Q2 2020 BWX Technologies Inc Earnings Call
Ladies and gentlemen, welcome to be Wx technologies second quarter earnings Conference call. At this time all participants are in they listen only mode. Following up following the company's prepared remarks, we will conduct a question answer session and instructions will be given at that time I would I like to turn the call over to our host Mr. Mark Kratz beat.
Expertise director of Investor Relations. Please go ahead.
Thanks, Jason.
Good morning. Thank you for joining me today <unk> second quarter 2020 earnings call.
Joining me today, our Rex Jackson, President and Chief Executive Officer, David Blackman, 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 Yesterdays earnings release and artists E filing.
We will also provide non-GAAP financial measures, which are reconciled to GAAP measures and the quarterly materials copies of these documents along with today's earnings presentation are available on the Investor section of our website.
<unk> all the turn call over to you.
[music], Thank you Mark and good morning, everyone.
Yesterday, we reported strong second quarter results with non-GAAP earnings per share of 71 cents.
Up 15% on 7% revenue growth, while delivering robust free cash flow of $111 million three times, the second quarter last year.
These results extend BW X T is exceptional first quarter and producing very strong first half performance, but non-GAAP earnings per share up 33% on 18% revenue growth.
And positive free cash flow despite substantial capital investments to lay the foundation for future organic growth.
This performance leads us to increase 2020 earnings per share guidance, despite negative impacts related to cobot 19, and commercial business lines.
Second quarter in year to date outperformance are driven by the nuclear operations group through the Columbia class product line ramp.
And accelerating weren't volume in long lead material production. These were bolstered by contract performance improvements through operational excellence as we execute against the robust backlog.
[laughter] over the last several months, both the house and Senate have made significant progress on the 2021 M.D.A. budget authorization is trending well for BW XT programs, particularly for a second Virginia class nuclear propulsion system and 2021, both the house and Senate pass to Bill's contain increased.
Funding for the Virginia program with the house, adding an incremental $272 million and the Senate allocating $472 million for long lead items for a second Virginia ship.
Additionally, the House Appropriations Committee said why 21 defense Appropriations Bill includes the same 272 million increase for Virginia advanced procurement.
As I discussed on the last earnings call. There was a scenario where the entire second Virginia class submarine is not ordered but the nuclear propulsion equipment for a second submarine is ordered this is the action by the Senate, thus far with the house fully funding the program. Consequently, the actions of both chambers are trending favorably for BW X T to me.
Maintain production cadence.
On the Virginia program.
Beyond Navy programs, we're pleased with the support for deal, we cite funding and new nuclear technology programs, including micro reactors for the strategic capabilities office, DARPA and NASA along with try so fuel.
And the second quarter energy was awarded a 26 million dollar competitive contract to expand and upgrade the try so a nuclear fuel manufacturing line. This win adds to the string of events and progress for this fuel production line that is unique to BW XT.
We anticipate future production options for the fabrication and delivery of try so fuel for deal D and NASA demonstration mentioned.
We're also pleased with the progress and the other government segment. The nuclear services group in May APW X T. Led team was awarded the de always 13 billion dollar hand for tank closure contract.
This hallmark when demonstrates the company's deep nuclear operations pedigree, there was a key differentiator for nuclear remediation projects. There. Shortly after the award the win was protested which will impact transition timing in light of the protest timing, we see incremental pressure on NSG operating income guidance for the year.
But nonetheless remain optimistic about future growth in this segment.
Beyond hampered the de <unk> deal, we opportunity pipeline remains attractive as we have outlined in the investor presentation materials. In fact, some opportunities have accelerated namely the recompete for the national nuclear security administrations uranium hub at Y 12, and the Central Assembly and just assembly side for nuclear weapons, Japan.
Tax [laughter] last week, the department of Energy released a pre solicitation notice for the management and operations of Pentaxim Y 12, and we expect a request for proposal to follow later this year with the potential award in the fall of 2021.
And lastly for N.S.G., we recently divested.
The U.S. commercial services business, which we viewed to be a sub scale noncore as we look to sharpen our focus on government nuclear remediation projects and site operations and this segment.
The facility we obtained in the transaction is located adjacent to the major energy production site and much Lynchburg, Virginia and will allow for much needed shop floor capacity.
For anticipated future expansion into space and defense micro reactors as that government driven market matures.
As anticipated on the last call second quarter nuclear power group results were down.
As customer driven cobot 19 impacts were most evident and this commercial segment.
[noise] within Canadian commercial power utility customers continued to navigate the cobot 19 environment to limit personnel exposure and have pushed out some refurbishment and service outage activities. However, we believe most of this impact is behind us and are well positioned for business recovery to begin in the back half of the year or through the resumption of service.
Outages, an increased fuel demand.
I have also task the business to look for incremental opportunities and to evaluate all possible cost actions at our disposal. During this extended disruption. We will also consider any potential government reimbursement programs that could offset negative financial pressure from carrying a fuller set of resources as we maintain a posture that is aligned.
Should return to more normal future conditions.
And the medical radioisotopes business, we witnessed weaker demand for products in the second quarter as hospitals prioritized resources for Cobot, 19, and doctors continue to limit patient exposure.
This trend is more difficult to predict as we move into the second half of the year. It may continue as covert 19 cases are on the rise for a second time in certain geographies.
On the other hand, we are progressing as planned on the Molly knocking on product line, the radio chemical and Radiopharmacy designs are complete and facility modifications and construction are well underway.
Overall, I am well pleased with the progress the team is making as we rapidly retire cost and scheduled contingency with each step towards production readiness.
The mid 2022 product introduction target, which include schedule and cost margin for any unforeseen risks is on track.
And I look forward to providing future progress updates.
Lastly, I want to emphasize my gratitude.
To the 6600, BW XT employees for their professionalism and dealing with the cobot 19 work environment.
We remain committed to protecting employee health and safety first while also maintaining business viability.
Any protocols continued to demonstrate effectiveness and minimizing employee exposure and business interruption as evidenced by the limited number of cases within the company and the absence of workplace transmission.
We remain cautiously optimistic about the trajectory of the business through the remainder of the year as we navigate through this unprecedented pandemic.
And with that I will turn the call over to David.
Thanks, Rex and good morning, everyone, starting with total company results on slide four of the earnings presentation.
Second quarter and year to date revenues were up 7% and 18% cents, respectively, and as Rex mentioned were driven primarily from outperformance in the nuclear operations group.
The strong execution. This year resulted in second quarter earnings per share up 15% and year to date EPS of $1.50 up 33% when compared with the first half of 2019.
First half operating margins expanded 140 basis points to 17.7%. So year to date earnings growth was dominated by segment operations, which is the picked it on slide five of the presentation.
Operating segments drove 28 cents of improvement and corporate cost controls resulted in four cents of improvement.
Lastly, we drove five cents, a bps improvement through higher pension income and lower interest expense.
Our year to date cash generation has been strong resulting in lower borrowings and the actions. We took in the first six months. This year to restructured debt has resulted in more liquidity a credit facility with lower rates and an extended debt maturity schedule with no debt due until 2025.
Moving to second quarter segment results on slide six.
Nuclear operations group delivered another solid quarter with revenue up 14% to $410 million.
We continue to see accelerated material production in the second quarter, including higher volume from the Columbia product line as well as higher volume from naval nuclear fuel and Downblending.
NRG operating income was $86 million, resulting in a 21% operating margin for the quarter.
The nuclear power group produced $68 million revenue in the second quarter, a 22% decrease when compared with the second quarter last year, primarily driven by lower components manufacturing, a commercial nuclear power and lower medical isotope volume as demand for procedures remain depressed due to cope at night.
Team.
NPG second quarter non-GAAP operating income was $2.4 million, resulting in a non-GAAP operating margin of 3.5%.
Operating income in margin were down significantly when compared to the second quarter 2019 for several reasons first cobot 19 impacts drove lower demand in both commercial nuclear power outages and services and medical isotopes second we had an unfavorable shift in product line mix, including the.
Since of the China's steam generator project when compared with the prior year period and lastly, the segment was impacted by higher foreign exchange rates between the Canadian and Us dollar.
The nuclear services group delivered operating income of $5.1 million in the second quarter up $3.3 million versus the prior year period as a result of lower expenses associated with business development activities.
Turning now to year to date results on slide seven.
Nuclear operations group year to date revenues were up 26% and operating income was up 33% year to date energy margins were robust at 21.1%.
Year to date nuclear power revenues are down 9% and segment margins were 7.1% in part from the business impacts of Koeppen 19.
And nuclear service group is trending well up about $8 million, an operating income year to date through a combination of increased income from U.S. commercial services early in the year and lower costs from bid and proposal activities.
As Rex mentioned, we're increasing our 2020 guidance shown on slide eight.
NRG has had exceptional performance year to date and so we now expect that segment revenue to be about up about 10% versus our prior expectation of about 9%.
NRG first half performance has offset some negative pressure from cobot 19 in the commercial businesses as we look to the balance of the year. We felt it was prudent to increase our earnings estimates, we're now providing a non-GAAP EPS guidance range up to 80 to 90 to account for certain unknowns largely in the commercial business line.
Lines, but still represents upside from our original EPS guidance and results in a modest increase with an EPS midpoint of to 85.
All other components of guidance remain consistent with our prior outlook on the year and we have updated the 2020 guidance bridge on slide nine to reflect the change driven primarily from upside and operations.
Lastly, I would like to conclude with some remarks on cash liquidity and capital allocation.
The company Gem rated robust cash of $162 million from operating activities in the second quarter about two and a half times added the second quarter last year cash and short term investments remained solid at $65 million at the end of the second quarter, and we are well positioned with over 700 million.
Dollars in total liquidity.
We continued to return cash to shareholders through a combination of dividends and share repurchases and have returned nearly $57 million year to date as we progress on our current capital allocation priority to invest in the business over the near term and navigate through the covert 19 environment, we continue to.
Valuate, the best use of cash to generate long term value for our shareholders as we look to a strategic allocation of capital.
We are progressing well on our capital investments for future organic growth. We have diligently spent $115 million year to date and remain on track to spend the expected $270 million and capital expenditures for 2020.
We still anticipate elevated capex levels in 2021, and expect to return to near maintenance levels in 2022.
And with that I'll ask the operator to open the line for questions.
Thank you.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone, if you're using any speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then too.
The first question is from Pete Skibitski from Alembic Global Please go ahead.
Hey, good morning, guys nice quarter.
[music].
Hey, just went on the strong first half gross I know G coming into this year did you guys kind of expect this it's you know it's very strong growth I know most of it is I think Columbia related I don't know if you expected more of a coming in as you're more rock kind of a level load across the year or if some materials purchases im just kind of.
Been pulled in from 20 to 21 Im just wondering how surprise you are more kind of inline with expectations.
This this phenomenon as you'd obviously implies kind of a weaker relative second half of the year.
Yes, Peter good morning.
Yes, certainly we outperformed relative to our expectations in the first half and as we said some of that is contract performance.
Through operational excellence.
Good amount of that as long lead materials, and so it's a bit surprised.
A bit of an upside surprise in the first half and I would say that one of the reasons, we give annual guidance instead of quarterly guidance is because the materials component of our performance can be pretty lumpy.
And a little bit on predictable and the reason for that is because a lot of that comes through suppliers, who are making for example, forgings and alloys for the business and they can pull on their backlog and book and Bill to US we can take percentage completion credit on that and book and Bill our customer. So there is that amount of unpredictability in it and certainly pleasant surprise in the first half.
And.
I wouldn't expect the same kind of upside to the second half.
But but we should have a good second half as well.
Okay. Okay that makes sense I appreciate it and I just on the MPG margin guidance of 11%.
Your your called for a big ramp on the second half, what's what's going to kind of drive those margins higher and H. too.
There's about three things going on there as we discussed in his script.
We've had currency pressure that's drifted back in our favor in the last quarter or so.
Conversion rate got as as low as $1.40 dollars 34 today, so thats, helping a little bit. So so that may give us a little bit a lift.
We expect when we certainly hope for a rebound in the isotope.
Business that.
I mean, there's still some pressure there, but thats a high gross margin business and so that when cuts both ways with a little bit will lift that will improve margins substantially Pete and the other part of it is the nuclear power group.
The commercial the commercial nuclear component of the nuclear power group was was weak in the first half some of it was cobot related because some service outages got pushed from the first half into the second half of the year. The original bias on service outages was going to be five in the first half and two in the second half and now it's.
Three in the first half and for the second half if I recall correctly, so there will be.
Sorry, I got that reverse there'll be more service jobs. It service outages in the second half than there were in the first half and and we've got good production tempo on our component manufacturing and second half as well. So I think just about all three of those things conspire to give us more lift in the second half peak.
Okay I appreciate all the color guys. One last quick one on the Hanford protest.
Do you have a date when that's supposed to be adjudicated by.
No I think thats, a little bit unpredictable. So we don't know I don't expect will get much of anything out of that in 2000 22020 at this point, though.
Okay. Okay. Thanks, guys.
Thanks, Pete XP.
The next question comes from Robert Spingarn from Credit Suisse. Please go ahead.
Hi, good morning, I want it.
First ask and good morning.
Ask on not.
Nuclear operations group just on the back of the comments that were just made Pete's question, but.
With respect to Virginia funding that directs talked about earlier in the overall visibility that you have in the business I'm wondering if there's anything you can you help.
Say that help us level set in terms of growth for next year.
Especially you talked about the material purchases in the trend this year.
First half to second how do we think about not growth next year with potentially the second Virginia and again the cadence on the material purchases.
So Rob we.
We certainly not going to get into forecasting 21 at this juncture, we do expect some growth there we've got.
Some some residual growth from the accelerated Ford aircraft carrier.
Procurement.
We will characterize our 2021 at a later time.
Alright.
And then just separately we saw some news regarding the possibility of the U.S. developing.
Nuclear power to ice breakers, I'm wondering if that's a real possibility if theres anything you can offer in terms of the timeline or value such thanks.
Yeah, Rob I think it I think it absolutely is a possibility has you as you know the White House asked the coast Guard to go and develop plans for some nuclear powered.
Ice breakers and that plan is due to the white house. This month actually literally they're only a couple of active ice breakers and and the Coast Guard fleet right now operating in the Arctic region and.
So the administration has said it would like up to we'd like to have a fleet of about 10 the mix between nuclear non nuclear I don't think is clear at this point for certainly on a path to add some non nuclear ice breakers and the next in the first half of this decade. So I think I think it's an interesting possibility if that should transpire.
Sure.
We would certainly being in position to.
Supply those reactors to that to that application, but I wouldn't expect anything meaningful to happen until probably the second half of this decade.
When we might see some order activity should should that should that opportunity transpire.
Okay. Thank you.
Thank you thanks.
The next question comes from Peter Arment from Baird. Please go ahead.
Yes, good morning, Rex David our Aarding.
Hey, just one come back to Rob's question, a little bit on on your growth for 21, and then just just because when we think about how your backlog converts there's quite a bit of a step up in in the backlog conversion for for next year. So is there something that's that offsets that or is it just the timing.
The way the the revenues flow through.
[music].
Referring my question for me Peter I Didnt in terms of in terms in terms of you're trying to think about the growth profile for 2020 Watt just because we see in the backlog there is a.
You're planning to recognize next year in 2021 in the queue for NRG certainly shows like a big step up I'm. Just wondering if there's something that may be offsets that growth.
Or just it's timing related just trying to understand better profile for growth and 21.
Yes, Peter those David.
As you look at our backlog, obviously, we do provide that we provide future runoff there as we look at NRG. There's a couple of things going into play here one other things as you know as as Rex mentioned.
There was some pulled ahead of some materials.
So that will have some offset depending on what we forecasted last year or next year to this year.
But on Rex also said there is growth.
And next year, we're just at this point in time, not defining what that growth is.
At this time and we'll do that when we talk about the 2021 guide.
Okay. That's helpful and just and then just David just quickly on on on your kind of your cash outlook really strong free cash flow.
To Q Capex still ramps are you expecting this you're still to be kind of around the breakeven level or what's your thoughts on how the timing is there.
Breakeven on the cash.
On free cash flow, yes, so I mean once again, we are forecasting 270 million of Capex for the year.
And you know the other elements of what we're forecasting so.
Because of the high Capex.
You know, we're still forecasting we haven't given the operating or the free cash flow number, but as you have forecasted.
That number has not changed.
Okay. That's helpful. Thanks very much.
Thanks Peter.
The next question comes from Michael.
CR moly from true Securities. Please go ahead.
Hey, good morning, guys. Thanks for taking my question.
Maybe maybe I'll take another swipe at the energy in second half and 21 here I mean as it is it fair to say guys that you know a positive developments with the Virginia class you didn't really mention the impacts of potentially a multi year.
Contracting for the Columbia class, but it sounds like the visibility for energy improves in the second half and then if we think about I guess Rex you talked about forging and other casting suppliers. Some of those guys also cater to the commercial aerospace markets, maybe they're different directing more research.
Sources towards the fence now I mean, it's fair to say that your visibility and momentum as we sit here today. Its is a lot better than where you were three months ago.
I don't think we've seen a material change in our visibility Michael its.
You know, it's a very long cycle in somewhat predictable business and I think I think if you look at what's happening with the Congress.
On the second Virginia for 2021 that certainly stabilizes our outlook and so we still expect.
And and this is in the absence of the Navy Shipbuilding plan, but we still expect to stay on a on that tempo of.
Two virginia's.
One Columbia, when we get into into the normal tempo on that one and the fords every on five year intervals.
So I think our visibility is really is really unchanged.
Okay, what would be the implications of data.
Multi contract with the Columbia class.
Yes, Mike Lawrie, Okay, Yes, I think it would it would be this so kind of the same effect as the as the as the advance word procurement.
The to the two Ford carrier by we would be able to order materials earlier, we'd be able to offer some potential savings to our customer on that which would be the which would be the appeal of it. So I think it pull forward some volume in a way that would be meaningful to the business.
Got it perfect and then any any additional color on where we stand with missile tubes in terms of how you guys are thinking about that market going forward, you think you're going to have.
Some leverage to get.
The pricing in the margin do you want it and staying matter and kind of definitively made a decision to pump on that business.
Yes.
In terms of the missile tube.
Well, maybe two categories of of an answer here Michael the on the repairs that is going according to plan, we feel quite good about where that is.
And we'll be starting to ship completed missile tubes.
Pretty shortly.
Terms of future opportunities I think it just doesn't have the margin profile that we want to see in the business and so we are.
Not likely to pursue that in the future.
Got it.
Perfect. Thanks, guys I'll jump back into queue.
Thanks, Michael.
Again, if you have a question. Please press Star then one.
Next question is from Ron Epstein from Bank of America. Please go ahead.
Hey, good morning, Doug.
Just a question on when you look at the National Nuclear Security Administration budget.
And the request for 2021.
It's up relative to 22, when and if you actually look for the proceeded maybe four years, it's gone up every year in their projections going out I've got a lot to.
So what kind of opportunity does that present for you guys because when you look at the 2021.
Yeah, and then as a budget relative to 2020.
It is materially higher than the 2020 budget. So what's what's effort not present for you guys.
So run I think most of that opportunity for US lies in the area of management and operations of deal. We in an essay sites and so what you see there is largely increased funding at places like Los Alamos and Livermore and Sandy.
Nevada, and and then Pentaxim Y 12, and so it shows up at the labs for the most part and the opportunity for Us is.
A significant boost in equity income around the management of those slides for deal we.
That's the most tangible I think opportunity for us in that budget trajectory.
Gotcha Gotcha, and then maybe just.
Yes.
A detail on.
The arm.
Amortization change, it's going to happen in 2022.
If it would happen in 2022 as stated.
What impact do you expect that to have on your cash flow that I mean, we've heard from other contractors that.
Yeah.
Relatively good numbers relative to their operating cash flow I am not youve guys thought about it or if you're comfortable talk about it but yes. The R&D amortization were to change like it's supposed to the law doesn't change what impact would that have under cashman.
Now when you look at our R&D were less than 1% of our revenue. So it's not as much of a an impact for us as it would be others.
But once again you know.
When we see the change then well, we'll talk about what that does to us but.
Amortization changes then you get the same.
Benefits that others get ours, it just be a lot smaller.
Okay. Thank you.
Thanks, Ron.
The next question comes from Accor's from Barclays. Please go ahead.
Hi, Good morning, guys. Thanks for the question.
Can you talk a little bit about working capital and how that could trend either in terms of absolute dollars or.
These are set of revenue kind of as we go through the Columbia ramping and if that could be kind of a meaningful impact of free cash flow.
And so anytime we build up in the business youre going to have additional working capital to support that build of your manufacturing.
You've got to remember that when we talk about our largest customer U.S. government. We do have you know terms by which we build twice a month.
Then when we bill we get paid very quickly. So so there is an initial pop of working capital, but we tend to manage that.
And so you know there is some fluctuation change are now when we look at.
To the future and we look at the isotope business there will be changes in working capital there and the commercial lines of businesses, but once again, our biggest impact being the government.
They are doesn't tend to be a long term working capital issue.
Got it thanks, and then I guess.
On tax I think another the cares actually get to defer some of the payroll taxes. The from 2020 into 2021 can you give us.
What the impact of that would be for this year.
So weve.
Included a forecast of tax.
Were you know and you've seen year to date, where we are so we've got everything you know built in we are.
From us from a tax perspective from a cash perspective, we're allowed part of the reason why our free cash flow is up it's because we are delayed payments of that.
Until next year, so that helps us from a free cash flow perspective.
You know tax range, where you were trending and expecting that our tax range is about the same as we forecasted for the year.
Got it thanks, and then I guess is one more following up on the missile to question.
Let them you're getting out of that business I think you talked about maybe repurchasing some of that some of those facilities for rather use is that something you could still do so with that.
Yes, the have any sort of positive offset versus some capex that you might otherwise.
Yes, we certainly will re purpose that facility that's at Mount Vernon, Indiana, which is.
The production side for some of our largest components for naval reactors and so there's plenty of volume there. So re purpose that entire facility for those large components that are coming through and there is a bit of a benefit on capex.
Not striking but it's incrementally positive to the business.
Got it.
Yes.
Operator, we'll take our last question.
Right. Okay. Last question is the follow up from Michael ceremony from true Securities. Please go ahead.
Hey, Thanks, guys.
Just on the Columbia class racks.
The second one is going to get ordered in 24 when should we expect you guys to start booking some revenue for the long lead material Sir.
Yes, so Michael you know that for the reactor components.
Those those precede the ship.
This the ship procurement schedule by to the shipyards by two years. So for the for the 2021, Colombia. The first one that business began to pick up for us in 2019 as an example.
We ramped that through last year, so for the 2024, Columbia, you'll see that start to hit our business in 2022, and then ramp up through that year and pick up.
Beyond that and so.
From our Investor deck, you see how those columbia's layer into our future business and on a seven year delivery tempo you see some accumulation of volume over the course of time.
Yep perfect alright. Thanks.
Thanks, Michael.
This concludes our question and answer session I would like to turn the conference back over to Mark Kratz for any closing remarks.
Thank you. Thank you for joining us this morning.
This concludes our second quarter 2020 conference call. If you have further questions. Please call me at 90 80365 4300.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
[noise].