Ladies and gentlemen, thank you for standing by and welcome to BWX Technologies, Inc.'s Fourth Quarter and Full Year 2017 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, Mr. Alan Nethery, BWXT's Vice President and Chief Investor Relations Officer. Please go ahead.

Thank you, Brandon and good morning, everyone. We appreciate your joining us to discuss our 2017 fourth quarter and full year results, which we reported yesterday afternoon. A copy of our press release is available in the Investors section of our website at bwxt.com. Joining me this morning are John Fees, BWXT's Executive Chairman; Rex Geveden, President and Chief Executive Officer; and David Black, Senior Vice President and Chief Financial Officer. As always, please understand that certain matters discussed on today's call constitute forward-looking statements under federal securities laws. Forward-looking statements involve risks and uncertainties, including those described in the Safe Harbor provision at the end of yesterday's press release and the risk factors section of our most recent 10-K and 10-Q filings. These risks and uncertainties may cause actual company results to differ materially and we undertake no obligation to update these forward-looking statements, except where required by law. On today's call, we will also provide non-GAAP financial measures, such as adjusted earnings per share, that are reconciled in yesterday's earnings release and our company overview presentation, both of which are available on the investors section of our website. BWXT believes the non-GAAP measures provide greater insight and transparency into the company's operational performance and provides these measures to investors to help facilitate comparisons of operating results with prior periods and to assist them in understanding BWXT's ongoing operations. And with that, I will now turn the call over to John.

Thank you, Alan and thank you all for joining the call today. Yesterday, we posted solid fourth quarter results, a capstone to an outstanding 2017 in which we delivered on our commitments to continue to create value for our customers and our shareholders. We met our increased guidance and finished the year with strong topline growth and best-in-class margins. We grew EPS an impressive 16% and took actions to position the company for continued, sustained long-term growth. In the fourth quarter, we delivered $0.47 of EPS on 7% revenue growth, while increasing R&D and CapEx to promote future growth. Our cost discipline was integral to our margins which delivered our quality earnings. We remain very positive about our future outlook, which we will discuss in more detail later in this call. For the year, we delivered $2.05 earnings per share, $0.01 above the midpoint of our latest guidance and well above our initial guidance of $1.85 to $1.97 for 2017. Our revenue was a record $1.69 billion, an increase of 9% over 2016. Operating income reached $315 million, a 13% increase over last year, while margins expanded 60 basis points to 18.6% on a consolidated basis. Backlog remains robust at about $4 billion at the end of 2017. So, 2017 was a remarkable year by any measure and is crowned by key wins in the fourth quarter. Naval nuclear propulsion program exercised contract options and new awards at nearly $0.5 billion. In Canada, we received a CAD168 million extension with Ontario Power Generation for fuel manufacturing in October. The BWXT-lead team was awarded a $4.7 billion contract for Savannah River’s liquid lakes waste services, which is still pending a protest. We also received several awards worth about $1.4 billion for environmental management work at the Los Alamos National Laboratory. Before Rex provides more details on our operations and 2018 outlook, let me turn the call over to David, who will discuss the segment's fourth quarter and full year results and other financial matters, including tax and pension.

Thanks John and good morning everyone. We mentioned on the last call that we were considering tax planning initiatives for the pending legislation. We had a $55 million impact, which was primarily related to a one-time, non-cash write-down of deferred tax assets and based on actions we took subsequent to the signing of the Tax Cuts and Jobs Act of 2017. This resulted in a GAAP effective tax rate of 127.6% for the fourth quarter and 49.8% for the full year. Our non-GAAP effective tax rate was 31.9% for the fourth quarter and 31.6% for the year. The new law, coupled with our tax planning actions will have a positive impact to the business going forward, driving increased cash and freeing up capital to be used for the growth initiatives and to return back to shareholders. For 2018, these positive impacts total about $0.30 per share and we are guiding to a non-GAAP effective tax rate in a range of 22% to 25%. For segment results, the nuclear operations group revenue was $309 million for the fourth quarter of 2017, a 7% decrease from the fourth quarter of 2016. For the year, the segment's revenue was up slightly to $1.27 billion, while operating income was up 8% to $290 million. Operating income for the quarter was $70 million, down 9% from the fourth quarter of 2016. NOG delivered operating margins inclusive of pension reimbursements at 22.8% for the year, a 160 basis point increase from 2016. This segment's backlog at the end of December was over $3.3 billion. Compared to fourth quarter 2016 revenue, Nuclear Power Group's revenue of $41.3 million more than doubled to $85 million, driven primarily by the BWXT Nuclear Energy Canada acquisition, marking another record for the segment. Fourth quarter operating income was up 149% to…

Thank you, David and good morning. John and David have already summarized our accomplishments for 2017, but let me provide a little more color on fourth quarter and a highly eventful of the year before returning to our strategy in 2018 guidance. As discussed, we reported robust revenue and operating margins in the fourth quarter driven by strong results across all three segments. Of particular importance is the growth in the nuclear power segment backlog, reflecting a growing strength in that market. Backlog in that segment is a near record levels and total BWXT backlog stood at about $4 billion at year's end, which supports continued strong topline and earnings growth in the coming years. In nuclear operations, we received fourth quarter awards of nearly $0.5 billion for the manufacture of Naval nuclear reactor components. We also anticipate additional contracts and options during the first quarter of 2018. We're making considerable progress on missile tubes having already delivered the fourth missile tube and expecting to complete a fifth this week. To-date, we believe we're the only contractor to deliver missile tubes and our performance gives us confidence in our ability to win and deliver on future awards. Lastly, the Nuclear Services Group is experiencing a resurgence as expressed by additional contract awards in the fourth quarter that John described earlier. Nuclear Services has been awarded more than $8 billion in contract value over the past year. And while the protest for the $4.7 billion Savannah River Liquid Waste contract to still pending, we're working with our customer through the process in order to resolve as quickly as possible so the transition work can begin. To summarize, we had another solid quarter in the context of an exceptional year. We began 2017 with aggressive growth aspirations, which we exceeded in almost…

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Bob Labick with CJS Securities. Please go ahead.

Good morning. Thanks for a lot of information very quickly. Congratulations on a good year as well.

Thanks Bob.

Thanks Bob.

Just to -- because you gave us so much to absorb, just to clarify a few things. In terms of the pension accounting change in NOG, can you highlight the moves again and how it impacts reported margins and then also EBITDA because if there is going to be a reduction to EBIT, should EBITDA be coming down as well? Or how should people think about that? And then finally and probably most importantly, you still guided to high-teens margins as you have in the past. So, are you changing our guidance? Or what is -- because you are taking out some of the pension reimbursements, so is the guidance actually higher or how should we think about that?

Okay. Bob, this is David. On the pension changes, what we have done is, the FASB change at this point of time, we have pulled out as we have stated 150 to 200 basis points of pension out of previously reported in the operational results and pulled that into other income. What still remains there is the FAS, CAS differential and that will remain in there and is still active inside of the operations and part of the margin, and that's why we say NOG margin continues to be projected in the high teens, which we have said forever with an upside for pension reimbursement because that FAS, CAS will continue still for a few years. So, that continues over time. As far as guidance, we haven't changed our guidance. I mean I think, our guidance has been always a low-double-digit growth rate off of 2017. Now, as Rex has said, we're going to -- on top of that, we will add any tax benefit. But our growth guidance is going to be a low-double-digit guidance off our 2017 EPS results and then any impact with the change in tax reform will be added on top of that. So, we continue that guidance going forward.

Okay, great. That's helpful clarity for sure. And then just jumping over to everyone's favorite topic to ask, and you do kind of answer, but not entirely. In your slides, you mentioned unique IP around the medical isotopes as well. So, is there any more color you can provide around that in terms of where you fit in the value chain or the supply chain and I understand Rex just said that we should learn more information as the year goes on, but is the moat fully built now? Where are you the process? I guess, what are the next milestones so we can learn where you are in the supply chain, et cetera.

Sure. Bob, I'll try to give a little bit of color on that. We won't disclose much for a few months. But we're well-positioned, fairly high in the value chain is the way that I would put it. We do have very unique technology, and we've had a number of exciting developments over the past year and into this year around that technology. We've been basically able to prove out that technology under all conditions, and we know that it works. We know that it is going to be cost disruptive, and we know that it will enable us to address a large number of isotopes on a particular kind of technology. We mentioned at Investor’s Day that we could produce something like 17 different medical radioisotopes with this technology. We know we can also produce certain kinds of industrial radioisotopes, and we have the possibility of producing certain national security isotopes. So, it's a very robust technology that has applications over a variety of different interesting markets. We have IP protection around that technology both in the form of patent filings and also in the form of trade secrets. And we are certain, it's a very unique approach to the production of isotopes.

Okay, great. we look forward to learning more and your continued progress there sounds great. So, thank you very much.

Thank you.

Our next question comes from Sam Pearlstein from Wells Fargo. Please go ahead.

Good morning.

Good morning Sam.

I wanted to ask you a little bit about the capital spending. And you have previewed, I guess, last quarter that R&D would be going was up this year as well as CapEx. How should we think about this $250 million? Does it continue into 2019? Is it a couple of years at this rate? How should we think about capital spending on a go-forward basis?

So, our provided guidance for is the current year, but as far as this will be the high of our capital and I think it will start going down, but we’ve got to be -- once again, that's based on what we currently think it's going to be in the forecast. Any changes to any builds for the government, we will have to relook at that. But remember, I think, we also guided in this case that the capital of $250 million includes two major things for the future. One is going to be the Navy build, which still includes improvement and additional capital for Columbia, the second Virginia-Class for missile tubes and the growth rate there, but it also includes organic R&D capital for the medical radioisotope mainly, so those are both in there for the current year. But the future years, it will go down, but we haven't guided to where that will be . I mean, I think, you can look back a year or so ago, we were at $60 million of ongoing maintenance and then we've added the acquisition in Canada. So, you put an add around for that and then – so you would have some sort of additional maintenance for all the new capital, but it would get you to a more normal level that will come back eventually in the future.

But if I look at some of the items like Huntington Ingalls has now started to talk about topline growth because of high share [ph] and I understand it's not all nuclear in terms of their growth. But I think you mentioned in the 10-K that if the Navy's plan actually comes to fruition, it would require more CapEx, what should I think of that? If that happens, we would stay at these higher levels for a longer period of time? Or is there potential to actually go higher?

I mean I guess we have to understand any future changes. The current look we currently have on what's going to be in our forecast and in our outlook, we don't think it's going to be higher because you've got those two pieces of capital in both of those eventually come down.

And Sam, I might add what this is about of course is getting additional capacity in the factories because the ramp-up will require us to add capital equipment, requires to add floors pace, and certainly requires to add headcount. So, you can think of this as a surge. It shouldn't be regarded as a normal level of capital equipment spent CapEx spend with the future.

To recognize too that when you try to compare us to others, recognize that we are two few years in advance of ship procurements and most sort of procurements that come to us. We kind of lead the pack typically in any kind of ramp-up or associated with any work that is coming down the road.

That's great. And David, can you just talk about cash from operations. If I think about from 2017 to 2018, from the tax change, does that help you from a cash standpoint at all in 2018, pension contributions, just can you help us in some of the big moving pieces as we think about what cash from operations looks like in 2018?

So, your cash from operations is obviously, tax is a benefit to us. Pension contributions, setting aside any future use of capital, if we're going to derisk of the pension plan any further. Our normal pension contributions are still in the $30 million to $40 million range. So, there's not a lot of change there. So, most of the cash from operations will improve with the growth of income in there, except now with the capital that offsets its once you get into free cash -- operating cash flow.

Okay, all right. Thank you very much.

Our next question comes from Rob Spingarn with Credit Suisse. Please go ahead.

Hey, good morning. Just one more on CapEx just to make sure I'm understanding this. If we do see a third Virginia-Class a non- Columbia years, that would require new capital spending that's not the plan?

Yes. If the third Virginia came in, there would be some additional capital expanding, Rob.

Okay. I just wanted to clarify that. In terms of your guidance for I think, it's MPG, did you say $300 million to $350 million?

That's correct.

Why the big range? I understand this is high growth opportunity and I assume it's timing-related, but seems like an awful be great for a number like that.

That business is there's a lot of book and burn nature to that business and so we have to win contract awards and that gives us a pretty wide range coming into a year.

And you -- any idea of what your visibility horizon is on that? Obviously, you don't quite have it yet. So, is this three months' out, six months' out?

So, we come into the year with a good fraction of that business book and so that range that you see there sort of represents the variability coming into the year, I think is a good way to think about it.

Yes, I guess, that part I do see. But I just -- I guess what I'm asking is at what point during the year would you know, which end you are going to be at?

I think -- couple of quarters into the year when we start to see visibility on the fallout, just we'll know.

Okay. And just going back to high level question on shipbuilding and with all this growth in the SCN [ph] account and the expansion of the build quantities, are you seeing any change in your scope on these ships? Are you taking on any of the work that might previously has been done by the two major shipbuilders in order to just spread the work around a little bit more? Is there anything that changes there?

No, we haven't seen the changes in our scope and we really don't anticipate anything other than what goes out with the missile tubes. Obviously, that was a move into the adjacency for us. It's a non-nuclear component, but obviously related to that whole nuclear Naval buildup. And so, we are quite well leveraged to that opportunity as you well know as we discussed a lot from these prior conference calls. And we're well-positioned for a new growth that might occur that relates to missile tubes as they -- as the ship quantities grow.

And is there any linearity to the missile tube revenue? Or is it somewhat more volatile than -- for example, your traditional nuclear core revenue?

So, we're in a ramping kind of stage on missile tubes right now. We're in very low production quantities. Certainly, the client is going to get into a block buy kind of scenario, multi-year buy, and we'll have a much more study production rate at that time, but we're still ramping at this point. We'll get to a steady-state in probably two or three years and you will get a sense of what the run rate looks like on that revenue.

Okay. Is there any way to quantify missile tube revenue?

Let's see here. We've put the total opportunity in the past at around $100 million a year or something like that. If I'm recalling correctly, I think that's what we've disclosed here in the total market.

Yes. Thank you.

Our next question comes from Michael Ciarmoli with SunTrust. Please go ahead.

Hey, good morning guys. Thanks for taking the questions. Maybe just to stay on kind of both the Bob's topics, on the Nuclear Power, you've got a wide range of revenue, but you're seeing the growth, what's the driver behind the margins coming down? I thought when you kind of made the GE Hitachi acquisition, it sounded like there were potential synergies there. Just maybe elaborate on kind of the market expectation and what are the puts and takes, if its makes, is it just kind of related to that variability and timing with the book burn business?

Yes, Michael, I'll take a crack at that. Some of it is related to mix. This is probably a bit unusual in most markets, but we do a bit better margin-wise on our services work than we do on our component manufacturing work. There's more component manufacturing in 2018 than there was in 2017. That was a little more service-heavy in that year. And certainly there is competitive pressure in that market. There are a number of new market entrants because of interested the refurbishment projects that are going on in Southern Ontario as that market sort of doubles. And so we have to sort of plan that business around some competitive pressure as well. But it's a nice growth market for us and we do expect to do well there.

What should we think -- how should we calibrate expectations in terms of a longer term margin target there accounting for synergies, growing market. I mean is this a business that can get into the mid-teens or should we kind of think of it as low teens here, any kind of color there?

I mean I think once again we're comfortable that group as to talk about our margins in 12% range. We will always try to improve that. And as we go out in time -- once again as a Rex talked about, it depends on the mix as we go out in time. So, if you feel there is an improvement in the future, we'll let you know if there's one we can count on going forward.

Got it. And just under CapEx, I guess, being split between Navy and then some of the other opportunities, just so I understand, I think it was at the Investor Day, you guys kind of put out that perspective opportunity for 2034, $4 billion revenues, this CapEx would presumably support the current plan of just the Virginia-Class submarines, but doesn't include that incremental, I guess, $2 billion of revenue you called out from three extra Virginias and the accelerated CVN, is that the right way to think about what kind of revenues CapEx supports?

Yes. This is the Columbia's missile tubes in the second Virginia-Class that we had talked about. It's not the additional now. Extra things that could come.

Okay. And just tying in the CapEx. I mean, is some of this spending going to be recoverable in your future billing rates? And I guess you just kind of talked about, but free cash flow conversion obviously will be down in 2018 and it sounds like that CapEx will subside. But can you guys you talked about the long-term low double-digit EPS CAGR, but can you give a color about where we should think about free cash flow in Navy conversion?

We don't provide cash flow and conversion other than the fact that it's very good. In the case of the capital, any of our capital that is NOG-related or Navy-related, all of that is built into our future rates. And we give recoverability of that through our rates. So, that does come back to us. But it's not -- as we spent money now for capital, it doesn't come back immediately. So, it's a timing thing that comes back over time.

Got it. All right guys. I'll jump back in the queue. Thanks.

Thanks.

Thanks Mike.

Our next question comes Asher Carey with Baird. Please go ahead.

Hey good morning guys. I'm on the call for Peter Arment. Thanks for taking my question.

Good morning.

Hey. I just wanted to focus on for upon R&D. I was wondering, can you talk about the variability in the non-customer fund in R&D, both in the context of your long-term growth prospects in the Navy and as it relates to the medical isotope. Do you expect elevated R&D next year to be peaking out or is that a new normal? And any commentary to collaborate our expectations directionally that would be appreciated. Thanks.

Hey Asher, I'll try to put some color on that. So, traditionally, we've been a low R&D spend business, right, constructed as a value shop kind of business and our R&D is kind of run at certainly the range of less than 1% of sales at least in recent times. As we migrate towards a more product-oriented portfolio, particularly medical radioisotopes, we will incur R&D expenses around the introduction of new products. We haven't given any guidance on what that looks like yet, but you will see R&D in the future as a bigger part of our spend.

Okay. And that's helpful. Just one more. Just to clarify or missile tubes. Is the plan still on track to go two tubes a month and maintain that production? And can you talk about that market a little bit in the competitive landscape. Do you expect an RFP for continuous production in the first quarter this year still? And how is that bidding process shaping up?

Right. So, continuous production RFP will drop in the first quarter this year. We do -- as its constructed right now for the major opportunity, which is the Common Missile Compartment and the Virginia Payload Module also Virginia Payload Tubes. We're position to compete primarily in the Common Missile Compartment tubes and the Virginia Payload Module tubes. There are two contractors in each area. We are the only supplier that is supplying at this point, both Common Missile Compartment tubes, CMCs and VPMs. So, we feel well-positioned for it. We said in the past that we thought we'd get at least half of the production quantities of those tube types and we still believe that we're positioned to do at least half of that market.

Okay. Thanks Rex. That's it for me.

Our next question comes from Peter Skibitski with Drexel Hamilton. Please go ahead.

Good morning guys. Nice quarter.

Thanks Peter.

I've got about 10 minutes late guys, I apologize for that. But Rex, I heard your comment on aircraft carrier acceleration and I just want to make sure I'm clear on that. I did notice carrier acceleration in the near-term budget. So, did you say post-2028, we might get a carrier acceleration, could you just clarify?

Yes, that's right. Navy's 30-year ship building plan and it looks like those go to four-year centers with a 2028 buy and possibly as much as three and a half years in the future.

Okay, great. And then Huntington, even though we didn't get like an acceleration in the near-term, Huntington Ingalls is still talking about doing a multi-year potentially for a couple of carriers. Would a multi-year benefit you guys in any way?

Yes, it would. It would pull some carrier volumes into this year and/or next year. So that will be beneficial to us. And there's still the matter, Pete, you'd be acutely aware of this. There's still a matter of what the appropriators do with the budget this year, right. I mean you could still end up with that Virginia in 2018 or some other kind of thing. It just depends on what they do. The authorizers have been quite aggressive. And obviously the object the budget caps have been lifted. So, there's upside potential in the near areas around that carrier quantity buy and around additional possible Virginias.

Okay, got it. Got it. And then let me ask a couple of quick more. You guys probably noticed the structural [Indiscernible] deal, I'm sure. Would you say -- is the Navy Nuclear sector fully consolidated now post this deal?

There is not much left. There's some small -- some -- almost tiny pieces here and there, but it's quite a little consolidated.

Okay. So, if we see any M&A for you guys now, it's unlikely to be a non-Navy work, is that a fair statement?

Yes, that's fair.

Got it. And my last one probably for you Rex, the NASA budget that came out, I couldn't get a lot of detail out of it, but the Nuclear Space Propulsion opportunity you guys have talked about, has the new budget has that changed your view on that market size or timing or anything else related to the NASA Space Propulsion?

No, I don't see any change in the outlook on that.

Okay. Same profile?

Yes.

Got it. Okay. Thanks guys.

Thanks Pete.

[Operator Instructions] Our next question comes from Ronald Epstein with Bank of America Merrill Lynch. Please go ahead.

Hello everyone. [Indiscernible] for Ron today.

Good morning.

So, for NOG, you mentioned potential upside for the margins from the high teen margins. So, what are the key milestones we should be see in the year at the segment that could unlock risk retirement?

I mean, I think, when we say high-teen margins, that's normally where the markets are going to come in for NOG unless the CAS, FAS pension and the upside of the pension and how that falls. So--

It is about cost costs and risk retirements?

An opportunistic situations relative to volume and other things can happen just on productivity I would say performance, which we pick-up periodically as you can see in our history.

Okay, sounds good. And then in the presentation you released last night, in slide eight, you have the scale for Canadian commercial nuclear power. Could you please discuss how this scale will flow-through your P&L?

Sure. Let me go to that chart. So, as we've described before, that market for us has been kind of give or take CAD1 billion -- addressable Canadian dollars, addressable historically and what you see here in this chart is a reflection of the refurbishment of 10 reactors in southern Ontario. 10 of the 18 reactors there are undergoing refurbishment projects over a period of years. As you can see, we started in the middle of 2018 at the Darlington Unit 2 and it goes all the way out to middle of 2033. So, fundamentally, what that does is it kind of doubles that market. It kind of run rate in that market is give or take, CAD2 billion over that period of time. And we see opportunities to address a large fraction of that. Some of that's not admissible, but the fraction of it that's addressable to us is pretty substantial in the area of components, in the area of services, and things of that nature. And that puts a little bit of downward pressure on fuel as these reactors go down for refurbishment, the ones that belong to Ontario Power Generation because we provide that fuel, but it's certainly more than offset by component manufacturing and other things related to projects with the outages. And I'll say that in the Canadian market, when they talk about refurbishing a reactor, it's not like a typical reactor refurbishment with replacement of some valves and this and that. It's a complete re-coring of the reactive. So, the entire core of the reactor is rebuilt. So, these are quite considerable projects and that's the reason you see the market basically doubling over that 15-year period.

Okay. Thank you. That's helpful.

You're welcome.

This concludes our question-and-answer session. I would like to turn the conference back over to Alan Nethery for any closing remarks.

Thank you, Brandon and thank you for joining us this morning. That concludes our conference call. A replay of those calls will be posted on our website later today and will be available for a limited time. If you have any further questions, please call me at 980-365-4300. Thank you.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.