Rex Geveden - President, Chief Executive Officer Robb LeMasters - Senior Vice President, Chief Financial Officer Mark Kratz - Vice President of Investor Relations

Ladies and gentlemen, welcome to BWX Technologies Second 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 turn the call over to our host, Mark Kratz, BWXT’s Vice President of Investor Relations. Please go ahead.

Thank you, Amber. Good evening and welcome to BWXT’s second quarter 2022 earnings 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 second quarter earnings presentation that is available on the Investors 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 Investors 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 robust second quarter 2022 results. Revenue was up 10%, net income and adjusted EBITDA were up 26% and earnings were up 32% per share. We also delivered good operating cash flow, which was up 29%. These results were driven by a combination of strong site and commercial field services performance, along with favorable timing of activities that were originally planned for the third quarter. It is worth noting that we delivered these positive results in spite of some production and efficiencies in the naval component manufacturing business at our sites in Ohio and Indiana. Strong second quarter performance reduces uncertainty for the year and leads us to increased underlying operational guidance and narrow the earnings outlook for 2022. The entire team continues to do a commendable job of supporting the ongoing operations while simultaneously building strategically significant new business lines in advanced micro reactors and nuclear medicine. Since the last earnings call we’ve achieved several important milestones on both fronts, so let me offer you a quick update on those. In the Commercial Operations segment, the BWXT Medical team has completed all operational qualifications and registration batches for the Tech-99 FDA submittal. The data collected from those batches demonstrate our ability to supply a competitive offering that matches industry standards for product quality. The team is now finalizing the FDA package. Furthermore, we continue to build an impressive portfolio of other products in the medical business. In June, we announced the signing of a commercial agreement to supply Bayer with high purity Actinium-225, an alpha-emitting radio isotope that has highly desirable characteristics for targeted cancer therapies that improve patient outcomes. In developing that product line, we have already successfully irradiated material for the first batch and expect to…

Thanks, Rex, and good evening everyone. Let’s start with total company results on slide four of the earnings presentation. Second quarter revenue grew nicely by 10% to $554 million, driven by growth in both operating segments. Second quarter adjusted EBITDA was robust, up 26% year-over-year to $115 million, which was driven by higher revenues and strong margins in both segments despite lower recoverable CAS pension income. Earnings were up 32% per share in the second quarter, given strong operational performance and the benefit of some below the line items, including lower interest expense, tax rate and share count, which was partially offset by lower pension income and some foreign exchange losses. Operating cash flow was also up $18 million year-over-year, driven by an increase in net income and some modest working capital improvements. Free cash flow improved more significantly as we continue to wind down the two major capital campaigns in the Navy and Medical businesses. We have detailed a second quarter EPS bridge on slide five and I will now move to segment results on slide six. In the second quarter, government operations revenue was up 8% to $437 million, driven by timing of long-lead material in the naval reactors business and higher volume in uranium processing. These increases were partially offset by lower missile tube revenue due to contract adjustments. Second quarter Government operations adjusted EBITDA was up 15% year-over-year to $95.7 million, driven by strong contract performance in uranium processing and technical services, which was partially offset by lower recoverable CAS pension income and fewer positive contract adjustments, particularly at some of the Northern sites that Rex mentioned. In Commercial operations, revenue was up as we expected due to the seasonality of commercial power service outages. The 16% year-over-year growth was also aided by higher fuel handling…

Thank you, Robb. I want to thank our employees for rising up together to take on the new missions that we see ahead. We are a strong company that does not back away from the challenge. Our corporate purpose is to take on some of the world’s most important problems using nuclear technologies and we all continue to be inspired by that vision every day. In 2022 we expect to grow underlying EBITDA in the high single digits, muted somewhat by a FAS/CAS pension headwind, which demonstrates the benefit of participating in our remarkable multifaceted end markets and positions us to drive strong economic performance despite challenging operating and macro conditions. This year we found ways to offset pension headwinds and interest rate pressures and next year we will again seek to outrun increased interest expense, depreciation headwinds and potential pension income decreases before the growth vectors that we lay out at our Investor Day fully inflect. We are primed to deliver on our medium term financial targets given an attractive exposure to multiple defense and commercial markets. We intend to harness our capabilities, facilities and uniquely qualified and talented workforce to attain the bright future we have laid out for this company and its shareholders. We now look forward to taking your questions.

Thank you. [Operator Instructions]. Our first question comes from Bob Labick with CJS Securities. Bob, your line is now open.

Great, thank you! Good afternoon and congratulations on a nice quarter. Wanted to start - also, obviously, congratulations on Project Pele. It’s a fantastic win for you and you know obviously it could be a big opportunity. Can you give us a sense of how the revenue will run through the P&L and kind of timing, and will you be running this neutral? Is it accretive? Will it be an investment in the P&L? Will it run at a loss or how should we think about that over the next couple of years?

Yes, I’ll start with it and maybe Robb will have some to add to it, Bob. Good evening to you. Pele is a $300 million contract that’s running over, let’s call it a 30 month period, and so think about sort of peanut buttering over that. Now we have to ramp up on the front end of it, so it won’t achieve sort of the average run rate for a while and it is a cost plus fixed fee contract. No, it’s a pretty modest fixed fee, and so think of it as dilutive to margins in that segment, generally speaking. So it’s not going to give us a lot of lift on the margin side, but of course there’s no cost risk here, so that’s an attractive proposition for us, and of course it is laying the foundational pieces for that micro reactor business. So we quite like the terms of that contract. And that’s probably about it. Robb, anything to add to that?

No, I think that’s alright. Rex talked about it good, that it will be a little bit lower margin contract for us. So we really want to get set up in that business, and as we hire – we’re trying to vigorously hire, and that’s really what we’re after is to ramp that as quick as we can.

Okay, great, thanks! And then just one quick one isotopes for me. Maybe a little more color on the leadership transition. How, if at all, does this impact the submission to the FDA? And do you now the recent [ph] batches are done. Would you expect by the end of September to be able to submit, and do you still believe it should be nine months plus or minus for approval after you do submit?

Yeah. Yes Bob, we expect to submit that FDA package probably by around the end of this month or so give or take. And the leadership change, yes, certainly I view it as positive for the business. As I mentioned in the script, Jonathan’s been involved with the business for a long time. He originally ran Advanced Technologies, the Advanced Technologies business before it became CTO, and that was the business that hatched the neutron capture technology for the Moly Tech-99 generator project, and he was also sort of on the vanguard of the technology for Lutetium 177 and other such developments. And even as CTO, it’s been deeply involved in this registration batch campaign and qualification campaign for all that equipment. So he knows the business up and down, back and forward; a very energetic, very bright person who's got very strong commercial instincts also. And Martin by the way is transitioning back into his consulting business and returning to his home in the U.K. But we're retaining Martin in a commercial role. He is particularly strong there in developing channels to market and developing good commercial terms for the business. So he'll be at Jonathan's right hand side, developing the commercial end of that business. But it's going to be quite a good leadership transition. It's very stable and it will be good for the business and give it some lift.

Okay, super. Thank you very much.

Thank you. Our next question comes from Pete Skibitski with Ambit Global. Pete, your line is now open.

Hey! Good evening guys! Yeah, nice quarter. Rex, can you talk maybe a little bit more about Indiana and Ohio in terms of you know how much more labor needs to be hired there, and are you still adding in kind of new pieces of machinery, maybe [audio gap] or something, and that's kind of contributing to maybe more issues. So I think maybe it was last year you had similar issues?

Yes, similar Pete. So let me paint the total labor picture for you. We're about 7,000 people across this entire enterprise, across mainly North America and a little bit in the U.K. now, and you know our attrition rates have been running kind of mid to high single digits these days. That's higher than historical and maybe sort of typical for what we and our peers have been facing. And if you think about that on the scale of 7,000 people, then you could by – through attrition lose, let's say 500 people this year around those kind of numbers, and we need to hire about 500. That's the kind of ramp that we're on you know given the demands in the Navy program, Pele program and all the other things that we're trying to do, and so we have to hire about 1,000 to net 500 out of all this and that's the headwind that we're facing, and we are net positive on our hiring for the year, but not at the rate that to get us to 500 and I don't think that's kind of typical of what's going in the business right now. Now to be more specific about what's happening in you know Ohio and Indiana. We are – we continue to have some struggles with the missile tubes program. Nothing to do with the well repairs or anything like that, we're well past that. But we did experience some cost creep in that program last year and we brought in some new leadership, and they've re-baselined the program and estimated some new costs to ramp that program up. That resulted in a negative EAC adjustment. Now, we have some claims against that number, and we're having some discussions with our customer about an equitable adjustment…

Okay, I appreciate the color. And just to tie it up on the missile tubes, is that – we're going to continue into 2023? I thought you guys were about done at this point?

Yes, we're in the ramping up phases of it. We have, I think it's eight more missile tubes to deliver and we have these box parts that go with you know hundreds of those, and those are the components that go on to the missile tubes and they box it up and ship with the tubes. That will bleed into '23. The bulk of the work is done by the end of this year, but some of it will continue.

Okay. Last one for me, just on this dynamic controls, can you talk about how integration performed there and the outlook for that business?

Yes, I will. I'll make a couple of comments about it, then I'll ask Robb LeMasters to comment. Robb kind of led that acquisition activity. It's a neat business Pete. You know it's making you know naval components supporting the U.S. Navy fleet and also the U.K. fleet. It has some exposure to Australia historically, and like our core business it’s specialized in high consequence components. In this particular case, valves and seawater components, cold form seawater components for the most part. I would think of that business as having the same kind of growth potential that the nuclear Navy business has, in the sense that you know governments that have those capabilities are recapitalizing their fleets. In the case of Australia, of course it's embarking on a nuclear naval fleet and so we see potential upside there and so we quite like it and that doesn't speak to the synergies that are available from the combination of BWXT with that business. So it's shaping up nicely. I think the business, frankly a little bit better growth trajectory than we anticipated when we bought it, and then opportunities to maybe take some cost synergies along the way too. So Robb, do you want to…

Yes, that's right. I would add that yes, it's being integrated quite nicely. As you know, there's an operation in Long Beach in California and then an operation in the U.K. and it's proving to be a nice bite sized acquisition. We're really swarming it with several people from our core business, taking different turns to trying to bring that company really into the fold and digestible steps. So bringing it to look very similar to our core business and they've got great people. The brand has frankly in both markets really surprised us. People really seem to have a great relationship with the company and they've turned out a good product over the years. So if they start really being integrated with our operations. We see those three core drivers that we outlined on our last call, around trying to drive the business around critical components for the U.S. Navy being a growth channel. We find the same in the U.K. We think that we can expand our mix of products there. And then thirdly, as international partnerships just become more and more relevant to us and to the U.K. and supporting all that. It just helps to have another entree into an international market. So those three are all growth avenues here and so we're really excited about that acquisition.

Thanks and I appreciate it guys.

Thanks Pete.

Thank you. Our next question comes from Peter Arment with Baird. Peter, your line is now open.

Good evening, Rex and Robb. Hey Rex, I wanted to circle back just on the FDA submission process. Anything that you view as any more like long poles in the tent? It sounds like you had some challenges initially getting the reference batches that you needed, but it sounds like you're there now. Just your confidence level on the submission of this timeline that you currently laid out?

Yes. I – it's a little bit hard to say, Peter. I would – our view is that we would request a priority. Historically we've said we would request a priority review with the FDA, which we will do. If that is granted, then you get a filing date shortly after you submit the FDA package and that filing date starts the clock on this six month approval process. The variable here is that you know if your data package is seen as incomplete in some ways or there are some problems and the FDA needs more information, then they stop the clock. Appropriately they stop the clock and then await the data submittal. So there can be some quite back and forth in that process and that's the reason we've always fussed it up a little bit...

And then just once you do – ultimately get approval, how quickly can you turn it on to producing revenues? I think a lot of us are expecting to ramp up pretty materially in '24, but just thinking about back half of '23?

Yes, I think it depends on – I mean I think from an operational perspective, you know all this, this has been a dress rehearsal for the commercial production of the product, and so I feel good about our ability to turn it into a commercial operation as soon as we have contracts in place and are ready to go with the radio pharmacy networks. You know the variable there is, when our projects is going to be available and the specifics of the supply agreements, which of course we're in discussions on, but – so it depends on the nature of those supply agreements when they become effective, and the timeline on the approval.

Okay. And then just Robb, just a clarification. You mentioned the combined headwind for the higher interest cost potentially in ‘23 and the pension side was $20 million? Is that what was the combined number? I just wanted to clarify.

Yes, so there's really two below the line impact if you’d really think about it. There's the interest expense that's just true interest rates just on our debt, and we tried to talk to people about. You know given where rates have gone, we're seeing about a $10 million increase there. If you just think about taking that debt balance and running it out over the course of next year and using higher interest rates, assuming we don't pay down any debt, so that's one item. And then the second item is a $20 million item in the other income, which really has two components to it, an interest rate component and an asset component if you will, and those each are $10 million. So in total, if you want to think about those three items being – or two items really, interest expense and then other income.

I appreciate it. Thanks Robb.

Thank you. Our next question comes from David Strauss with Barclays. David, your line is now open.

Hi David!

Hi David!

Hey! So what were your EAC adjustments in the quarter, net EACs?

So it's about – we actually had about flat and that was composed of missile tubes being down as we talk about it, which will be in the queue of about $11 million number and then other offsets to make it up.

Okay, got it, thanks. And Robb, I mean how are you thinking about leverage and the potential paying down debt given – or terming out this 40% that you've got that's floating at this point to try and take away that volatility?

Yes, we have flexibility. Those markets are still completely open if we ever needed to refinance that or even enlarge that facility. You know as we look out over the next year or two, as we’ve talked about, the free cash flow really starts to get pretty robust here shortly. So we're sort of looking to grid our teeth and pay down debt. We don't see a lot of need to do large-scale M&A of any sort, so we'll do just kind of lipid tuck-ins and very strategic deals there. And so as we look out and you think about the sort of operating cash flow at a kind of $300 million-ish number over the next couple of years, and that we're hoping to bring that CapEx down to more of the maintenance level, you're going to be generating a couple of hundred million dollars. So we'll be able to pay down debt and move our leverage back below the 3x. So we're not in any rush to go deal with that. We certainly aren't looking to do anything on -- in the sort of bond market. So we always have the flexibility if we wanted to do something on the bank side. So we'll review that and see whether we need any additional capacity.

Okay, and then the last one for me. In terms of the medical business, at the Investor Day you had put up the slide that showed during the ‘22 to ‘24 timeframe, $60 million in sales going to $125 million, EBITDA $10 million loss going to $25 million positive. Are we still in those kind of ranges in terms of where things are running today and kind of how you're projecting things over the next two years?

Yes, I think that's right. I think we've clearly lost a couple of months here this year, but those are endpoints that we still see as very reasonable to get to, right? So we're going to be ramping. Actually our therapeutics, that was a total BWXT Medical story as you know, which included sort of the Nordion business, the ramping of the Tech-99 and ultimately the therapeutic. And so along those different, there might be slight puts and takes, but ultimately that picture still lines up quite nicely with what we’re seeing.

Alright thanks very much.

Thank you. Our next question comes from Michael Ciarmoli with Truist. Michael your line is now open.

Hey! Good evening guys. Thanks for taking the questions. Rex, just on the naval, the core naval business, you mentioned some production related inefficiencies tied to the steam generators, and I wonder if you could just talk about maybe any other manufacturing choke points you’re seeing. We keep hearing about forgings and castings, you know anything else in the supply chain that you’re seeing or that might create or lead to further inefficiencies as we kind of progress here?

Hey Michael! No, we haven’t seen much of that. Our forgings business has been fine, and the other long-lead material that we of course concern ourselves with are the alloys, special alloys that we need for that business and those supply chains are stable. So we haven’t seen much of that show up in the supply chain. It’s really been around labor for the most part and not the other elements.

Okay, okay. And what about just dealing with the contract structure and you know you’re looking for all the hires you just mentioned. I’m assuming there’s a fair amount of wage inflation happening. Do you think you’ll be able to kind of contain that that cost growth in your current contracting structure or should we expect maybe some pressure on margins as you bring on these new employees?

Well, it’s – you know we talked about the two edge sword of negotiating pricing agreements on two or three year boundaries with – in a sole force configuration like this Michael, so it cuts both ways, and the way that it benefits us as we get into a new pricing discussion, you know hopefully you can capture all the escalation that you’re seeing in raw materials and labor and any other things and bring those into the cost baseline, which form the basis for how you lay in the profit on top of it. The downside is that also applies to your backlog and so you get a negative contract adjustment from the application of higher materials and labor to that. So we’re walking that tight rope right now. We think we’ve got it under reasonable control and it hasn’t changed our view about the long term margins in this business. We still believe we can deliver margins into the high teens and we’ve got paths to get there.

Got it. Just last one, any latest update or additional thoughts on the Orcus [ph] submarine?

You know not much. We’re on the outside looking in on that one. We’re not in the room on those negotiations, but we’re seven or eight months probably from an announcement here, and we remain excited about it. I would say that from BWXT’s perspective, we certainly would like to support that effort and we’ll see what the decision makers do with it.

Got it. Thanks a lot guys.

Thanks Michael.

Thank you. Our next question comes from Tate Sullivan with Maxim Group. Tate your line is now open.

Thank you, and good evening. I’m just starting to follow-up on government operations margin increase quarter over to quarter to 19% from 17%. What was a meaningful portion of that Savannah River and was Savannah River at a full run rate in 2Q ‘22?

Yes Tate, Savannah River is in there, although I would say that was probably a modest component of all that. Generally speaking, site performance in our Technical Services business has been good, and that did contribute to the improved margins in that business. We also had long lead materials that we pulled that we are able to deliver in the second quarter originally forecasted for the third quarter. That was a contributing factor there and those would be the primary elements, I believe.

Yes. We’re also seeing strength in the core Navy business. You have a couple of other businesses in there as well. We’ve talked about the fuel business and the HEU metal, the purification business. Those are good parts of businesses and so we do see a ramp up there, so we’re doing quite well on that contract, and so that’s building up nicely for us. So that’s helping.

Okay, thank you on that. And a follow-up on Project Pele and thanks for the detail before that. I mean with delivery of the prototype in 2024, per your previous press release testing period that could last up to three years, can you book revenue during the period? I imagine from supplying TRISO fuel for the testing period or is that in the $300 million contract amount?

So Tate, the TRISO fuel is a separate contract for that. We announced a few years ago the base phase of that contract, which I believe was $29 million. There’s another option piece. It’s a bit bigger than that that hasn’t been exercised yet to manufacture the fuel itself for that reactor. And so think of that as tens of millions on top of the Pele reactor. In fact, the TRISO fuel contract was competitively awarded also. It was a little bit of a smaller news item for us, but those two together push you into the mid-300s or above. And I thought the point you were headed to, which is also true, is there would be sustaining engineering for BWXT modest revenues, but sustaining engineering have to deliver that reactor while it’s being tested and demonstrated at Idaho National Laboratory.

Okay, thank you.

Thanks Tate.

Thank you. There are no further questions in queue. [Operator Instructions]. As there are no further questions in queue, I will pass the conference back over to Mark Kratz for any additional or closing remarks.

Thank you everyone for joining us today. If you have further questions, you can reach us by phone at 980-365-4300 or by e-mail through investors@bwxt.com.

Thank you. That concludes today’s BWX Technologies Second Quarter 2022 Earnings Conference Call. Thank you for your participation. You may now disconnect your lines.