Ladies and gentlemen, welcome to the BWX Technologies First Quarter 2024 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, Kathleen. 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 first quarter 2024 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 all of you. This afternoon, we reported the BWXT first quarter results. We delivered 6% organic revenue growth, 9% adjusted earnings per share growth and remarkably good cash flow compared to historical seasonal patterns. Operating performance was in line with our expectations, and we are reaffirming our full year guidance, calling for mid-single-digit revenue and adjusted EBITDA growth leading to adjusted earnings per share of $3.05 to $3.20. Before I get into the segment discussion, I'd like to spend a few minutes on our recent announcement to expand the Cambridge plant, which is already North America's largest heavy nuclear equipment manufacturing facility. As we discussed on recent calls, demand in the commercial nuclear markets is robust with new and ongoing life extensions of CANDU reactors in Canada and the international market, the potential for large new builds and the incipient demand for small modular reactors. With this tangible future demand and our existing commercial nuclear backlog of over $700 million, we are moving forward with a project to increase the Cambridge facility footprint by 25% and upgrade it with advanced manufacturing equipment. Over the next 2 years, we will invest about $60 million with construction starting in the third quarter of this year and planned completion in mid-2026. I would add that the expanded capacity enables more efficient execution of our existing backlog and room for new and exciting growth projects. While much smaller in scale, our intention is to get ahead of demand that we know is precipitating in this market just as we did with naval propulsion, microreactors and the medical business in recent years. This investment also enables our customers to signal supply chain strength as they compete for and secure more clean energy projects. In that vein, just last…

Thanks, Rex, and good evening, everyone. I'll start with some total company financial highlights on Slide 4 of the earnings presentation. First quarter revenue was $604 million, up 6% organically on a consolidated basis, with similar growth in both segments. Adjusted EBITDA was $115 million, up 4% year-over-year as growth in Commercial Operations and lower corporate costs were partially offset by slightly lower Government Operations EBITDA. The lower corporate costs in the first quarter were mainly due to the timing of health care-related costs and are expected to return to a more normalized level over the next several quarters. We continue to see full year unallocated corporate EBITDA at flat to slightly lower than 2023. Adjusted earnings per share was $0.76, up 9% compared to $0.70 in the prior year quarter. As you can see in the EPS bridge on Slide 5, operations contributed about $0.02 to the year-over-year growth with the remainder split between slightly higher pension and other income, lower interest expense and a lower tax rate. For the full year, we expect the net impact of nonoperational items to be relatively neutral to adjusted EPS compared to 2023 as various items around timing of certain expenses, FX gains and interest expense that benefited the first quarter will have offsets over the next 3 quarters. Our adjusted effective tax rate was 22.5% in the quarter due to higher excess tax benefits of stock compensation expense. Nonetheless, we still expect a full year tax rate of approximately 23.5%, meaning you could see a tax rate closer to that level over the next few quarters. Free cash flow in the quarter was $3 million compared to a use of $43 million in the first quarter of 2023. Albeit modest, this was the first time we had positive free cash flow…

[Operator Instructions] Your first question comes from the line of Scott Deuschle from Deutsche Bank.

Robb, just to clarify, was the year-over-year margin pressure at Government Operations this quarter entirely from the onboarding inefficiencies and cost plus mix? Or is there anything else in there that's dragging down the margins?

No. The year-over-year margin -- the GO margin that you're referring to, the kind of 200 basis points, those were some of the pressures that we saw, Scott. But really, if you really look back to last year, you'll realize that, that was the highest margin that we saw all year. So that's the first thing to note. That quarter really enjoyed positives in a couple fashions. One was it had -- if you go back and look, it had a kind of one-time positive uplift from TSG performance fees that normally we see over kind of the next couple of quarters. We also saw a really good NOG volume. I think that had to do with just sort of a release in general as we got through the workforce ramp-up. That first quarter, we really saw some positives that we talked about, if you go back and look at the script. That was about half, honestly, that high point. The second half of the step down is that kind of 100 of the 200 basis points really came from less so inefficiencies in the way of describing mix, Scott, but more around just what's going on with some of our new projects. So as we ramp up the U-Metal project and the initiatives within AT, our Advanced Technology group, specifically Pele and DRACO, all those businesses are just new for us, right? So they're coming at a lower margin. So again, about half of it came from that extraordinary performance that we saw last year that was just kind of a real high point. And the other half came from really the ramping of what you could call mix, the ramp of some of these new projects.

Okay. That's helpful, Robb. And then, Rex, I think this multiyear pricing negotiation was supposed to have finished up last year, I want to say. So it seems to be taking quite a bit longer than normal. Just curious if you can shed any light on what's driving that delay and whether you got a bridge contract to help you kind of get through until you get the actual multiyear done.

Yes. Sure, Scott. Of course, we completed the fuel part of that contract earlier. That one's in the bag. But yes, the rest of it, we've been operating under a bridge contract for a period of time while we work out the negotiation detail. I would say that the uncertainty around the FY '24 appropriations, that combined with the defense supplemental, created some uncertainty about what funding would be available. And so I'd say now that those are water under the bridge, we're in a position to get this across the finish line now. But your assertion is correct, right? We've been executing the work scope under that pricing agreement for a long time now through bridge contracts.

Your next question comes from the line of Bob Labick of CJS Securities.

Rex, you mentioned the drug master file for lutetium. I was just wondering if you could give us a little more update on the process of seeking Canadian approval for the irradiation of ytterbium up there in your target delivery system and everything and then other steps that it's going to take to get all the way through the DMF for lutetium.

For lutetium. Okay. Well, so for lutetium and those other active pharmaceutical ingredients that's a pretty simple process. And what happens there is that the pharmaceutical companies that are planning to use that radioisotope will reference our product in their filing to the FDA. So it's a simpler and cleaner process, and the timing for that is we'll be in business on lutetium sometime next year and I believe the same thing for ytterbium.

Yes, that's right. Maybe just to give a little added color there. We're through the process of making targets. As you know, you need to get through that. And then ultimately, you'll place those in a source of irradiation. There's 2 sites that we're going to be looking to a radio material first at the Missouri Reactor. That's sort of the first stage. And then ultimately, as you mentioned, Bob, in our TDS at OPG, we built that obviously for tech, but that has capability around irradiating ytterbium. So we will have to go through some work to get that credentialed with the regulators, but that's in process as it relates to OPG. We don't see that as an impediment on there. And then ultimately, we're also standing up a processing line for that irradiating material, Bob, as you know, to make active pharmaceutical ingredients. So that's one more step. And so we're rolling out the construction there. So kind of moving along nicely. As the market matures, frankly, we're seeing a lot of different customers for both irradiated material as well as for API.

Okay. Super. And then just sticking with isotopes. Obviously, you have a lot going on this quarter. I didn't hear any update on the moly-99. Any news from the FDA? Or when should we expect next information?

Yes. Yes. Thanks, Bob. Let me give maybe sort of a broad perspective on that product line and this development. I think of -- for products like this, you can think about sort of 3 big phases: the research and development phase, of course, which we exited a long time ago; the industrialization phase, which we are going through right now; and then, of course, commercialization phase, that's what everyone's been most interested in. And so we're at the very tail end of industrializing that product line. And by the way, it's overlapping with commercialization of that product. And so when you think about the industrialization phase, the systems that we've described to you, and you've seen them, you've put your eyes on them for the most part, but it's really exercising the target delivery system and then exercising our radiochemistry and radiopharmacy line. There's other things, too, waste management systems and other such, but those are the big 3. And by the way, let me pause for a second and remind you that, as Robb said about the -- in his previous answer, we pivoted from a MURR radiation campaign and went directly to the target delivery system, which did cost us some schedule, but it avoids having to do a second filing to get that product approved by the FDA. So I think we're going to look in the rearview mirror and see that as a good decision. So where we are is we have exercised our target delivery system. We've run targets through the reactor at Darlington in a high-neutron flux environment and produced high activity targets. We have exercised all 4 of those target elevators. We frankly had to work out some kinks in that system, which we have done so. It's working very well now. We have run those high activity targets through radiochem and radiopharm. And I would say that we are doing the final tweaking on both of those systems to get the product exactly right. I would say that we are very well pleased with the product quality. It meets all the drug pharmacopeia. And then we're working through sort of the final items of our checklist with the FDA. In the meantime, we've been focusing on the commercialization phase. There is quite a bit of enthusiasm in the market for this product. So we've been doing some product testing by way of sending our generators to radiopharmacy networks and tagging our product with cold kits -- tagging cold kits with our product. We're working through in pretty serious ways now, supply agreements with the radiopharmacy networks. And we're working on logistics details now, the shipping costs and how we distribute the product, in particular, with which radiopharmacy. So I'd say I'm super well pleased with all that progress, and it's -- we're pushing through to the finish line.

Your next question comes from the line of David Strauss of Barclays.

Actually, Josh Corn on for David. I wanted to ask about the expansion of the Cambridge plant for the SMRs. If you could give us anything on when you might see some of that elevated demand start to come through and what the additional capacity might allow you to produce.

Yes. Sure, Josh. I'll start with that one. Robb may want to add. So the thing that kind of tripped us over on making a decision on that capacity expansion was the formal announcement on Pickering. That's a very big project. We'll be making the steam generators of which there are 48 for those 4 reactors, 12 per reactor. 48 steam generators will likely to be -- very likely to manufacture the feeders for that, heat exchangers and other kinds of components. It's a lot. And when you look at what we have in that plant right now, we're making all the steam generators, replacement steam generators for the Bruce site. We're making feeders for the Bruce site. Making heat exchangers for the Bruce site. We're doing feeders for the Darlington refurbishments. And now we've got this activity on the small modular reactor and the reactor pressure vessel, and we expect to receive firm orders for that in the next few months, as we said on the call. So when you blend all that up, basically, if you walk through that plant, it is full. I mean it is full. And so we really need the capacity now. And our expectation is that we'll see the follow-on orders for the other 3 reactor pressure vessels. And there's other content on that reactor, the 3 fueling systems and various other things for which we will compete. And so -- and then after that, the fast followers would be organizations like TVA, which is preparing the Clinch River site for the same type of small modular reactor. We hear of other utilities that are interested in that and then potential reactors that would go into Poland and other places that you've heard us talk about. So the demand seems to be coming in kind of a wave, and we've built out a capacity to be ready for that.

Yes. I might just add that we've done a lot of business cases. We kind of -- we've been talking about this with you guys even in the last couple of quarters. And I really wanted to do a business case to say, can we make the numbers work on the expansion with essentially the book of business that we have, right, and then leave the upside of being able to either serve international or U.S. demand on the SMR side. That's sort of gravy to this. So as Rex said, as you have the Darlington OPG refurb kind of come to an end at some point that you're ramping up on the Bruce Power and then ultimately the Pickering, all that refurb work, and then you have the GE Hitachi work of the first SMR and the likely follow-on, that really kind of makes you the business case. And then you want to have a tail of opportunity that ultimately pushes it to a really good business case. And that's when I looked at international growth, [indiscernible], either refurbs. You're talking now more about greenfields. And so all of that can't be priced in to counting on it but really will seem to be quite clever if that all comes through. So we're pretty excited about the economics of that build-out.

Your next question comes from the line of Peter Arment of Baird.

Rex, Robb, Chase, nice results. Maybe just to stay on that topic on Pickering. Can you talk about -- I think at your Investor Day, you highlighted that some of these refurbishment projects that the BWX kind of content was roughly about 10% of the total project cost. Is that -- would that be similar for Pickering? And when would we expect actually the ordering of the long-lead materials to start?

So on Pickering, let me see, Peter. I don't know if I could give a rule of thumb on percentage of total project costs. But you can think of the opportunity as being similar in scale to the -- I think a good comparison point would be the Bruce reactors, where we built the steam generators for all those, and that was a CAD 600 million, CAD 650 million contract, I believe, at the time. So maybe factor in a little bit of escalation and a larger number of steam generators. Then you can add the feeders to that and heat exchangers. That's sort of a $1 billion scale opportunity there. And I don't know the total project cost estimate from OPG, but it's -- obviously, that's a sizable opportunity.

Okay. That's helpful. And then just when does the long lead materials kind of activity begin? Obviously, you're putting the CapEx in place in front of that.

Yes, I can take that one. Yes. So they're already talking about whether or not that long lead material could come in the near term. And they're also looking at a schedule to get after a set of those in a more sequential basis to ultimately drive down the cost. So I wouldn't be surprised if you get a more upfront or go working through that with the customer and see how quickly they want to go. But I think in the near term.

That's helpful. And then just regarding Romania, is there any updates there in terms of -- you mentioned the export financing is in place. When would we think about kind of order timing on that one?

Yes, I can take that, too. It's still looking at kind of a year or 2 out until when it will sizably hit our books. That date is moving around, but they're moving forward. The OEM and EPC are moving forward. And so we're starting to see schedules put out and starting to get our business lined up. So I would say it's sort of, call it, 2 to 3 years out for it to be meaningful for us.

Just lastly on the CapEx part, Robb. So it sounds like you had already kind of planned for this. So CapEx doesn't seem like it goes up at all very much. Are we thinking about this kind of similar levels next year just given this announcement? Or do you think this is kind of like a little bit of growth CapEx that you're putting in place?

Yes. The way I'd describe it is if you go back to Investor Day, right, we had a little bit over $100 million, $110 million, if you just look at 4% of sales. And then we're finishing off the microreactor projects from last year. So that probably put us at the lower end, if you will, of our sort of guidance, right? The free cash flow range that I have out there includes a couple of different scenarios. So maybe on the upper end of free cash flow, you might say you're going to have a $125 million, $130 million of CapEx. And so for this year, that could tilt us from a CapEx standpoint to -- as we build out Cambridge to be sort of the upper end, but we fully expect to offset that with all the goodness that we're seeing in operating cash flows. So that's what allows us to kind of remain in our range, is that even if we spend $10 million to $20 million on this project this year, that was sort of contemplated. We could absorb that with all the good initiatives we have on operating cash flow. I think it's a tad too early to talk when you say next year. Yes, no problem. Just I'll comment about next year. I think it's a little far out, but I don't see any major changes in this project. It can live within that normal budget.

Your next question comes from the line of Pete Skibitski of Alembic Global.

Just one for me, Rex. You touched earlier in your opening comments about the '24 baseline budget and supplementals approved. And I think there was $3.3 billion in the SIB funding. I guess, A, does any of that SIB money go to you guys at all? Or basically, you're just doing okay and you're already facilitized so it goes to other suppliers? And then anything -- any changes at all between the '24 budgets and the new '25 budgets at NASA or DOE with anything you guys are interested in there?

Let's see here. On the submarine base industrial funding, it is for the broad submarine industrial base, which could include us, Pete. And that would, of course, come through our customer. I'd say there's more to come on that as to what if any of that would get to us. And would you repeat the second question again for me?

Yes. Just in the '25 fit-up that got released, with regard to NASA and DOE, I was just wondering if there's anything kind of new or interesting nuclear-wise that you saw in those budgets, the plans there.

New and interesting nuclear-wise. Probably not, but I would say that we're continuing to see sustained and very good support for the programs of record like DRACO and Pele. And hopefully, that will continue.

Your next question comes from the line of Michael Ciarmoli from Truist.

Nice results. Maybe, Rex, just back to the multiyear pricing. Did -- is that -- I mean you mentioned kind of maybe a delay. I don't know if that's the right word, but just what was going on with the fiscal '24, '25 budget. Is the Ford CVN sort of schedule a factor in kind of what's happening with that new multiyear contract?

Yes. I think that when we're working through those agreements with our customer, Mike, it's everything, right? So it's what is the shipbuilding schedule, what is the budget available, how many spares do they want to order, what's going on with escalation. So that blends up to a pretty complex thing, particularly right now with labor and materials, inflationary pressure. So it's sorting through that. And by the way, certainly not unusual for other defense contractors to be on bridge contracts to negotiate through these things. So it's of that -- it's all the above. It was the FY '24 appropriation. It was the supplemental, and it's the shipbuilding schedule and the budget request all blended up into what do we have here. And we'll certainly sort it out.

Got it. Got it. And then, Robb, just on the -- back to the medical and the Tc-99. Any sort of change in your thought process? I mean I guess directionally, maybe it sounds like the Tc-99 approval is sliding to the right a little bit. But still comfortable with the trajectory of '24 and '25 revenues there for overall medical pushing to $200 million and I guess getting that margin into the mid-30s?

Yes. No, I don't think there is any change really overall. Again, we don't anticipate any tech really moving the needle this year in 2024. We talked about that last quarter. We're not really seeing -- we're going to try to get commercial, but the actual impact will be minor in the near term. Ultimately, as we laid out that target, we said that it would really come from a couple of different areas: our core portfolio, the therapeutics portfolio, and then the last area is the tech portfolio. And if you move through those and you really think about it, there's been some pretty good upside on the Nordion. I think therapeutics is, at least from a market standpoint, surprising. We need to get some contracts. We talk about lutetium. We're the only commercial supplier in actinium. So I wouldn't be surprised if we get surprised to the upside there. And tech, for all the fits and starts that we've had, is actually lining up pretty nicely. The market is ready for a third player. And so I wouldn't be surprised if we nail that one as well. So the target overall for, call it, '25, '26 year to have that level of $200 million revenue still seems readily achievable.

Got it. And then just last one for me. Just, Robb, given your background, what were your thoughts when you saw Fusion kind of pre-revenue, pre-EBITDA getting acquired for $2 billion, knowing what you guys have in terms of your medical business?

Yes. I thought it was a solid acquisition, I think, for the acquirer. We're working very closely. As you know, we've press released that we're working closely with a couple of key companies. One of them is Fusion. And we've been constantly impressed with their products and their knowledge that understanding how to get supply of the actinium, which is what their drugs are really based on, is key. And if you read the press release from the acquirer, they're really focused on the fact that they could bring that to bear to the parent company. So it's not only the products they have but the knowledge of the supply chain. And we're a partner there. So in indirect way, they're affirming our strategy that that's really a key aspect to what makes that company solid. I think I've always been transparent that we don't sell -- we're not in the drug business. So those valuations really are multiples of revenue, if you will. And we're more of a pick and shovel player. But we're a very solid part of the ecosystem that I think really will warrant a valuation when we bring our whole business plan to bear. And I know everybody has been patient with that. But if we hit these targets, I think the valuation of that entity could be quite compelling.

Your next question comes from the line of Ron Epstein from Bank of America.

Just maybe a quick one. When you look at the cadence for submarine production, it seems like Virginia class has kind of been, I don't know, slowed down given what the industry can do. And what impact does that have on you all? I mean is it -- are you kind of directly connected to that? Are you delivering your stuff separately? I mean how should we think about that?

Ron, I just touched on that in the script a little bit. I think you can think of us as somewhat decoupled from the shipyards. I mean first off, the shipyards, HII and GD are not our customers. We sell that product to naval reactors, and we sell it to them on their schedule. And then that's government furnished to the shipyards. So we're a little bit decoupled from that. And so I think that's a way to think about it. Another aspect here -- maybe 3 things to think about. Another aspect to consider here is that, look, this is the President's budget request. And that's the shipbuilding schedule, but it doesn't mean that much until the authorizers and appropriators are done enacting the budgets for '25 and beyond. So I think it's certainly very early innings in that game of Virginia production. We've heard our peer companies out there, HII and others, talking about how important it is to keep that production rate funding going. And obviously, very, very strong bilateral support for the Virginia program. So I'd say that one is not done yet. The third thing I would say is that the industrial base ultimately and BWXT ultimately have to get to a higher production rate in order to meet the needs for AUKUS. And so this Virginia rate needs to go to 2.3 for a decade or more. And so we've got to build the industrial capacity and the workforce capability to do that. And so slowing down doesn't make any sense to me. And so we'll see what the appropriators do. But it doesn't worry me all that much given the depth of our backlog and given the strategic priority that the Virginia represents.

Got it. Got it. Yes, that makes sense. And then I think you spoke to this some, but can you speak to what's going on with labor for you all? I mean labor has been a challenge for, it seems like, everybody across the space. I mean has it been any different for you? Are you retaining people, hiring people and potentially the people that you're going to need to bring on board to eventually ramp up to meet the demand for the Navy?

Yes. I'd say maybe there's a couple of things I would say about that. And I talked about this a lot in prior calls, and that is that we've reengineered our talent acquisition process under Bob W's leadership who runs human capital for us over the last, let's call it, 1.5 years. And the fruits of that were we hired 10% of our total workforce last year, as we said in the script. And so we -- there were 2 things there, right? We were able to achieve -- largely achieve our growth needs and do so in an environment where attrition post-COVID is higher than historically it has been. So I'd say that we sort of won on both sides of that one. All that said, it's a tough environment for labor, right? I think we're reindustrializing the U.S. economy and certainly trying to ramp up submarine production. And that's not an easy thing to do, and it's hard to get your hands on those scarce resources. And so when Robb talked about the pressure that we're feeling on -- the pressure that we're getting in our margins, it has to do with onboarding that many people in that amount of churn. Our efficiencies are good. We're making this product with the profit that we thought we would. But you've got a lot of people sitting in training classes, and you got a lot of people turning through overhead because of that. So I want to say that we've done a really good job of dealing with what I think is a very challenging environment, and we just have to keep swinging the ax at this thing. Robb, do you want to add anything?

No, I think you said it well. We're absorbing -- we got ahead of the industry, I think, on CapEx to build the capacity. And we tried to do the same thing last year, really swarm the issue of workforce. And so we got ahead of it, and others are also in our industry, but that's sort of how BWXT goes about it, which is just address the problem quickly. And now we're turning through. As Rex said, our utilization at our top component sites are up almost 400 basis points year-over-year. But we're chewing through that, and we will all year. So we're sticking with our guidance, which shows that we can take all that workforce in and still keep moving. So I think we're going to be on the other side of this and be quite strong.

That concludes our Q&A session. I will now turn the conference back over to Chase Jacobson for closing remarks.

Thanks, everybody, for joining us today. We will be speaking with many of you in the coming days and seeing many of you over the coming months. If you have any further questions, you can feel free to reach out at investors@bwxt.com. Thanks.

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.