Earnings Call Transcript - BWXT Q2 2024

Operator, Operator

Ladies and gentlemen, welcome to the BWX Technologies Second Quarter 2024 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, sir.

Chase Jacobson, Vice President of Investor Relations

Thank you, Kathleen. 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 second 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.

Rex Geveden, President and CEO

Thank you, Chase, and good evening to all of you. This afternoon, we reported strong second quarter results that were ahead of our expectations. We had robust 11% organic revenue growth, 18% adjusted EBITDA growth, and adjusted earnings per share growth of 26%. We benefited from good execution of our business lines and favorable timing for a number of items in the first half, which drove the outperformance. Year-to-date performance gives us the confidence to increase the lower end of our adjusted earnings per share guidance, resulting in a range of $3.10 to $3.20, and to reaffirm our full year guidance for mid-single-digit revenue and adjusted EBITDA growth. Over the last several months, we have continued to experience positive demand momentum in our global security, clean energy, and medical markets. We are seeing federal and state governments prioritize regulatory clarity and funding to boost investments in nuclear power as a reliable clean energy alternative, complemented by demand from private industry. This ranges from utilities and major power consumers looking to add nuclear capacity to the grid to pharmaceutical companies investing in radio therapeutics as the first line of attack for complex cancers. BWXT's nuclear technical depth, unique licenses, and differentiated infrastructure across various industry segments position us well to help our customers realize their goals across project life cycles. At our core, we are a supplier and partner to our customers, capable of everything from concept development and engineering in early design stages through manufacturing of critical components and ultimately providing services to maximize the utilization and lifespan of their assets. This provides us substantial visibility into the long-term potential of the markets we serve and opens decadal life cycle opportunities for BWXT. Now turning to a discussion of segment results and market outlook. Government operations had a solid quarter, with 10% revenue growth and 13% adjusted EBITDA growth, both ahead of our expectations and driven by the continued ramp on newer special materials and microreactor projects as well as solid volumes in our naval propulsion business. From an operational standpoint, our naval nuclear propulsion business performed well in the quarter. As we discussed in detail last quarter, the lower tempo of work associated with the ordering lull for the Ford-class aircraft carrier will be with us through at least 2025 and potentially 2026, but we are seeking and finding ways to keep our plants operating at level loads. We remain intensely focused on operational equipment effectiveness initiatives and driving process improvements throughout the organization to mitigate these headwinds, and we expect to finalize our next pricing agreement in the coming months. At the same time, we continue to invest in our businesses to ensure sufficient capacity for execution of program schedules and to improve our competitive positioning. For example, in the second quarter, we engaged in a significant and successful facility and process line modernization in our newer fuel services plant to support growing demand. Such investments can create modest near-term margin headwinds, but we make these investments to improve product quality and production capacity. Also within government operations, we are very excited about the contract award and quick transition onto the Pantex plant in Amarillo, Texas. As of July 13, BWXT is leading a joint venture that will supervise this important site under a 20-year contract, further solidifying our leadership in the NNSA space. In the microreactors business line, our defense-related projects, Pele on land and DRACO in space are progressing well. And in the commercial sector, we continue to work with the Wyoming Energy Authority to assess the viability of deploying microreactors in that state, leveraging our banner work largely funded under the Department of Energy's Advanced Reactor Development Program. In a related matter, in early June, the Army and Defense Innovation Unit posted an RFP for procurement of microreactors capable of generating 3 megawatts to 10 megawatts of power for US Army bases. We believe the strong team of partners we have selected, our experience with Tail-A, and our existential component and fuel manufacturing facilities put us in a leading position for this remarkable opportunity. Overall, long-term demand trends in our government operations segment are favorable. We remain confident in the segment's medium-term outlook for mid-single-digit revenue and adjusted EBITDA growth as modest growth in our naval nuclear propulsion business is enhanced by real growth in microreactors, special materials, and technical services. Turning to Commercial Operations. Revenue in the segment grew 17% organically and adjusted EBITDA grew 42%. Demand for commercial nuclear power is blossoming with interest from industry, utilities, and government buyers. During the quarter, we received full notice to proceed with the manufacture of the reactor pressure vessel for GE Hitachi's BWRX-300 small modular reactor project at Ontario Power Generation's Darlington site. As the first SMR project in the Western Hemisphere, this is a strategically meaningful project for BWXT and is also an important reference point for power plant developers assessing the build-out of SMRs. Additionally, in June, the Department of Energy announced that it would provide up to $900 million of funding to spur SMR development. This was followed by Dominion Energy issuing an RFP to find a technology partner to build an SMR at the North Anna Power Station in Virginia. Dominion joins a growing list of domestic and international utilities expressing interest in building small modular reactors. We face the SMR market with deep nuclear design capabilities and as a merchant manufacturer with the largest nuclear equipment assembly facility in North America. In the CANDU market, we had a solid quarter driven by ongoing life extension projects and strong field service growth weighted toward outage projects that generally bring slightly higher margins. We are starting early work on the life extension of Ontario Power Generation's Pickering units five through eight, which will be a part of this segment's bookings and earnings over the next 10-year life cycle of that project. Turning to BWXT Medical. Revenue in the first half of 2024 is tracking in line with our full year expectation of approximately 25% growth. I continue to be pleased with the progress we are making in growing and executing on our existing diagnostics portfolio and expanding our product lines in key cancer therapeutics. Specifically, over the last couple of months, BWXT has extended its leading commercial position in high-quality actinium-225, a therapeutic isotope being used in over 25 clinical trials for the treatment of multiple forms of cancer. In June, we submitted a drug master file with the FDA for our actinium-225 pharmaceutical ingredient. We are now the only commercial company with an active drug master file for this vitally important medical isotope. This enables pharmaceutical companies to reference our product as they advance drugs through clinical trials or prepare to file new drug applications. Additionally, in July, we announced a partnership with North Star, whereby BWXT will provide processing and purification services to develop radium-226 targets that will be utilized in North Star's electronic accelerator to produce actinium-225. This partnership highlights our pick and shovel strategy through which we serve the ecosystem with a full suite of services, including sourcing starter target design, irradiation, processing the irradiated material, and waste stream management. In this instance, with North Star, we are initially focused on constructing the difficult-to-manufacture radium-226 targets. But over time, that could evolve into a second source of irradiation and production in addition to our current actinium operations in Vancouver. In Diagnostics, we continue to advance our Tech-99 development and commercialization strategy. We have successfully produced test generators and continue to work with the FDA at the pace we previously outlined and see clear customer support for our product as the pending FDA approval date becomes more visible. We have been actively marketing and testing samples of our product with customers to enable supply agreements and commitments to significant spot volumes when they become available. We have planned a methodical entry into the market to ensure a smooth product launch with gradual increases throughout 2025 and a full annual run rate of contracted volumes in 2026 and beyond. Finally, as BWXT Medical transitions from development to a more operational and commercial phase, we are adding executive talent to the business. I am pleased to announce that Vittorio Pufa will join BWXT this month. He brings deep operational and commercial expertise, having spent most of his 30-plus year career in the nuclear medicine industry at Amersham, Bracco, and Medtronic, among others. I appointed Dr. Jonathan Certain to run this business in 2022 with a charge in development and regulatory approval of the technetium-99m generator product and to establish the foundations of a therapeutic growth strategy. He has made remarkable strides in developing the product portfolio, nearly doubling sales and driving it to positive EBITDA. He will now return to my direct staff and resume his role as Chief Development Officer, maintaining a focus on BWXT Medical alongside Vittorio and growing the larger BWXT product portfolio, including microreactors, advanced fuels, special materials, and other exciting new product lines. Overall, we had a strong quarter, and we continue to position BWXT to capture and overweight share of business in these exciting and growing nuclear market segments. Our year-to-date performance leads us to narrow our 2024 adjusted earnings per share guidance range. There are firm demand signals from our government and private customers and their desire to use nuclear solutions to address their challenges is steadily increasing. BWXT has world-class manufacturing and processing and services capabilities backed by our highly credentialed and experienced workforce and unique infrastructure that enables us to benefit from the many compelling nuclear opportunities we see ahead. With that, I will now turn the call over to Robb.

Robb LeMasters, Senior Vice President and CFO

Thanks, Rex, and good evening, everyone. I'll start with some total company financial highlights on slide four of the earnings presentation. Second quarter revenue was $681 million, up 11% organically, with solid growth in both segments. Adjusted EBITDA was $126 million, up 18% year-over-year with double-digit growth in both segments, albeit off an easier comparison in the second quarter of last year. Unallocated corporate EBITDA was essentially flat compared to the second quarter of 2023, in line with our expectation for the full year. Adjusted earnings per share of $0.82 increased 26% compared to the $0.65 in the prior year quarter. As you can see in the EPS bridge on slide five, the majority of growth was driven by operations, with modest contributions from lower interest and a lower tax rate. Our adjusted effective tax rate in the quarter was 22.7%. This is lower than our previous guidance for the year of 23.5%, driven mainly by a catch-up for the recently enacted Canadian tax legislation that reduces the statutory tax rate for nuclear manufacturers through 2034. As such, we now expect our full year tax rate to be less than 23.5%. Free cash flow in the quarter was $36 million, down modestly from $41 million in the second quarter of 2023. Slightly lower cash flow was due to higher working capital requirements as we ramp up several new projects in each of our segments. Year-to-date, free cash flow was $38 million, up significantly from a use of $2 million in the first half of 2023. CapEx in the quarter was $30 million and $61 million year-to-date. We continue to expect CapEx to be similar to last year's level of $151 million, with the ramp in the second half of 2024 largely driven by our commercial nuclear capability expansion in Cambridge, Ontario, as well as other select growth investments. Moving now to the segment results on slide six. In government operations, second quarter revenue was up 10% to $541 million driven by increases in naval nuclear components, long lead materials, U-Metal, and microreactors. Adjusted EBITDA in this segment increased 13% to $108 million as higher revenue complemented by solid operational performance. EBITDA margin in the segment was 20.0%, compared to 19.4% in the same quarter last year. While higher compared to Q2 2023, a GEO EBITDA margin performance continues to be limited due to both investments in new capabilities such as the fuels modernization optimization project Rex discussed earlier and faster growth in our development stage work streams that carry lower margins until they become more established programs. At this point in time, we view first-half 2024 GEO segment EBITDA margin performance as a good proxy for the year as these items continue. This should ultimately lead to modest year-over-year adjusted EBITDA growth in the segment in line with our previous guidance. Turning to commercial operations. Revenue was up 17% due to strong growth in commercial nuclear power and continued growth in BWXT Medical. Adjusted EBITDA in the segment grew nearly $7 million to $22.5 million driven by higher revenue, good execution, favorable contract items, and mix in our Commercial Nuclear Power business. As a reminder, our Commercial Nuclear Power business is seasonally stronger in the second and third quarters due to outage schedules and associated field services work, which had an outsized benefit on second quarter results. This led to a commercial EBITDA margin of 15.9%, up from 13.1% last year. We continue to expect commercial operations revenue growth in the high single digits to low double digits in 2024 with higher EBITDA margins compared to 2023. Turning now to guidance on slide seven. We are reaffirming our operational guidance metrics and narrowing our adjusted EPS guidance range for the year. We project total company and adjusted EBITDA growth in the mid-single digits, leading to a revenue of at least $2.6 billion and adjusted EBITDA of approximately $500 million. We now expect adjusted earnings per share of $3.10 to $3.20. As you can see on the EPS bridge on slide eight, we see a slightly lower interest expense and tax rate with no material change to our view on operations for the year as we experienced a shift between first half and second half timing compared to how we originally saw our quarterly earnings cadence playing out. We now expect a more even cadence of EPS between the first half and second half of the year with the next two quarters being similar. Lastly, we are reiterating our expectation of strong free cash flow growth. We expect free cash flow of $225 million to $250 million, driven by EBITDA growth, improved working capital management, and a disciplined approach to capital expenditures. To sum it up, we had a strong quarter that was ahead of our expectations, derisking our full year EPS guidance. Our focus remains on capturing growth opportunities across our business lines, pursuing new opportunities, and mitigating macro headwinds such as higher labor costs through operational excellence and improved planning. And with that, we look forward to taking your questions.

Operator, Operator

We will now begin the question-and-answer session. Your first question comes from Scott Deuschle from Deutsche Bank. Please go ahead.

Scott Deuschle, Analyst

Hey, good evening, guys. Rex, is actinium already a meaningful contributor to growth at BWXT Medical, just given the pricing there? Or is it still very small right now?

Rex Geveden, President and CEO

It's a pretty small fraction of revenue, but it's ramping pretty fast and has a chance to be meaningful in the fairly near term, I would say.

Scott Deuschle, Analyst

Okay. So do you need to have the commercialization of drugs in actinium for that to be meaningful? Or can it become meaningful just with these large numbers of Phase III trials that are out there?

Rex Geveden, President and CEO

I think you can think of it as maybe having a similar profile to lutetium in the sense that there's a business in the clinical trial phase and there are, as we said in the script, over 25 clinical trials at the time. So there's something there. Yes, but the real growth occurs when you get drugs approved and get into production. And we've announced prior agreements with Bayer and Fusion for such supply. So we're doing clinical trials stuff with an expectation of participating meaningfully in the production of the drugs.

Scott Deuschle, Analyst

Okay. And then speaking of lutetium, Rex, are you getting ready to file the DMF or that here soon as well?

Robb LeMasters, Senior Vice President and CFO

Yes. I can fill in for that because I think I gave an update last year. We still have that as a project that we're rolling out and expecting that next year. So it's a couple of months off. We're readying construction and figuring out the processing and so forth. And again, we'll have two radiation sources, we think, to do that. So we'll be filing that next year, Scott.

Scott Deuschle, Analyst

Okay. Rex, I might be misinterpreting, but your confidence in the outlook for Tech 99 seems quite strong based on your prepared remarks. Are you seeing something specific regarding FDA approval that is contributing to that confidence, or am I just reading too much into it?

Rex Geveden, President and CEO

No. I think our confidence is good here. We've been optimizing the formulary, so to speak, and the product quality is really exceptional. We know we have a viable commercial product. We've been working off our sort of list of actions with the FDA and there's a normal tempo of communication with them. And I think we're probably most excited around the commercial progress where we have very engaged central customers working through our future with them. So I'm certainly bullish on this.

Operator, Operator

Your next question comes from the line of Rob Labick of CJS Securities. Please go ahead.

Rob Labick, Analyst

Good afternoon. It's Bob Labick. Just to stick with the isotopes question there for a second. And on the moly-99 in particular, it does sound obviously that your confidence continues to increase and the timing, and you gave us and outlined it sounded like a ramp during 2022. So what is the next news wheel here? Is there a time frame for approval that you have or can share? Or how should we think about the next steps that we'll hear in terms of moly to start with?

Rex Geveden, President and CEO

Yes. I'd say just stay tuned, Bob. We are on the same course and expect things to develop in the way that I outlined here in the remarks. We are, I think, going to be a little careful about how we approach '25 because the production and logistics are complicated for Technetium. That's a well-understood market, but we'll ramp up in a cautious way and have a viable product to the market.

Robb LeMasters, Senior Vice President and CFO

Yes. I want to clarify that for 2024, as I mentioned last quarter, we aim to be commercially ready and able to serve customers this year. We are currently in discussions about agreements, and based on some indicators, we are already prepared to launch pending FDA approval. As we look towards 2025, our strategy is not to pursue immediate blockbuster results. Instead, we plan to enter the market gradually while keeping our expenditures in check. I've previously mentioned that we can approach this in phases, beginning with one production run and gradually building up to additional runs over time as we see customer satisfaction increase and establish our logistics. Ultimately, we expect our business to gain momentum in 2026, which is reflected in our guidance. This strategy means that there won't be a significant impact financially for 2024. Overall, our plans for 2025 will allow us to enter carefully without making substantial changes to our profit outlook, with 2026 expected to bring stronger financial performance.

Bob Labick, Analyst

Okay. Super. And then shifting over to TSG. Congratulations on the Pantex win. It sounds like that one was not protested. So can you give us a time horizon for ramp-up and that starts to hit the P&L and then an update on the Hanford tanks timeline or what we might hear from that?

Rex Geveden, President and CEO

Yes, I'll address that, Bob. We've previously explained that with the technical services contracts, there is a transition phase where we overlap with the current provider for three to four months. We are currently in that transition phase. You are correct, it has passed the protest period, and we began the transition on-site in mid-July. I can't remember if it’s three or four months, but I believe it's four months. During this time, there are no fees generated; however, there are some minor cost absorption benefits, but it should not be considered fee-bearing. You can expect a modest effect in the fourth quarter, with a full run rate for Pantex in 2025. Regarding Hanford, to give a brief recap, we won the contract a couple of years ago, which was protested. Judge Horn in Federal Claims Court sent it back to DOE for corrective actions due to issues with both bids. We reproposed with new submissions and were selected again, but that selection was protested and is now awaiting a decision from the court. It is with the Federal Court of Appeals, and we anticipate it will be resolved probably in the next quarter.

Operator, Operator

Your next question comes from the line of Pete Skibitski of Alembic Global. Please go ahead.

Pete Skibitski, Analyst

Hey, good evening, guys. Hey, Rex, on the DIU RFP, I just was wondering if you can maybe share with us some of the structure there. Is this sort of LREP request for one unit or for multiple units? And then I was just wondering if you guys have been able to identify if the Army is actually budgeted for some of these units across their fill-up?

Rex Geveden, President and CEO

Yes, Pete. It seems like they are planning to use possibly two different contractors. We will move through a study phase and then transition to a deployment phase. Their goal is to have these two types of microreactors operational by the end of the decade. The total procurement could involve up to five reactors of each type, which presents a significant opportunity for us. Regarding the Army aspect, I'm not sure if the funding has been allocated yet.

Peter Skibitski, Analyst

Okay. Okay. But yes, that sounds like I don't know, $0.5 billion or more kind of opportunity for you. It sounds like?

Rex Geveden, President and CEO

Yes. I don't want to specify a number at this point, but it is significant. We had always hoped to establish an order base for these microreactors, and this will certainly resemble that. Ideally, we will achieve a steady production pace as we progress. It has always been our goal to duplicate our franchise business in different areas with new technologies, and this represents that next step.

Operator, Operator

Your next question comes from the line of Peter Arment of Baird. Please go ahead.

Peter Arment, Analyst

Thanks. Good afternoon, Rex, Rob, Chase. Nice results. Rex, you mentioned the GE Hitachi SMR kind of work. How do we think about kind of the revenue timeline impacting just related to that?

Rex Geveden, President and CEO

Yes. We outlined a pattern in recent calls where the first unit is initiated, and we hope that Ontario Power Generation will start the second to fourth units in the future, likely spaced 18 months to two years apart. We estimate approximately $100 million in revenue for each of these small modular reactors for BWXT, which would include the reactor pressure vessel and possibly other components. This work, including design and manufacturing, is expected to spread over two to three years. Robb, would you like to add anything?

Robb LeMasters, Senior Vice President and CFO

No, that's right. We've been talking about these different opportunities. Obviously, we've also been selected by other providers. They generally range from, call it, $50 million to $100 million of content each time you get selected depending on what our mission is for that. And then generally, we've been saying over about a three, maybe four-year time frame is where you kind of spread that, call it, $100 million over that. And hopefully, it just keeps layering in blocks of those as they increasingly take orders and push it down to us as the merchant manufacturer.

Peter Arment, Analyst

Got it. And just a quick question about the Pickering refurbishment work. It seems like the initial work is starting. Could you discuss the capacity or significant headcount needed to support all the projects you're handling with Darlington, Bruce, and now Pickering?

Rex Geveden, President and CEO

Yes, Peter. That's why we're expanding the Cambridge facility as we announced a few months ago. We're currently ramping up the workforce aggressively due to significant work on the Bruce refurbishment, which includes steam generator and feeder manufacturing. We'll have similar work scopes at Pickering that somewhat overlap, and these also coincide with the small modular reactor project at Darlington. This is the reason for our expansion. We are actively recruiting and have been successful in that effort. Our talent acquisition process is well-organized, and we expect to meet our labor needs. We believe that with the capacity expansion we undertook, we can address all of these competing priorities and fulfill our customers' needs.

Operator, Operator

Your next question comes from the line of Josh Korn from Truist Securities. Please go ahead.

Josh Korn, Analyst

Hi, good afternoon. This is Josh Korn on for David. Thanks for taking the question. I was hoping you could provide an update on the build schedules for Carrier, Virginia, and Columbia, and discuss any potential impacts on the government outlook over the next couple of years. Thanks.

Rex Geveden, President and CEO

Yes, I would say there’s nothing new to report. Consistent with our previous statements, the shipbuilding schedule indicates that the ordering lull for the Virginia will extend into 2026, which was previously expected in 2024 and 2025. We are basing our forecasts on the shipbuilding schedule. However, we must note that the authorizers and appropriators have not finalized their decisions yet, so we will need to wait and see what unfolds. There is some discussion around long lead materials and advanced procurement, and we will monitor that situation closely. For now, we are forecasting according to the shipbuilding schedule, and we are confident we will find avenues for growth outside of that to meet our medium-term guidance targets.

Josh Korn, Analyst

Thank you. I'll stick to one.

Operator, Operator

Your next question comes from the line of Andre Madrid of BTIG. Please go ahead.

Andre Madrid, Analyst

Hi, thanks for taking my question. Kind of following up the last one, there has been a lot of chatter around Virginia class maybe getting cut by one on the appropriations bill. Seems like there might get some emergency funding put back in. But I mean do you think that the prospect of this happening is actually real in the next coming years? And if so, would it be a one-off? Or could we actually see a step change from the Navy happening?

Rex Geveden, President and CEO

Yes, it's speculative at this point. And I think it's something we can manage if it does materialize, but we continue to build two Virginias a year, and it's our hope that that continues.

Robb LeMasters, Senior Vice President and CFO

Yes. And the specific thing you're talking about maybe was the one-off in the actual budgets that were filed earlier this year. I think we talked about in the last call that going from two per year cadence to one actually, if you look at the funding profile, we've actually received even that scenario; we get advanced procurement dollars that would keep us steady. So while that might affect the shipyards to some extent, I wouldn't be surprised if they fill it in, and just to be clear, if you're talking about just this year, that ordering that one looks quite good for us. I just want to be clear. And then thereafter, I haven't heard much chatter. In fact, the two per year thereafter, a lot of people are trying to push up to making sure that the industry is able to sustain almost 2.3 because, as you know, the AUKUS program will be quickly on the back. So to the extent that you can ramp even more, I think frankly the U.S., U.K., and Australia would take more.

Rex Geveden, President and CEO

I would like to emphasize, Andre, as a supplementary point to what Robb accurately stated, that the Department of Defense is particularly concerned about maintaining a stable supplier base for submarine and carrier production. Consequently, you can observe that the legislature tends to support long lead materials and the supply chain, despite the throughput challenges at shipyards. This has been the historical trend.

Operator, Operator

Your next question comes from the line of Michael Ciarmoli of Truist Securities. Please go ahead.

Michael Ciarmoli, Analyst

Hey, good evening, guys. Thanks for taking the questions. Nice results. Robb, I think Robb or Rex, you commented in light of the CVN kind of low, maybe level loading lands. You've obviously got the micro reactors ramping. But how do we think about the margin implications? You've guided government down slightly this year. Even in this quarter, you had really good sequential growth, but the margins were down sequentially. So if CVN does, in fact, play out, should we sort of calibrate our expectations to be a little bit more cautious on the government EBITDA margins just given the type of work that's going to be flowing through the facilities?

Rex Geveden, President and CEO

Yes. Let me start with a response and then I'll pass it to Robb for further insights. The margin pressure we are observing isn't primarily related to operations in the naval nuclear propulsion program. Instead, it stems from the rapid growth in our Advanced Technologies group. We have four reactor programs, which we’ve mentioned before. These are cost-plus fixed-fee programs in their early stages where the government assumes the risk, resulting in a slight drag on fees and margins for the business. Until we progress to production programs, we also face other factors like a heavier R&D load and the Advanced Reactor Development Program, which operates on an 80-20 cost share with the government. This means the government covers $0.80 of every dollar spent, benefiting us significantly as it helps advance our commercial goals regarding microreactors, although it incurs costs as the program expands. So, it's more of a mixed situation rather than purely margin pressure from operations. I think that covers most of the story, and now I'll hand it over to Robb for any additional insights.

Robb LeMasters, Senior Vice President and CFO

Yes, you articulated that well, Rex. To clarify the GEO margins for 2024, Michael, we have maintained our guidance, although there might be a slight decline due to a high-margin one-time item in Q4 last year. Excluding that, the margins for 2024 are essentially flat compared to 2023. That's the first point, no change in the GEO margin, and we've communicated all of that in our earnings script. Secondly, regarding our recent quarter performance, as Rex mentioned, the underlying NOG margin, which represents our core manufacturing margin, is improving as we resolve inefficiencies from previous quarters. I observed that those margins are actually up year-over-year on an underlying basis. As you can see, with the acceleration of growth, particularly in our newer development programs, we experienced a strong revenue quarter in Q2, while those lower margins are being blended in. Lastly, looking ahead two or three years, if the scenario you presented about CBM being delayed occurs, it is likely that the margins from these development programs will mature, creating a positive impact on the business over time. This will align similarly with our established programs. Additionally, we have been effective in identifying ways to grow EBITDA in 2024 and 2025, and we aim to continue that momentum even if market conditions shift. We anticipate growth from various avenues, whether it's from the TSG business, advancing other programs, or enhancing enrichment franchises. I'm not worried about finding ways to navigate through potential challenges, and we will also collaborate with the government to seek their support.

Michael Ciarmoli, Analyst

Okay, perfect. That's a great color. I'll keep it to one, guys. Thanks.

Rex Geveden, President and CEO

Thanks, Michael.

Operator, Operator

Your next question comes from the line of Ron Epstein from Bank of America. Your line is now open.

Ron Epstein, Analyst

Hey, good evening, guys. Rex, in your prepared remarks, you seem pretty bullish about kind of terrestrial nuclear. Can you give us a little more color on that? What are you hearing and what you're seeing in terms of incoming on that?

Rex Geveden, President and CEO

Yes. Yes. On the microreactors, you mean, Ron?

Ron Epstein, Analyst

Yes.

Rex Geveden, President and CEO

Yes, we're bullish on it. The Defense Innovation Unit published an RFP that I referenced in the call that's asking for microreactors with power outputs in the 3- to 10-megawatt range to be put on a couple of army bases by the end of the decade, with quantity orders up to five each. And so I think what we've got here is a transition from the prototyping stage on these microreactors into what I would characterize as an LRIP, low-rate initial production phase, and that's very, very encouraging, that's the next step towards full-rate production where hopefully we're putting out a couple of years like we do on the Navy reactors and can populate army bases or whatever the military need is. So I think it's quite an exciting development and in some ways surprisingly early.

Ron Epstein, Analyst

And if I may, just kind of quickly as a follow-on to that, I mean how different are these in principle than what you already do on a submarine?

Rex Geveden, President and CEO

Well, it's different technology. On the submarine, that's pressurized water reactor technology, and that's where it originated in the Rickover program. Although it's advanced very dramatically over the decades, it's still that kind of architecture. In the case that we're talking about here for these microreactors that go on the military bases, by and large, those would be high-temperature gas reactors. So they're cooled differently, moderated differently. They have different types of fuel. And I think notably, these things will have high assay, low enriched uranium, generally TRISO kind of fuel. So there's a very interesting fuel opportunity for us regardless of kind of which particular design is chosen, and that TRISO fuel, as we've articulated on prior calls, is inherently safe fuel. Because it captures the vision products at the level of the fuel grain, and these reactors are also designed to have negative reactivity coefficients; they shut themselves down when they reach a certain temperature. So materially different in the type of technology and certainly different in the way that safety is managed on those systems.

Operator, Operator

Your next question comes from the line of Thomas Meric from Janney Montgomery. Please go ahead.

Thomas Meric, Analyst

Good evening, gentlemen. Thanks for the time. Just a few for me. I'll start on Tech 99. As you mentioned some early conversations. And I'm curious if you could kind of give any more color around conversations are focused on, whether it's term volume scale up, quality, price, anything stick out from that initial marketing.

Rex Geveden, President and CEO

Yes, we are sharing the details of the product quality with potential customers and testing that material, which is leading to discussions around commercial terms. Robb LeMasters has been collaborating with Jonathan Certain in that specific area. Let me ask Robb if he would like to provide any additional insights.

Robb LeMasters, Senior Vice President and CFO

Yes, sure. Yes. So there's really five distributors in the North American market, and that's where we'll be launching first. And so we're going to target. We know who those people are. We know where their radio pharmacies are. We've been kind of studying that for the past couple of years. And what's adding is that you can reach out now and really exchange agreements and talk about what time they want to take delivery and start testing whether or not it truly is a drop-in replacement. So when you can actually show up and do that business development activity with live circumstances, we're seeing that all five of those, frankly, are saying, yes, we'd love to have a third supplier. As you know, there are two others, and we have a differentiated product. At a minimum, it just increases the ability for them to have a couple of different providers. I think we'll eat in pretty substantially to the incumbents there, but we're happy to show up and prove that our product will be reliable will be on time. We'll have all the benefits that we've been advertising to all of you. And I think we're just seeing customers say, yes, that kind of makes sense to us. So we're discussing term price, logistics, everything, right, and getting ready so that we can quickly get into the market when that happens.

Thomas Meric, Analyst

Helpful. On microreactors, curious if there's any timeline you could share for Project Pele specifically, if there's kind of a testing campaign schedule that is worth kind of remembering and paying attention to?

Rex Geveden, President and CEO

Yes. We are currently in the development phase, finalizing the design and coordinating the supply chain. The reactor assembly will take place at our Technology Center in Lynchburg, Virginia. After that, we will transport it to Idaho, where we plan a testing campaign at Idaho National Laboratory, which is expected to continue into the middle of the decade. All of this will progress over the next few years.

Operator, Operator

That concludes our Q&A session. I will now turn the conference back over to Mr. Chase Jacobson for closing remarks.

Chase Jacobson, Vice President of Investor Relations

Yes. Thank you, everybody, for your interest in BWXT again for your questions. We look forward to seeing with many of you in the days and weeks ahead over the phone or in person. If you have any questions, you can reach out to us at investors.bwxt.com. Thank you.

Operator, Operator

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