Earnings Call Transcript - BWXT Q4 2022

Operator, Operator

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

Mark Kratz, Vice President of Investor Relations

Thank you, Joel. 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 the call, we will reference the fourth-quarter and full-year 2022 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 a separate presentation that can also 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, Mark, and good evening to everyone. Earlier today we reported fourth quarter and full year results that were in line with our expectations as we closed out the year on a strong note. 2022 revenue and adjusted EBITDA each were up 5% and underlying operational profitability was up 9.5% factoring out pension headwinds. Despite macroeconomic pressures this year, earnings per share grew by 2% and we brought down capital spending by over $100 million. Labor remains a focus area for the company as we experienced growth in all our major markets. We continue to monitor hiring and retention metrics and are making progress, streamlining our processes, and advancing our training programs, particularly on the government side of the business. We remain cautiously optimistic that our efforts will deliver the net employment required to support our growth. Having said that, we believe the challenging labor dynamics will mask some of the potential growth for BWXT this year, but is ultimately a hurdle we will clear. Beyond labor, interest rates have begun to stabilize. While this presents a 2023 headwind to earnings, stable rates and excess free cash flow should enable us to overcome interest expense headwinds over the medium term. In December, the President signed the National Defense Authorization Act for 2023 into law. BWXT's core businesses remain well funded and our new growth areas are receiving increased budget support. Columbia advanced procurement in aircraft carrier funding saw significant increases. Virginia submarine advanced procurement is steady and in-line with our expectations. Budget for Project Pele is increasing and the Army is receiving funding to support fielding. DARPA and NASA received increases to support nuclear thermal propulsion space demonstration program. The National Nuclear Security Administration received increases for uranium processing projects including uranium purification and down blending. And the Department of Energy site remediation and operations budgets were well supported. All in all, we see an improving macro backdrop with positive momentum in our government and commercial markets. Let me go into a little more detail for 2022 highlights and near term opportunities in both of our reporting segments. Within Government Operations in 2022, we announced about $1 billion in option orders for the Core Navy franchise. We certified and shifted some of the first items for the Columbia program and continued steady production for Virginia-Class and Ford-Class components. For 2023, we anticipate wrapping up negotiations for the next multi-year pricing agreement and compassing two years of scope which will span orders through 2024. We eagerly anticipate the announcement of decisions for the AUKUS trilateral security agreement, particularly as it pertains to Naval Nuclear Propulsion. We expect to hear additional details next month and remain engaged with our customers and other key stakeholders to support the nation's allies in deploying this unique technology to ensure global security. We continue to leverage our NRC category 1 license facilities to grow the business and provide the nation with critical services. In 2022, we were awarded a production contract for a high-assay, low-enriched uranium TRISO fuel to be used for the first fourth generation microreactor in the United States. Separately, this year we completed the first phase of uranium purification and conversion for the NNSA. Both of these programs will grow in 2023 as we undertake production runs for TRISO fuel and expand into the second phase of uranium purification. As you are all aware, 2022 was a hallmark year for BWXT with microreactors as certain programs transitioned from design contracts into prototype production. In June, the strategic capabilities office awarded BWXT the $300 million contract called Project Pele to build and deliver the first advanced mobile nuclear reactor in the United States. As we look at 2023, we anticipate growth in that program as we experienced a full year of revenue and achieve key project milestones. And beyond Pele, we see ourselves in a strong position on DRACO, the space nuclear propulsion demonstration mission. Early this year, NASA and DARPA announced they will be collaborating on this program to demonstrate a nuclear thermal rocket engine in space, enabling capabilities for both space exploration and other potential applications including national security. We believe that our history with NASA's nuclear thermal propulsion work, combined with our innovative technology solutions, creates a favorable competitive position for our company. This program will be similar in size to Project Pele and would have similar aggressive program goals. Lastly, on the government side. In early 2022, we successfully transitioned the Savannah River mission completion contract and had a year of excellent safety and contract performance, resulting in higher site scores and income than we originally forecasted. In 2023, we look forward to the award of the Hanford integrated tanks disposition contract, which if successful would likely be the largest single contract in our government services portfolio. Switching gears to commercial operations. Our base nuclear power business grew nicely in 2022; we saw a higher volume of service work related to life extension projects for a large portion of the Canadian fleet. Notably, the Government of Ontario announced support for the continued operation of part of the Pickering plant that was originally slated to shut down in 2024 and 2025. Under the new plan, units five through eight will continue to operate through most of 2026, given the recent successes in other life extension projects. The utility plans to update its feasibility study on the potential refurbishment of those Pickering reactors, which would extend the operational life by another 30 years. Both the near-term extension and the potential for longer-term refurbishment upcycle improve an already favorable outlook for our CANDU business lines. Beyond traditional nuclear power, we established a meaningful stake in the small modular reactor market. On the last call, I said that we are under an engineering design contract for GE Hitachi's BWRX-300. With high interest in decarbonizing electrical grids, we anticipate continued growth and interest coming into 2023. Ontario Power Generation intends to build this reactor by the end of the decade. And I have mentioned in the past that the Tennessee Valley Authority began the planning and preliminary licensing for the potential deployment of the same reactor at the Clinch River Site. SaskPower also announced that it has selected BWRX-300 for potential deployment in the mid-2030s, and just the other week, Fermi Energia announced that it has also selected this design for SMR deployment in Estonia. BWXT remains positioned to support SMR designers with engineering services and critical nuclear components manufacturing for these projects. In fact, we anticipate receipt of our first SMR production order sometime later this year. There is a broad consensus now that nuclear power will play a significant role in global clean energy production. This, combined with a renewed focus on energy security in the wake of the Russian invasion of Ukraine, is driving intense interest in grid-scale nuclear power. Now turning to the nuclear medicine side of commercial operations. We saw a string of successes in 2022. Our base business grew double digits. And our Tech-99 generator FDA application was submitted, accepted and granted a priority review status. Next week, the FDA will be conducting an implant pre-approval inspection of our Tech-99 generator line and we look forward to working with the FDA to support this review. While our FDA submission is based on targets of irradiated at the Missouri University Research Reactor, which limits activity levels and restricts our product offering to small generators, our ultimate solution is to irradiate targets on a CANDU commercial power reactor, which will enable production of large generators comparable to those in the market today. Last month we announced the completed installation of our target delivery system on the OPG CANDU reactor through our collaboration with Laurentis Energy Partners. We have now conducted radiation test runs of our Moly targets, and as expected, these tests demonstrate that our process will yield high specific activity material needed to produce these large generators. Impending final FDA approval, we will enter the market with a product that has all the attributes our future customers are going to expect and this is a very exciting milestone for this foundational product. Beyond Tech-99 generators, we made substantial progress in 2022 on other products, most notably in therapeutic isotopes. Building on its heritage for innovation, BWXT Medical executed an agreement with TRIUMF for the manufacturer of high-purity Actinium-based products and followed up with the announcement of a commercial agreement to supply Bayer with Actinium-225. We also announced a partnership with Fusion Pharmaceuticals to supply this isotope in support of their exciting portfolio of targeted alpha therapies. We expect growth in this business to accelerate, driven by therapeutics and contract drug manufacturing opportunities that add new layers to BWXT Medical. Overall, 2022 was a year of meaningful strategic milestones for BWXT accompanied by consistent operational outperformance. I am energized by the tailwinds we see across the portfolio coming into 2023 and the future trajectory of this business. This year we see near-term opportunities in every market as we approach our experience inflection points and EBITDA growth, return on invested capital, and free cash flow. This provides a clear pathway to the strategic and financial targets we articulated at our Investor Day, 16 months ago. Let me turn it over to Robb to discuss 2022 financial results in more detail and to walk through the components of our 2023 guidance.

Robb LeMasters, Senior Vice-President and CFO

Thanks, Rex, and good evening, everyone. I’ll begin with a summary of the financial highlights for the company on slides five and six of the earnings presentation. In the fourth quarter, revenue increased by 5% on a consolidated basis, with Government Operations rising by 8%, though this was partially offset by a 6% decline in Commercial Operations. The fourth quarter EBITDA rose 6% to $130 million, supported by increased revenue and improved margins in Government Operations, despite a decrease in recoverable pension income. Additionally, lower corporate expenses contributed to the growth in EBITDA, although this was somewhat countered by lower contributions from commercial operations. Due to a higher effective tax rate and increased interest expenses, earnings per share fell by 2% in the fourth quarter to $0.93. Importantly, we generated $44 million in free cash flow during the fourth quarter, slightly below our expectations due to higher tax payments and reduced accounts payable balances resulting from year-end activities. The strong fourth quarter contributed to full year 2022 revenue totaling $2.23 billion, which marked a 5% increase with equal growth contributions from both operating segments. Full year 2022 EBITDA also grew by 5% to $439 million, despite a $17 million pension-related headwind. Excluding pension effects, we saw underlying operational growth of 9.5%, aligning with the high end of our initial operating guidance for the year. This achievement was primarily driven by growth in Government Operations and lower corporate expenses. In spite of higher interest rates and other challenges linked to non-operational items, earnings per share increased by 2% to $3.13 for the year. We concluded the year with $245 million in operating cash flow, slightly less than we expected. We have set the stage to enhance working capital management by streamlining our procurement processes across the company. However, in the fourth quarter, we made some advanced payments due to expedited installation work completed at year-end for our target delivery system in Canada. It’s also worth noting that the evaluation of total cash flow includes considerations of our foreign exchange hedging activities. To mitigate potential negative impacts to operating cash flow, we arranged foreign-exchange contracts aimed at minimizing currency fluctuations. The net effect of these contract settlements is reflected in the financing section of the cash flow statement rather than in operating cash flow. As a result, we experienced a $24 million inflow, allowing us to achieve total cash flow in line with our expectations. Additionally, we successfully reduced capital expenditures by over $100 million, finishing the year with $198 million in CapEx. There is an EPS bridge available on slide seven that details the various factors affecting the year. Now, I will move on to our guidance for 2023 as outlined on slide eight. In providing guidance for 2023, we want to highlight five key metrics that collectively illustrate a growing and high-margin enterprise. I will walk you through those key metrics on the left side of this page and provide some detailed insights and assumptions behind them. We project revenue for 2023 to be approximately $2.4 billion, reflecting mid-to-high single-digit growth compared to our 2022 results. We anticipate adjusted EBITDA to be around $475 million, representing high single-digit growth year-over-year and resulting in EBITDA margins of about 20%. We expect adjusted pre-tax income of about $350 million, which would lead to an anticipated earnings per share range of $2.80 to $3, decreasing year-over-year due to significant non-cash and non-operational items that we’ll discuss later. Lastly, we foresee a clear pathway to achieving $200 million in cash flow as we enhance operating cash flow and complete our two largest CapEx projects, indicating a substantial increase from our 2022 results. These key metrics authentically depict the strong financial outlook BWXT anticipates as we head into 2023. I’d like to share our assumptions that support this guidance. For revenue, we expect Government Operations to grow mid-to-high single digits year-over-year, fueled by a slightly expanding Navy business as we grow our workforce to meet rising demand. The majority of revenue growth, however, is expected to stem from micro reactors and uranium processing. We are confident about short-term growth in micro reactors, especially with a full-year run rate on Project Pele. We could experience additional growth this year if we succeed in NASA and DARPA's in-space reactor demonstration project called DRACO. Another significant contributor to government growth will be the transition from uranium conversion and purification Phase 1 to Phase 2, which expands that capability. In Commercial Operations, we anticipate low to mid-single digit growth, mainly driven by commercial nuclear power, including some revenue from small modular reactors, along with strong growth in nuclear medicine fueled by robust demand for our existing products and the introduction of new offerings to the market. For overall company EBITDA, we expect strong growth and some modest margin expansion, although this will be partially offset by a return to more normalized corporate expenses compared to last year. Regarding Government Operations, I’d like to highlight a few points about EBITDA growth and margins. Initially, we expect the majority of GAO's EBITDA growth to come from our core Navy business. As Rex mentioned, we are beginning to see early signs of progress from our hiring and training initiatives, which we expect to drive modest growth. We anticipate an increase from our uranium processing contract as we advance into the second phase of that program. Additionally, within the naval segment, we expect income from cost recovery in non-nuclear components to contribute to growth. These factors together are expected to support both EBITDA growth and modest margin expansion. Another driver for GAO will come from a full year of growth from 2022 contracts, including our Savannah River services and Project Pele efforts, which will have a relatively neutral impact on margin mix. The third area of margin growth will come from a mix of new contracts in our services and micro reactor sectors, where we believe we are well-positioned to secure key wins later in 2023. In Commercial Operations, we expect modest EBITDA growth, primarily from the strength of BWXT Medical, which will be partially offset by the mix of field services work that significantly benefitted the nuclear power business in 2022. Looking at other factors, we anticipate three headwinds entering 2023, which are relatively similar to what we discussed on previous earnings calls. First, we expect to face about a $40 million non-cash pension headwind due to increased discount rates and negative performance of our pension assets in 2022. This will lower the other income line below operating income to approximately $10 million in 2023. Second, we anticipate a $15 million headwind in interest expense as a result of a projected 300 basis point increase in interest rates year-over-year. Third, we are looking at a $10 million headwind to depreciation and amortization related to new capital being utilized. We foresee a consistent tax rate in 2023 compared to 2022 and have factored in sufficient repurchases to negate any dilution. Regarding free cash flow guidance, we expect operating cash flow in 2023 to return to more typical levels, which had been trending toward the $300 million mark observed in 2021 and on most trailing twelve-month evaluations. Starting with this approximate $300 million as a baseline, we anticipate adding growth in line with high single-digit EBITDA growth from operations, along with modest improvements from our working capital initiatives, leading to a solid increase in operating cash flow for 2023. On the CapEx side, we currently expect a notable decrease year-over-year, with maintenance-level CapEx in most of our businesses, micro reactors capital investments in the tens of millions, and a minimal amount of medical CapEx as we wrap up that major investment. Considering the macro dynamics we encountered last year, I’d like to outline some general assumptions incorporated into our 2023 guidance. On the labor front, we expect gradual progress in hiring and attrition, consistent with recent trends observed in the past several months. We are also assuming that interest rates will remain relatively stable, in accordance with the forward one month SOFR curve, which closely relates to interest expense on our variable-rate debt. Lastly, we continue to expect minimal supply chain disruptions, mirroring the situation we’ve seen during the COVID-19 pandemic and in recent times. Overall, BWXT is experiencing growth across its portfolio and is capitalizing on strategic successes and a strong competitive position, enabling us to achieve another year of operational growth and to accelerate toward our medium-term financial goals. We look forward to addressing your questions.

Operator, Operator

Thank you. We will now begin the Q&A session. The first question is from Pete Skibitski with Alembic Global. You may proceed.

Pete Skibitski, Analyst

Good evening, Rex, Robb, and Mark. Rex, could you provide some insights on the labor outlook? It's a bit challenging to gauge from the outside. Looking at 2022, how short were you on net hiring for the year? What are your targets for 2023? Additionally, while you are hiring, how long does the training process take before new employees become fully productive?

Rex Geveden, President and CEO

Thank you, Pete, and good evening. Last year, we aimed to net hire about 500 people but anticipated needing to hire around 1,000, based on our historical attrition rates, to achieve that net gain. Unfortunately, attrition was higher than expected, which we reported throughout the year. We hired 1,000 but lost around 700, resulting in a net gain of about 300, leaving us 200 short of our goal. Most of this shortfall was in Government Operations, which has about 5,000 employees, meaning we were about 4% short in that area. This deficit translates to a noticeable impact on revenue. For this year, we not only need to address that 200-person deficit but also hire an additional 500 due to our growth, totaling a goal of net 700 hires this year. This presents quite a challenge. As mentioned on the call, we've significantly revamped our hiring processes, undergoing an intensive review to simplify and improve them. Bob Duffy, who oversees administration, has been leading this effort, and we're starting to see positive results. We're monitoring our progress daily and have increased our recruiting team while leveraging various recruiting services. As of the last report I received on Monday, we've netted 89 hires for the year, which is a good pace to meet our goal. While we face challenges, I see improvements overall. Regarding training, particularly for our naval reactor operations where we train welders, assemblers, and inspection technicians, there is a learning curve that can take weeks or months. This creates some delay in revenue and income until these workers are fully qualified. Fortunately, we have strong support from our customer for these training programs, and we expect to navigate through these challenges successfully.

Robb LeMasters, Senior Vice-President and CFO

We understand that you experienced a challenging period at the beginning of the year due to retirements, and we are gradually ramping up our efforts. We're observing positive data, and we are monitoring our budget as we slowly build. However, we are currently facing some inefficiencies during this ramp-up process.

Pete Skibitski, Analyst

Have you had to increase salaries sort of that inflation plus type of level and I assume some of those you can pass-through your contracts maybe?

Rex Geveden, President and CEO

Yes, there is some of that happening, but we're working to manage it while still attracting the right talent. I would say our plans for merit and raise pools this year are in line with what you're seeing in the broader U.S. economy.

Pete Skibitski, Analyst

Okay, okay, understood. Just last one for me then. Sometimes it's hard to predict for you guys some of the material purchases, the seasonality aspect of that as it flows through the year. So I don't know, maybe, Robb, if you could give us a sense of how revenue is expected to kind of flow this year with the puts and takes that you guys kind of typically progress through?

Robb LeMasters, Senior Vice-President and CFO

Yes, I'm happy to answer that, Pete. Thank you for the question. As we look ahead for the year, it can be challenging since the activity varies from quarter to quarter. However, I believe this year will follow a pattern similar to the last couple of years, where we start off slightly lower and build up over time. Typically, we've seen about 20% of our earnings come in the first quarter, then we progress throughout the year, usually reaching around 30% of the full year's result in the fourth quarter. So, I expect to see about 20% at the start, increasing throughout the year to approximately $0.10 more every quarter thereafter. Additionally, as we aim to align earnings with operating cash flow, we focus on the seasonal aspects as well. The first quarter often starts slow for us because that’s when we pay our bonuses, resulting in lower income. Historically, for six out of the past seven years since going public, we’ve experienced a negative operating cash flow of around $20 million in the first quarter, which then builds up as the year progresses. This pattern in earnings also reflects in our operating cash flow.

Pete Skibitski, Analyst

Okay, very helpful. Thanks, guys.

Robb LeMasters, Senior Vice-President and CFO

Yeah, thanks, Steve.

Operator, Operator

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

Michael Ciarmoli, Analyst

Good evening, everyone, and thank you for the questions. Rex, you mentioned in your prepared remarks about the ongoing developments in the commercial nuclear market. There’s a significant amount of activity occurring, including legacy plant constructions, new small modular reactors, various participants in the market, and the demand for fuel. You hinted at the possibility of your first order coming in later this year. Could you provide an overview of the situation? While we anticipate slower growth in the commercial sector this year, it appears that there are considerable growth opportunities available. Do you believe this segment can experience notable growth acceleration?

Rex Geveden, President and CEO

Yes, I do believe that. It's a fascinating time for nuclear power, particularly due to the convergence of energy security and the decarbonization of the grid, which is creating significant global interest in nuclear. Just yesterday morning, we conducted a thorough strategic review with our Board of Directors regarding commercial nuclear power, highlighting the substantial interest within our Board. We think about it in three layers. Firstly, we have a solid base business centered around Canada, particularly with the CANDU fleet and related services. Our offerings include CANDU fuel, field services, especially for steam generators and fueling equipment, as well as spent fuel waste containers in that market. This has historically been a strong market for us, and it's been enhanced by refurbishment campaigns at Darlington and Bruce. The business has seen significant growth over the last four to five years. Additionally, they are currently exploring the refurbishment of the Pickering reactors, which offers similar opportunities for innovation and services, with the refurbishment cycle potentially extending out to 2040. Furthermore, our CANDU operations have a global footprint, with reactors in Romania, Argentina, and South Korea. There is ongoing discussion about refurbishing the Romanian reactor in Cernavoda, which adds to our core business. Alongside this, we see emerging growth opportunities, particularly with small modular reactors (SMRs). We are well-positioned within the supply chain for the BWRX-300, which currently has strong market traction. OPG Darlington is committed to constructing one by the end of the decade, and SaskPower is also showing interest for installation in the mid-2030s. We are currently engaged in a design contract for the reactor vessel and are likely to manufacture the components we design. There are other small modular reactor opportunities in the pipeline that we haven't announced yet, particularly in designing reactor vessels and heat exchangers. Interestingly, there has been a growing global interest in large reactors lately, as it becomes clearer that achieving grid decarbonization by 2050 will require a mix of both small and large reactors. This revitalizes prospects for potential large-scale CANDU reactor builds. We are also exploring the future of microreactors through the Pele contract, which has government backing, along with a commercial variant called BANR targeted at high-density power applications. While the potential for microreactors is on the horizon, the opportunities for small modular reactors are immediate. We are currently under contract for their design, and we expect to launch a production program soon. The landscape has changed dramatically over the past year, with commercial nuclear power showing unusual momentum, likely beyond our previous expectations.

Michael Ciarmoli, Analyst

Got it. That's extremely helpful. And maybe just one more, Robb, just thinking about commercial as well. The operating margins, weak in the quarter, they kind of trended lower. As you look at the opportunities in commercial and even looking into next year, how should we think about this commercial. And maybe, I guess, I'm just keeping it to the nuclear side, I guess. I would assume, once some of Medical starts to hit, that would give you more of a margin lift. But how do we think about this kind of commercial nuclear margin opportunity going forward as well?

Robb LeMasters, Senior Vice-President and CFO

We anticipate a modest increase in margins across the business in 2023, particularly at the segment levels, although this will be balanced by some pressure from rising corporate expenditures. In terms of commercial margins, we see a trend with higher-margin medical services growing at a faster rate, while lower-margin legacy businesses remain in the mix. Looking ahead to 2023, there isn't anything overly significant to highlight, but we do expect some delays in finalizing our fuel contract from 2022 to contribute next year. The mix within our field services business is expected to remain stable, similar to recent years, with the medical segment affecting margins as we compare 2023 to 2022.

Michael Ciarmoli, Analyst

Got it, helpful. Thanks, guys. I'll jump back in the queue.

Operator, Operator

Thank you. The next question is from the line of Scott Deuschle with Credit Suisse. You may proceed.

Scott Deuschle, Analyst

Hey, good evening, guys. Rex, has the FDA come back to you with any supplemental data requests since they started the priority review on Tech-99?

Rex Geveden, President and CEO

We will have more information in the coming weeks and months as the preapproval inspection takes place. At that point, they will send us a formal request for data, and we will assess our current standing with the FDA.

Scott Deuschle, Analyst

Okay. And then, Rex, Rolls-Royce is going through a strategic review. I think they have some overlap with you all in a couple of areas. So curious to get your thoughts there, if you're willing to say anything, kind of whether you see anything in their portfolio that might be of strategic value to BWXT.

Rex Geveden, President and CEO

Yes. I won't say much about that other than to say, we actually enjoy quite a nice strategic relationship with Rolls. We operate, obviously, in different geographies, and we have very little competitive overlap. And so we do have some collaboration areas in naval nuclear that we've worked on. Obviously, naval nuclear propulsion is certainly an interesting overlap of capabilities serving our own sort of domestic needs. So there's certainly a lot there that's interesting to us, and we keep an open dialogue with them.

Scott Deuschle, Analyst

Okay. And then, Robb, maybe just what's your latest thinking on when you look to take out this variable rate debt and the timing for when you do that. Obviously, it's creating a bit of an overhang in terms of estimates given the stickiness of inflation and the short-term rates continuing to creep up. So curious for your thoughts there. Thanks.

Robb LeMasters, Senior Vice-President and CFO

Yes, the fixed rates that we and other companies are experiencing have significantly increased. We issued our bonds at low rates, but our debt is currently trading at around seven percent. We believe that as rates decrease, it will create an opportunity for us. However, we are not in a hurry to take action. We have $500 million in liquidity available, putting us in a strong position. We completed a transaction in September that provided us with additional flexibility, which is detailed in our 10-K. I believe we have ample resources and are primarily focused on small acquisitions. We don't need to take any significant steps at this time and will wait for the market to stabilize. This is our current approach regarding the balance sheet.

Scott Deuschle, Analyst

Okay, got it. Thanks, guys.

Operator, Operator

Thank you. Your next question is from the line of Bob Labick with CJS Securities. You may proceed.

Pete Lukas, Analyst

Yes. Hi, good afternoon. It's Pete Lukas for Bob. You guys have covered a lot, answered most of his questions here. Just wondered if I could get a little more detail on the target delivery system at Darlington, and what's happening now? Are you running weekly batches? How is that going? And I think you kind of covered where you stand with the FDA there.

Rex Geveden, President and CEO

Yeah, Pete. We installed and fully validated that system on the Darlington reactor Unit 2. That was certainly a comprehensive campaign to assemble that thing and then test it. We have run target material through it at different soak times. We've done moly targets, I believe, at one and two and three week different soak times and retrieved those targets and have begun to test those targets as we said. So what we've done is proven that the system works, that we can move material in and out of there. And I think, certainly, the OPG has confidence in that system now. But the important output of all that was the activity level of those targets that we took out of the system, which do support, as I said in the script, that full spectrum of generators that we would deliver to the market ultimately.

Robb LeMasters, Senior Vice-President and CFO

I would note, too, that now that's up and running, yes, I would note that now that we have that up and running, we're testing that as it relates to tech. There's also a lot of potential to use that system for other isotopes, be it lutetium or otherwise. And so now that we've got that up and we can start working with it, we're starting to explore how we use that for all those margins. There's some real potential to scale that equipment and what we can do. It goes far beyond tech.

Pete Lukas, Analyst

Extremely helpful. Thanks. I'll jump back-in the queue.

Operator, Operator

Thank you. Your next question is from the line of Ron Epstein with Bank of America. You may proceed.

Unidentified Participant, Analyst

Hi, all. This is Andre Mitchell on for Ron Epstein. A quick question. Could you just detail the free cash flow bridge from 2022 to 2023? Sorry if you went over it already, I got kicked from the call.

Robb LeMasters, Senior Vice-President and CFO

No, that's fine. So what we talked about is doing about $200 million of free cash flow in 2023, which is up very significantly, from around $50 million this year. What that will be driven by is operating cash flow being up at a $300 million-plus level. What that's going to be driven by is a rebound from the levels that we saw this year, some working capital, some growth in just the underlying business. So that should drive a $300 million-plus sort of number on the operating cash flow side. And then the offset, obviously, to get down to the $200 million level would then be CapEx. We've talked about trying to return to a maintenance capital level, which we've commonly talked about, at about $100 million. And then last year, we described how we had a significant win in the Project Pele, and that would generally be about $20 million to $30 million incremental. We only spent a small slice of that in 2022. So you can expect a decent bit of that. We continue to have growth in our nuclear medicine business, where we're doing one or two growth projects. So I would say, the $100 million plus, if you will, to ultimately get to an operating cash flow minus that of around $200 million.

Unidentified Participant, Analyst

All right. That's helpful. I'll jump back-in the queue for now. Thanks.

Operator, Operator

Thank you. There are no questions in queue. Your next question is a follow-up from Peter Skibitski with Alembic Global. You may proceed.

Pete Skibitski, Analyst

Yeah, guys, I figured maybe we could talk a little bit more about AUKUS. Just because, Rex, it seems like most of the congressional shipbuilding guys are pretty nervous with regard to kind of the lack of incremental capacity at the submarine yards, right? I think that's fair right now. So are you seeing, in your talks, a potential that Australia could be kind of satisfied with what they need in other ways as opposed to our actual yards, building more subs, maybe using your reactors in different ways? Or any other pads, I guess, that could benefit BWXT?

Rex Geveden, President and CEO

Yeah. So there's a lot of speculation in the trade press about this one right now, Pete, and maybe I won't say much. And we do expect some details here in the middle of March, and we're hopeful about it, but that's about all I could really say at this juncture.

Pete Skibitski, Analyst

Okay. That's fair. I'll sneak in one last one then. I was a little confused. You've got the actinium agreement with Bayer that you had, and now it looks like the same drug with Fusion. So those are two separate revenue opportunities with the same drug. Am I understanding that right?

Rex Geveden, President and CEO

Think about it this way, Pete. There’s the radioisotope, often referred to as the active pharmaceutical ingredient, which serves as the payload. Then there’s the drug, generally developed by large pharmaceutical companies, which we can think of as the missile rather than the warhead. These drugs are biochemicals that target proteins produced by specific types of cancers. The combination of the drug and the radioisotope, or active pharmaceutical ingredient, is what gets injected into patients. In this case, Bayer has developed its own drugs for certain indications and conditions, and we will provide the radioisotope for their clinical trials. Fusion is working on a different set of drugs for various indications and conditions, and we will also supply them with the radioisotope. We can provide this isotope to a range of drug development companies. Additionally, the businesses we are expanding involve therapeutic isotopes, and we have the potential for contract manufacturing, like we do with Boston Scientific for TheraSphere. In that scenario, we would combine the drug and our radioisotope at our facility and manage logistics and distribution to the radiopharmacies. It is still early for actinium, but there may be multiple customers for our specific radioisotope.

Pete Skibitski, Analyst

Okay, okay, great. Look forward to hearing more in the future. Thanks, guys.

Rex Geveden, President and CEO

Yeah. Thanks, Pete.

Operator, Operator

Thank you. I would like to hand the call back over to Rex Geveden for concluding remarks.

Rex Geveden, President and CEO

Thanks, Joel. I wanted to say as we close here that I'm proud of the entire BWXT team of 7,000 employees and the accomplishments that we realized together in 2022. We do have a healthy and growing business, and we positioned ourselves for new meaningful opportunities. And even in the face of public health, economic and geopolitical distractions, our employees remain steadfast in our mission to provide safe and effective nuclear solutions. And I do commend them for helping us to run and grow this remarkable business. So I just want to say to them, thank you for your continued focus and dedication. Robb, would you have anything to add?

Robb LeMasters, Senior Vice-President and CFO

Yeah. Thanks, Rex. I echo that sentiment. We have a remarkably resilient team and it showed up in the financial results this year. I'm energized and continue to be amazed by the way the employees here are tackling evolving challenges and seeking to take this company to higher heights. So with that, we thank everyone for joining us this evening. As always, if you have any further questions, you can reach us by phone at (980) 365-4300 or email us through investors@bwxt.com. Thank you.

Operator, Operator

That concludes today's conference call. Thank you for your participation. Please enjoy the rest of your day.