Ladies and gentlemen, thank you for standing by. And welcome to BWX Technologies, Inc. Fourth Quarter Earnings Conference call. At this time, all participants are in a listen-only mode. [Operator Instructions] Following the Company's prepared remarks, we will conduct a question-and-answer session and instructions will be given at that time. Please note this event is being recorded. I would now like to turn the call over to our host, Mr. Mark Kratz, BWXT's, Director of Investor Relations. Mr. Kratz, please go ahead.

Good morning, and thank you for joining BWXT's fourth 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 documents, along with today's earnings presentation 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. I want to open my remarks today by expressing gratitude to the entire BWXT team for successful and more importantly safe 2019. We had a record year for safe operations and the hard work and dedication to the BWXT mission and core values was evident in 2019 results. The attention to detail and enduring commitment delivered the highest quality products and solutions continue to enable success for the company as we move into the decade. Yesterday, we reported strong fourth quarter results with non-GAAP earnings of $0.71 per share on revenue growth of 5%. These results kept off an exceptionally year for BWXT culminating in annual revenue growth of 5% to a record setting $1.9 billion with earnings up 10% to $2.62 per share as we outperform outperformed against our revised earnings guidance for the year. Fourth quarter performance was anchored by strong execution and the Navy franchise as the segment exhibited continued growth and delivered solid margins. As we anticipated with the multi-year agreement we discussed on the last call NOG received a $1 billion contract for nuclear propulsion equipment on the next Ford -Class carrier resulting in approximately $4 billion in cumulative contracts for the year. The commercial nuclear power business continues to be strong through the CANDU refurbishment cycle and delivered strong operating margins as we closed out 2019. The business was also edified by the acquisition of Laker Energy products in early January. Although small, this acquisition will provide BWXT with complimentary products. A larger global customer base and incremental opportunities to expand share and this favorable nuclear power market moving forward. Additionally, the Services segment delivered solid results in the fourth quarter lighter than we would have liked but still good results given the pace of awards…

Thanks Rex and good morning. Starting with segment results on slide 4 and 5 of our earnings presentation. Nuclear Operations Group delivered another strong quarter with revenue up 6% to $371 million. We witnessed continued growth from Columbia through higher production volume and higher long lead material purchases, partially offset by lower down blending. For the full year 2019, NOG revenue grew 8% to $1.43 billion outperforming our previous guidance. 2019 revenue growth was primarily driven by the lead chipset for Columbia Nuclear Propulsion equipment and long lead material. NOG operating income for the quarter was $72 million resulting in a 19.4% operating margin. This was down versus fourth quarter 2018 in which we had more significant EAC changes to backlogged contracts. For the full year 2019, NOG produced $298 million of operating income resulting in a 20.9% operating margin. Segment operating margins for 2019 were higher than 2018 driven by the absence of missile tube charges and some one-time EAC changes to backlog contracts that provided an incremental margin in the third quarter that we do not anticipate to occur annually going forward. The Nuclear Power Group produced $97 million of revenue in the fourth quarter, a 1% decrease when compared with the fourth quarter last year, primarily driven by lower field service activities that we anticipated. 2019 Segment revenue was $353 million and represents a 4% decline versus 2018. This decrease was more than we anticipated as higher component manufacturing volume was more than offset by the slowdown in Field Service activity and the completion of the China steam generator project. NPG fourth quarter non-GAAP operating income was robust at $19.7 million resulting in a non-GAAP operating margin of 20%. This increase was primarily due to a favorable $5 million change in an asset retirement obligation and higher…

[Operator Instructions] The first question today comes from Bob Labick with CJS Securities. Please go ahead.

Good morning. Thanks for taking my question. Hi. I wanted to start, it's kind of a broad question with two specifics at the end, but I just want to give a little context. Given that you've reiterated your long-term guidance which is essentially for 2022 is the low double digits growth for 2022. It certainly implies acceleration in earnings in 2021 and 2022 or somewhere in that timeframe. And could you tell us based on the information you gave us today about the President's budget request for one Virginia class in 2021 and then also pushing out the moly-99 project. Although you didn't specify the time period, how those play into still having confidence in accelerating earnings growth in 2021 and 2020 timeframe?

Yes. Sure. Thank you, Bob. Maybe I'll give you a little color on that. We -- so a long way to go on getting from a President's budget request to an appropriated program. So that's not really factoring into our analysis at this juncture. Although, we're extremely vigilant on that one. If that Virginia turns out -- if that Virginia procurement turns into one for 2021 and coupled with some other delays, it certainly puts pressure on our three to five-year scenario. But will --we have to go and evaluate exactly where we are if those two things happen. However, there's a lot of other content in our strategy that can help to overcome some of those kinds of problems. For example growth in NSG business growth and the NPG business and so it certainly be a heavier lift, if those two things unfold it that way, but we have opportunities to grow.

Okay. Great. And as it relates to the moly-99 isotope?

Right. So the, if you look at the isotope portfolio that we have. We have two new products that I mentioned in the script here that one of which that were introduced at the end of last year. Indium oxine's growing germanium 68 is another one that's growing. So we see pretty robust organic growth in that portfolio as it is and then moly is of course an add or to that and then out-year things beyond that.

Okay and then just as it relates to the moly, can you talk a little bit more about what the project's delays are and then forgive me for not knowing the whole kind of FDA submission timeline and everything, but working with MURR can you submit from MURR since you've successfully demonstrated the cold-kit labeling already or can you kind of tie all of that in -- what's the delays. Can you shift to MURR and if there's a basic timeframe as a quarters or years in terms of the delays? And help us kind of sense around that.

So the shift to MURR is not a shift. I mean we're still on track to work with Ontario Power Generation for sort of let's call it the baseline program. But shifting to MURR what that does is reduces some regulatory risk and enables us to started radiating material on an earlier timeframe in a much simpler way. So it's think of that as kind of a hedge against any regulatory delays related to using the system at open -- the target delivery system at OPG. And that's good for us. In terms of delay, so let me just sort of lay out what the programmatic structure is. We really have three principal systems that are involved in the moly production here. One is the target delivery system that's the system that delivers the moly into the reactor at OPG. The second one is called the radio chemistry line that's located at our facility in Kanata, outside of Ottawa and that's where we take the radiated material and do some radio chemistry on it through a series of hot cells. And then there's a thing called the radio pharmacy line. This is where we take the product that comes out of the radio chemistry line and then we dose it into a generator which is the standard product that the market accepts. The technetium-99 generator that's a shielded vessel that would contain the moly-99 which is decaying into technetium. All of those systems have their degrees of complexity. I would say that the target delivery system is the most mature followed by radio chem followed by radio farm. The radio pharmacy system is -- it has a number of hot cells and a high degree of automation to it. And that's the most challenging part of it. The product -- the component delivery is related to the radio pharmacy. So I call that the critical path on the program. As we think about schedule delays, they're not insignificant and I think may be a good way to think about it is, they're probably -- think of it delays measured in quarters, certainly not in days or weeks or anything like that. We have to -- and where we are as we need to, as you -- and when you get into problems like this, of course, what you do is you charge the team with going and finding ways to improve the schedule and they'll find creative ways to do that too. So we're going to let the team do its work and then and let investors know where we are as soon as we've got clarity on that.

Got it. And are you still -- just final one for me and I'll jump back in. I appreciate this. I mean in terms of the 2022 or the long-term guidance, are you still anticipating having sales of moly and tech generators in that 2022?

Well, it's -- I won't speculate on that, yes, we need to get through our analysis.

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

Hi. Good morning. David I was going to see if you could give us a little bit more color in terms of growth in margin cadence for MPG and NOG as we go through 2020.

So what we said was that our margins inside of NOG will be consistent what they've been in the past. It'll be high teens with room for improvement for the pension reimbursements as we go. So we don't anticipate that that will change. So if you look at NPG, the margins have been a little higher and remember we had the China steam generator project and in this past year we had NASA retirement obligation we valued for you, but there were some things inside there that caused some margins to be higher than normal. So what we've said is that those margins are going to go back to a more sustainable 13% margin inside of NPG for the year. So that's what we've provided.

Okay. And then if we could just go back to the lower growth in NPG for the year. I think you said that's because of -- it has to do with the comps and I want to just clarify what happened last year in NPG, what's happening Bridge NPG from 2019 to 2020? And the 5% growth.

What we continue to see is we continue to see changes in the services and the outages business that we started to report on the number of, I think, last year. We're in a refurbishment cycle for NPG and I think last year we saw some of those refurbishments take place of some of those outages we anticipated. Now we're -- also seeing some of those outages shift out in time. So those outages are causing some changes to the revenues as we go forward.

I see. And then just lastly, can you remind us how your CAS recovery and ERISA contributions trend over the next several years, particularly for 2022 since we're building out that year for all of the companies in the sector.

Yes. Right. I mean right now what we're saying is that we continue to show strong reimbursements in our CAS recoverable amounts. For 2019, it was roughly the CAS cost were roughly $50 million. And those will continue for the next three years and after that they will fall off.

The next question comes from Peter Arment with Baird. Please go ahead.

Yes. Good morning, Rex, David, Mark. David just to follow up on the kind of another question on the CapEx profile. You mentioned so the step up this year was that just that's some of that sounds like it's very much timing related. Was there anything incremental in that $270 million?

Now remember we had talked about capital being roughly $225 million and than this last quarter last year we pushed it to $240 million year because of timing and now the way the timing worked out for the year, we're now up to $270 million. If you look at the $225 million, we only spent a $185 million last year so there's about a $40 million play that is then pushed into this year to get you up to $270 million. So mainly the cap, the capital expenditures is all timing related causing us to spend to peak not increased at this point in time.

Okay. Understood. And then your maintenance CapEx level I believe was still 3% to 3.5% of sales. Is that still valid for 2022?

Yes. So for 2022, we feel will be back to the 3% to 3.5% of revenue.

And how much does it -- so you didn't in 2021which obviously we're all trying to model. What's your anticipation? How that comes down?

Once again we're rebased lining our moly schedule in the project. So I think some of that will tighten up on what capital we're going to need for 2021. So it's somewhere in between where we are today and our maintenance capital we just happened to find 2021 yet. It'll be higher than -- definitely higher than our maintenance capital. And remember, we had been saying for the first six months, it'll be a very high level. So some of that might now slip full year that's why we're saying maintenance capital is starting in 2022.

Okay. And just Rex just a quick one follow back on kind of the MURR questions around the -- in bringing it, so is this you view this is kind of more of a de-risking of the overall strategy just from or was it just push back from the regulators?

Oh no, no. It wasn't pushed back from the regulators at all. It was really just a way to hedge against the regulatory timeline. It's easy to get in and out of MURR and the way we have that one arranged doesn't require an exotic target delivery system. You just have to be able to put your material into a fixture. So it's a simple way for us to be able to run hot chemistry through our facilities up in Canada albeit at lower volumes, but it's also a good way for us to ramp production frankly. So it's a nice hedge.

The next question comes from Matthew Akers with Barclays. Please go ahead.

Hey, good morning, guys. Thanks for the question. So a follow up on the CapEx questions. I guess how much of that shift, I might have missed it, so how much of that shift out is sort of NOG versus isotopes? And I guess yes as you work through kind of finalizing the latest schedule on isotopes, is there chance that the CapEx on the isotope side could shift or do you think you've sort of de-risked that in your forecast for this year?

So we haven't defined how much of 2019 going into 2020 is NOG versus isotope. We have inside of our investor presentation for 2020 and said that there's about 140 of NOG of the 270 is -- 140 of the capital is NOG and 140 of its NPG where the isotopes resides, but we haven't said specifically of the shift which is which. And as I stated as we go into 2021, 2021 was also supposed to be an elevated year towards the end of the year we would have got to maintenance CapEx. We're saying maintenance capex is 2022, but we haven't really defined whose capital is 2021 either. It's for the future but it will be at an elevated level I would say that from 2020 it'll be at that level or lower, but it's still an elevated level in 2021.

Okay. Got it. And then I guess just on the Virginia class cut the one in the budget obviously a lot of negotiations before we get to the finalized budget, but if worst case if we really did get one Virginia-class when would that sort of impact your numbers?

It starts to impact us in the government fiscal year. I mean if you imagine that all the appropriations got done on time and the President signed off on the budget before the fiscal year began. I mean theoretically in Q4 of this year, it would start to taper in but in a minor way. The more significant impact starts in for us calendar year 2021. And then starts to peak out later two, three years later than that because of the way the funding wedge goes on those nuclear ship sets.

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

Hey. Good morning, guys. Thanks for taking the question. Maybe Rex just to stay on that Virginia-class what would happen regarding your capacity and your CapEx planning. And just on that that timing impact why would 4Q not potentially being the realm of possibilities just given that, I know, it's the President's budget but we already had a basically a two-year deal signed off to eliminate sequester. And I thought that would have provided a lot more clarity to get a budget in place potentially maybe not October 1st but sooner than prior years.

Yes. So maybe on the first one, Michael, on in terms of CapEx and capacity, it doesn't really change that picture in any appreciable way. Because we would expect even if that occurs we would expect the two Virginia tempo going forward. And when you think about is we've sort of laid out the math on the in the past, 12 Virginia's at some state of completion going through the shop at any point in time a handful of Columbia's as we get into the future. And it at any point in time between two and four Ford-Class chipsets going through the factories at any one time. A Virginia on the margin doesn't really change our production capacity picture or our capital picture because we're having to build out to be able to accommodate Columbia. And the continued two Virginia tempo as it is. And so we're kind of running at full capacity I guess is the way that I would put it. So one Virginia doesn't change that much for us. So I wouldn't imagine that we would change our capital spending based on the possibility that that one Virginia scenario occurs in that one year. In terms of whether or not we can get a budget deal, I'm just looking at history right. We never get a budget deal before October and certainly in an election year I cannot imagine a budget deal before the election being signed off by the President.

Okay. And then just back to the Virginia not running at full capacity should we think about overhead absorption maybe just some under utilization or is it just kind of on the margin just not having -- it's just kind of given everything else you just said with Columbia's and Ford's and what-have-you?

Yes. I mean it has an impact, of course, in all of those things on the margins but certainly something we would manage if it occurs.

Okay. And then just to the comments on moly I mean you previously had said commercialization ready for 1Q, 2021 but considering you said this is more quarters not days in terms of level setting our expectations. I mean it seems like late 2021 is this still a calendar 2021 revenue generating product line or just how should we think about timing now?

Michael, just don't want to put any color on that until we let the team do their work out maybe the way I would say it -- the way I would think about the program is we've absolutely addressed any questions around the technological viability with all this cold-kit tagging. Now we've got critics out in the market -- marketplace who have been saying, oh, well, the materials not going to have enough activity. The physics doesn't work. If you make it it's never going to tag to a cold-kit and a bunch of nonsense like that. And so we've certainly answered the question on whether or not the product is viable and whether it's a drop-in replacement. So from the standpoint of technological maturity, technological risk that's retired and I think we feel sitting here today feel more optimistic about this program than we ever have. And the other thing is we can see the finish line right. We've got all these vendors -- all these large components under contract with vendors and we're just getting through that natty nitty-gritty detail about the final -- taking the product specifications converting into drawings; converting into hardware and modifying our facility up in Kanata. So we're right in the heat of it. So we do have these delays but and I'm just not prepared to characterize it any further than that right now. I just want to let the team do their work before we start speculating again about the readiness date.

Got it. And then just one housekeeping. I think you guys called out, I jumped on a little bit late but the down blending was it -- was going to be a bit lower? What was the driver behind that?

Oh, yes. The Q4 down blending numbers you mean?

Yes. Sorry, yes.

Yes. It was nothing and that was just timing in the program nothing big there.

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

Yes. Good morning, guys. And apologies for the noise. I'm at the airport but, Rex, I was wondering if you could talk about small nuclear reactor opportunities? I was kind of struck by the magnitude of the budget increase at NASA. And you mentioned their visits and then I think there's a lot of out there I think on both Moon and Mars reactor opportunities and all the DoD work. And I guess I was wondering at this point if there's anything meaningful in year 2020 guidance for small reactors? And may be if we are at the point where you can be quantify kind of the opportunity set there? Thanks.

Yes. Sure, Pete. Thank you for the question. I've said on this call and certainly continue to say internally at BWXT that we have an interesting opportunity to replicate our franchise Navy platform in other markets such as space and other national security applications. And I think it is pretty exciting having said that it'll take a while for any of that to develop. In terms of what we saw out of the President's budget request, it was encouraging to me the NASA top-line went up 12% contained within that was a nuclear technology line if you will and that's for both power and propulsion nuclear power and propulsion. And that budget line for 2021 is a $100 million and then over the five-year horizon it goes all the way up to $257 million. I haven't integrated those numbers but call that a $0.5 billion-ish or better over that five-year period. Of course, just as I said on the Virginia, this is -- these are early days and the authorizers and appropriators and the conferences will do what they do with that, but it does indicate, it's certainly coming out of the White House strong interest in nuclear solutions for surface power and for propulsion. And then similarly there's an interesting budget line in the DoD, in the DoD part of the President's budget request within DARPA for a program that's called reactor on a rocket. And that one's funded in the $20 million range in 2021. And so we're seeing it, it occurs in various places. What we -- I would say that what we're seeing are dollars that would go towards technology development and ultimately towards demonstration missions. So there's nothing in that five-year timeframe and shouldn't be for let's call it production type programs where we're building multiple units. So in terms of characterizing the opportunity for BWXT, I think it's something that's in the range of tens of millions over the next few years. Maybe rising into the hundreds of millions if we got deeply involved in a demonstration mission with either NASA or DARPA or someone else. So the seeds are being planted and we're starting to see some of these green shoots of growth around it. And I'm optimistic but it's definitely we're playing the long game on that one here.

Operator, we will now take the last question.

Okay. The last question is a follow-up for Matthew Akers with Barclays. Please go ahead.

Hey, guys. Thanks for the follow up. Could you comment a little bit on EACs and I guess particular nuclear operations. Are there any sort of big milestones we had coming here that may be good for EAC?

No. I mean we get our estimated completion changes every year. So I mean we take those improvements to the contracts depending on when they come inside of NOG. And we've always said that from quarter-to-quarter from year-over-year to year-over-year it's difficult because those improvements could come in Q1 this year they could come in Q3 next year. Once you take those improvements then you run it through EACs; you run it through percentages of completion and then you take those improvements to your backlog contracts. So that continually happens for us. Now every once in a while there is an adjustment or something in the EACs that's little abnormal and we'll call those out, but usually all the EACs are normal things for our business as we go through the year. End of Q&A

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

Thank you and thanks for joining us this morning. This concludes our fourth quarter 2019 conference call. If you have further questions, please call me at 980-36543-100. Thank you.

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