Ladies and gentlemen, welcome to BWX Technologies' Fourth Quarter and Full Year 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, Joel. Good evening, and welcome to today's call. Joining me are Rex Geveden, President and CEO; and Robb LeMasters, Senior Vice-President and CFO. On the call, we will reference the fourth-quarter and full-year 2022 earnings presentation that is available on the Investors section at 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 fourth quarter and full year results that were in line with our expectations as we closed out the year on a strong note. 2022 revenue and adjusted EBITDA each were up 5% and underlying operational profitability was up 9.5% factoring out pension headwinds. Despite macroeconomic pressures this year, earnings per share grew by 2% and we brought down capital spending by over $100 million. Labor remains a focus area for the company as we experienced growth in all our major markets. We continue to monitor hiring and retention metrics and are making progress, streamlining our processes, and advancing our training programs, particularly on the government side of the business. We remain cautiously optimistic that our efforts will deliver the net employment required to support our growth. Having said that, we believe the challenging labor dynamics will mask some of the potential growth for BWXT this year, but is ultimately a hurdle we will clear. Beyond labor, interest rates have begun to stabilize. While this presents a 2023 headwind to earnings stable rates and excess free cash -- free cash flow should enable us to overcome interest expense headwinds over the medium-term. In December, the President signed the National Defense Authorization Act for 2023 into law. BWXT's core businesses remain well funded and our new growth areas are receiving increased budget support. Columbia advanced procurement in aircraft carrier funding saw significant increases. Virginia submarine advanced procurement is steady and in-line with our expectations. Budget for Project Pele is increasing and the Army is receiving funding to support fielding. DARPA and NASA received increases to support nuclear thermal propulsion space demonstration program. The National Nuclear Security Administration received increases for uranium processing projects including uranium purification and down blending. And…

Thanks, Rex, and good evening, everyone. I'll start with total company financial highlights on slides five and six of the earnings presentation. Fourth quarter revenue was up 5% on a consolidated basis with Government Operations up 8%, which was partially offset by Commercial Operations being down 6%. Fourth quarter EBITDA was up 6% to $130 million, driven by higher revenue and better margins in Government Operations despite lower recoverable pension income. Lower corporate expense also contributed to the growth in EBITDA, which was partially offset by a lower contribution from commercial operations. A higher effective tax rate and more interest expense resulted in an earnings per share decline of 2% for the fourth quarter to $0.93. Notably, we generated $44 million of free cash flow in the fourth quarter, a little shy of our expectations as we had higher tax payments and lighter accounts payable balances due to year -- to end of year activities. The solid fourth quarter drove full year 2022 revenue to $2.23 billion, up 5% with equal growth rate contributions from both operating segments. Full year 2022 EBITDA was also up 5% to $439 million, despite a $17 million pension headwind. On an ex-pension basis, underlying operational growth was 9.5% and at the high end of our original operating guidance range for the year. These results were driven primarily from Government Operations growth and lower corporate expenses. Despite higher interest rates and other headwinds to non-operational items, earnings per share grew 2% to $3.13 for the year. We finished the year with $245 million of operating cash flow, a little lower than we had anticipated. We have laid the groundwork to improve working capital management by tracing procurement to pay processes across our company. However, in the fourth quarter, we advanced some payments, given the rapid…

Thank you. We will now begin the Q&A session. [Operator Instructions] The first question is from the line of Pete Skibitski with Alembic Global. You may proceed.

Hey, good evening, Rex, and Robb, and Mark. Rex, maybe you could start with giving us a little more color on the labor outlook. It's a little tough to see from the outside. Just for 2022, how short did you end up on net hiring for the year? And what's kind of the goal for 2023? And then understanding you hire people, but then what's kind of the -- in terms of training, how long does that take to really get the guys up and productive?

Yeah, thank you, Pete, and good evening to you. So last year, we were trying to net hire about 500 people, and we thought we'd need to get maybe 1,000 people, given our historical attrition rates, to get that net 500, Pete. But as it happened, attrition was higher than normal. We reported about that -- reported on that throughout the year. So what happened was we did hire 1,000, but we lost about 700. So we netted about 300 against that goal of 500. So think of that as 200 short. And most of that was in Government Operations, where we have about 5,000 employees. And so if you think about that, that's kind of 4% short on that workforce. The headcount is, you translate that to marginal revenue on roughly the same ratio. And you think about the income fall through, it's not an insubstantial impact. But that's how it came out. So coming into this year, we've got that 200 deficit, and then we're trying to hire another 500 because of how much growth we have on top of the 200. So we need to net 700 this year. So it's -- I think of it as a pretty high hurdle. That said, as we discussed on the call, we've really revamped our hiring processes, went through an intense Kaizen kind of activity to figure out how to take steps out of it and to streamline it. Bob Duffy, who runs administration, has been in charge of all that. And we're seeing big results from that. We're daily monitoring it. We've beefed up our recruiting staff and availed ourselves to various other recruiting services. And so we're seeing a turnaround in that area. I'm getting a weekly report on it. The last one I got on Monday, we were up 89 net for the year, and that's a good pace that would get us there. So that's the kind of challenge that we face, and I do see it improving overall. Now in terms of any training, there's a bit of a learning curve, particularly on our naval reactor side, where we have to train welders and assemblers and inspection technicians. And so think of that as weeks or months to go through kind of the training component of that. So there's a little bit of drag on revenue and income until those workers are fully qualified. That said, we've got good support from our customer for those training programs, and we expect that to, and we expect to work our way sort of to our way through that.

Yeah. And Pete, we model that we know that you come off a pretty challenging period at the start of the year as people retire and then we slowly ramp-up and in all of our efforts are kind of building. We're seeing good data and so we track -- we're tracking how we're budgeting, but we're sort of slowly building to that and we have a lot of inefficiency as it ramp-ups. So, that's all taken into consideration the inefficiency of how that ramps up.

Have you had to increase salaries sort of that inflation plus type of level and I assume some of those you can pass-through your contracts maybe?

Yeah, there's some of that going on, but we're trying to keep -- trying to keep a lid on that and still attract the right kind of workforce and I'd say that what we have in in-store for our merit pool and race pool throughout the year is kind of consistent with what you're seeing across the U.S. economy.

Okay, okay, understood. Okay. Just last one for me then. Sometimes it's hard to predict for you guys some of the material purchases, the seasonality aspect of that as it flows through the year. So I don't know, maybe, Robb, if you could give us a sense of how revenue is expected to kind of flow this year with the puts and takes that you guys kind of typically progress through?

Yes, sure. Happy to do that, Pete. Thanks for the question. Yes, as we look out over the year, it is difficult, as you know, it's kind of splotchy quarter-to-quarter in terms of different activity. But I think we see the year shaping up as you've seen in the past couple of years, where you start a little bit lower and build over time. The past couple of years, we've generally seen about 20% of earnings, if you will, EPS in sort of the first quarter. And then we build over the course of the year, generally end up at almost 30% of the full year result kind of hitting in the fourth quarter. So that's the way I see it flying out. It's about 20%, and then you probably would build over the course of the year. It's actually pretty sequential because you kind of bring on the workforce, you get some of the awards later, you have outages early on, and so I'd see sort of 20% and building to almost about $0.10 every quarter thereafter. And just while we're on it, because we're pretty focused on matching up that earnings to also in operating cash flow, we're really trying to look at that just to help you on seasonality there. Likewise, we start out a little slow in the first quarter. That's when we pay our bonuses. That's when you have lower income. And so as we look back, your model probably reflects this. Since we went public, I guess, the past seven years -- six of the past seven years, we started out with a negative result in the first quarter to the tune of about $20 million outflow in operating cash flow in the first quarter, and then we build thereafter. So that's kind of the same seasonal trend that we're seeing in earnings, kind of flows down through operating cash flow.

Okay, very helpful. Thanks, guys.

Yeah, thanks, Steve.

Thank you. The next question is from the line of Michael Ciarmoli with Truist. You may proceed.

Hey, good evening, guys, thanks for taking the questions. Maybe, Rex, just on -- you kind of touched on it with your prepared remarks in terms of everything that's happening in the commercial nuclear market, but there certainly is a lot of activity between legacy plant builds, new SMRs, multiple players in the marketplace, the need for fuel. I think you kind of talked about maybe getting your first order later this year. But can you just give us maybe the lay of the land? I mean, I know we're expecting slower growth in commercial this year, but it certainly seems like the growth opportunities are pretty prevalent there. Is this a segment that you think can see some significant growth acceleration?

Yes. I really do, Michael. It's a pretty interesting time -- it's a very interesting time for nuclear power because of what I said in the script, which is this convergence of energy security with decarbonization of the grid is really driving a global trend here, a very powerful interest in nuclear. In fact, we literally, yesterday morning, we did a comprehensive strategic review with our Board of Directors on commercial nuclear power. So a lot of interest here within our Board. . And I'd say, we think of it in kind of three layers. First off, we have that incumbency, that very strong base business that's entered around Canada, with the CANDU fleet servicing and products that we have there. So CANDU fuel, as you know, we do field services, particularly around steam generators and fueling and servicing and fueling equipment. We do spend fuel waste containers in that market. And so that's been a good market for us historically. But it really sort of got jet fueled by these refurbishment campaigns going on both at Darlington and at the Bruce side. And that's the reason that business has grown so significantly over the last, let's call it, four, five years. Now as I mentioned in the script, they're looking at refurbishing that Pickering, that set of reactors at Pickering, which would be the same set of opportunities for us, steam generator manufacturing feeders, various other components that we do, heat exchangers and the like. So that refurbishment upcycle you can imagine going all the way out to 2040 or something now instead of 2032, which is what we had modeled. So that's going on. And by the way, the global -- sorry, the CANDU business is a global business. There's CANDU reactors in Romania, a pair there, there's…

Got it. That's extremely helpful. And maybe just one more, Robb, just thinking about commercial as well. The operating margins, weak in the quarter, they kind of trended lower. As you look at the opportunities in commercial and even looking into next year, how should we think about this commercial. And maybe, I guess, I'm just keeping it to the nuclear side, I guess. I would assume, once some of Medical starts to hit, that would give you more of a margin lift. But how do we think about this kind of commercial nuclear margin opportunity going forward as well?

Yeah, I think we see a margin lift across the business, particularly in 2020, modest margin lift We talked about at both the segment levels, you're going to see that lift. And then that's offset by a little bit of pressure as we have a rebound in our corporate expenditures. When you look at the commercial margin, specifically, as you said, you had that mix of higher-margin medical sort of drifting higher over time, that's growing a little bit faster. And then you have the lower-margin, what we used to refer to as -- to the NPG legacy business. And then you always have mix within that. As you look out to 2023, nothing to call out that's super important. There is some pushout that we had in terms of signing our fuel contract in 2022. And so that will be a contributor in 2023. We see a good -- we see mix in the field services business that's comparable to what we've seen in the past couple of years. So I don't think a lot within that segment going up or going down, and then you have the mix-up of the medical sort of on top of that is how I would think about that segment for 2023 versus 2022.

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

Thank you. The next question is from the line of Scott Deuschle with Credit Suisse. You may proceed.

Hey, good evening, guys. Rex, has the FDA come back to you with any supplemental data requests since they started the priority review on Tech-99?

So no, we'll know a lot more in the next weeks and months, Scott, as we go through -- as they go through the preapproval inspection. They'll send us a formal request for data at that time, and we'll see what we have. And we kind of understand where we are with the FDA.

Okay. And then, Rex, Rolls-Royce is going through a strategic review. I think they have some overlap with you all in a couple of areas. So curious to get your thoughts there, if you're willing to say anything, kind of whether you see anything in their portfolio that might be of strategic value to BWXT.

Yes. I won't say much about that other than to say, we actually enjoy quite a nice strategic relationship with Rolls. We operate, obviously, in different geographies, and we have very little competitive overlap. And so we do have some collaboration areas in naval nuclear that we've worked on. Obviously, naval nuclear propulsion is certainly an interesting overlap of capabilities serving our own sort of domestic needs. So there's certainly a lot there that's interesting to us, and we keep an open dialogue with them.

Okay. And then, Robb, maybe just what's your latest thinking on when you look to take out this variable rate debt and the timing for when you do that. Obviously, it's creating a bit of an overhang in terms of estimates given the stickiness of inflation and the short-term rates continuing to creep up. So curious for your thoughts there. Thanks.

Yes. I mean the fixed rates that we're seeing and all companies are seeing, right, has kind of blown out. I mean, we issued our bonds in the low fours, right? Our debt's trading, I think, is around seven. So we think that as rates come down, right, that would provide an opportunity. We're in no rush to turn that out. We have $500 million of liquidity just in general. And so we're actually in a great position. As you know, we just did a transaction in September that gave us some extra flexibility, which you can see in the 10-K. So I feel like we've got plenty of dry powder. We're looking at -- largely looking at just tuck-in acquisitions. So we don't need to do anything to set ourselves up for anything gigantic. So we'll just kind of wait until the market settles in. That's kind of our posture now as it relates to the balance sheet.

Okay, got it. Thanks, guys.

Thanks, Scott.

Thank you. The next question is from the line of Bob Labick with CJS Securities. You may proceed. Q - Pete Lukas Yes. Hi, good afternoon. It's Pete Lukas for Bob. You guys have covered a lot, answered most of his questions here. Just wondered if I could get a little more detail on the target delivery system at Darlington, and what's happening now? Are you running weekly batches? How is that going? And I think you kind of covered where you stand with the FDA there.

Yeah, Pete. We installed and fully validated that system on the Darlington reactor Unit 2. That was certainly a comprehensive campaign to assemble that thing and then test it. We have run target material through it at different soak times. We've done moly targets, I believe, at one and two and three week different soak times and retrieved those targets and have begun to test those targets as we said. So what we've done is proven that the system works, that we can move material in and out of there. And I think, certainly, the OPG has confidence in that system now. But the important output of all that was the activity level of those targets that we took out of the system, which do support, as I said in the script, that full spectrum of generators that we would deliver to the market ultimately.

I would note, too, that now that's up and running, we're -- yes, I would note that now that we have that up and running, we're testing that as it relates to tech. There's also a lot of potential to use that system for other isotopes, be it lutetium or otherwise. And so now that we've got that up and we can start working with it, we're starting to explore how we use that for all those margins. There's some real potential to scale that equipment and what we can do. It goes far beyond tech.

Extremely helpful. Thanks. I'll jump back-in the queue.

Thank you. Your next question is from the line of Ron Epstein with Bank of America. You may proceed.

Hi, all. This is [Andre Mitchell] (ph) on for Ron Epstein. A quick question. Could you just detail of the free cash flow bridge from 2022 to 2023? Sorry if you went over it already, I got kicked from the call.

No, that's fine. So what we talked about is doing about $200 million of free cash flow in 2023, which is up very significant, from around $50 million this year. What that will be driven by is operating cash flow being up at a $300 million-plus level. What that's going to be driven by is a rebound from the levels that we saw this year, some working capital, some growth in just the underlying business. So that should drive a $300 million-plus sort of number on the operating cash flow side. And then the offset, obviously, to get down to the $200 million level would then be CapEx. We've talked about trying to return to a maintenance capital level, which we've commonly talked about, at about $100 million. And then last year, we described how we had a significant win in the Project Pele, and that would generally be about $20 million to $30 million incremental. We only spent a small slice of that in 2022. So you can expect a decent bit of that. We continue to have growth in our nuclear medicine business, where we're doing one or two growth projects. So I would say, the $100 million plus, if you will, to ultimately get to an operating cash flow minus that of around $200 million.

All right. That's helpful. I'll jump back-in the queue for now. Thanks.

Thank you. There are no questions in queue. [Operator Instructions] Your next question is a follow-up from Peter Skibitski with Alembic Global. You may proceed.

Yeah, guys, I figured maybe we could talk a little bit more about AUKUS. Just because, Rex, it seems like most of the congressional shipbuilding guys are pretty nervous with regard to kind of the lack of incremental capacity at the submarine yards, right? I think that's fair right now. So are you seeing, in your talks, a potential that Australia could be kind of satisfied with what they need in other ways as opposed to our actual yards, building more subs, to maybe using your reactors in different ways? Or any other pads, I guess, that could benefit BWXT?

Yeah. So there's a lot of speculation in the trade press about this one right now, Pete, and maybe I won't say much. And we do expect some details here in the middle of March, and we're hopeful about it, but that's about all I could really say at this juncture.

Okay. That's fair. I'll sneak in one last one then. I was a little confused. You've got the actinium agreement with Bayer that you had, and now it looks like the same drug with Fusion. So those are two separate revenue opportunities with the same drug. Am I understanding that right?

Yeah. Think about it this way, Pete. So there's the radioisotope frequently called the active pharmaceutical ingredient, which is sort of the payload. And then there's the drug that are developed generally by large pharma, which are the missile, let's call it, instead of the warhead. And those drugs are biochemicals that have affinity for proteins that are produced by particular types of cancers. And so the combination of those things, the drug plus the radioisotope or the active pharmaceutical ingredient is what you inject a patient with. And so in this particular case, Bayer has their own drugs, the biochemicals they've been developing for certain indications and certain conditions, and we would supply the radioisotope to Bayer for those clinical trials. Fusion has a different set of drugs they've been developing for different indications and different conditions and different approaches, and we would supply, again, the radioisotope or active pharmaceutical ingredient to them. So it's just the isotope. There are -- and so we could supply that isotope to a whole number of different drug developing companies. There are also -- the businesses that we're layering on, as I said in the script, are around that, the therapeutic isotopes. But we also have an opportunity to do the contract manufacturing like we do with Boston Scientific for TheraSphere, where we would take that drug in our radioisotope and combine it at our plant and then take care of the logistics and distribution to the radiopharmacies. So it's kind of early days on actinium, but there could be multiple customers for our particular radioisotope.

Okay, okay, great. Look forward to hearing more in the future. Thanks, guys.

Yeah. Thanks, Pete.

Thank you. [Operator Instructions]. There are no additional questions waiting in the queue. I would like to hand the call-back over to Rex Geveden for concluding remarks.

Thanks, Joel. I wanted to say as we close here that I'm proud of the entire BWXT team of 7,000 employees and the accomplishments that we realized together in 2022. We do have a healthy and growing business, and we positioned ourselves for new meaningful opportunities. And even in the face of public health, economic and geopolitical distractions, our employees remain steadfast and our mission to provide safe and effective nuclear solutions. And I do commend them for helping us to run and grow this remarkable business. So I just want to say to them, thank you for your continued focus and dedication. Robb, would you have anything to add?

Yeah. Thanks, Rex. I echo that sentiment. We have a remarkably resilient team and it showed up in the financial results this year. I'm energized and continue to be amazed by the way the employees here are tackling evolving challenges and seeking to take this company to higher heights. So with that, we thank everyone for joining us this evening. As always, if you have any further questions, you can reach us by phone at (980) 365-4300 or e-mail us through investors@bwxt.com. Thank you.

That concludes today's conference call. Thank you for your participation. Please enjoy the rest of your day.