BWX Technologies, Inc.

Ladies and gentlemen, welcome to BWX Technologies, Inc., fourth quarter 2021 earnings conference call. At this time, all participants are in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. Following the company's prepared remarks, we will conduct a question and answer session, and instructions will be given at that time. Please note this event is being recorded. I would now like to turn the conference call over to our host, Mark Kraus, BWXT's Vice President of Investor Relations. Please go ahead.

Thank you, Andrea. Good evening and welcome to BWXT's fourth quarter and full year 2021 earnings call. Joining me are Rex Jevedin, President and CEO, and Rob Lemasters, Senior Vice President and CFO. On today's call, we will reference the fourth quarter earnings presentation that is available on the investor 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 our SEC filings. We will frequently discuss non-GAAP financial measures, which are reconciled to GAAP measures in those materials. With that, Rex, I will turn the call over to you.

Thank you, Mark, and good evening, everyone. Before we get into the results, I want to welcome Rob Lemasters to his first earnings call as BWXT's Chief Financial Officer. Rob was new to his role at our investor day a few months ago when many of you met him for the first time. Since assuming his new role, Rob has impressed me and all of us with his appetite for detail, his drive for continuous improvement, and his disciplined stewardship of the company's financial resources. As the company rolls off a multi-year capital campaign and positions itself for future accelerating growth, I've asked Rob to focus on driving our financial results from several angles, including managing the glide path downward on CapEx and maintenance levels in 2023, improving the efficiency of managed working capital, and expanding margins through cost efficiencies and synergies within the company. We'll also assess how we can make small future investments to increase operational effectiveness and modernize operational support functions. With the completion of two large capital campaigns and our near-term focus on streamlined execution, BWXT is firmly positioned to layer in new revenue and margin expansion from our growth vectors. Our first step on that path is consolidating from three operating segments into two. The new segments will be called government operations and commercial operations. This new organizational structure lines up nicely with how we intend to leverage capabilities within each segment to more effectively meet customers' needs. We also expect this action to result in meaningful future strategic and cost synergies, both for our customers and our shareholders. Turning now to earnings results, earlier today we reported strong fourth quarter earnings of 95 cents per share on $592 million of revenue, wrapping up 2021 on a solid note in an otherwise challenging year. We finished 2021 with earnings of 306, representing modest growth from 2020. So let me give you some color on what challenges we saw before providing a business update on the exciting progress we're making across BWXT. First and foremost, the COVID-19 pandemic persisted. We saw the heaviest impacts to operating productivity during the spikes that occurred in the first and third quarters. We had expected to gain back some efficiencies in the fourth quarter that we had forfeited earlier in the year. However, the unforeseen rapid spread of the Omicron variant limited progress once again. We continue to experience lingering disruption into early 2022, but we believe things are easing and that we are finally turning the corner on COVID. It's hard to specifically define the full financial impact of these disruptions, but we estimate that it was well north of $10 million of operating income pressure across the year and was concentrated within our core Navy business where a majority of our workforce is necessarily on site to manufacture critical components. As I mentioned on the last call, the other major challenge in the Navy business came from workflow complications related to the installation of new large and complex machinery into operating factories, which itself was exacerbated by COVID-related supply chain and transportation disruptions. In services, growth was delayed by the timing of major awards from government customers, proving even our conservative estimates to be, in hindsight, aggressive. Beyond operational challenges, we had some financial headwinds that expressed themselves in cash and earnings, namely the beginning of the roll-off of FASCAS pension reimbursement, which runs through segment operating income. Despite all the headwinds, we were able to modestly grow earnings and achieve important operational and developmental milestones in an otherwise challenging year. We remain focused on executing against our robust backlog and advancing our growth initiatives in 2022 and in the years to come. In the core Navy business, we are entering the last year of our major capital campaign, so the equipment installation bottlenecks that we experienced in 2021 should begin to abate. Impressively, the resulting facilities and equipment should leave our flagship business with the necessary capacity to meet the production growth forecasted in the Navy shipbuilding plan over the next few decades. With our 2022 CAPEX budget, we are upgrading our scheduling and cost reporting systems to provide greater visibility commensurate with our investment and capacity. We also believe that if additional domestic demand surface from the U.S. Navy organically or from the needs of our allies in light of an increasingly contentious global landscape, we should be able to shoehorn some of that into our workload planning systems and enhance capacity. On that note, and as an update on the AUKUS Nuclear Powered Submarine Task Force, we continue to stand by as they perform an 18-month assessment of their needs and potential partnerships. While we don't have any specific update on potential roles for our company, we continue to engage our Navy customer and in parallel are performing a self-evaluation on the capabilities and capacity that we could offer to support the security partnership. Beyond Navy work, we are leveraging our category one license to grow the business. About a year ago, BWXT was awarded a contract from the National Nuclear Security Administration to design and prototype a demonstration system for uranium conversion and purification. I am well pleased to report that the project is running ahead of schedule, and we look to transition to production and scale the process over the next year or two. On the government services side, BWXT's joint venture received authority to proceed on the Savannah River integrated mission cleanup contract, and we are currently in transition and satisfying all deliverable requirements. We anticipate a fee-bearing activity to begin in the spring, and this long-term project is expected to provide solid EBITDA growth for the business over the course of 2022 and 2023. Shortly after the Savannah River Award, the Department of Energy awarded the Pantex Y12 M&O contract to another competitor. However, the award was subsequently protested and the DOE has paused the award pending corrective actions. Ultimately, we remain optimistic about the BWXT team's competitive proposal and will await a determination from the Department of Energy. Lastly, in government operations, we continue to make progress on multiple microreactor programs. We completed another design review for the Strategic Capabilities Office, and we are now in receipt of the RFP for the demonstration phase. We anticipate that it will be awarded around the middle of the year. In commercial operations, long-duration life extension projects continue to progress on schedule, and more recently, we've seen positive developments around the long-term small modular reactor opportunities. In early December, Ontario Power Generation selected the GE Hitachi SMR solution to deploy at the Darlington Nuclear Site, which is already licensed for a new nuclear build. They intend to leverage the strength of the Ontario-based supply chain, inclusive of VWXT, to construct Canada's first commercial grid-scale SMR as early as 2028. As more provinces and nations decarbonize, we are seeing renewed interest in nuclear power as a component of green energy portfolios. Shortly after the OPG announcement, BWXT, GE, Hitachi, and Synthos Green Energy announced the intention to cooperate on deploying 10 small modular reactors in Poland by the early 2030s. The Tennessee Valley Authority is also exploring the construction of multiple advanced reactors, starting with the GE Hitachi SMR. BWXT intends to leverage its unique facilities and skilled workforce, which we are well suited to manufacture a wide range of products, including reactor pressure vessels, reactor internals, and other key nuclear components. Lastly, I want to provide you with a detailed update on the commercialization efforts for the Tech 99 generator product line, as we see a clear path for a submission of our new drug application to the FDA by the end of the quarter. All production equipment is installed and commissioned. All facility modifications are complete. and we are operationally ready. We completed cold chemistry runs in the fourth quarter and have produced repetitive hot chemistry batches at full scale this month. The results from these 700 Curie batches have been positive and are being used to validate our quality control methods, which will be integrated into the data package for the FDA. We utilize the drug substance to successfully label our Tech 99 with the most widely used cold kits in North America. also a critical input to the FDA package. We remain confident that such data will support regulatory and commercial market acceptance for the BWXT generator, given that our product meets the needs, the pharmacopeia standards for TEC99. We also held a formal Type B meeting with the FDA a few weeks ago. We were pleased with the feedback and are shaping our package to drive a high-quality submission. The FDA agreed that strengthening the Moly 99 supply chain remains a priority. In fact, over the last two months, this fragility has been on full display with the shutdown of the HFR reactor in the Netherlands that supplies 20% of the world's Moly 99. To that end, we intend to request a priority review with our submission to the FDA. As a reminder, the BWXT product uses targets that will ultimately be irradiated in a power reactor in Ontario. meaning that continuity of supply is a highly attractive feature of our offering. So what is left prior to FDA submission? In the coming weeks, we will complete testing of the radiopharmacy line. Following that, we will conduct validation and qualification using cold and hot material through the entire production sequence. This is the last component of the testing phase. Final task will be to complete three registration batches, which entails three runs of hot chemistry through the full process, yielding the data required for a high-quality FDA data package. We remain committed to this exciting nuclear medicine market and expect to build our growth not only through the Tech 99 generator line, but also through expansion into therapeutics and contract drug manufacturing enabled by multiple major partnerships, some of which we have disclosed publicly. Finally, we believe that this portfolio consisting of uniquely positioned defense and commercial nuclear power assets Combined with multiple shots on goal provides for our investors high predictability in our core defense and clean energy businesses with growth optionality in compelling adjacent nuclear markets. And with that, let me turn the call over to Rob.