BWX Technologies, Inc. (NYSE:BWXT) Q1 2024 Earnings Call Transcript

BWX Technologies, Inc. (NYSE:BWXT) Q1 2024 Earnings Call Transcript May 6, 2024

BWX Technologies, Inc. beats earnings expectations. Reported EPS is $0.746, expectations were $0.67. BWX Technologies, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Ladies and gentlemen, welcome to the BWX Technologies First Quarter 2024 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 instruction will be given at the time. I would like to turn the call over to our host, Chase Jacobson of BWXT's Vice President of Investor Relations. Please go ahead.

Chase Jacobson: Thank you, Kathleen. 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 today's call, we will reference the first 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 provision found in the investor materials in 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 BWXT website. I would now like to turn the call over to Rex.

Rex Geveden: Thank you, Chase, and good evening to all of you. This afternoon, we reported the BWXT first quarter results. We delivered 6% organic revenue growth, 9% adjusted earnings per share growth, and remarkably good cash flow compared to historical seasonal patterns. Operating performance was in line with our expectations, and we are reaffirming our full-year guidance, calling for mid-single-digit revenue and adjusted EBITDA growth, leading to adjusted earnings per share of $3.05 to $3.20. Before I get into the segment discussion, I'd like to spend a few minutes on our recent announcement to expand the Cambridge plant, which is already North America's largest heavy nuclear equipment manufacturing facility. As we discussed on recent calls, demand in the commercial nuclear markets is robust with new and ongoing life extensions of CANDU reactors in Canada and the international market, the potential for large new builds, and the incipient demand for small modular reactors.

With this tangible future demand and our existing commercial nuclear backlog of over $700 million, we are moving forward with a project to increase the Cambridge facility footprint by 25% and upgrade it with advanced manufacturing equipment. Over the next two years, we will invest about $60 million with construction starting in the third quarter of this year and planned completion in mid-2026. I would add that the expanded capacity enables more efficient execution of our existing backlog and room for new and exciting growth projects. While much smaller in scale, our intention is to get ahead of demand that we know is precipitating in this market, just as we did with naval propulsion, microreactors, and the medical business in recent years. This investment also enables our customers to signal supply chain strength as they compete for and secure more clean energy projects.

In that vein, just last week, GE Vernova announced that BWXT is the first qualified company in the BWRX 300 supply chain group. Our customers require products that meet extremely high-quality standards with on-time delivery. By making meaningful investments now, we will be ready to satisfy the demand at the right time with market-leading credentials and capacity. Before making this investment, I'm personally engaged in discussions with our top customers and will be on the road visiting with others over the next couple of months to underscore BWXT's commitment to the industry and our need to generate appropriate returns for the value we provide. As capacity inevitably tightens, BWXT will occupy an enviable position given its world-class workforce, facilities, and experiential qualifications.

Now turning to a discussion of segment results and the market outlook, government operations continue to grow nicely with 6% organic revenue growth in the quarter. From a demand perspective, I would like to touch on a couple of key areas. First, at a high level, the long-delayed fiscal 2024 appropriations provided good funding across all our programs and government operations. Looking beyond this year, the President's fiscal year '25 budget supports the secular themes, namely the great power competition and global decarbonization that underpin BWXT's long-term growth story. The request prioritizes the Columbia-class submarine program and provides substantial investment in modernization of the submarine industrial base to sustain the shipbuilding plan and prepare for AUKUS.

This was further supported with $3.3 billion of the defense supplemental bill that was just signed by the President. The FY'25 request supports clean energy, including investments in advanced nuclear technology development, which is important for growth in the micro and small modular reactor markets. More specifically, it fully funds NASA and DARPA's DRACO project, the first demonstration of a nuclear thermal rocket engine in space, a program in which BWXT is manufacturing the reactor hardware and complex coated fuel. Second, there's been a lot of recent news flow around delays in Navy shipbuilding at U.S. shipyards and changes in the procurement schedules reflected in the Navy's new 30-year shipbuilding plan. To address the shipbuilding delays, I will remind you that BWXT made early, significant investments to ensure we could handle the workload associated with the serial ramp and Columbia-class orders concurrent with two Virginia-class orders per year and carrier work going through our facilities.

For the most part, we have successfully navigated some of the labor and supply chain issues at the shipyards during and post-COVID. Accordingly, we are somewhat decoupled from the shipbuilding delays. That said, we remain vigilant and continue to work with our customers to ensure the stability of our execution schedules. The updated 30-year shipbuilding plan, released since we last spoke at Investor Day just over two months ago, reflects pressures and trade-offs the Navy sees amid tighter times with varied priorities. While plans for the Virginia-class are mixed, that is not particularly meaningful to BWXT given our backlog of work, but the Navy's potential adjustment to the Ford-class aircraft carrier schedule would be more impactful because of the reactor scale and quantities.

According to this new plan, CVN-82 will be procured in 2030 rather than in 2028, with advanced procurement starting in 2027 rather than 2026. For BWXT, this could mean that the carrier lull in '24 and '25 could be extended another year. As we are doing in 2024, we will aim to offset this potentially extended lull with other programs. In any case, our visibility into the demand for naval propulsion reactors, components, and fuel work remains clear with steady procurement cadence of Virginia-class submarines and serial production of Columbia-class submarines. Additionally, while still early, it is possible that the Navy could use an extended carrier lull to get ahead on AUKUS-related work. BWXT has received funding for initial architectural and engineering facilitation work scopes to support future increased workload demand, including potential AUKUS activity.

While the cadence of orders on any specific ship set could shift from year-to-year, we believe the 10-year compound growth rate for our naval propulsion business of 3% to 5% that we laid out in Investor Day remains achievable. The nation is doubtlessly committed to its long-term goals for the nuclear fleet, and changes under various administrations or other Washington dynamics have not historically supplanted the national security imperative. Our microreactor projects for both land and sea are progressing nicely. Project Pele, the terrestrial microreactor we are developing with the Strategic Capabilities Office, is in the procurement phase, and we are working alongside Idaho National Lab and the DOE to finalize the requirements for the authorization basis needed for licensing operation of the system.

It is worth noting that Pele received the full funding request in the fiscal 2024 defense bill, highlighting the government support for this critical technology, one that could ultimately serve as a strategic advantage due to increasing needs for stable power at remote military bases and for applications including high-powered radars and the electrification of military tactical vehicles and weapons. Similarly, while in its early stages, DRACO was ramping nicely and was a key contributor to revenue growth in the quarter. Beyond DRACO, we continue to build on our space franchise as the U.S. and its allies increasingly invest in nuclear technologies to expand their presence and capabilities in this domain. We recently entered a teaming agreement with Rolls-Royce through which we secured a U.K. space agency contract for nuclear space power missions.

This teaming agreement provides for expanding our collaboration beyond space and into other advanced nuclear applications, including microreactor and small modular reactor fuel and component development. While our microreactor strategy is primarily focused on defense applications, we continue to assess opportunities in the commercial markets. Our history of manufacturing nuclear reactors for the Navy, along with our dedicated manufacturing footprint and significant technical expertise position as well as commercial opportunities materialize. In special materials, we've assembled a deep portfolio based on our strengths and technical capabilities in radiochemical processing, handling, and accountability. Earlier this year, we announced a two-year extension of our downblending contract, building on the success of 2023 when we captured a five-year uranium purification and conversion contract and a multi-year contract to recycle scrap material from the Y-12 National Security Complex into high-SA, low-enriched uranium.

In March, a BWXT-led joint venture was awarded the 10-year Hanford Integrated Tank Disposition Contract by the DOE. We were first awarded this contract in April 2023. After multiple protests by the incumbent, the DOE decided to re-award the contract to the BWXT-led joint venture. While it is again being protested, we delivered a superior proposal as evidenced by our being selected twice. Assuming it settles in our favor, we expect a contract transition later this year. While we are encouraged by market demand, we also remain keenly focused on improving our operations. As I discussed before, we've made significant investments in our workforce and facilities. In the first quarter, we continued to realize benefits of our operational equipment effectiveness program as we saw improved efficiency metrics across our key sites.

An aerial view of a nuclear plant, its domes casting a unique shadow.

By way of example, the team tasked with improving tube sheet drilling, a process that requires immense precision, nearly doubled the efficiency of this work track. This is just one example of how our focus on OpEx is helping to drive profitability and offset inflationary impacts to the business. Turning now to our commercial operations segment. Revenue in the segment grew 7% in the quarter and adjusted EBITDA was up 55%. Continuing a recent trend, growth was driven by increasing demand for medical isotopes and improved medical EBITDA contribution. As I described earlier in the call, demand in the commercial nuclear power market is strong. At the end of January, Ontario Power Generation formally announced that it will proceed with life extension of the Pickering site units 5 through 8.

This is a substantial opportunity for BWXT that will drive backlog and revenue growth and provide another 10 years or more of visibility into our backlog of life extension work that began in that region in 2017. In the SMR market, we are working with GE Hitachi on the reactor pressure vessel for the BWRX 300 project with OPG and anticipate a full release of the manufacturing award in the coming months. And our opportunity set remains enticing as utilities in North America and Europe consider building SMRs to meet growing electricity demand. The expansion at Cambridge that I described earlier improves our position as the preeminent supplier of large nuclear equipment in North America. Turning to BWXT Medical, revenue grew rapidly building on the momentum from last year with base diagnostics and contract drug manufacturing expansion.

We continue to expect full-year medical revenue growth of about 25%. Demand for diagnostic and therapeutic isotopes is increasing and rapid consolidation of the therapeutic space continued with AstraZeneca's announcement to acquire Fusion Pharmaceuticals, a key partner of BWXT and a leader in actinium-based drug development for up to $2.4 billion. We continue to see positive data points as various actinium and lutetium-based radiopharmaceuticals advance through clinical trials driving significant growth in the addressable market. There are over 155 active clinical trials for drugs using these isotopes, some involving drugs that have already proven to be successful. For example, Novartis recently announced that it will seek approval for Pluvicto use in the pre-chemotherapy setting.

Pluvicto is the market-leading lutetium-based prostate cancer drug with over a billion in annual sales and is currently only approved for post-chemotherapy settings. Approval would open a significantly larger patient set, highlighting the meaningful growth potential of this market. We are currently the only commercial supplier of non-carrier-added actinium and are supporting multiple clinical trials and plan to ramp commercial sales of lutetium significantly next year as we finalize our drug master file with the FDA. So overall, we had a good quarter and are reaffirming our 2024 guidance. BWXT is at the forefront of the nuclear industry, occupying meaningful competitive positions in multiple markets. We are experiencing secular tailwinds over the long-term in a portfolio that can withstand near-term demand and funding variability.

We have a highly credentialed experience workforce, unique infrastructure, and world-class capabilities in manufacturing, processing, and services, and are enhancing these with organic investments. We are committed to providing our customers nuclear solutions to address critical missions in global security, clean energy, interventional oncology, and other nuclear applications, positioning us well to achieve our medium-term financial targets. With that, I will now turn the call over to Robb.

Robb LeMasters: Thanks, Rex, and good evening, everyone. I'll start with some total company financial highlights on Slide four of the earnings presentation. First quarter revenue was $604 million, up 6% organically on a consolidated basis, with similar growth in both settings. Adjusted EBITDA was $115 million, up 4% year-over-year, as growth in commercial operations and lower corporate costs were partially offset by slightly lower government operations EBITDA. The lower corporate costs in the first quarter were mainly due to the timing of healthcare-related costs and are expected to return to a more normalized level over the next several quarters. We continue to see full-year unallocated corporate EBITDA at flat to slightly lower than 2023.

Adjusted earnings per share was $0.76, up 9% compared to $0.70 in the prior year quarter. As you can see in the EPS bridge on Slide five, operations contributed about $0.02 to the year-over-year growth, with the remainder split between slightly higher pension and other income, lower interest expense, and a lower tax rate. For the full year, we expect the net impact of non-operational items to be relatively neutral to adjusted EPS compared to 2023, as various items around timing of certain expenses, FX gains, and interest expense that benefitted the first quarter will have offsets over the next three quarters. Our adjusted effective tax rate was 22.5% in the quarter, due to higher excess tax benefits and stock compensation expense. Nonetheless, we still expect a full-year tax rate of approximately 23.5%, meaning you could see a tax rate closer to that level over the next few quarters.

Pre-cash flow in the quarter was $3 million, compared to a use of $43 million in the first quarter of 2023. Albeit modest, this was the first time we had positive free-cash flow in the first quarter since becoming a standalone company, highlighting our focus on working capital management and CapEx discipline. CapEx in the quarter was $30 million, and we continue to expect full-year CapEx to be flat to slightly down, compared to 2023, inclusive of early spend on the Cambridge facility that Rex discussed earlier. Moving now to the segment results on Slide 6. In government operations, first quarter revenue was up 6% to $487 million, driven by higher naval nuclear component production, special materials, and microreactor volume that was partially offset by lower long-lead material procurement.

Despite higher revenue, first quarter adjusted EBITDA in the segment declined modestly to $100 million. This led to an EBITDA margin of 20%, 25%, compared to 22.5% in the first quarter of 2023, which benefited from a particularly strong mix and timing of certain items, both of which worked against us this quarter. For the full year of 2024, we continue to expect government operations EBITDA margins to be down, only slightly, from 21.1% in 2023, due to a few key dynamics. Those include grinding through onboarding inefficiencies and higher labor rates after growing our workforce by 10% last year, absorbing outsized revenue growth in cost plus microreactor projects and other new programs, and the absence of the missile tube expense recovery in the fourth quarter of 2023.

Providing quarterly margin guidance can be challenging, but at this juncture, our best view is that government EBITDA margins in the second and third quarter will be similar to the 20%, 25% we reported in the first quarter, with a typical slight seasonal lift in the fourth quarter. Again, all of this leaves us right in line with the government operations margin guidance we gave last quarter. Turning to commercial operations, revenue was up 7%, driven by increases in field service activity in our commercial nuclear business, as well as robust BWXT medical revenue growth, and partially offset by lower nuclear components and fuel handling volume. Commercial operations adjusted EBITDA was up about $5 million to $14 million. The increase was driven mainly by improved performance in medical, which was partially offset by slightly lower contribution from commercial nuclear.

This led to commercial EBITDA margin of 11.9%, up from 8.2% last year. We continue to expect commercial operations growth of high single digits to low double digits in 2024, with higher EBITDA margins compared to 2023. Growth will be led by medical, with commercial nuclear contributing as well, particularly in the second half of the year. Turning now to guidance on Slide seven. We are reaffirming our guidance for the four key metrics we provided last quarter. We project total company revenue and adjusted EBITDA growth in the mid-single digits, leading to revenue of at least $2.6 billion, and adjusted EBITDA of approximately $500 million. Included in this forecast is a year-over-year D&A step-up of approximately $10 million, driven mostly by government operations, as the new equipment and capacity we have invested in for our naval propulsion business and microreactor projects are more fully utilized.

As such, we are reaffirming our adjusted EPS guidance of $3.05 to $3.20. As for the quarterly cadence of earnings, we expect slightly higher operating results on a sequential basis over the next two quarters and a seasonal pickup in the fourth quarter. On the sequential progression of non-operating items, we expect the next three quarters to have higher net interest expense, slightly lower other income, and a higher tax rate. In total, this should lead to EPS in the second and third quarters being relatively consistent with the first quarter, and then a seasonally stronger fourth quarter. Lastly, we are maintaining our free cash flow guidance of $225 million to $250 million, driven by EBITDA growth and improved working capital management. Capital expenditures are expected to be flat to slightly down, inclusive of early spending on the Cambridge plan expansion and other select growth investments across our businesses.

As discussed at Investor Day, we are keenly focused on driving improved free cash flow for both working capital management and CapEx discipline as we work toward our medium-term target of 90% free cash flow conversion. To sum it up, we had a good first quarter and our tracking to achieve our full year guidance. Our focus remains on capturing growth opportunities in our core businesses, innovating to pursue new markets, and driving operational excellence and financial performance. With that, we look forward to taking your questions.

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