BWX Technologies, Inc.

gentlemen, welcome to BWX Technologies' third 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.

Thank you, Ron. Good evening and welcome to today's call. Joining me are Rex Jebeden, President and CEO, and Rob Lemaster, Senior Vice President and CFO. On today's call, we will reference the third quarter 2024 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 provisions found in the investor materials in the company's SEC filings. who 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 BWXC website. I would now like to turn the call over to Rex.

Thank you, Chase, and good evening to all of you. This afternoon, we reported strong third quarter results that were ahead of our expectations. We delivered 14% organic revenue growth, which combined with solid operational performance led to 19%. adjusted EBITDA growth, and 24% adjusted earnings per share growth. Given our strong year-to-date performance and despite weather-related challenges stemming from Hurricane Helene and other events, we are raising our 2024 adjusted earnings per share guidance to about 320, the high end of the previous guidance range, and we are maintaining our free cash flow guidance of $225 to $250 million. As we look to 2025, we expect another record year with continued growth in government operations, complemented by accelerating growth in commercial operations. Our preliminary 2025 outlook is for mid to high single-digit revenue, EBITDA, and earnings per share growth compared to 2024, with expectations for at least 10% free cash flow growth. Before I jump into our quarterly results and market outlook, I would like to spend a few minutes on our special materials portfolio. and the acquisition of AOT announced today. Special materials is a strategically important line of business for BWXT and one that I would suggest is underappreciated by some investors. The foundation of our special materials portfolio is our Navy fuel business in East Tennessee. Through this business line, BWXT is the only commercial enterprise in America to hold a category one NRC license, which permits BWXT to handle special nuclear materials. We have leveraged this credential to develop unique infrastructure and retain some of the top radiochemistry talent in the world to execute high-value national security programs for the Department of Defense and Department of Energy. Over the previous decade, we have built a portfolio of businesses around our Navy fuel franchise, including the expansion of our down blending product line, growing our business in specialized nuclear fuel elements for university and government research reactors, securing a contract that converts scrap material into usable HALU for advanced reactor fuel, and standing up a new production line to purify and process uranium metal and oxides for the NNSA. Further, over the past few months, we have announced two new important contracts that strengthen this portfolio. In September, we announced that BWXC was the sole awardee of a contract to study the build-out of a national security uranium enrichment capability. And in October, The DOE announced that BWXT was one of several companies selected to provide HALU deconversion services that will be a linchpin in fuel fabrication for advanced nuclear reactors. Simply put, we have one of the broadest sets of capabilities in the uranium fuel processing cycle, and our customers place immense trust in BWXT to support national security missions and novel civil applications. Building off that foundation, Today we announce the acquisition of AOT from L3 Harris. Based in Tennessee, AOT is a former aerojet business that is the sole manufacturer of depleted uranium and other specially finished metals used in a variety of defense applications. From a strategic viewpoint, AOT is a bullseye. It is a natural extension of our special materials portfolio and fits perfectly with BWXT's unique business characteristics customer base, and special materials handling and processing capabilities. End users of AOT products are mainly the Department of Defense and Department of Energy, including the National Nuclear Security Administration. Sales in this business are expected to be about $40 million in 2024, and the combination of its market position, program exposure, and micro-level supply and demand factors all create good visibility into future top-line growth at solid mid-teens EBITDA margins. We are targeting to close this roughly $100 million transaction by the end of the year and are excited to welcome AOT to BWXT and to add another important product line to our unique special materials portfolio. As you know, Rob and his team look at many M&A opportunities but act on few as companies that meet our stringent criteria are hard to come by and often demand premium purchase multiples. With a stronger than ever corporate finance infrastructure and solid balance sheet, we remain active with M&A diligence activities to complement our organic growth with interesting inorganic opportunities to maximize our exposure to growing strategic government and commercial nuclear markets. Turning now to a discussion of segment results and market outlook. Government operations had a strong quarter with 17% revenue growth and 18% adjusted EBITDA growth, driven largely by outperformance in our naval propulsion and technical services businesses. In naval propulsion, our teams are keenly focused on execution as we seek to level load our plants while we work through the Ford-class aircraft carrier lull that will be with us through 2025 and maybe 2026. In any case, I'm pleased to report that we have completed negotiations and signed a term sheet with our customer on the next multi-year pricing agreement for naval nuclear reactor components with terms that are in line with today's supply chain and labor environment. The agreement is on track for a formal contract award by the end of the year, pending final government approval of the term sheet and the contract. In technical services, after a lengthy appeal process and being awarded the contract multiple times, the BWXT-led joint venture H2C received a notice to proceed on the 10-year plus Hanford Integrated Tanks disposition contract in mid-October. With this transition, the Hanford Tanks project becomes the largest contract in our technical services portfolio and punctuates our long-term strategy to convert our unmatched capabilities and nuclear operations into outsized market share for environmental remediation and management and operations of DOE and NSA sites. And micro-reactors Our current projects continue apace. Project Pele is maturing nicely and continues to receive good funding support. In fact, Idaho National Laboratory, where the reactor will be final assembled and powered, recently kicked off construction of the Pele testing facility, highlighting concrete progress on this key project. Last quarter, we discussed the Defense Innovation Unit, RFP, for microreactors on Army bases, an opportunity that continues to be intriguing. And beyond that, we are seeing tangible interest from other defense agencies and emergency relief organizations. With our foundation of recurring businesses and in-hand opportunities we see playing out in the near term, we anticipate modest organic growth in the government operations segment in 2025, consistent with the trajectory contemplated in our medium-term guidance. This will be complemented by the AOT acquisition, ultimately leading to mid-single-digit revenue and EBITDA growth in 2025. Our focus remains on driving operational excellence throughout the organization and providing our customers with high-quality nuclear solutions that enable some of the government's most critical missions. Turning now to commercial operations, revenue was up modestly, driven by robust medical and commercial nuclear components growth, partially offset by lower field services activity. In commercial nuclear power, consistent with our prior view, demand is continuing to grow from traditional nuclear utilities, and now the emergence of new customers investing directly in first-of-a-kind nuclear to secure long-duration, clean baseload power. Many of these customers are signaling a newfound appetite for nuclear, given unprecedented levels of electricity demand growth and nowhere else to turn for reliable green energy. Over the past several months, some of the largest companies in the world, including Microsoft, Amazon, and Google, have announced investments in nuclear power. These investments range from restarting decommissioned large-scale nuclear plants like Three Mile Island and Palisades to investing in new advanced reactor technologies such as SMRs. This newfound demand is evolving rapidly and the shape is uncertain, but it is a clear indication of the growing demand and broadening public support for nuclear power. For BWXT, our breadth of experience and capabilities around nuclear technologies that stem from decades of experience in naval propulsion and commercial nuclear power position us as a merchant supplier to the market. The foundation of our commercial nuclear power business is in large-scale CANDU reactors. However, we are also supplying SMR projects with large complex components, including the reactor pressure vessel for the GE Hitachi BWRX300 project in Canada and molten salt heat exchangers for TerraPower's Natrium reactor in Wyoming. Further, BWXT has the potential to play a key role in the advanced reactor fuel supply chain by providing TRISO fuel, HALU deconversion, or other manufacturing services. We are also working with parties like the Wyoming Energy Authority and the state's mining industry to potentially build micro-reactors to address off-grid power needs, leveraging our experience in the Pele and Draco prototypes. New investment in nuclear is no doubt exciting, but I want to emphasize the strength of our existing commercial nuclear power business. Current projects, including the life extension of Ontario Power Generation's Pickering Units 5 through 8, reactor pressure vessel work on the SMR project at Darlington, and heightened demand for field services to ensure the fleet can run longer and harder, are all ballasts that will enable BWXT to quietly deliver solid double-digit growth in 2025. In the near term, Our operational focus is on building our workforce and executing on the capacity expansion of our Cambridge facility to ensure we are well positioned to capture the dynamic growth we see in this important market. Turning to BWXT Medical, we had another good quarter. Year-to-date growth is in line with our full year expectations of about 25%. This is driven by our base diagnostics portfolio that supports the SPECT and PET imaging markets, both of which are experiencing increased patient volumes, as well as higher contract drug manufacturing volumes for TheraSphere. We expect these trends to support similar growth in 2025 for these product lines, which represent most of our medical revenues today. Specific to our Tech 99 development program, we continue to test and perfect our product and build the commercial relationships necessary for future growth. Notably, we have successfully tagged our product with every cold kit on the market and have finalized our first supply agreement with the radiopharmacy network. FDA communications and commercialization efforts are consistent with the update we provided you last quarter, and we continue to anticipate disciplined market entry with spot volumes in 2025 and a full annual run rate of contracted volumes in 2026 and beyond. In therapeutics, we continue to support our customers' clinical trials with Actinium-225 and are taking initiative to prepare for higher volumes, including new production modalities to increase capacity and provide better surety of supply as these drugs move through the pipeline and closer to commercialization. Similarly, our strategy for lutetium production is taking shape and we anticipate starting radiation runs on our Darlington target delivery system next year alongside Tech 99 irradiations, making that investment more value enhancing than our original business case. With that, I will now turn the call over to Rob, and I will come back with closing remarks.