BWX Technologies, Inc.

Ladies and gentlemen, welcome to BWX Technology's third quarter 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 pass the call over to your host, Mark Kratz, BWXT's Vice President of Investor Relations. Please go ahead.

Thank you, Tia. Good evening and welcome to BWXT's third quarter 2022 earnings call. Joining me today are Rex Jevinen, President and CEO, and Rob Lemasters, Senior Vice President and CFO. On today's call, we will reference the third 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 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 investor section of the BWXT website. I would now like to turn the call over to Rex.

Thank you, Mark, and good evening to everyone. Earlier today, we reported third quarter earnings of 69 cents a share in line with our forecast and consistent with our framing in the last earnings call. Revenue was up 5%. Free cash flow was up $25 million. Adjusted EBITDA was down 5% and strong performance in commercial operations and company-wide cost controls, nearly offset labor challenges and government operations. Despite macro market volatility this year, the company has exhibited solid underlying financial performance from its core operations. The labor challenges that have emerged have been largely offset by cost controls and outperformance from our commercial facing businesses, resulting in high single digit EBITDA growth on an expansion basis. Given our performance to date and the impacts of macro headwinds, we have narrowed 2022 earnings per share guidance to just below the original midpoint issued about a year ago in a very different overall economic environment. Revenue and EBITDA have both moved favorably from our initial 2022 outlook in February. Before I turn the call over to Rob to go through the financial details, let me give you an update on the business and the optimistic long-term outlook we have on BWXT's nuclear end markets. In our government business, we continue to see strong demand for our naval products, including components, reactors, and nuclear fuel. The Columbia submarine program continues to ramp, and we recently shipped some of the first components for the lead boat. The reactor components and fuel for the Virginia program are progressing at a regular cadence, and we are continuing to work on multiple Ford-class carrier propulsion chipsets. And although we are starting the government fiscal year with a continuing resolution, we don't anticipate any disruption to these critical and well-supported national security programs. We recently kicked off the next multi-year pricing negotiation with our Navy customer and anticipate getting that next set of orders negotiated and under contract in the first half of 2023. This agreement is for reactor components and fuel for the next two fiscal years and supports the Navy's 30-year shipbuilding plan, which includes stable production of Virginia fast attack submarines and additional content on the Columbia program as we approach an annual ordering tempo for reactor components and fuel for the new ballistic missile submarine. We also continue to support the U.S. Navy and the government as they negotiate the details of the AUKUS trilateral security agreement. If called upon, BWXT stands ready to utilize our unique capabilities, facilities, and licenses to help enable this important global security effort. As I noted, and not unlike our market peers, we are experiencing some difficulties in our core business in this post-pandemic dislocated labor market. Finding and retaining skilled manufacturing labor is our most acute problem. At some of our nuclear manufacturing sites, we are tracking almost 10% below our net headcount plan. Said another way, we are simply struggling to sufficiently hire to satisfy our growth needs as we stretch to meet demand from our customers. This has the two-fold effect of limiting progress against the backlog and reducing planned overhead absorption. To address these labor shortages, we have implemented a set of comprehensive actions. For recruiting, we've expanded our employee referral programs and conducted a detailed Kaizen exercise to streamline the talent acquisition process. The recruiting battle rhythm includes daily tracking and reporting to ensure constancy of purpose and process visibility. We've also hired more site level recruiting resources to more effectively market our unique career offerings to top candidates. For retaining and onboarding new team members, we are expanding and accelerating our training programs to improve their skill sets and create a foundation for competency and success. Beyond the labor impacts this year, we are doubling down on operational excellence to drive efficiency to offset increasing costs and improve schedule and quality. Having made significant capital investments in the Navy business, we are in the process of optimizing throughput to reduce span times and drive efficiency as we execute the backlog. While we've always had a continuous improvement culture and formal operational excellence functions, we are taking a fresh look at improving the business by getting back to the basics, deploying lean manufacturing tools, including visual flow boards, process mapping, and key performance indicators, to name a few, and standardizing their usage across the enterprise. We are firmly invested in the belief that our new leaders, third-party assessment, and continuous commitment to rigor and discipline will create additional capacity for the business drive efficiency, and position us to exceed customer expectations. In any case, the outlook for this business is superb, despite these near-term labor and financial pressure, and these efforts better position us for the future and serve as an accelerator of our naval performance as macro headwinds abate. On microreactors, Project Pele is ramping, albeit at a slower pace than we had planned, given the challenge finding engineering talent needed for this special project. That said, we have begun procurements for long lead items, baselined our schedule, and configured the supply chain for this prototype reactor. Our interactions with the DOD Strategic Capabilities Office and future potential customers have been very positive. On a related topic, we anticipate a contract option award in the near term for TRISO fuel to be used in this mobile reactor, which is separate from and incremental to our existing $300 million contract to build the prototype reactor. We remain optimistic about the microreactor market and continue to see strong government demand for nuclear space power and propulsion manifesting in multiple opportunities, including the Draco program at DARPA, fission surface power and space nuclear propulsion for NASA. And as we have noted on multiple calls before, the ideal end state for this market is continuous production of microreactors and fuel, and we remain bullish about those possibilities over the long term. The services business continues to track upward. The new Savannah River site remediation contract is executing well, and outside of that, performance scores have been trending favorably. Our strategy to leverage BWXT's unique nuclear knowledge in site management and complex nuclear environmental restoration is working, and we are building back our portfolio through market share gains, enabling us to reach historical levels of operating profit. The next stair-step opportunity for growth in the pipeline is the Hanford Integrated Tank Disposition Contract, which we anticipate to be awarded by early next year. Beyond that, there are smaller-scale but fairly near-term opportunities at the decommissioned enrichment plants in Portsmouth, Ohio, and Paducah, Kentucky. In the longer term, there remain large opportunities to manage and operate the Pantex and Y-12 sites the scopes of which are clearly in our sweet spot. Lastly, on the government side, we see near-term growth in processing special nuclear materials. In March of last year, BWXT was awarded a contract from the National Nuclear Security Administration to design and pilot a process for uranium purification and conversion services. This first phase is tracking ahead of schedule, and we anticipate a larger second phase award next summer. Now switching gears to BWXT's commercial-facing markets. Momentum is building in our nuclear medicine business. In September, we submitted a new drug application to the FDA for BWXT's Tech 99 generator. In that same timeframe, we hosted investors, customers, and others at BWXT Medical's headquarters and major production facility in Canada, Ontario, Last week, the FDA requested dates to conduct a pre-approval inspection of our Tech 99 generator line and accepted our application for priority review. In a related matter, we have begun installation of the target delivery system, or TDS, at the Darlington site near Toronto. The TDS is a first-of-a-kind system used to irradiate target material for the Tech 99 generator. The system, which we expect to be fully operational next year, will have the highest production capacity of any radioisotope irradiation system globally. It bears mention that beyond our Tech99 application, the target delivery system can be utilized for multiple other neutron capture isotopes and will be a major industry accelerant. For instance, the system can irradiate targets to produce Yttrium-90, the active pharmaceutical ingredient in the TheraSphere product that we manufacture. It also has the potential to deliver an unprecedented scale of irradiated Lutetium-177, an isotope of growing demand for radiotherapeutic applications. On that topic, we are making substantial progress on important therapeutic isotopes, including the development of our Lutetium-177 product and related preparation of a drug master drug file for sale of that product as an active pharmaceutical ingredient. In addition, The business recently completed and shipped the first trial batch of Actinium-225 to Bayer for use in their therapeutic clinical trials. In summary, we see tangible progress in positioning the nuclear medicine business for accelerating growth. Finally, we continue to see positive sentiment around commercial nuclear power, particularly in light of the current geopolitical environment wherein energy security is increasingly viewed as a component of broader national and economic security considerations. This, coupled with net zero emissions targets, has created an intense focus on new commercial nuclear power solutions globally. To that end, we are pleased to announce receipt of a new contract from GE Hitachi for engineering design of the BWRX 300 small module reactor pressure vessel, which we expect will lead to material procurement and manufacturing. Not only do we see serious interest in the GE Itachi design for potential customers in Canada, the U.S., and Poland, to name a few, but other small modular reactor designers and integrators are also gaining traction for potential orders. BWXT occupies a premium position in the commercial nuclear supply chain in North America and can support multiple technologies and designs given our capacity, which includes the largest nuclear cleanroom manufacturing facility in North America. In summary, all of our markets are growing and BWXT maintains enviable competitive positioning across its entire portfolio amid a strengthening macro demand signal for nuclear. Having a highly differentiated and diverse nuclear portfolio is advantageous as we navigate the near-term macro challenges in the broader context of steady long-term growth in markets characterized by growing demand and high entry barriers. Rob?