Ladies and gentlemen, welcome to BWX Technologies Second Quarter 2023 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to our host, Chase Jacobson, BWXT’s Vice President of Investor Relations. Please go ahead.

Thank you, Brianna. 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 today’s call, we will reference the second quarter 2023 earnings presentation that is available on the Investors section of the BWXT website. We will also discuss certain matters that constitute forward-looking statements. These statements involve risks and uncertainties, including those described in the Safe Harbor provision found in the investor materials and the company’s SEC filings. We will frequently discuss non-GAAP financial measures which are reconciled to GAAP measures in the appendix of the earnings presentation that can be found on the Investors section of the BWXT website. I would now like to turn the call over to Rex.

Thank you, Chase and good evening to everyone. Earlier today, we reported solid second quarter results that were slightly ahead of our expectations, highlighted by robust double-digit organic revenue growth, good execution and improved free cash flow. Given our strong performance in the first half of the year, coupled with favorable demand trends, we now expect high single-digit revenue growth and are raising the low end of our 2023 adjusted EPS guidance by $0.05 to $2.85 to $3. Before I dive into the highlights of the quarter, I would like to provide a state of the union on what we are seeing in our key nuclear end markets. There are several underlying secular themes supported by the increasing use of nuclear solutions in our global security clean energy and nuclear medicine end markets. And given the BWXT’s extensive experience in the industry, our exceptional nuclear design capabilities, robust manufacturing footprint and vertical scale, we are very well positioned to benefit from the growing demand that we see in the years ahead. The first of two emerged on large themes driving heightened interest in nuclear is the great power competition. This drives the global security market, but is becoming an increasingly important stimulant in the commercial nuclear power market as well. Before explaining that, let me note that the U.S. government strategy to bulk up on our strategic force capabilities, including a recapitalization of the U.S. naval nuclear fleet is in direct response to this geopolitical reality. We have supported this strategy with investment in BWXT’s Navy plants to enable a greater level of naval nuclear shipbuilding, especially in the second half of this decade and beyond, something the industry required given its aging infrastructure. The current 30-year shipbuilding plan calls for 10 years of serial procurement of Columbia class submarines…

Thanks, Rex and good evening everyone. I’ll start with some total company financial highlights on Slide 4 of the earnings presentation. Second quarter revenue was up 11% on a consolidated basis, with government operations up 13% and commercial operations up 2%. This growth led to robust second quarter revenue of $612 million. Despite our strong revenue growth, second quarter adjusted EBITDA was down year-over-year as expected. Adjusted EBITDA was $107 million, down 7% year-over-year as higher revenue was offset by lower margins in both segments due to onboarding inefficiencies, operational improvement investments, and less favorable product and services mix in both government operations and commercial power as well as higher corporate costs. Adjusted earnings per share, was $0.65 compared to $0.82 in the prior year quarter. As you can see in the EPS bridge on Slide 5, the year-over-year decline was dominated by non-operational items, including lower pension income and higher interest expense. Despite lower net income, free cash flow improved to $41 million compared to $35 million in the second quarter of 2022 driven by improved working capital management and slightly lower capital expenditures. Our capital expenditures of roughly $40 million in the quarter were down modestly compared to last year and consisted of maintenance CapEx and select growth initiatives. Our target for the next couple of year is that capital expenditures consists most of maintenance spending with additional investments to support specific projects or visible growth opportunities. Just as the case will be in 2023, previously signaled $125 million to account for maintenance CapEx and a top up to finish the build-out of our BWXT Innovation Campus in Lynchburg, Virginia, that we announced late last year and set up this year. That campus will be the home of our terrestrial microreactor team for the foreseeable future. We are…

[Operator Instructions] Your first question comes from Peter Skibitski with Alembic Global. Your line is now open.

Hi, guys. Rex, a lot going on, that’s for sure. Maybe we could start by talking about labor. I don’t know if you guys can quantify the amount of net hiring that took place in the second quarter. It seemed like that enabled the growth at government. And maybe what the net hiring goals are for the second half?

Yes, I’ll put a little color on that, Peter. I’m really super pleased with what’s going on with hiring right now. Our Chief Administrative Officer, Bob Duffy, and his human capital team basically completely redesigned the talent acquisition process, did kind of a kaizen approach to that and took out days and weeks and even months in that process. And so the onboarding process, the hiring process is really streamlined and really functioning. And at the same time, if you look at our attrition rate, it’s – we’ve gone through six quarters of sequential improvement of trailing 12-month attrition and now we’re trending back down toward our historical averages, which are around mid-single-digit voluntary attrition. So it’s trending the right way. The hiring is accelerating and the attrition is decelerating. So we’re making great strides there. And that’s really giving us, there is sort of two factors in the business, but one is that’s giving us the capacity for more volume, which is good for the business, but it’s also creating some inefficiencies on the front end because of training and indirect charges related to that. So two impacts on the business. But altogether, super well pleased. We’ve got more work to do, but we’re climbing the hill really fast right now. And I like where we are – And maybe, Robb, you could offer a little bit more color on that.

Yes. No, thanks for the question. Yes, so I’m tracking the data pretty closely. We’ve seen, as Rex said, as we talked about last quarter, we had that bulge of pending starts, and we got those through the funnel. And actually, as I tracked it over the course of the month, every single month during the quarter, we sort of built a larger number of net hires into the company. Ultimately, when I looked at the whole quarter, we’re running at about 2x the first quarter number in terms of total net hires. So that’s having a really good impact. We don’t have the July data in front of us for the full month. But I am sure that shaping up nicely too. So people are coming through. It’s also, as Rex said, having a noticeable impact on our utilization. So when I look at the data here on a utilization front, some of our key sites where we’re taking in a lot of people, we’re seeing a year-over-year impact as we expected, and that’s what’s causing a strain. So – in three of our major sites in the – in our core naval business, we’re seeing almost a 200-plus decline year-over-year in utilization. And so as we ramp those people up, that utilization come through. The third area is just to highlight that we’re trying to do increased data runs on is trying to figure out how, for the remainder of the year, as you said, we feather those people in nicely. So we’re looking at different sites, and we now have so much more data to try to understand how direct versus indirect come into the business, how we can layer those and ever better and how we can really know, when people are going to hit the site and be able to train them quickly. So coming through as we expected and having the strain in Q2 that we expected and ultimately, we will see a little step up in Q3 in terms of margin. And ultimately, I think we will work through the hardest part and be fully primed by Q4.

Okay. Well, it’s great to hear the pretty active management there and the progress, guys. Before I get back in queue, let’s just talk about DRACO, if we can. I guess, first of all, Rex, this is an OTA contract, right? So it can’t be protested. Maybe you can validate that and maybe give us a sense of whether or not it was within the second quarter or it will go into backlog in the third quarter. And my understanding, it sounds like it’s roughly a 3-year contract. So will you book revenue on it this year? And did that give any sort of upward push to guidance this year that was offset elsewhere, just some color about all that would be great. Thank you.

Yes. Lots to impact there, Pete. Yes, exciting win for us. That was booked in the third quarter. So we will start to see revenues hit the book in the second, third quarter. We would see the bulk of the revenues on that program going through ‘24 and ‘25 and bleeding into 2026 and ‘27 as we apply that mission, but the bulk of it in the next couple of years after this. Correct that, that contracting mechanism is done through another transactional authority and OTA. So it’s not subject to federal acquisition regulations in that standard format. So there is no appeal path for it. So that’s a win. And it’s an exciting one. As I said in the script back there, we’ve won the flagship program for the space domain. And then last year with Pele, the flagship – government flagship program for the terrestrial domain, we have that’s the Navy franchise and it’s a pretty important set of projects for us, particularly from the competitive context. So really happy with that when and excited to see that program go forward.

Yes. Just a little bit of information on specific ‘23 and ‘24 and ‘25 and ‘26. The way I’m looking at that, that’s almost about a 3-year term for that contract. And as we mentioned, that’s about $200 million. So if you just think about that ratably, it’s going to take a while even this year to kind of get it ramping. So maybe think about kind of one quarter of 1 year hitting kind of this maybe a little bit more as we kind of ramp into the second half of 2023, but it’s going to be only a little bite of it. And then we kind of hit a full, call it, third of that contract next year in ‘24 and ‘25 and then a little bit as it tapers off in ‘26.

Okay, thanks for the color, guys. Congrats.

Thanks.

Your next question comes from Bob Labick with CJS Securities. Your line is now open.

Good afternoon. Thanks for taking our questions. And Congratulations on the DRACO win and also on the FDA Darlington news you just mentioned.

Thank you, Bob.

So I just wanted to start with that, with the Darlington radiation news, could you give us a sense of how this impacts the time frame for potential approval? What additional information they have given you? And then once assuming approval goes forward, just describe how that – how Darlington generator compares to existing and versus which seems like you can lead broadcast right now.

Yes, Bob. That was pretty exciting and an interesting development for us because, we miss there are certain questions about the final product, such as what is the – what are the radio impurities that exist in the target after you radiate that you really can’t answer unless you’re in your final solution, which is, in our case, the Darlington reactor using our target delivery system. And so I think we’ve been trying to – we’ve been urging the FDA to take that view that as we go through this last targeted radiation campaign. It just doesn’t make sense to go back through MER. So we’ve got informal consent to go and pivot to Darlington, which means that we can offer that, as you’re well aware, that full suite of Tech-99 generator options, all the way up from the small sizes all the way up to the very largest sizes that are on the market today and whereas with MER, we had a pretty modest offering of small curie generators. So, it’s externally important to us and I think on the timeline I don’t want to get into the guessing game on the regulatory approval process. But suffice it to say, we have very high confidence of getting into the market in 2024 with that full suite of products and so quite a positive beta for us.

Absolutely. Now congratulations. That is exciting. And just a brief follow-up, just so I don’t know you next quarter on. Is there – are there any more milestone until kind of approval or any other events where we are just playing that waiting game over the next few months quarters until the FDA? You guys will go back and forth with them. But will there be any other announcements, or is that kind of the next announcement over the x period of time?

Yes, not anticipating any milestones to be published. We do – we certainly do need to go through back to our campaign to irradiate the material and get that delivered to the FDA. But really no milestones, I think we will be calling out.

Okay. Super. Well, congratulations again. Thank you.

Yes. Thank you. Thank you, Bob.

Your next question comes from Peter Arment with Baird. Your line is now open.

Yes. Good afternoon Rex and Robb. Rex, thanks for all the color on the SMR kind of updates. I was curious though, when you made some comments about not needing a lot of capacity additions. It just seems like there is a lot of things coming your way on the SMR front and small micro reactors. Maybe you could just give us a little more color on your ability to kind of weave in some of these new contracts and opportunities from your existing capacity? Thanks.

Yes. Maybe that was misunderstood, Peter. We are examining what capacity we need to step into this volume of demand that we see. I mean I was in our Cambridge plant a couple of weeks ago. And its chock full of steam generators that we are building for Bruce. The feeders are in there for both Bruce and for Darlington still finishing up the Darlington project. And it is at the very large heat exchangers running through that plant right now. So, it’s pretty well jammed up. And when you think about putting a reactor pressure vessel for that first small modular reactor, the BWRX-300, add the other three to it. This fall, we are certainly going to get – I certainly believe the Ontario Province will approve formally the Pickering refurbishment. There is 48 steam generators to build for that project, all the feeders, all the refurbishment waste containers, which are additive to all of the above. And then you have got potential build that CBA for Clinch River on that same BWRX-300. And then the Bruce side is looking at 4.8 gigawatts of capacity, that’s almost certainly going to be a large plant build. So, that ends up being either can do our AP1000 or something. And so there is just a tremendous amount of opportunity and volume ahead of us. And so we need to look at what our plant capacity is and whether or not we need to build out additional capacity, and I certainly expect us to need to do that in the coming year because it’s just a lot.

Yes. Maybe I will add something and just in terms of trying to talk about the footprint because we are going through kind of a look at, if we were to increase capacity. Our main facility in Cambridge, just to give you some sense, a little over 200,000 square feet facility we are talking about whether you need to add 100,000 square feet there or in the U.S. And there is multiple different ways, different properties that we have to do that and to expand capacity. I would also note that’s a pretty capital light if we do a lot of final assembly in that business, which is different than our government business. So, it’s really increasing square footage and can be done sort of in that same sphere as what we have talked about in the past, that if this market really takes off, these types of projects are tens of millions of dollars, depends on how quickly it sort of increases. But that’s what we are seeing is that SMR market really takes off in either Canada or U.S., we would want to facilitate for that. So, that’s all conceived up really in the way we have been talking about growth investments in the past.

Appreciate that color. I will leave it there. Thanks guys.

Thanks Peter.

Your next question comes from David Strauss with Barclays. Your line is now open.

Thanks team. So, the medical business, are you still on kind of a trajectory or timeline to go from, I guess somewhere slightly positive breakeven EBITDA today in that business to the $75 million in EBITDA that you have talked about in 2025?

Yes, we are. We put out that slide that at Investor Day, they are probably well familiar with the approximately about $200 million of revenue and $75 million of EBITDA in the kind of the 20%, 25%. We put a plus there, obviously, because depending on the timing of what we can get in the market, you kind of need a full year run rate to hit that. So, whether that’s a full year 2025 or dips over the year. But that’s exactly right. We still feel we can hit that. In fact, in the quarter, I can’t remember whether we said in the script, we kind of hit a milestone for ourselves. We turned EBITDA positive in the quarter. And as you recall, at the Investor Day, I sort of said, Jeez, I hope by the second half, it was our goal to turn positive at some point in the second half of 2023. And so proud that the team kind of keep forward both because the top line is working as well as really good cost management of the individuals that are running that business is really looking at everything that we are doing and thinking about it not only from a top line growth, but from an expense standpoint. And so here we are with positive EBITDA in the quarter, and we see that continuing. So, that’s sort of positive EBITDA from here on in and next hopefully $75 million.

Okay. And Robb, probably another one for you, so you talked about – it sounds like a little bit of CapEx creep this year, but you think you can offset with working capital, good news. Can you maybe talk – I knew we have talked in the past about the initiatives on the working capital side, where things kind of stands there and where might be working capital upside that you are staying at confirmed this year?

Yes. Thanks. That’s exactly right. So, as we have been sort of where The Street is at is consistent with the kind of base level of the $100 million-ish plus we had to finish off that. We had a little bit of the $30 million that we announced last year on Project Pele in the 2022 timeframe, but then we really had to eat up to $25 million, if you will, of the $30 million in 2023, so $100 million plus the $25 million is kind of where most people on the street are from a CapEx standpoint. So, that’s sort of the level that I feel where we sit at today as we look at DRACO specifically and maybe some light manufacturing activity on SMRs. You will get a little bit of upside potential on the CapEx just the prime versus that $125 million. We are by the way from a CapEx standpoint, the first half, we are at $70 million. And so if you just were to double that and say we are on that run rate, that kind of gives you a sense for where CapEx could be beyond the $125 million. And you are exactly right. What we are trying to do is rally the team around if you are going to spend more on CapEx, let’s find a way to lean in on the working capital side. And so – we have a couple of people really targeting that. My Head of Finance is really all over that Mike Fitzgerald and we spent a lot of time on that. Really, the biggest opportunity we see, there is a couple of different elements of working capital. The biggest opportunity we see right now is on the DSO side of things. We are looking hard not only our receivables but advanced billing around SIP. And really, what we are seeing is pretty good year-over-year, we had a good quarter this quarter. We were a little bit better than we expected. We are seeing a lot of management around milestones and billings and thinking about how to structure contracts and hit those milestones at good points. And so ultimately, I see that target of working capital days coming down by one day or two days each year, where actually year-over-year, we are down by about a day. So, I am hoping to squeak out another day or two days over the second half. So, we are targeting across the board initiatives, but that’s where we are spending a lot of time.

Great. Thanks very much.

Thank you.

Your next question comes from Michael Ciarmoli with Truist Securities. Your line is now open.

Hey. Good evening guys. Thanks for taking the question here. I don’t know who wants this Rex or Robb. But certainly, when we look at your business, you mentioned Terra Power, DRACO, Pele, TRISO going. It sounds like there is a lot of irons in the fire for other SMR work. How are you managing the potential design risk? I mean all of these kind of programs and opportunities are first of a kind. Are you strained on resources there? And I am just wondering how you kind of prevent one of these calls from going off the rails if there is cost overruns or kind of what you were just saying missing milestones, but how are you looking at the portfoli8o and managing that design risk?

Yes. Hey Michael. Thanks for the question. I will take a crack at that one. We have got quite a design capability in our commercial business in Canada. We had an in-house design capability when we spun in 2015. But recall that we acquired the GE Hitachi business from the Canadian nuclear businesses in late 2016 and brought in quite a design capability with that, that’s the team, it does the refueling robotics and a number of other things, they designed the target delivery system and they do other complex nuclear designs. So, we have got quite some design depth there. The team has plenty of capacity for it. Most of these designs, for example, the reactor pressure vessel for the BWRX-300, and now this Natrium heat exchanger, that’s a molten solute heat exchanger. That’s an exotic thing, a pretty interesting project for us. Those are projects in the million single digit kind of millions. They are typically done at fixed price basis. But we have got a great history of being able to estimate what the design costs are going to be and managing all of that and so I don’t if not a risk that I worry about very much given our history there and our design depth.

Okay. Good. And then just one more on – I think you kind of mentioned quickly you are working on pricing with the Navy. How does that – those negotiations, conversations and the capsules what the potential happens here with [indiscernible] and the transfer of those subs? Are they in this pricing agreement, or just how should we think about that expectation?

Yes. So, this pricing agreement certainly does not include anything related to Okta. So, I think that’s on the come. What we are negotiating right now is kind of a standard pricing agreement that would have Virginia, Columbia type content in it. So, we have nothing there yet. I expect that in the future years. And maybe, Mike, let me go back and add a footnote to my prior answer to you on design risk. Recall that for the government new reactor designs that we have, Pele and for DRACO, those are done – both of those are done under cost reimbursable contracts, and so we are not exposed to cost risk on those more exotic and more complex designs, let me say. And so we have that. We also have government indemnity on those things. And so much different posture on the government reactor design side of it.

Got it. Okay. Thanks guys.

Thanks Michael.

Your next question comes from Andre Madrid with Bank of America. Your line is now open.

Hey. I know some – I know it’s kind of been touched on a little bit, but I was wondering if you could maybe quantify a bit more about the sales upside you could be seeing from medical through the end of the year?

The sales upside, you said?

Yes.

Yes. So, what we said is our ultimate goal for the year is to be up 20% plus. We had a better quarter than that. And I see for the remainder of the year prospect for coming in higher than that 20% growth for revenue. That was our target for ‘23. We are tracking, as I say, year-to-date to exceed that. And so we will keep going on that.

Got it. That’s in our model and I will hop back in the queue. Thank you.

Okay. Great. Thanks.

Thanks Andre.

There are no further questions at this time. With that, I will turn the call back to Chase Jacobson for closing remarks.

Thank you, Brianna and thank you everyone for joining us today. We look forward to seeing and speaking with many of you at upcoming investor events. If you have any questions, you can reach me by phone or e-mail at investors@bwxt.com. Thanks.

This will conclude the conference call. Thank you for joining us today. You may now disconnect.