BWX Technologies, Inc.

Ladies and gentlemen, welcome to BWX Technology's third quarter 2023 earnings conference call. At this time, all participants are in 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, with BWXT's Vice President of Investor Relations. Please go ahead.

Thank you, Sherelle. Good evening and welcome to today's 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 third quarter 2023 earnings presentation that is available on the investor section of the BWXC 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 investor section of the BWFT website. I would now like to turn the call over to Rex.

Thank you, Chase, and good evening to everyone. This afternoon we reported solid third quarter results that were slightly ahead of our expectations. The quarter was highlighted by robust 13% organic revenue growth with double-digit revenue growth in both segments. Adjusted EBITDA grew 6% compared to the same quarter last year as higher revenue in government operations and solid revenue and margin performance in commercial operations were offset by lower margin in our government operations segment and some growth in corporate expense. As we forecasted last quarter, although higher sequentially, Government operations margins were somewhat compressed by the onboarding of new team members and less favorable product mix, while commercial operations margins benefited from operational improvements and medical profitability. Adjusted earnings per share declined 3% to 67 cents as higher EBITDA was offset by non-operating items. Overall, and consistent with what we have experienced throughout 2023, the combination of steady advancements in our core franchises and incremental increases from new growth vectors is producing strong organic top-line growth even in these challenging and unpredictable economic times. Coupled with our focus on operational excellence and functional continuous improvement, we expect to produce good financial performance and strong cash flow throughout the remainder of 2023 and 2024. Based on our year-to-date performance and our expectations for the fourth quarter, We are narrowing our 2023 adjusted earnings per share guidance to $2.90 to $2.95, the midpoint of which is slightly higher than where we started the year. Our guidance assumes approximately 8% year-over-year adjusted EBITDA growth. And as Rob will detail in his remarks, we are pleased to have a similarly positive outlook for 2024, anchored again by solid organic growth at the top and bottom line. Our preliminary view is that we can grow revenue, EBITDA, and earnings at a mid-single digit rate in 2024 and continue to drive improved free cash flow. Last quarter, I provided a detailed update on some of the major secular themes driving our demand outlook, including the impacts of the great power competition and decarbonization of the grid. As we begin to turn the page on 2023, I expect these same themes to remain key drivers of the increased application of nuclear solutions in our key national security, clean energy, and nuclear medicine end markets. Looking through that lens, let's step through the drivers of our segment results, including key wins in each segment. Starting with the government operations segment, we had a strong third quarter with 13% organic revenue growth driven by an increase in naval propulsion volume and strong growth in nuclear fuel services and micro reactors. On the demand outlook, our naval propulsion business prospects remain robust, underpinned by the 30-year shipbuilding plan, which supports the government's strategy to bulk up our strategic force capabilities, including a recapitalization of the U.S. Navy nuclear fleet. On top of a consistent procurement of Virginia-class submarines, the current shipbuilding plan calls for 10 years of serial procurement of Columbia-class submarines beginning in 2026 and the potential for the Ford-class aircraft carrier to move to four-year ordering centers beginning in 2028. We are also anticipating incremental demand for submarines resulting from the AUKUS trilateral security agreement signed a little more than one year ago. To that end, Australia's recent announcement to invest $3 billion into the U.S. naval manufacturing industrial base is a positive step in helping to increase U.S. submarine production, not only to meet our country's needs, but also to support incremental demand from our key allies, including Australia, and the United Kingdom. However, even as AUKUS efforts mature, our primary focus continues to be fully supporting naval reactors. Just last week, we announced a $300 million award for the manufacturing of naval nuclear fuel through mid-2025. We expect to finalize the other elements of our next multiyear pricing agreement, including reactors and key components of the propulsion package in the coming months. Within our non-naval propulsion government business, which now comprise about 20% of the segment's total revenue, up from about 15% just two years ago, we're also seeing nice growth and emerging opportunities. Leading this growth, of course, are microreactor programs within the advanced technologies division of the segment. During the third quarter, we booked the initial portion of our $200 million contract for the Draco project, the first demonstration of a nuclear thermal rocket engine in space. BWXT will manufacture the reactor's hardware and complex fuel and assemble the reactor in our Lynchburg facility before delivering the fully fueled subsystem for spacecraft integration. Programs like Draco and Pele are progressing well, and others that we are pursuing show how our investments in talent and infrastructure are driving growth beyond our core in enabling BWXT to offer the U.S. government breakthrough nuclear solutions for applications in all national security domains, including sea, land, and space. Our wins with government customers are also creating opportunities to develop micro reactors for novel commercial applications. While some of our nuclear technology peers are taking more significant and open-ended profit risks to enter these nascent markets, BWXC is taking a page out of the Navy's history books. As some of you will know, early naval investments in the 1950s led directly to the first commercial nuclear power reactor in Shippingport, Pennsylvania. We believe this model is still sensible today as we can leverage government program funding and experience to advance novel commercial nuclear concepts while investing modest amounts of capital to further development of nuclear solutions for maritime, remote power, or other industrial applications. In that vein, we recently announced early stage contracts with the Wyoming Energy Authority stemming from our involvement in the Advanced Reactor Development Program to assess the potential for microreactors at mining sites in the state. We also announced a relationship with Crowley to explore the use of a microreactor on a barge that could be used for backup and emergency power. Another part of the government operations segment that is sometimes overlooked is our special materials business. While most of our investors are aware of the strength of our nuclear fuel services franchise, Over the past several years, we have methodically assembled a broader portfolio based on our strengths and technical capabilities in radiochemical processing and special materials handling and accountability. Given the reduction of Cold War era infrastructure and other capacity constraints within the government laboratory complex, VWXT has worked with its government customers to pilot and scale backup production systems for special nuclear materials. This special materials franchise includes uranium down blending, wherein we have converted highly enriched stockpile material into lower enriched material under a current contract since 2018. A triso coated fuel line we stood up in 2021, and a uranium metal processing line at our nuclear fuel facility that began production last year, the objective of which is to return valuable national security material to the stockpile for later use in naval fuels or other national security applications. We further expanded this unique line of business in late August by securing an MNSA contract to recycle scrap material from the Y-12 National Security Complex into high assay, low enriched uranium or HALU feedstock material. This material is an important stopgap source for much needed HALU for the DOE's Advanced Reactor Development Program. that requires higher assay nuclear fuels to support prototype development. We are in regular discussions with the Department of Energy, the National Nuclear Security Administration, and other government agencies about where BWXT can be of assistance in supporting their missions. So more to come on this special materials processing platform as it blossoms into a larger business line within the government operations segment. Looking ahead to 2024, we believe these demand trends will continue to support growth in our government operations segment. However, as we laid out at our November 2021 investor day, the lull in the ordering cadence for the Ford-class aircraft carrier in 2024 and 2025 creates some headwinds that we expect to overcome the next two years. Turning to commercial operations, revenue in this segment grew 10%. with high single-digit growth in commercial nuclear and another quarter of robust double-digit growth in medical. Backlog in the segment which is almost entirely related to our commercial nuclear business lines was up sequentially for a third consecutive quarter and is up 14% over last year. This highlights the robust demand we are seeing in the market, which will continue for the next several years given demand for nuclear power in Canada and around the world. As we discussed in more detail last quarter, the Ontario government is seeking to double the scale of the power grid by 2050 to meet projected demand and is fully committed to using nuclear to satisfy a large portion of this demand. This is evidenced by three recent developments, including Ontario Power Generation's commitment to build four BWRX-300 small modular reactors at the Darlington site, life extensions of existing plants at the Pickering site, and the potential for new large-scale power reactors at the Bruce Power Nuclear Generating Station, among many others. We see international momentum as well. We have talked about the potential for new nuclear in Europe and countries like the UK, Poland, and Romania, as they seek to add clean baseload power and to improve their energy security postures. Just in September, Canada announced export financing of $3 billion Canadian to be used for the construction of two CANDU reactors at the Chernivota Nuclear Power Station in Romania. Our strong position as a fuel and equipment provider in the CANDU reactor market and our role as a merchant supplier of large critical equipment to the SMR markets positions us well to benefit from such projects in the global market. At BWXT Medical, revenue growth in our base diagnostic and contract drug manufacturing businesses continues to accelerate, growing approximately 30% in the quarter. We expect this trend to continue as demand for isotopes such as trontium and germanium used in cardiac and cancer imaging studies remains strong while we experience the rising tide of demand for newer therapeutic isotopes like lutetium and actinium. It is worth noting that our proprietary actinium generators are now being used exclusively by Bayer for late stage human clinical trials in Europe. As it relates to our Tech99 product development, Our team is diligently working to respond to the questions and data requests that we received from the FDA this summer. We have conducted several successful test runs of Tech 99 generator production with irradiated material using the target delivery system at the OPG Darlington site, and we continue to work toward commercialization of the product next year. Overall, our commercial operations segment is poised for continued solid growth in 2024 with improving profitability based upon a better mix in commercial nuclear and higher profitability in medical. I would also like to take a moment to discuss a few of the initiatives we have in place to sharpen our business execution and improve the day-to-day operational functionality of our company. Last quarter, I discussed that on top of the significant financial capital we invested in the business over the last several years, we've also made significant investments in human capital throughout the organization to ensure we have the people, systems, and processes to skillfully manage the strong growth we see ahead. Not only are we focused on capturing growth, but we are intent on honing our business through the use of AI and automation throughout the organization, more efficient operational effectiveness practices, including, for example, real-time monitoring and reporting on large machine tool utilization, at all our major U.S. plants and enhanced human resources and financial back office platforms to increase the efficiency of administrative functions. We expect these initiatives to maintain our strong competitiveness in the markets we serve and to drive returns on capital by sustaining our industry-leading growth, solid margin performance, and robust free cash flow generation. In conclusion, as we look at our portfolio, and our dual focus on growth and execution, I couldn't be more confident in how well our employees are positioning BWXT to serve the nuclear markets around our three key capabilities, manufacturing, processing, and services, mainly for power and propulsion applications. The core of BWXT is our significant experience in manufacturing critical nuclear systems and components, handling and processing highly complex materials, and providing services around these capabilities. Because of our extensive experience in the nuclear markets, unmatched facilities in the US, Canada, and the UK, and our deep technical expertise, we are uniquely positioned to benefit from the trends driving our markets. We are focused on taking these power and propulsion solutions to meet the demands of our distinguished customers in the national security, clean energy, and nuclear medicine markets. Before I turn the call over to Rob to discuss the third quarter financial results in more detail, and to discuss our updated 2023 guidance and preliminary 2024 outlook, I would like to take a moment to express my gratitude to the men and women at BWXT for their hard work and dedication in supporting the many critical missions carried out by the customers we serve. It is widely known that the US has deployed two carrier strike groups to the Middle East to support Israel, led by the USS Ford and the USS Eisenhower aircraft carriers both of which are powered by BWXT reactors. This is a stark reminder of the importance of the work we do every day at BWXT in supporting the U.S. and our most important allies. With that, I will turn the call over to Rob.