in 2024 and the combination of its market position, program exposure and micro-level supply and demand factors all create good visibility into future top line growth at solid mid-teens EBITDA margins. We are targeting to close this roughly $100 million transaction by the end of the year and are excited to welcome A.O.T. to BWXT and to add another important product line to our unique special materials portfolio. As you know, Robb and his team look at many M&A opportunities but act on a few as a company that meet our stringent criteria are hard to come by and often demand premium purchase multiples. With a stronger-than-ever corporate finance infrastructure and solid balance sheet, we remain active with M&A diligence activities to complement our organic growth with interesting inorganic opportunities to maximize our exposure to growing strategic government and commercial nuclear markets. Turning now to a discussion of segment results and market outlook. Government Operations had a strong quarter with 17% revenue growth and 18% adjusted EBITDA growth driven largely by outperformance in our naval propulsion and Technical Services businesses. In naval propulsion, our teams are keenly focused on execution as we seek to level load our plants while we work through the Ford class aircraft carrier lull that will be with us through 2025 and maybe 2026. In any case, I'm pleased to report that we have completed negotiations and signed a term sheet with our customer on the next multiyear pricing agreement for naval nuclear reactor components with terms that are in line with today's supply chain and labor environment. The agreement is on track for a formal contract award by the end of the year, pending final government approval of the term sheet and the contract. In Technical Services, after a lengthy appeal process and being awarded the contract multiple times, the BWXT-led joint venture H2C received a notice to proceed on the 10-year plus Hanford Integrated Tanks Disposition Contract in mid-October. With this transition, the Hanford Tanks project becomes the largest contract in our technical services portfolio and punctuates our long-term strategy to convert our unmatched capabilities and nuclear operations into outsized market share for environmental remediation and management operations of DOE and NNSA sites. And microreactors, our current projects continue apace. Project Pele is maturing nicely and continues to receive good funding support. In fact, Idaho National Laboratory, where the reactor will be final assembled and powered, recently kicked off construction of the Pele testing facility, highlighting concrete progress on this key project. Last quarter, we discussed the Defense Innovation Unit RFP for microreactors on Army bases, an opportunity that continues to be intriguing. And beyond that, we are seeing tangible interest from other defense agencies and emergency relief organizations. With our foundation of recurring businesses and in-hand opportunities, we see playing out in the near term, we anticipate modest organic growth in the Government Operations segment in 2025, consistent with the trajectory contemplated in our medium-term guidance. This will be complemented by the A.O.T. acquisition, ultimately leading to mid-single-digit revenue and EBITDA growth in 2025. Our focus remains on driving operational excellence throughout the organization and providing our customers with high-quality nuclear solutions that enable some of the government's most critical missions. Turning now to Commercial Operations. Revenue was up modestly, driven by robust medical and commercial nuclear components growth, partially offset by lower field services activity. In commercial nuclear power, consistent with our prior view, demand is continuing to grow from traditional nuclear utilities and now the emergence of new customers investing directly in first-of-a-kind nuclear to secure long-duration, clean baseload power. Many of these customers are signaling a newfound appetite for nuclear given unprecedented levels of electricity demand growth and nowhere else to turn for reliable green energy. Over the past several months, some of the largest companies in the world, including Microsoft, Amazon, and Google have announced investments in nuclear power. These investments range from restarting decommissioned large-scale nuclear plants like Three Mile Island and Palisades to investing in new advanced reactor technologies such as SMRs. This newfound demand is evolving rapidly, and the shape is uncertain, but it is a clear indication of the growing demand and broadening public support for nuclear power. For BWXT, our breadth of experience and capabilities around nuclear technologies that stem from decades of experience in naval propulsion and commercial nuclear power position us as a merchant supplier to the market. The foundation of our commercial nuclear power business is in large-scale can-do reactors. However, we are also supplying SMR projects with large complex components, including the reactor pressure vessel for the GE Hitachi BWRX-300 project in Canada and molten salt heat exchangers for Terra Power's Natrium reactor in Wyoming. Further, BWXT has the potential to play a key role in the advanced reactor fuel supply chain by providing TRISO fuel, HALEU deconversion, or other manufacturing services. We are also working with parties like the Wyoming Energy Authority in the state's mining industry to potentially build microreactors to address off-grid power needs, leveraging our experience in the Pele and DRACO prototypes. New investment in nuclear is no doubt exciting, but I want to emphasize the strength of our existing commercial nuclear power business. Current projects, including the life extension of Ontario Power Generation's Pickering units 5 through 8, reactor pressure vessel work on the SMR project at Darlington, and heightened demand for field services to ensure the fleet can run longer and harder are all balances that will enable BWXT to quietly deliver solid double-digit growth in 2025. In the near term, our operational focus is on building our workforce and executing on the capacity expansion of our Cambridge facility to ensure we are well positioned to capture the dynamic growth we see in this important market. Turning to BWXT Medical. We had another good quarter. Year-to-date growth is in line with our full-year expectations of about 25%. This is driven by our base diagnostics portfolio that supports the spec and pet imaging markets, both of which are experiencing increased patient volumes as well as higher contract drug manufacturing volumes for TheraSphere. We expect these trends to support similar growth in 2025 for these product lines, which represent most of our medical revenues today. Specific to our tech-99 development program, we continue to test and perfect our product and build the commercial relationships necessary for future growth. Notably, we have successfully tagged our product with every cold kit on the market and have finalized our first supply agreement with the radiopharmacy network. FDA communications and commercialization efforts are consistent with the update we provided to you last quarter, and we continue to anticipate disciplined market entry with spot volumes in 2025 and a full annual run rate of contracted volumes in 2026 and beyond. In therapeutics, we continue to support our customers' clinical trials with actinium-225 and are taking initiative to prepare for higher volumes, including new production modalities to increase capacity and provide better surety of supply as these drugs move through the pipeline and closer to commercialization. Similarly, our strategy for lutetium production is taking shape, and we anticipate starting radiation runs on our Darlington target delivery system next year alongside tech-99 radiations, making that investment more value-enhancing than our original business case. With that, I will now turn the call over to Robb, and I will come back with closing remarks.

Thanks, Rex, and good evening, everyone. I'll start with some total company financial highlights on Slide 4 of the earnings presentation. Third quarter revenue was $672 million, up 14% organically with growth in both segments. Adjusted EBITDA was $127 million, up 19% year-over-year, driven by robust Government Operations growth, which was partially offset by lower Commercial Operations EBITDA due to project timing and the mix of revenues. Unallocated corporate EBITDA was lower compared to last year due to cost management and the timing of health care costs. We continue to expect full-year corporate EBITDA expense to be relatively flat compared to 2023. Adjusted earnings per share of $0.83 increased 24% compared to $0.67 in the prior year quarter. As shown in the EPS bridge on Slide 6, growth is largely driven by operations as slightly lower interest expense was offset by lower pension income and a slightly higher tax rate. Our adjusted effective tax rate in the quarter was 23.1% and 22.8% year-to-date. We expect our full-year tax rate to be approximately 23.0%, a touch lower than our initial guidance. I would like to tip my hat to our tax team, which has embraced our culture of operational excellence, focusing on driving continuous improvement wherever possible. They're finding small but consequential items to generate incremental value for the shareholder. And frankly, I see more value in this area as we challenge ourselves further and come through various tax planning exercises. Free cash flow in the quarter was a use of $8 million as the timing of contracts impacted our working capital during the quarter. Despite that, we are reaffirming our full-year free cash flow outlook of $225 million to $250 million. As you likely know, East Tennessee, where our nuclear fuel services facility is located, is one of the areas that was impacted by flooding and widespread power outages caused by Hurricane Helene. This devastating weather event resulted in an over 3-week shutdown of our navy fuel processing facility and the metal construction project from late-September through mid-October. As such, large customer payment milestones that we had anticipated in fourth quarter 2024 may be pushed into early 2025, putting the upper half of our free cash flow guidance at risk. To be clear, these opportunities are not lost and may simply move into 2025, and we are working with our customers to see what is possible in light of this highly disruptive weather event. No matter where we land, I am proud of our team and their focus on improving working capital and free cash flow conversion, laying the groundwork for another year of at least 10% or greater free cash flow growth in 2025. Capital expenditures in the quarter were $40 million and $101 million year-to-date. We continue to expect 2024 CapEx to be similar to last year's level of about $150 million. We have begun the expansion of our large commercial nuclear component manufacturing facility located in Cambridge, Ontario. This, combined with other select growth initiatives, sets us up for similar capital spend in 2025. Moving now to the segment results on Slide 7. In Government Operations, third quarter revenue was up 17% to $560 million, driven by increases in naval nuclear components, long lead materials, U metal, and microreactors. Adjusted EBITDA in the segment grew by 18% to $117 million as higher revenue was complemented by solid operational performance. EBITDA margin in the segment was 20.9% compared to 20.7% in the same quarter last year. Consistent with the view provided last quarter, we expect full year Government Operations segment EBITDA margin to be just over 20%. Turning to commercial operations. Revenue was up modestly, driven by our portfolio of BWXT Medical products and strong growth in commercial nuclear power components, fuel, and fuel handling systems, which was partially offset by lower commercial field services revenue. Adjusted EBITDA in the segment was $13.5 million compared to $13.9 million in the same quarter last year. Solid execution was offset by revenue mix and growth investment in the commercial nuclear power and medical business lines. Turning now to guidance for the remainder of 2024 and our preliminary outlook for 2025. We are raising our 2024 adjusted EPS guidance to about $3.20, the high end of the guidance range we set in the beginning of the year. We are maintaining our segment-level operating assumptions, but we'll note that the summation of our revenue is likely to be just slightly higher. As such, you will notice we've raised our consolidated revenue guidance accordingly to approximately $2.7 billion. Moving now to our preliminary outlook for 2025, which includes a modest contribution from the A.O.T. acquisition we announced today. Overall, we expect to see another solid year that is in line with our medium-term outlook. In 2025, we expect mid- to high single-digit revenue, EBITDA, and EPS growth with at least 10% free cash flow growth compared to our 2024 guidance. In Government Operations, we expect mid-single-digit revenue and EBITDA growth, which consists of low single-digit organic growth plus a marginal contribution from A.O.T. For organic growth will largely be driven by our Special Materials and Technical Services portfolios, while naval propulsion will be relatively flat as growth from increasing Columbia-class production is offset by the aircraft carrier volume lull in 2025. Government Operations EBITDA margin is anticipated to be relatively consistent with the strong 2024 rate as revenue mix, a greater amount of early-stage programs, and lower volumes of aircraft carrier work are offset with OpEx initiatives and seasoning of our much expanded workforce. In commercial operations, we anticipate double-digit growth in both commercial power and medical. EBITDA growth is anticipated to outpace revenue growth as better EBITDA contribution from medical and higher commercial power revenue is partially offset by project mix and investment in our facilities and workforce to support the growth we see ahead. To sum it up, we had a robust quarter, and we are on track for a strong end to 2024, another year of likely record earnings and cash flow in 2025. I would like to thank all of our over 8,000 employees whose hard work and dedication helped to drive our results and position BWXT for continued success. I will now turn it over to Rex for final remarks.

Thanks, Robb. Let me close by taking a moment to recognize our employees and their families at our nuclear fuel services site in Erwin, Tennessee, who were impacted by Hurricane Helene. Many of whom experienced loss of personal property and, in some cases, friends and loved ones. We have and will continue to provide support for this region as it rebuilds. I'm extremely proud of how our team has navigated extreme weather events in addition to other shorter-term power outages and flooding at several of our other sites in the Midwest throughout the summer. Our workforce at all locations demonstrated their preparedness for emergencies by taking immediate action to ensure the safety of all employees and the safeguarding of special nuclear materials. Severe weather events like these are also a stark reminder of the impacts of climate change and the obvious need for clean, reliable baseload nuclear power. In conclusion, despite these weather events, it is an exciting time at BWXT. Over the past several years, we have invested in our people and our infrastructure and instilled the culture of innovation and operational excellence. There are secular tailwinds supporting our key defense, clean energy, and nuclear medicine markets and there are tangible signs of accelerating demand for nuclear solutions that will lead to steady earnings and free cash flow growth for BWXT. Our focus remains on providing our customers high-quality solutions to address their most critical missions, and we will continue to invest organically and inorganically to position BWXT for ongoing success. And with that, we look forward to taking your questions.

Your first question comes from the line of Pete Skibitski with Alembic Global.

Nice quarter, guys. Thought I would start out, we're seeing a lot of supply chain issues at the shipyards due to things like steam turbines and such for submarines and carriers. Has that impacted you guys at all? Or is the systems guys and the Navy kind of keeping you guys level loaded and the supply chain issues aren't impacting you guys?

Yes, Pete. I want to mention a couple of things regarding that. First, our build schedule is a few years ahead of the shipyards because of advanced procurement and reactor delivery times. This gives us earlier visibility into potential issues like supply chain challenges, material shortages, and wage pressures. Overall, we have navigated these issues fairly well. We feel confident in our ability to complete our products. Regarding our supply chain, we have effectively managed through the COVID periods and emerged successfully. We're not currently experiencing supply chain pressures, and we believe we are well-equipped to meet our commitments to our customers.

Okay. That's great. And just one clarification for me. In Government this quarter, you had strong growth. Was there some materials ordering that kind of drove that? I know sometimes in the past, the outsized growth has a material aspect to it. And then maybe that was kind of pulled ahead from the fourth quarter. Could you just maybe clarify that?

No, I don’t think anything to particularly call out. It was the strongest growth rate we had all year. We’re really hitting nice strides in Advanced Technologies as we have both Project Pele and DRACO coming through. We’re hitting nice performance and some of the ramp-up of those immature programs just in general, kind of ramping those. So nothing just general good execution across the board really.

The next question comes from Bob Labick with CJS.

It's Pete Lukas for Bob. You covered a lot, and I appreciate that. I have a couple of broad questions. Given the renewed interest in the nuclear space, can you remind us of your main competitive advantages beyond experience, such as your licenses and commercial capabilities, and how this positions you compared to competitors?

Yes, there are several ways we differentiate ourselves in the market. First, we are the market leader in advanced nuclear fuels, particularly coated fuels for space applications and TRISO fuel, which has significant commercial potential for advanced reactors. Additionally, we are essentially the last remaining company capable of large component manufacturing in North America. Our Cambridge site can produce large pressure vessels for steam generators, pressurizers, and heat exchangers, including the reactor pressure vessel for the GE small modular reactor. Furthermore, we have a unique and continuous supply of experiential qualifications. We've been involved in nuclear projects for decades without interruption, thanks to our commercial operations in Canada and our naval nuclear propulsion capabilities in the U.S., where we've delivered 415 reactors to the nuclear Navy. This level of experience is unmatched by competitors. There are likely many other ways we stand out, but we definitely have substantial differentiation in serious ways.

Very helpful. And just one last question for me. You mentioned some incremental growth and progress in Pele and DRACO. Can you provide a timeline for the growth in the isotopes microreactors and SMRs, specifically regarding when we can expect that to significantly impact the P&L?

It's an intriguing situation. We've developed a portfolio in nuclear medicine that is experiencing significant growth. The therapeutics are gaining traction and our imaging products are also expanding robustly. We currently have two active prototype programs for microreactors and are engaged with the GE product and TerraPower's natrium reactor for small modular reactors. I see three primary timeframes for growth. In the short term, nuclear medicine and small modular reactors are our main contributors to growth. In the midterm, microreactors, although we're working on them now, will begin to show promise as we move into production programs and commercial opportunities. AUKUS will also contribute to midterm growth as we anticipate interesting developments in the next few years. Looking further ahead, we see potential with enrichment opportunities related to national security and possibly commercial prospects, which are very promising. I believe we can create a whole new franchise based on the national security aspect of enrichment. Additionally, we expect to see quick announcements regarding large-scale nuclear reactors for grid-scale applications to address rising power demands. This is not just about data centers or AI; it's the electrification of everything, including transportation and industrial processes, as we transition to clean energy, which will significantly increase demand on the grid. Meeting this demand will require a diverse array of technologies, with large commercial nuclear reactors playing a crucial role. We have identified three horizons for potential growth, all of which will converge to create lasting growth opportunities for our company. We believe these enduring trends will continue for decades.

The next question comes from the line of Scott Deuschle with Deutsche Bank.

Robb, the 2024 guide implies a sequential decline in EPS from 3Q to 4Q. I think that's a big contradictory to your typical seasonality of the business though. Just wanted to see if you can walk through what's going to drive EPS to decline in the fourth quarter from the third quarter?

Yes. Thanks for the question, Scott. As you know, we traditionally do have a significant fourth-quarter dynamic. All year, frankly, we've been just sort of bringing some of that goodness what we normally see in the fourth quarter. We never know how it's going to sort of play out for the year. So we're always banking on that happening, of course, by the fourth quarter. And you just think about different events that have happened throughout the year, performance fees at TSG or performance on different microreactor contracts. And so you just think about all that, we've kind of almost taken some of that into the numbers. So that derisks the fourth-quarter numbers specifically. The other impact that I think you just need to be aware of is there will be a little bit of a sequential headwind from the activity we saw down in Tennessee; we were offline for three weeks. Not only do you have that sort of headwind, if you will, but you have the ramp-up going into the rest of the year. And so we're just working our way through that. There's fits and starts of that. And so if you just think about the sequential Q4 versus Q3, that factor alone really would cause you to sort of step down. The last smaller thing is I think you know that our corporate expenditures generally bump up because of just cadence around health care. That has an impact in the fourth quarter. So that caused a sequential move down for the Q4 versus Q3.

Okay. That's helpful bridge. And then Robb, excluding tech-99, are you expecting growth to flow at the rest of BWXT Medical next year? Or should we expect the base BWXT Medical business to continue to drive this 25% type growth next year? Rex's comments kind of seem to be alluding to that, but I just wanted to check.

Yes, that’s right. The underlying growth is really how we guided preliminarily to say, look, ex tech, we have a very small slice of spot volumes that I frankly think at the profit level is relatively neutral as it relates to 2025, but your question is specific for sales. We do not bank on tech in order to hit that sort of similar growth as what we’re experiencing here in 2024. The portfolio is really strong across the pet products, TheraSphere is strong. So it’s really the underlying portfolio that’s going to drive that.

The next question comes from the line of David Strauss with Barclays.

In terms of the new Navy pricing agreement, can you provide some additional insights? I understand it will layer in over time with the other contracts you are currently working on. Will this pricing structure, if it remains stable, allow the Government Operations EBITDA margins to stay around the 20% range for future contracts?

Yes, David. That's certainly what we hope. As you know, we negotiate those into the low mid-teens as a starting point of the cost baseline and then drive OpEx, try to gain advantages in materials pricing and other such things. And certainly, with a high focus on operational excellence, maybe volume matters to drive it into the high teens as we've done traditionally. So that's our model, and that's what we hope to achieve.

Yes, maybe I'll offer just a specific on the margin. The dynamic that we saw in 2024 was strong underlying performance on the Government Operations basis, right, basically fighting through mix all through the year but holding that constant. And then we obviously had the missile tube issue last Q4. So when you exclude that, we sort of held our own underlying ex the missile tube. That's how I'm really sort of thinking about 2025. Very similarly, of course, you have some immature programs that are ramping, whether it's microreactors or special materials. We obviously have the A.O.T. acquisition, small in revenue, but a touch lower in terms of margin. And so we're really looking to hold underlying margins, which is like saying, look, you're fighting mix and you're growing underlying margin to offset the mix. That's how I see 2025 margins for Government Operations.

Got it. Okay. And Rex, your comment about the carrier lull potentially extending into '26. What's the background there?

We have discussed this previously, David, over the past few quarters. It relates to the shipbuilding plan released by the Navy and their timeline for procuring the next carrier. Depending on how the advanced procurement unfolds, we might experience an additional year of the current lull. We are optimistic and actively addressing it, aiming to prevent the supply chain disruption that results from this situation. However, this is something we have been indicating for several quarters now.

Yes. Two quarters ago, we announced the shipbuilding plan slightly changed adding that third year. Of course, it has been as long as two investor days ago, we talked about that ordering cadence being a two-year thing. And then the new shipbuilding plan as it came out was a third year. And so we just highlighted that to investors. That was pretty far off when we did that two quarters ago. And as Rex said, we’ll continue to – as we do this pricing agreement and the next one, try to look effectively. As you know, we sort of – all of our facilities are met for various types of volume. And so our customer is very focused on finding ways to drive as much volume as they can through a fixed cost infrastructure like we have. And we hope to be successful there.

The next question comes from the line of Peter Arment with Baird.

Rex, and perhaps Robb will also share some insights. You mentioned expectations for double-digit organic growth in commercial nuclear by 2025. Can you elaborate on the key factors contributing to this? Is it largely due to an increase in refurbishment activity? Are you already seeing positive impacts from Pickering? Additionally, is there a significant revenue shift related to your work with GE Hitachi?

Sure. Yes. Maybe I'll start by just saying that's exactly right. The big drivers we see in the commercial nuclear business, of course, there are two segments there. We've already talked about the Medical, which will be a really nice driver of growth in the Commercial Operations segment in general. As it relates to commercial nuclear, we have ways that we can play across the value chain, if you will, of nuclear. We have the large position in Canada. We have medium reactors, if you will, with the SMRs and then you have the microreactor play increasingly being of interest to people in that part of the market. And when you think through the large, medium, and small presence we have, on the large side, we're really seeing both refurbishments with Pickering, some pickup of thinking a little bit about greenfield activity, that will be a little further out, but that's where we're going to see some growth there over time. It probably doesn't bleed into 2025. It's mostly about Pickering there as well as just generally the Canadian fleet seeing good growth, and we have that recurring business. On the medium side, our project at Darlington as it relates to BWRX-300, that will pick up steam as we enter 2025. So we'll get kind of a full year of that. And then a lot of cats and dogs in and around that, that we're doing for other competitors and trying to get some scope there and different engineering work for various companies. And in the small, we don't have a huge presence yet on the commercial side. But obviously, what we're seeing with Pele and DRACO educates ourselves on how to play in that market. So I wouldn't be surprised if you get a little bit of at least some work that we're going to start to think about over the medium term.

Got it. And then just on the microreactor, I think Rex, you made a comment about the Army RFP that was out there. Is there any update on timing? And then just lastly, on 2025 CapEx, is it still, Robb, the kind of $100-plus million of maintenance plus the $40 million-ish of kind of growth CapEx? Just any thoughts on that.

Yes. Regarding the first opportunity with the Defense Innovation Unit, we submitted a compelling proposal and assembled an interesting team. There's notable industry interest in this initiative, but we have not yet received any feedback from the government. We are awaiting further information on what we believe could be a valuable opportunity.

Yes, and I can deal with the CapEx question. So we guided free cash flow to be up. We really haven’t disaggregated the operating cash flow from the CapEx. We’ll provide you more guidance on that next quarter. I will say a couple of things. One, you just look at our Q4 cadence to finish out this year. It’s a step-up from the past couple of quarters. Why that is related around to the Cambridge expansion. As you know, we’re trying to bring as much of that forward just given all the demand signal we’re seeing for the BWRX-300 as well as all the growth in Canada. So we’re trying to wrap our heads around how that sort of feathers into 2025. That's one factor. I think the second factor that you just need to be aware of is as we sign this term sheet, we’re trying to decipher sort of the operating cash flow, if you will, versus the CapEx. Several of our peers on the shipbuilding side, there are certain triggers of profit, if you will, or different cash flow that makes somewhat fungible between operating cash flow and CapEx. It’s a small thing, but we’re kind of coming through that and deciding where we need to invest on the naval side given what our customer wants in terms of accelerating Colombia, in terms of preparing for international growth and so forth. Those are all factors that still puts you in and around the level that we’ve been running this year, maybe a touch higher. We’ll provide more guidance as we roll into 2025. But no matter what the scenario is, we’re sticking with our free cash flow, right? That’s kind of how we guide the overall company. And so we’ve really asked you to focus on the free cash flow, and we’ll deliver either operating cash flow or CapEx to perform at that level that we guided you to for 2025.

The next question comes from the line of Ron Epstein with Bank of America Merrill Lynch.

Rex, I have a broad question for you. This quarter, the shipyards have faced significant challenges, especially with the Virginia and Columbia programs. Your team has been performing well in this area, and you mentioned having a lead time on that. When do you expect this to affect you? Specifically, considering that the shipyards are still working at about one-third to one-and-a-half Virginia-class submarines per year, how much advanced procurement for power plants can the Navy realistically achieve given the current delays in the shipyards that may be beyond initial expectations?

Yes. Thanks, Ron. So a couple of things I would say. Yes, I'll reiterate the point that we're kind of a couple of years ahead of the shipyards when it comes to environmental labor conditions, all of that. And so that gives us a little bit of an advantage. And I think it's helped us to contend with those complex issues. I would add to that, that we have a very sophisticated customer in naval reactors and they really see around corners and they supported us a few years ago with some setting industrial-based funding that enabled us to go and add some training capabilities to add some workforce, some talent acquisition capabilities, and some other kinds of depth, including some digital transformation dollars that we needed. And so that's been extremely helpful to us. We're grateful to that to what we get from our customer there; they help us think. I guess the other thing I would say about it is, look, the shipyards are not slowing down. They're just not achieving the shipbuilding tempo that's required by the Navy. So they're going full steam ahead and the supply chain is going full steam ahead. And I don't think there's any world in which you could conceive of just stopping the supply chain to let the shipyards catch up to the supply chain, right? So if you stood down the supply chain for 2, 3 years or whatever it was, you would literally lose the capability. And so I think the wisdom of the Navy, the wisdom of the appropriators is we've got to keep the supply chain going even if there are challenges at the shipyard and you just have to bet that the shipyards are going to get it sorted out and they'll get up to the production rates that are required for our defense needs. And I believe that they will. I certainly believe you have to bet on that outcome, but you can't just ask your supply chain to go and take a vacation for 2 or 3 years. And so I think we're going to continue to produce at the levels that are appropriate for our business, including the idea of level loading our factory and letting our customer take full advantage of the rates that go with that.

Got it. And then maybe shifting focus a bit. At the Investor Day, you mentioned that the SMR market could reach $300 billion by 2040. How much of that do you think you could actually capture? How much of SMR is your business currently, and where do you see it in the next 5 or 10 years?

So that is a big picture question. Maybe a little tough to speculate, but I'll give you maybe some ways to think about it. You look at the GE BWRX-300, we've said that we thought we would get maybe $100 million of content. On that $100 million of content on that reactor in the U.S., we've got work going with TerraPower now and the natrium reactor and a contract there that could lead to maybe tens of millions. And so I think on a per unit basis, you can think about it in those terms, Ron. I mean, it's possible that we could put ourselves into a partnering configuration with a reactor developer and capture more scope. And certainly, we have those kinds of conversations. But when you think about our role as a merchant supplier to the market, that's how I would scale it. And so take the number of units and multiply it with those kinds of numbers as kind of the baseline consideration for our growth with the possibility of sort of leveraging our capabilities with a partnering kind of approach.

Yes, I might add a couple of other just sort of call options in that space. Some of those platforms demand fuel solutions. So we have a really good expertise in that area of TRISO and so forth. And so we do have plays that we can’t actually get the component manufacturing that Rex talked about, underlying those. We’re certainly going to be ready and willing to help other players on the fuel side, and that’s a very challenging part of their equation. And so as they ramp, we’re ready and able to satisfy some of those SMR demands on the fuel side. The other thing that I would say is that we've expanded our facility to accommodate the BWRX-300 and the Canadian growth and as growth continues to show itself up in the U.S., you can imagine that our sites that are principally government sites in terms of component manufacturing in the U.S. are very able to have U.S. capacity. And so as those customers in the U.S. start to show themselves and look for solutions where they want a domestic supply chain, I think there’s other options that you’re going to see more from us in the near term in terms of manufacturing capability in the U.S. in addition to our expansion in Canada.

The next question comes from the line of Andre Madrid with BTIG.

I wanted to ask a quick one. I think late October, the DOE selected four providers for domestic high SA, low-enriched uranium production. I think the max was about $2.7 billion. Was this something that you guys were bidding on? I know you won a similar award earlier in the month for deconversion, but I wasn't sure if there are other ways you guys were looking to play the newfound demand for domestic uranium.

Yes. So that's an opportunity we did not submit a proposal for. That's really about developing commercial capability in the enrichment space and there are other companies that are better suited to do that. So there are places where we can play. We have some nice niches in deconversion, for example, that you mentioned. But our intention was not to get into large-scale commercial fuel enrichment. That's not where we play.

Got it. I believe Amersham was chosen for a decommissioning contract in Lithuania. It was relatively small, but I saw it as a good chance to revisit the international opportunities you were exploring moving forward and how those could enhance the broader business.

Okay. So maybe two different. Maybe I'll parse that one a little bit. From the standpoint of decommissioning or environmental remediation, we haven't really looked too much to international scope. And certainly, we're not interested in exposing ourselves to the risk that comes with sort of the fixed price large-scale decommissioning projects that are out there. We just haven't chosen to play there. We like the decommissioning and environmental remediation work in the DOE space. It's cost reimbursable. The risk is bounded there, and it's something that we understand and I think it contributes meaningful value to. And so I don't think you'd see us doing decommissioning in Lithuania or places like that. The commercial nuclear power development opportunities in international are pretty intriguing. I mean I think if you look at the CANDU footprint, we already work in places like Romania to a limited extent in Argentina and in South Korea. And I think those refurbishment projects in Romania and new reactors there that are around the CANDU technology are exciting and important for us for growth. And there's interest in scaling that CANDU technology to a gigawatt scale reactor called MONARK and we certainly have a role to play there. And we believe there will be an international footprint for that MONARK reactor and others, right? There are things out there like the AP1000 and others where you could see us contributing. So I think the international opportunity is significant, and we'll find ways to play.

Ron, can we go to the next question please.

Robb, could you elaborate on the EBITDA margins? It seems you're facing some challenges due to hurricane-related disruptions this year. While you've mentioned the mix, could you specify what exactly is causing dilution? At the consolidated level, it appears that EBITDA margins will be flat next year. I had expected to see some improvement, particularly in Medical. Is there anything significantly changing in the mix that could be leading to this lack of margin expansion?

Yes, we've been discussing this throughout the year. A clear example is our microreactor programs. We are not aiming to take risks for higher margins. We have secured two vital contracts for Project Pele and Project DRACO, which come with lower margins but generate solid revenue and help us maintain a competitive edge with those prototype contracts. This will have an impact in 2024 and into 2025. Additionally, we have some contracts related to special materials, particularly in metal, which also yield lower margins compared to other areas of our business. We are managing our operations within the core enable segment, as we are currently experiencing a slowdown. Our Lynchburg plant is performing well, effectively balancing upper tier and lower-tier components. This adaptability allows us to sustain margins despite overall market challenges. Our naval business remains a good source of margins. We are navigating through immature programs and lower volumes, which we have been carefully managing during the initial years of our medium-term outlook, especially until we see an end to the slowdown regarding aircraft carriers. This situation compels us to focus on maintaining margins, which is influenced by the mix and general softness in core demand due to limited volumes that typically benefit a business like ours.

Got it. That's fair. And just quickly on Pele, I think the initial contract is like $300 million, and it probably runs its course in '25. Do you get additional funding for that? Or do you kind of complete your portion of the work in '25? I guess I've seen the press releases out there with their kind of testing at construction sites. But what has to happen in terms of Pele and your funding and next steps?

Yes. It’s Robb. I’ll take that. Yes. So you’re right. That was the initial contract now. The customer – we work with the customer as they have expanded their scope and different things that they want as part of that, that will not end in 2025. We continue to see different interest in different features. We see different spending as we move it out to Idaho. And so that’s not going to be a program that terminates in 2025. So there will be a tail, and I wouldn’t be surprised if it runs higher than the $300 million.

That concludes our Q&A session. I will now turn the call back over to Chase Jacobson, Vice President of Investor Relations. Please go ahead.

Yes. Thanks, everybody, for joining us today. We look forward to seeing and speaking with many of you at conferences and other events over the next quarter. If you have any questions, please feel free to reach out to me at investors@bwxt.com. Thanks.

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.