Q3 2022 BWX Technologies Inc Earnings Call
Ladies and gentlemen.
Welcome to BWXT technologies third quarter 2022 earnings conference calls.
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 pass the call over to your host Mark Kratz, Bwxt's Vice President of Investor Relations. Please go ahead.
Thank you Tia and good evening and welcome to <unk> third quarter 2022 earnings call.
Joining me today are <unk>, <unk>, president and CEO , and Rob Lemasters Senior Vice President and CFO .
On today's call, we will reference the third quarter 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 a separate presentation. They 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 third quarter earnings of 69 cents a share in line with our forecast and consistent with our framing in the last earnings call.
Revenue was up 5% free cash flow was up $25 million.
Adjusted EBITDA was down 5% and strong performance in commercial operations and company wide cost controls nearly offset labor challenges and government operations. Despite.
Macro market volatility this year. The company has exhibited solid underlying financial performance from its core operations. The labor challenges that have emerged have been largely offset by cost controls and outperformance from our commercial facing businesses, resulting in high single digit EBITDA growth on an ex pension basis.
Given our performance to date and the impacts of macro headwinds we have narrowed 2022 earnings per share guidance suggest below the original midpoint issued about a year ago in a very different overall economic environment.
Revenue and EBITDA have both moved favorably from our initial 2022 outlook in February .
Before I turn the call over to Rob to go through the financial details. Let me give you an update on the business.
And the optimistic long term outlook, we have on Bwxt's nuclear end market.
And our government business, we continue to see strong demand for our naval products, including components reactors and nuclear fuel.
Columbia submarine program continues to ramp and we recently shipped some of the first components for the lead boat.
The reactor components and fuel for the Virginia program are progressing at a regular cadence and we are continuing to work on multiple Ford class carrier propulsion chipsets and although we are starting the government fiscal year with a continuing resolution we don't anticipate any disruption to these critical and well supported national security programs.
We recently kicked off the next multiyear pricing negotiation with our navy customer and anticipate getting that next set of orders negotiated and under contract in the first half of 2023. This agreement is for reactor components and fuel for the next two fiscal years and supports the Navy 30 year Shipbuilding plan, which include stable production of Virginia fast.
Attack submarines and additional content on the Columbia program as we approach and annual ordering tempo for reactor components and fuel for the new ballistic missile submarine.
We also continue to support the U S Navy and the government as they negotiate the details of the August Trilateral security agreement.
If called upon BWXT stands ready to utilize our unique capabilities facilities and licenses.
To help enable this important global security effort.
As I noted and not unlike our market peers, we are experiencing some difficulties in our core business in this post pandemic dislocated labor market, finding and retaining skilled manufacturing labor is our most acute problem.
Some of our nuclear manufacturing sites, we're tracking almost 10% below our net head count plan.
Said another way, we are simply struggling to sufficiently higher to satisfy our growth needs as we stretch to meet demand from our customers.
It has a two fold effect of limiting progress against the backlog and reducing planned overhead absorption.
To address these labor shortages, we have implemented a set of comprehensive actions for recruiting we've expanded our employee referral programs and conducted a detailed kaiser an exercise to streamline the talent acquisition process.
The recruiting battle rhythm includes daily tracking and reporting to ensure constancy of purpose and process visibility. We've also hired more site level recruiting resources to more effectively market our unique career offerings to top candidates.
For retaining and Onboarding new team members, we are expanding and accelerating our training programs to improve their skill set and create a foundation for competency and success.
Beyond the labor impacts this year, we are doubling down on operational excellence to drive efficiency to offset increasing costs and improve schedule and quality.
Having made significant capital investments in the Navy business. We are in the process of optimizing throughput to reduce span times and drive efficiency as we execute execute the backlog well.
Well, we've always had a continuous improvement culture and formal operational excellence functions. We are taking a fresh look at improving the business by getting back to the basics deploying lean manufacturing tools, including visual flow boards process mapping and key performance indicators to name a few and.
And standardizing their usage across the enterprise.
We are firmly invested in the belief that our new leaders third party assessment and continuous commitment to rigor and discipline will create additional capacity for the business drive efficiency and position us to exceed customer expectations in any case the outlook for this business is superb. Despite these near term labor and financial pressure and these efforts.
Position us for the future and serve as an accelerator of our naval performance as macro headwinds abate.
On micro reactors project Pele is ramping, albeit at a slower pace than we had planned given the challenge finding engineering talent needed for this special project that said, we have begun procurements for long lead items baseline our schedule and configured to supply chain for this prototype reactor.
Our interactions with the D O D strategic capabilities office and future potential customers have been very positive on a related topic.
We anticipate a contract option award in the near term for try sell fuel to be used in this mobile reactor, which is separate from an incremental to our existing $300 million contract to build the prototype reactor. We remain optimistic about the micro reactor market and continue to see strong government demand for nuclear space power.
In propulsion manifesting in multiple opportunities, including the Draco program at DARPA fission surface power and space nuclear propulsion for NASA and as we have noted on multiple calls before the ideal in state for this market is continuous production of micro reactors and fuel.
And we remain bullish about those possibilities over the long term.
The services business continues to track upward.
The new Savannah River site remediation contract contract is executing well and outside of that performance scores have been trending favorably our strategy to leverage bwxt's unique nuclear knowledge and site management and complex nuclear environmental restoration is working and we are building back our portfolio through market share gains enabling.
US to reach historical levels of operating profit.
The next stair step opportunity for growth in the pipeline as the Hanford integrated tank disposition contract, which we anticipate to be awarded by early next year.
And that there are smaller scale, but fairly near term opportunities that the decommissioned enrichment plants and Portsmouth, Ohio in Paducah, Kentucky.
And the longer term they remain large opportunities to manage and operate the pantex and Y 12 sites the.
The scopes of which are clearly in our sweet spot.
Lastly on the government side, we see near term growth in processing special nuclear materials and.
In March of last year BWXT was awarded a contract from the National Nuclear Security administration to design and pilot our process for uranium purification and conversion services. This first phase is tracking ahead of schedule and we anticipate a larger second Phase Award next summer.
Now switching gears to bwxt's commercial facing markets.
Momentum is building in our nuclear medicine business in September we submitted a new drug application to the FDA for Bwxt's Tech 99 generator in that same timeframe, we hosted investors customers and others at BWXT Medicals headquarters in major production facility in Kanata, Ontario.
Last week, the FDA requested dates to conduct a preapproval inspection of our tech 99 generator line and accepted our application for priority review.
In a related matter, we have begun installation of the target delivery system or T. D. S.
At the Darlington site near Toronto, the Tds as a first of a kind system used to irradiate target material for the Tech 99 generator the system, which we expect to be fully operational next year, we'll have the highest production capacity of any radioisotope irradiation system globally.
Bears mentioned that beyond our tech 99 application the target delivery system can be utilized for multiple other neutron capture isotopes.
And will be a major industry accelerant for instance.
The system can irradiate targets to produce your three of 90, the active pharmaceutical ingredient and that their sphere product that we manufacture. It also has the potential to deliver an unprecedented scale of irradiated lutetium 177, and isotope of growing demand for radio therapeutic applications.
On that topic, we are making substantial progress on important therapeutic isotopes include.
Including the development of our lutetium 177 product and related preparation of a drug master drug file for sale of that product as an active pharmaceutical ingredient.
In addition, the business recently completed and shipped to the first trial batch of actinium $2 25 to Bayer for use in their therapeutic clinical trials.
In summary, we see tangible progress in positioning the nuclear medicine business for accelerating growth.
Finally.
We continue to see positive sentiment around commercial nuclear power, particularly in light of the current geopolitical environment wherein energy security is an increasingly viewed as a component of broader national and economic security considerations.
This coupled with net zero emissions targets has created an intense focus on new commercial nuclear power solutions globally to that end. We are pleased to announce receipt of a new contract from GE Hitachi for engineering design of the BW Rx 300, small module reactor pressure vessel, which we.
Spec will lead to material procurement and manufacturing.
Not only do we see serious interest in the GE, you're talking design for potential customers in Canada, the U S and Poland to name a few but other small modular reactor designers and integrators are also gaining traction for potential orders.
BWXT occupies a premium position in the commercial nuclear supply chain in North America.
And can support multiple technologies and designs given our capacity, which includes the largest nuclear clean room manufacturing facility in North America and.
In summary, all of our markets are growing and BWXT maintains enviable competitive positioning across its entire portfolio amid a strengthening macro demand signal for nuclear <unk>.
Having a highly differentiated and diverse nuclear portfolio is advantageous.
As we navigate the near term macro challenges in the broader context of steady long term growth in markets characterized by growing demand and high entry barriers.
Rob.
Thanks, Rex and good evening everyone.
Let's start with total company results on slide four of the earnings presentation.
Third quarter revenue was up 5% to $524 million driven by growth in both operating segments, but most notably in commercial operations.
Third quarter, adjusted EBITDA was down as anticipated by 5% to $100 million, which was driven by higher revenues and solid cost controls and commercial operations, which were more than offset by government operations headwinds, including the hiring and labor challenges that Rex mentioned as well as lower recoverable Cas pension income.
As a result, non-GAAP earnings were down seven cents per share as we outlined on our previous earnings call. Our more detailed quarterly bridge can be found on slide five of the earnings presentation net.
Net operational headwinds were about <unk> <unk> per share, which was further reduced by <unk> <unk> per share from lower recoverable Cas pension income.
Higher interest rates, some foreign exchange losses, and a higher tax rate contributed another another three <unk> per share headwind.
These were all partially offset by a lower share count from last year's share repurchases, which contributed <unk> <unk> to EPS.
Lastly, free cash flow was up $25 million, primarily driven by a decrease in capex as we continued to wind down the two major capital campaigns and the Navy and medical businesses.
Moving now to segment results on slide six.
And government operations third quarter revenue was up 1% to $423 million driven by higher naval production and micro reactor volume that was partially offset by lower long lead material.
Third quarter, adjusted EBITDA was down 8% year over year to $94 million as decreased efficiencies from a challenging hiring dynamic resulting in fewer favorable contract adjustments.
Year over year results were also down given lower recoverable Cas pension cost, which were partially offset by higher income from our technical services joint ventures.
And commercial operations revenue was up 22% driven by higher field service activity and fuel handling.
BWXT medical revenue was also up year over year.
Third quarter commercial operations adjusted EBITDA was up 12% through a combination of higher revenue a more favorable business mix and segment cost controls.
Turning now to guidance on slide seven.
As we noted in the earnings release, we are narrowing 2022 guidance for revenue EBITDA and EPS.
We now expect consolidated revenue growth of six 5% to 7% this year with government operations expected to come in at the low end of the prior range at around 6%.
Commercial operations is expected to land at the higher end of the prior range at around eight 5%.
Consolidated adjusted EBITDA, which includes a $17 million pension headwind is now expected to grow about 5% with government operations now anticipated to be lower than previously expected at $395 million due to labor issues.
Commercial operations is expected to be slightly better than prior guidance at about $50 million.
We also anticipate lower corporate unallocated costs for the year.
This overall outcome was enabled by a diverse set of businesses and end markets all pulling together to achieve a great operating result.
Many companies in our industry have sought to hold or end up at the lower end of their operational guidance, whereas we are proud to be able to drive all year to the upper end of our initial operating range. We started 2022 with mid to high single digit EBITDA growth guidance on an ex ex pension basis and today, we are affirming that.
We will be squarely in the upper end of that guidance range growing nearly double digits on that metric.
However, we anticipate some modest non operational headwinds, including including a higher tax rate as well as a little less income from other income from minor foreign exchange losses that will dampen overall EPS performance.
The summation of these operational and non operational factors is keeping non-GAAP EPS relatively stable from prior guidance.
We now see earnings in a tight range of $3 10.
To $3 15 per share.
The EPS guidance bridge is on slide eight.
From an operating cash flow standpoint, we still anticipate a broader range of $260 million to $290 million as working capital items can fluctuate at the end of the year.
Given the R&D tax amortization legislation has not changed as well as overall net income performance to date, we expect to land in the low end of that range.
I will note that currency hedging activity to neutralized key balance sheet items expresses its benefit in the financing section of the cash flow statement under settlement of forward contracts.
Those hedges provided over $10 million of cash settlement proceeds in the third quarter and we are tracking well to have an equivalent cash inflow from financing in the fourth quarter. This year.
On the Capex side, we have revised our expectation to less than $200 million this year.
This change was driven by a combination of a slower ramp in spending on some of our investments primarily project Pele as well as some modest savings from rationalizing and re prioritizing spend.
Before turning to our preliminary 2023 outlook I did want to make a few comments on our recent balance sheet enhancements through an improved capital structure.
Last month, we amended and extended our credit agreement, resulting in $250 million of additional liquidity at generally the same or more favorable terms, including an enhanced interest rate pricing grid and generally better flexibility.
While we don't currently anticipate a need to utilize this expanded liquidity, we didn't want to take advantage of the favorable environment for companies like BWXT that lenders see stable credits and this unique financing environment.
BWXT now has no debt maturities until 2027.
Turning now to our preliminary 2023 outlook that we have summarized on slide nine of the earnings presentation.
Overall, we expect to see another strong year of operational growth that is likely to be more than offset by below the line headwinds, namely lower noncash pension income and higher interest expense.
Operationally, we anticipate mid single digit revenue growth driven by the government operations segment with the main driver being the ramp up of the project Pele micro reactor as well as some modest anticipated growth in our uranium processing activities.
Our naval nuclear reactors business is expected to remain roughly flat next year.
In commercial operations, we anticipate that the growth in BWXT medical will be offset by a downshift in field services. After strong volumes in 2022 from that business line.
Margins should expand given various dynamics in both segments.
And government operations not only do we anticipate better margin contribution for more technical services work, but we expect to claw back labor volume and associated efficiencies as the year progresses.
Initially the benefits from creating non cap capex long term capacity inefficiency won't bleed through until we move past the shorter term headwinds of having a newer workforce.
Next year, we are seeking to simply maintain margins than our core Navy business, but should begin to build on that over the medium term.
Finally in this segment and as we have highlighted in our last 10-Q filing we continue to explore opportunities for recovery of contract changes and associated cost growth related to non nuclear components.
We help stand up the American manufacturing of some of these key components and have absorbed unforeseen costs related to changing work scopes and design instability in the execution phase.
We intend to seek adjustments for the past few years are grappling with this situation and bearing the cost through our bottom line.
In commercial margins are anticipated to expand as a lower mix of field services relative to a growing medical business will serve as a tailwind.
All of these factors will enable consolidated adjusted EBITDA growth to outpace revenue growth next year.
As we highlighted on our last earnings call 2023 is setting up to potentially experience some meaningful non operational and non cash headwinds, which are expected to dampen our earnings outlook.
We will finalize estimates for pension asset and liability balances as part of our standard year end process and we will specifically guide to these noncash and macro driven items on our fourth quarter earnings call in February .
As a preview we were using the latest September 2022 asset performance and forward interest rate curves to provide an initial outlook.
We currently anticipate about $55 million of headwinds for both noncash pension income and interest expense similar to the relative magnitude as seen by several of our defense peers.
The most significant component of next year's non operational headwinds is the accounting treatment for pension expense and income which is presented in the other income line of the P&L.
Last quarter, we provided the sensitivities related to pension accounting impact on the income statement and we are enhancing that by providing a table in the appendix of the presentation that depicts our pension estimates for next year against asset returns and discount rates.
Currently returns and discount rates suggest a $40 million noncash Fas pension headwind given year to date asset returns down about 25% and a discount rate that has moved up almost 300 basis points from the start of the year.
So simply put standing here today that other income line to which we just guided at 48 million dollar number to you in 2022 could be under $10 million in 2023.
As a reminder, noncash pension income is an add back in operating cash flow. So there was no cash impact from this reduction to income nor does it affect the strategic and operational condition of the business.
Higher discount rates also enhanced the funded status of the pension which will likely finish the year at a nearly fully funded position.
We continue to anticipate no material non no material cash contributions to the pension and the years ahead.
For interest expense, we anticipate a headwind of about $15 million driven by significant increases in interest rates applied to our floating rate debt, which currently stands just about $500 million.
Rodley projected interest rates are up about 275 basis points compare compared with this year's weighted average.
Lastly for 2023, we continue to focus on achievement of another important aspect of our medium term guidance the inflection in free cash flow and conversion of earnings into cash.
Next year, we anticipate about $200 million of free cash flow, which will be driven by improvements in operating cash flow management across the business and a significant moderation of capex.
There has been no change to our view that after several years of significant investment and two large capital campaigns that we will be able to return to the maintenance levels of capex of roughly $100 million with the need for only tens of millions of dollars for any top up strategic investments.
A prime example of incremental strategic investment is the Pele micro reactor project, which can be supported by bite sized amounts of capital.
That project in particular, only requires $30 million or less of incremental capex, most of which we expect to place throughout 2023.
With years of solid investment across the company's facilities. We believe we can sustain and accelerate the strong adjusted EBITDA growth rates. We are delivering this year and that we anticipate for next year and with that I will turn the call back to <unk> for some closing remarks.
Thanks, Rob we remain excited about the underlying growth of the business. This year and next that is largely masked by exogenous factors and are committed to navigating near term operating and macro market challenges, which do not change the long term trajectory of the business bwxt's growth verticals across multiple defense and commercial.
Markets are building rapidly and the backdrop for nuclear solution remains extremely positive. This gives us continued confidence in our plans to accelerate growth over the medium term and we thank our shareholders for embracing the value of the core businesses and our growth aspirations. We now look forward to taking your questions.
We will now begin the question answer session.
Like to ask a question. Please press star followed by one on you touched on keypad.
If for any reason you would like to remove that question. Please press star followed by Tim.
Again to ask a question press star one.
As a reminder, if you are using a speaker phone. Please remember to pick up your handset before asking your question.
We will pause briefly to allow questions to generate in Q.
The first question comes from the line of Bob Lubbock, Let's see J S. Securities. Please go ahead.
Good afternoon, congratulations on the priority review.
Yeah. Thank you Bob the Big Big day for Us.
Yeah, No that's great. That's all I just wanted to kind of following up on that a little bit could you give us an update now on.
On next milestones timing and if there.
Maybe in fact that opportunity for initial sales you know late 'twenty three are what your timeline for that is given that you have the priority review and a half now.
Yes, sure Bob So the way that looks as send you a letter with a priority review designation along with a bunch of questions that we need to answer.
Then they perform.
In the next over the next month or two a sort of a facility inspection.
Our product line or manufacturing line in Kanata.
The timeline that they commit to on a priority review is six months, but you know theres.
There is some.
Some discussion around that point when the when the FDA gets to a place where it requires more information from <unk>.
The producer of the product.
<unk> in this case, they kind of hit this news button on the clock and so it pauses for a period of time and so we've always hedge that by saying that the timeline is something like six to nine months and I think that's that's still.
That's still consistent with our view.
So great to get the priority review and so I'd say the timeline of six to nine months as to any product sales in 2023.
We do expect those to be modest because recall that we're using the research reactor in Missouri, the merger reactor to irradiate, our target material in the beginning and that means we can only offer a limited.
Limited suite of products.
To the radio pharmacies.
The real growth comes when were radiating our target materials on the.
The Darlington reactor that belongs to LPG and so I would see that that business building.
You know nicely into 'twenty four 'twenty five so I'd say.
Modest expectations for 'twenty, three as we see the market and create demand and started entering into long term supply agreements.
Bob I'll, just remind you that we laid out that page for BWXT medical that built on those couple of different businesses, we were really not expecting much of anything from from in 2023 to hit those.
The statistics that we outlined that the underlying business is actually doing quite well.
Scratching as we had outlined tee up in Kanata that businesses go is getting to about a $60 million run rate business and we expect a.
Teens growth rate next year as well so it's building quite nicely, we hope to get some sales, possibly in 'twenty, three but that really wont impact ultimately delivering on the financials that we've laid out for you.
At the Investor Day, and we've affirmed recently.
Okay, Great and then as it relates to the target delivery system Tds timeline.
How does that work as it relates to the review for the current.
Generator and so I guess first you know when you have that installed this year early next and then and then what's the timeline on that product coming to market. I think you said, obviously 'twenty four 'twenty five and beyond but just maybe give us the steps that we should look forward to on the Tds installation.
Yeah. So the way that works so I'll talk about the implications for the FDA application and then talk about the timeline for the Tds. So we're in the we just started installing that onto to the Darlington reactors unit number two actually and that will go on over the next several months and be completed sometime next year as it relates to our FDA application what.
Happens there is we will get it will get approved hopefully four.
For our product manufacturing configuration in Kanata, which you've seen but also for the radiation source, which in this case is the merger reactor because the neutron spectrum does matter to the FDA the different neutron spectrum can create slightly different product characteristics and so you have to account for that in the application and so what we would do is.
Assuming approval in our current configuration with the murder reactor, we would submit a supplemental application to the FDA for irradiation at the Darlington site now that's typically a shorter timeline, so think of that as two or three months.
Approval timeline would be typical and so that's how that'll work. After we received the approval on the initial configuration, then we would supplement.
Super very exciting stuff, congratulations I will jump back in queue.
Yeah. Thank you Bob.
Thank you.
The next question comes from the line of Scott <unk> with Credit Suisse. Please proceed.
Hey, good evening, Thank you for taking my questions.
Rex.
Our challenge was more acute or the labor challenges more acute in retention or is it more about hiring new talent and I know the two kind of go hand in hand in terms of that shortfall, but.
I'm just curious I would think that productivity would differ between those two groups. So I'm just curious if you can disaggregate the the labor challenges for us a little bit more thank you.
Yes, certainly certainly certainly both of those factors are conspiring against the business right now.
To think about how attrition is impacting the business I will take that one first Scott.
Typical attrition for our business would be kind of mid single digits historically in that I'm talking about.
Both kind of planned attrition.
Standard kind of.
Forecastable retirement rates are.
Along with some unplanned attrition that would typically let's call it 6% in the business historically.
Numbers crept up into the high single digits over the last year or two.
And so we've got a higher turnover rate and when you think about that on the scale of workforce of 7000 people so think of that as a.
Turnover in the range of 500 or more.
Over the course of the year and that's what that's what we're facing right now.
And so so that is a challenge we've tried to hire a net 500. This year. We are trying to hire a net 500. This year. We've been we've succeeded in hiring over 800.
We also lost in the range of 500, so we've netted about two.
$2 50 to 300, along the way so that's the kind of churn that we're dealing with in it.
As you suggest as you imply in your question that affects us in a couple of ways.
One is obviously, we're not ramped up fully to our workforce plan, which impacts production and also absorption, but the second thing is obviously with new workers. We have we have a higher learning curve and we've also got more intense training requirements and so that's kind of the that's kind of a two part problem that we're dealing with.
That's super helpful has the attrition gotten any better in recent weeks as people, maybe digest the slower macro environment and risks of going somewhere beyond beta has that dynamic that you. Just described has it changed at all in the past month, Yeah. We're seeing it we're monitoring this every day, obviously, but if you look at the month to month numbers.
It looks like our attrition peaked in about the middle of the year It has been improving.
Sequentially since that time.
Modestly, but it has been improving so I think we've hit an inflection point on that one and as to the latter point I do believe that you know that the challenging macroeconomic environment actually favors a company like BWXT I mean.
For for a couple of reasons. One is that you know with reduced 401, K balances, we see a lower retirement right and that helps a little bit.
But the other thing of course is that as you as you walk into a recessionary period stability starts to have a higher value than it does maybe in the past couple of years and so so we expect that you know that that attrition rate to move favorably for us if the economy does we can like we anticipated to do.
Got it well I can attest to the point on 401k is just for Rob quickly for you can you walk through the the working capital trends are expecting for the business over the next two years I think that's been an area of focus for you. So just curious.
What your thoughts are on working capital and the opportunity for improvement near term and the medium term as well. Thank you yeah.
Yeah, Yeah, we monitor that pretty closely where we've got a lot of different efforts going on as you know it takes some time to get the analysis straight and to actually figure out where youre going to attack, but if you've been watching our trends are managed working capital as kind of a flattening out in the past couple of quarters and we expect next year some of the big headwinds that we had this year.
Specifically the steam generator projects that we brought up in the past, we're seeing sort of a worst year of headwinds of about $20 million headwind. This year, we've called that out in the past that's going to flatten out and not be a headwind next year, we hope.
That's our plan in terms of what we look at it from a billing standpoint, and then it will get positive in 2024 and 25. So that's been the biggest kind of headwind overall to manage working capital and then I would just call out onesie Twosies things that we're just going to look through procurement supply chain and really get after some of our terms, how we are billing our customers.
We have we have a good handle on where the opportunities lie analysis is really getting our hands around it. So we've been looking at working capital days as a percentage of sales and we think both of those can really be driven and I think we'll be successful in 'twenty three and beyond.
Great. Thank you so much.
Thank you Scott.
Thank you.
The next question comes from the line of Pete Australian What true Securities. Please go ahead.
Good evening I'm on for Mike Chipotle Tonight, Thanks for taking our questions.
First I just wanted to clarify on the labor situation. It sounds like it's mostly impacting the government business when youre not seeing similar issues regarding labor and commercial ops is that correct and what's driving the difference there.
Yes, I'd say, that's mostly correct Pete.
Factors that that differentiate those businesses are.
We tend to have a.
Slightly older workforce in our government businesses, particularly in the Navy manufacturing business and so we've seen higher retirement rates I think people sort of rethought their personal considerations when they went through the COVID-19 period.
So thats part of it it's also.
It's the part of the business that has the most intense touch labor in it.
The craft labor.
And so thats, where you feel it the most acutely I would say and then the other side of that is I would say that we are experiencing that same labor problem in other parts of the business, but the growth is sort of masking. It out I mentioned on a couple of calls this year. The challenge we've had in finding qualified Rad techs and our medical business for example, which which.
Actually lengthened our campaign for the for the Tech 99 program.
But the growth is the growth is overwhelmed it there frankly and so so it's just showing up more in the Navy business.
Okay. That's helpful color. Thanks, and then switching gears I just wanted to broadly ASP on the <unk> market. What are you seeing so far in terms of the competitive environment. How much competition is currently out there for the VW.
AWS would provide on <unk>.
What are your user base advantage in capstone growth in this market.
Yeah.
We're in a really good competitive position in that market and its because of where we positioned ourselves strategically in that market I'd say the competition is most intense at the level of reactor design and supply.
Those whom our marketing designing small modular reactors, although I think they can you know many of them can win because the demand is going to going to be a compressive I believe in the long run, but where we sit is kind of at the top of the supply chain and would look to supply.
Companies like GE and others, who are who are who are let me call them Prime contractors.
Reason that we stand out BWXT stands out in that market is because we have.
Our capabilities for manufacturing large components that are unmatched in North America I mentioned, we mentioned here in the script that we have the.
The largest nuclear manufacturing clean room in North America, we manufacture fuel we designed components, we designed nuclear reactors.
And so we can we can really answer the mail for a lot of a lot of companies who are attempting to sell reactors in that market and so and we've been let me call. It design agnostic.
Merchant supplier kind of if you will.
We feel very well positioned for the for the uptake in that market.
I might add I might add just from a overall geography as you know we're based in Canada.
That country and specifically in the province of Ontario has really been forward leaning just about how much nuclear can be part of the clean energy solution and so that's allowed us to essentially be in business for <unk>.
Building new stuff, while other geographies were not and so we've continued to maintain such a unique posture in that market and then if you even see what theyre doing on the SME side, there really forward leaning there too. So so having that position that incumbency position and then also seeing where theyre going on to SMA rates really kind of allow.
As us to be on the forefront and we see that a couple years earlier than some other players in other geographies. So that's been so nice better to be lucky than good.
Alright, great. Thanks for taking the question.
Thank you.
Thank you.
The next question is from the line of David Strauss with Barclays.
You May proceed.
Okay.
Thanks, Good evening.
David.
Hey.
So your guidance for government groups for the full year implies a pretty big fourth quarter could you just run through what's driving that exactly you are you counting on a recovery on the labor side to be able to get there.
No. We're not we're not we're not counting on the labor. So generally our fourth quarter always is the time that we're sort of.
Snow plough, all the efficiency efforts that we have all year and sort of open up and take a look so that's just a natural time do we look at that business. Secondly, as you know some of the businesses that we've announced over the course of the year, both Savannah River as well as scope you really had to ramp up to a certain level and gain efficiencies so that'll be a big quarter there.
The last one I would call out is we do have some really good growth in our non what you'd think of as our core sort of nuclear operations businesses around blow down blending of Nu metal and those businesses are just lining up to have a very good <unk>.
Fourth quarter. So when you swear all that up it seems achievable. It definitely is a a large quarter, but we.
We think we're going to hit that for the fourth quarter.
Okay. It looks like you are implying.
Double digit growths physical requirements when the wanted to make sure okay.
And.
Depreciation is that is that factored in is.
Big step up in depreciation is that still a factor as a headwind next year as well.
Lease term.
Bottom line EPS standpoint.
It is David as we were thinking about I mean, theres a couple of different things just the swelling up depreciation as you say will be an incremental headwind.
Across the business and particularly in <unk> right. They finally brought on some of their capital it's taken a little while to get that productive. So we had a little bit of a lighter.
In 2022 that we thought and that's why you brought down ultimately over the course of the year the depreciation, but we will get that load to the tune of about five or 10 million dollar headwind to earnings next year.
The second item that we've called out for you is the $55 million of sort of below the line.
Headwind that really comes from the $15 million of interest expense that's from that half a billion dollars of sort of a revolver that we have that those rates have gone up almost 3% and so you just take 3% on a half a billion dollars. It gets you to 15.
And then the other part of that $55 million is the 40 million that we have from from pension as you know that's really broken down into two pieces, which is the asset performance underlying we're pretty fully funded a little bit over $1 billion of both assets and liabilities and when you just think about you know what.
We're generally expecting about a 7% return there as that balance has come down about 25% that's about half of the 40. So thats about 20 of the 40 and then the other 20 is just what's gone on with interest rates. So the liability has come down but the interest rate has gone up all over over 3% and so you've got a doubling of the <unk>.
Interest rate on your liability balance so on first glance you think the liability is going down, but then you have that that second impact. So you have the depreciation yes. The interest and then you have the two components of the pension and all of that we hope are.
The bad guys, we actually see pretty good prospects next year for growing our business, we talked about this sort of mid single digit.
Revenue growth overall and hopefully.
Margin improvement that sort of says your EBITDA to grow 5% six 7% and so when you just look at what our EBITDA. This year and you take that 567% and we started last year also added at a similar posture right mid single digits, and we hope to work higher but you should be able to sort of claw back at that $55 million and that little bit.
Depreciation headwind all of that being said, it's going to be challenging next year, we're kind of at $3 10 to $3 15, but when you throw all that up I think youre going to have a very good underlying operating result, but offsetting that $55 million.
To be hard to probably clear more than say $3 a share. So all year, we're going to be calling it that and we'll see where all those.
Pension and interest items.
Over the year, but that's kind of what we're aiming for for next year.
Great.
Full color and then just to follow up on the prior question.
The $200 million pre cash flow next year. Rob is are you baking in neutral working capital or are you baking in some sort of net working capital headwind into that number.
Yes, so as we've said that our <unk>.
Deal with the easy one which is Capex nothings changed there and then I'll, maybe outline a little bit about where we stand on operating cash flow for this year as well as well as next.
On a capex basis, we still see about $100 million of maintenance Capex and then were there.
One of the reasons, we downgraded.
Capex guidance is that we just haven't deployed a significant amount of that scope related project Pele Capex and so if you think about where we started the year. We were at 180 to 200 million call. It $190 million and we were able to spend five five we will see how the fourth quarter goes $5 million to $10 million on on that scope project and so.
That that stuff, if you will up the remaining $25 million to $30 million will come on top of the $100 million next year. That's how we're seeing sort of 2023. So so so so that's the capex part of the equation and then on an operating cash flow standpoint, we do see.
Good good improvement versus our guidance.
Guidance this year, which is $260 million to $290 million I think we've been running at about a $300 million LTM number we will see how we come in the fourth quarter, but I see doing greater than $300 million, obviously in order to get to that $200 million next year and so those are all of those initiatives that we talked about earlier that just takes some time to bear fruit.
So I see greater than $300 million by about.
120 ish million of Capex. If you just were all that up that's where we're getting the around the $200 million free cash flow number.
Alright, great. Thanks very much.
Okay.
Thank you.
The next question comes from the line of.
Peter Arment with Baird. Please proceed.
Yeah, Good evening Rexam Rob.
Correct.
Congrats on kind of the commentary around the S. M. R work can you give us a little bit of a.
Understanding the cadence of how revenues would begin to be reflected I know Darlington like Ontario power has selected that to be kind of targeted for 2028.
So how would that impact for you guys from a revenue perspective. Thanks.
Yes, we said earlier Peter a couple of calls ago, I think that we expect revenue opportunities in the range of $100 million.
For each of those small modular reactors that are of the GE type in.
It's kind of it's kind of similar to the situation that we saw on the refurbishment projects in Canada and in the sense that a lot of the long lead material design work hardware work gets done early and so that favors us from a revenue perspective, because we're getting into design work for that for that reactor vessel right now.
And and.
And so we would we would expect to be.
Ordering long lead materials, probably as early as next year.
So that would ramp relatively soon for us.
Okay terrific and then just.
Back to the labor commentary. So you said I think in your prepared remarks, you're running about 10% below the head count plan.
And then you walked through some of the differences on the on attrition is that you know is it should we expect you are trying to do a similar plan for next year. As you can just kind of continue to scale up and just wondering if youre approaching the labor market any differently as you are thinking about it now.
One correction Peter what I said in the script was we are we're off as much as 10% at certain sites. If you look the aggregate number it's more like 5% or across the entire business, but I think we're not we're not.
Not planning with the expectation of dramatic improvements in the labor market for next year's plan.
Particularly because of the two factors that I talked about which are one is the attrition rate itself and being able to hire to our growth and we do see more growth next year. So it's another it's an even higher hurdle and then of course, we have some efficiency challenges around new employees that are unique to this to this labor labor environment. So I'd say, we're not planning on.
Our thinking is not that we're going to have a full recovery from that problem next year.
I appreciate that thanks, guys.
Yes, Thanks Peter.
Okay.
Thank you.
Question comes from the line of Tate Sullivan with Maxim Group. Please proceed.
Hi, Thank you.
Your comments about the 2023 outlook.
What you've commented on the labor market.
What are the sources of the expanding margins in 2023, if you can comment on some of the drivers there. Please.
Okay. Yeah. There's a couple of factors that we have maybe just move through the couple of different businesses. So so as you know our mix and government operations will improve over the course of the year. We do expect as we said to to try to call back some of those.
Non nuclear businesses, though those could come in at a high margin because we've basically taken the pain. There. So that's that's one contributor the second contributor is that as we build our <unk> business as you know that doesn't come come come with revenue.
And then as we just bring on a better base of micro reactor business within <unk>.
That's just absorbing overall cost better so those those are main businesses and the final one I'd call out is within the the the non.
Non nuclear operations business.
We're really ramping our contract there, which looks very similar to our down blending contract that we've called out of your metal. So we're doing our processing business that also has a high margin business that will be ramping next year. So.
That's sort of the the government operations part of the story in 2023 versus 2022 for the commercial business, specifically that really comes down to we've had a blockbuster year in field services overall in terms of dollars of a profit, but those are a little bit lower margin for us relative to other businesses we have.
In that in that legacy NPG segment. So that will will will will will drop away, whereas the the BWXT medical really has higher margins. So you're really kind of dropping field services lower margin for higher margin.
Our base of business, there with BWXT medical.
Great. Thank you. Thank you Rob and then can you just review the comments on Capex, so with the slightly lower Capex for 'twenty two.
Timeline, the anticipated timeline to reduce the maintenance capex levels, and then whats a reasonable decline in Capex. If you can comment on it for 2023.
Yeah, I mean overall I don't I really don't think anything's changed our overall commentary, we basically had $180 million to $200 million. This year, we bumped that by as you recall I think it was last quarter by $15 million, just basically trying to draw a line in the sand as saying half of that.
We've estimated the skull build to be about $30 million, we really didn't get after a full load of that so we're kind of coming in at our midpoint overall of non Pele and then just a little bit and we'll see how the fourth quarter goes to talk us under the 200, and then whatever's left let's just take if we only spent about $5 million of the <unk>.
Pele in 2022, well then the remainder of call it $25 million to get to a full 30, we hope to do it for less than 30, we have line of sight to that but if you just take that scenario you would layer $25 million on top of the 100 million that we've been talking about for maintenance.
Ultimately have a Capex guide next year of $1 25, and from that point, we're kind of at that that project.
We're hoping to deliver that prototype in 2024, So project Pele will kind of be behind US. We think in 2023, and then you'll be back to kind of a $100 million cadence. If you will for 2024 now why would that change.
We are buying for AR.
Of special project that will require some outfitting of the facility that we're in for a project Pele, but there are some different things that we're doing on the fuel side, specifically on the DARPA project.
Draco that somebody you know about that might drive a little bit of Capex.
Over and above that kind of a $125 million next next year the $100 million. If you will in 2024 and then the other big one that's on the horizon that we're we're seeing some some good progress on is in our nuclear medicine business.
So as you know our strategy there as we have outlined and posted on our website is really about building into the therapeutics market starting with the the API the active pharmaceutical ingredient ingredient, which we have the facilities and our sort of unmatched in our capability now with all the different sources, we have a radiation.
To pull off some of those unique therapeutics, but really so we kind of have the capital in the ground for that part we don't have the capital in the ground for US what we do for for things like <unk>, where we're actually building the drug. So now that we have the API and we have line of sight on some of the most important ones. We mentioned on the call both lutetium as well as actinium those are.
The leading therapeutics, the API side of things, but if we get into the contract drug.
Aside of manufacturing those come with generally.
Multiyear contracts locked in volume locked in pricing and you have to stand up some again tens of millions of dollars you could think about it like a scope project, where we come to you and say, we just want a new drug we're going to do this we're ultimately going to go through clinical trials and go onto production and so that that's where you would again get a $20 million to $30 million.
<unk>.
Step up of our strategic capital investment over and above that 125. If you will so those are the two areas something on the micro reactor side or something on nuclear medicine.
Thank you very much Rob.
Sure. Thanks for question.
Thank you again to ask a question. Please press star one.
There are no additional questions at this time I will pass it back to the management team for closing remarks.
Thanks to you and thank you everyone for joining US today. If you have further questions you can reach us by phone at an 8036, $5 4300 or by E mail through investors at BWXT Dot com.
Yeah.
That concludes today's conference call. Thank you you may now disconnect your line.