Ladies and gentlemen, welcome to BWX Technologies Third Quarter 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. Instructions will be given at that time. I would now like to turn the conference call over to our host, Mr. Mark Kratz BWXT's, Director of Investor Relations. Please go ahead.

Good morning, and thank you for joining BWXT's third quarter 2019 earnings call. Joining me today are Rex Geveden President and Chief Executive Officer and David Black, Senior Vice President and Chief Financial Officer. On today's call we will discuss certain matters that constitute forward-looking statements and involve risks and uncertainties, including those described in the Safe Harbor provision found in yesterday's earnings release and BWXT SEC filings. We will also provide non-GAAP financial measures, which are reconciled to GAAP measures in the quarterly materials. Copies of these materials, documents, along with earnings presentation, and a replay of today's call are available on the Investors section of our website. And with that I will turn it over to Rex.

Thank you, Mark, and good morning to everyone. Yesterday, we reported record third quarter results with non-GAAP earnings of $0.79 per share nearly doubled compared to the same period last year on a robust revenue growth of 18.9%. Revenue was up in all segments and consolidated operating margins expanded to 19.6%. Combined with a strong second quarter these results lead us to increased 2019 earnings guidance to about $2.55 per share. The quarter was highlighted by sustained growth in the Navy business, the Nuclear Operations Group achieved record results driven by a sustained focus on execution and attention to detail, even as we expand production capacity to meet shipbuilding needs. In addition, we recognized several favorable contract adjustments in the quarter, most of which were originally planned for 4Q and typically do not repeat on an annual basis. Few weeks ago we announced that the Nuclear Operations Group secured a multi-year, $806 million contract for long-lead material. This contract supports all of the Navy's nuclear platforms and includes annual options that extend visibility into strategic nuclear material purchases into 2025. Furthermore, we also recently reached an additional multi-year pricing agreement of approximately $1 billion pending final government review, we anticipate a signed contract to follow, leading to production in 2020. Combining the $2.1 billion multiyear pricing agreement we announced in February with the aforementioned two agreements, BWXT will have secured about $4 billion in incremental naval nuclear propulsion work in 2019, which is indicative of the growth ahead. The Nuclear Operations Group is maintaining a high capital expenditure rate as we continue to add production capacity at all of our US plants. In concert with that we continue to build the workforce in this segment of the business having recently added about 75 people, which brings the total employee headcount…

Thank you, Rex. Starting with segment results, Nuclear Operations Group delivered a record quarter with revenue up 23.5% year-over-year to $394.5 million. This robust growth was driven by higher production volume, higher long-lead material purchases and higher missile tube activity, partially offset by lower fuel downblending. Operating income for the quarter was $93.7 million more than double the prior year period due to the absence of missile tube charges, also higher volume and favorable contract adjustments, including non-recurring adjustments to backlog contracts related to new agreements and future sharp volume assumptions. The Nuclear Power Group produced $84 million of revenue in the third quarter, a 6.6% increase when compared to the third quarter last year, driven by higher refurbishment component work and growth in medical radioisotopes partially offset by lower volume in recurring field service activity. Third quarter segment non-GAAP operating income was slightly - up slightly versus the prior year period to $9.3 million. Third quarter NPG non-GAAP operating margins were 11% lower than the first two quarters due to the completion of the China project as well as changes in estimated cost for another long-term project. And lastly, the Nuclear Services Group contributed operating income of $5.5 million in the third quarter, down about $1 million versus the third quarter last year as improved operating performance was more than offset by contract completions in 2018. Moving now to company results. As Rex mentioned third quarter non-GAAP EPS was an all-time record at $0.79 up 98% from third quarter last year. The absence of missile tube charges, higher segment volume, solid operating margins, lower share count, and a better tax rate were partially offset by higher interest expense and lower pension income. The company's third quarter capital expenditures were $47 million, bringing the year-to-date CapEx to $123 million, up…

Thank you, David. 2020 is shaping up to be another strong year of growth for BWXT. We anticipate about 9% consolidated revenue growth driven by NOG and NPG. We expect earnings per share growth of about 7% from the elevated 235 guidance for 2019. I would add that we expect modest margin pressure from some one-time adjustments in nuclear operations that were realized in 3Q 2019 that will not repeat next year and the completion of the China steam generator project in NPG. We will of course issue more formal guidance when we report year end results in February. I will conclude with some comments about the emerging demand for BWXT advanced nuclear technologies that could lead to meaningful business growth in the coming years. Last month we announced that we would restart the Existing Triso Nuclear Fuel Production line and expand capacity over the next year at an immaterial cost. We are the only company that manufacture this type of fuel using production scale equipment, and have been doing so for over a decade and a half to support experiments that the advanced test reactor at the Idaho National Laboratory. This is being done in preparation for nuclear demonstration project in the DoD, DOE, and NASA, including micro reactors that could have multiple future use cases. Triso fuel would be an essential element in the success of developing such systems. Beyond Triso, I'm encouraged by the progress the research team is making on other nuclear-based technologies, for example, we have recently used the additive manufacturing technology to print uranium and complex geometrical forms a first in the industry. We are also utilizing Artificial Intelligence in novel ways to optimize reactor design, which we expect will lead to entirely new classes of safe high performance systems. All of these efforts align our capabilities with future government needs and position BWXT to enter these new markets with clear and competitively unique value propositions. And with that, I will ask the operator to open the line for questions. Operator?

Ladies and gentlemen, at this time, we'll begin the question-and-answer session. [Operator Instructions] Our first question today comes from Bob Labick from CJS Securities. Please go ahead with your question.

Good morning, thanks for taking my questions. I wanted to start with the isotope timeline and as it relates to the equipment installation into the reactor, which remains scheduled for Q1 of 2020 on your chart. Is this - are you putting the equipment in during a planned shutdown or is the special event and if regulatory approval drags a little bit onto the schedule, is there any risk to this timeline or do you have any contingencies for that?

Yes, thank you for the question, Bob. We can do - we can install the target delivery system either through a planned outage or through a dedicated outage, and we have those discussions ongoing with Ontario Power Generation. But we also recognizing the complexity in commercial operations of a nuclear reactor, we also have contingency plans and so we have other reactors available, should we need that to get our production going. So we're well prepared for any changes in the outage schedule.

Okay, super. And then just a quick follow-up. As it relates to the timeline, obviously potential revenue 15-months or so away, can you remind us the commercial arrangements that you either have or need to get and who you will be selling to and what agreements you have in place, anticipate, please?

Yes, Bob we haven't been explicit about any of that, we, as I have said on multiple occasions, have a clear view about our channels to market, but we haven't disclosed anything specifically.

Got it, understood. Okay, thanks very much.

Our next question comes from Matt Akers from Barclays. Please go ahead with your question.

Hey, good morning guys. Thanks for the question. You guys have talked about the volatility in the back half of this year and we definitely saw that with the big positive adjustment this quarter. What's kind of the right way to think about that into 2020. I mean, are there other sort of milestones coming up that could cause another kind of volatile quarter like we saw at this time, or does the things sort of submitted out from here?

Matt, I would tend to think of 2020 as a bit smoother and the reason is, when we negotiate these pricing agreements with our Navy client, we'll end up with backlog changes and therefore rate adjustments that can have generally positive effects on not only the backlog, but also in our financial results. And so I don't - well, I wouldn't anticipate as much chunkiness into next year as this year.

Okay, thanks. And then I guess just on the services side, some of the government service companies have talked about, I guess, the government just being a little bit more cautious around kind of budget uncertainty and maybe delaying some award are you guys seeing any of that at all, it doesn't sound like there's too much of that going on?

I don't think so in the DOE space. If you look into the environmental management budget it's steady and goes on and has very high visibility, goes on for decades, and the same is true for the management, and operations contracts that we see around the weapons complex in the other Department of Energy laboratories. It's very steady, very well supported by not only the budgets President's budget request, but also by the Congress. So I think that looks very steady, from my perspective.

Great. Thanks.

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

Hi, good morning. I wanted to start David with you and just go back to the capex, you were pretty clear a few minutes ago about it normalizing in the back half of '21, but could you clarify the first half of '21? Does that first half trend at a similar percentage of sales that you saw this year and expect in '20? Or is there some kind of a ramp toward what the back half of '21 should be on a percentage basis?

So, what I would look at is, as we talked about last quarter it was - our capital was about 225, this year it was 225 roughly the same next year, and then it would stay at that elevated level in the first six months of '21, and then it would go down to 3% to 3.5% of revenue at the end of that year. So we've now said that this year is going to go down to 210, but that timing is going to move into next year. So that changes from 225 to 210, takes it from 225 to 240 next year. So then that elevated level it - 120 or so beginning of '21...

The first half of '21.

The second half will go down to, once again, 3% to 3.5%.

Got it, okay. And then, Rex, on the isotopes you mentioned the Germanium 68 and some of the others. How do we think about the relative sizes of these markets? And then I think there was a comment earlier about the approval and ramp process being similar. I think that was, that comment was about the 111, but are the incremental margins higher as you add product here because of what you've already done with moly-99 or am I not understanding this properly?

Yes, I think we've said in the past, Rob, that we expect gross margins to be 50 plus contribution margins, obviously higher than that, so it serves as a business that has very good operating leverage to it. We said in the last call that the germanium and indium oxine products would add something like 15% marginal revenues in '20 as we got into full run rate, let's call that 2020 at very good growth and incremental margins.

How big are their relative markets in other words, the opportunity long-term?

Yes. Those are - those aren't very big markets, you put them in this call it to $10 million to $20 million range, something like that.

Okay. And then just one other thing, is there a way to quantify the long-lead boost to revenues in the quarter.

I mean, I think, are you looking for the changes in the contracts or the - what we're saying is the one-time or just to specifically to the long-lead?

Anything that you would call out is beyond normal.

So what I would do is I would know that we've always said that our margins are in the high-teens and then you have a plus up there to get you into the very low '20s for the pension, I would say that would be normalization. So if you take the margins, we provided this quarter 0.37 - and take it to that normalization, that difference in margin is really what we've been talking about as those one-time adjustments that you can take out for the future.

Okay, all right. Thank you, David. Thanks Rex.

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

Hey, good morning guys. Thanks for taking the questions. Maybe Rex just on 2020 you talked about 9% top-line, can you maybe parse that out for us a little bit, you kind of gave some color on the NPG side of the business with the outages. So those NPG contribute growth next year with some of that outage headwind? Does the isotope add to that growth rate? Maybe if you could just give us some growth by segment or a little bit more color there?

Sure. Good morning, Michael. So the growth drivers are both NPG and NOG and I'd say they are approximately balanced in that growth with NPG itself. We will see higher volume, higher sales from the isotopes. We will seeing an upswing on outages, but probably not as sharp as we had anticipated because of the cyclicalities interrupted by the refurbishment projects but we're continuing to see good growth in the component work that we do in the in the Canadian market and the spare parts work that we do in the Canadian market. So we remain quite bullish about that the refurbishment opportunities are significant and we're winning our share of the work. So you'll see that business growing at, let's call it approximately the same rate as the Navy business next year.

Okay. And then, just - I mean, going back to the, when you guys made the acquisition of the GE Hitachi business, are you guys realizing those expected revenue synergies I know you talked about a doubling of the market, it sounds like you've got some of the cyclicality interrupting these outages. But are you guys getting the full benefits is that seemingly playing out as expected?

Yes, absolutely. Yes, if you look at where that business was in 2015, $120 million business will finish 360, 370 next year and then the growth that we describe for 2020. So think of it as a business that's on the verge of quadrupling on the top-line, bottom-line is moving faster than that and some of that is attributable to the GE Hitachi acquisition, it just made us a more robust player in that market and as we look at the pro-formas that we developed at the time of that deal and looked at them in the rearview mirror, that's been a very attractive acquisition for us and certainly strongly outperforming the pro-formas at the time of the deal.

Got it. And then, just the last one and I'll jump back in the queue. On the fuel restart, can you sort of quantify for us what the potential revenue opportunity can be there. Obviously, you do some of the downblending now on an annual basis if some of these potential projects materialize, how should we think about that kind of layering in from a revenue perspective over time?

Yes, maybe I'll characterize it in at a higher altitude Michael, so the way we think about these new projects the space and defense reactors and the fuel and the related work around that is we will as a company go and spend some R&D to develop a new capability, a new technology for these kind of markets and that comes from our higher R&D budget of course and then we typically will get into some kind of a co-funded R&D with the DOE or the Department of Defense or NASA and we've seen it occur in all three of those cases and then normally what happens after that for these new markets for reactors and fuel, you'd see something like a demonstration mission a nuclear thermal propulsion for example or the demonstration of a ground reactor and then of course the end game for all that is low rate production or high rate production for those kinds of reactors. And so the way that I think about it is, I think of the R&D opportunities in the single-digit millions think at the demonstration programs as in 10s of millions to hundreds depending on how complex and depending on where we are in the supply chain for that and fuel is a good fraction of that let's call it 20% or 25% of those kind of numbers and so, I mean you can imagine a fuel business that certainly generating 10s of millions in the future, depending on the demand.

Got it. Thanks, guys. I'll jump back in queue.

Our next question comes from Peter Skibitski from Alembic Global. Please go ahead with your question.

Hey, good morning guys. Nice quarter. Rex to follow up on the whole small reactor front, it looked like certainly year-to-date there's been a lot of momentum there even over the last quarter, right? I think you were out there talking to David bring this thinking about us, and I've seen some RFIs out there from DOD organizations. So is this relative is this becoming near term, my recollection is always that you kind of put out 2020 as being potential year that this kind of breakthrough, do you feel the same way about the timing there and any other color you could add to this interesting area would be appreciated.

Yes, sure, Pete. Thank you and good morning. Right, I did speak at the National Space Council, which chaired by the Vice President in the NASA administrators there, the Chairman of the Joint Chiefs and others that have interest in space, and so we have, I think the established a national level dialog for these micro reactors in there, there are many applications including nuclear thermal propulsion surface power directed energy weapons off grid power for remote and forward basis. So I think there is a great deal of interest from a variety of government agencies for these applications in terms of timing for that. Pete, if you look at the appropriations progress on the NASA bills there is 125 million in the House Bill, 100 million in the Senate Bill for nuclear thermal propulsion demonstration mission certainly not all that would flow to the contractors, but we'd expect a piece of that. Should this appropriation be done and then as you said you've seen RFIs and activity across the DoD strategic capabilities office for example is interested in the demonstration reactor, we hear interest from the Army and others and those kind of reactors and so, yes, I think, assuming that we can get through and all this sort of the political flux it's occurring now at the national level, get through the appropriations cycle in some kind of normal way I do believe we'll start to see meaningful funding in 2020 and beyond that.

That's great, I appreciate the color. Let me ask on the CR it's almost seems like to give it, it's going to go into calendar 2020 is the 9% growth that you guys are giving your target of 2020, how much would an extended CR or even a full-year CR potentially impact that?

We're not too terribly sensitive to it, obviously it has nothing to do with our Canadian business. The things that are going on in our technical services business I think we'll proceed pace, and then in the Navy business. All three of those are programs of record that will get funded at approximately normal levels Columbia forward in Virginia. So not all that sensitive to whether we get into a year-long CR.

Okay. I appreciate it. Then last one for David. David, on the build-in contracts and process through kind of year-to-date I imagine that's nuclear Navy related. How are you thinking about the fourth quarter in terms of can that reverse and on a full year basis? Do you think you guys have a shot at getting to one-time conversion on free cash net income?

I mean, obviously we're starting an increased amount of revenue both at NOG and NPG so along with that you're going to have additional working capital that's going to be built into the business especially early parts of these contracts. So I mean I think the working capital will continue to be healthy but you know eventually in near-term, it will come back, but right now at a probably be strengthened.

Okay, got it. Thanks guys.

Thanks, Pete.

Alright, operator. I believe that was our last call. Thank you everyone for joining us this morning. This concludes our third quarter 2019 conference call. If you have further questions, please call me at (980) 365-4300. Thank you.

Ladies and gentlemen, that does conclude today's conference call. We thank you for attending today's presentation. You may now disconnect your lines.