Q4 2022 BWX Technologies Inc Earnings Call
Ladies and gentlemen, welcome to BWXT technologies fourth quarter and full year 2022 earnings conference call. At this time, all participants are in a listen only mode.
Following the Companys prepared remarks, we will conduct a question and answer session and instructions will be given at that time.
I would now like to turn the call over to our host Mark Kratz Bwxt's Vice President of Investor Relations. Please go ahead.
Thank you Joel good evening and welcome to today's call joining me on Rex <unk>, President and CEO , and Rob Lemasters Senior Vice President and CFO .
On the call, we will reference the fourth quarter and full year 2022 earnings presentation that is available on the investors section 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 and a separate presentation can also be found on the investors section of the BWXT website.
I would now like to turn the call over to Rex.
Thank you Mark and good evening to everyone.
Earlier today, we reported fourth quarter and full year results that were in line with our expectations as we closed out the year on a strong note.
2022 revenue and adjusted EBITDA, each were up 5% and underlying operational profitability was up nine 5% factoring out pension headwinds. Despite macroeconomic pressures. This year earnings per share grew by 2% and we brought down capital spending by over $100 million.
Labor remains a focus area for the company as we experienced growth in all our major markets. We continue to monitor hiring and retention metrics and are making progress streamlining our processes and advancing our training programs, particularly on the government side of the business.
We remain cautiously optimistic that our efforts will deliver the net employment required to support our growth having said that we believe the challenging labor dynamics will mask some of the potential growth for BWXT. This year, but it is ultimately a hurdle we will clear.
Beyond labor interest rates have begun to stabilize while this presents a 2023 headwind to earnings stable rates in excess free cash free cash flow should enable us to overcome interest expense headwinds over the medium term in December the President signed the National Defense Authorization Act for 2023 into law.
<unk> core businesses remain well funded in our new growth areas are receiving increased budget support.
Columbia Advanced procurement and aircraft carrier funding saw significant increases Virginia submarine advanced procurement is steady and in line with our expectations.
Budget for project Pele is increasing and the army is receiving funding to support fielding DARPA and NASA received increases to support a nuclear thermal propulsion space demonstration program the.
The National Nuclear Security administration received increases for uranium processing projects, including uranium purification and downloading and the department of energy site remediation and operations budgets were well supported.
All in all we see an improving macro backdrop with positive momentum in our government and commercial markets.
Let me go into a little more detail for 2022 highlights and near term opportunities in both of our reporting segments.
Within within government operations in 2022, we announced about $1 billion in option orders for the core Navy franchise, we certified and shipped some of the first items for the Columbia program.
And continued steady production for Virginia class and Ford class components.
For 2023, we anticipate wrapping up negotiations for the next multiyear pricing agreement encompassing two years of scope, which will span orders through 2024.
We eagerly anticipate the announcement of decisions for the Argus Trilateral security agreement, particularly as it pertains to naval nuclear propulsion.
We expect to hear additional details next month and remain engaged with our customer.
And other key stakeholders to support the nation's allies in deploying this unique technology to ensure our global security.
We continue to leverage our NRC category, one licensed facilities to grow the business and provide the nation with critical services. In 2022, we were awarded a production contract for high assay low enriched uranium try so fuel to be used for the first fourth generation micro reactor in the United States.
Separately. This year, we completed the first phase of uranium purification and conversion for the NSA. Both of these programs will grow in 2023 as we undertake production runs for <unk> fuel and expand into the second phase of uranium purification.
As you are all aware 2022 was a hallmark year for BWXT with micro reactors as certain programs transition from design contracts into prototype production in June the strategic capabilities office awarded BWXT that $300 million contract called project Pele to build and deliver the <unk>.
First advanced mobile nuclear reactor in the United States.
As we look to 2023, we anticipate growth in that program.
As we experienced a full year of revenue and achieve key project milestones and beyond Pele, we see ourselves in a strong position on draco space nuclear propulsion demonstration mission.
Early this year in NASA, and DARPA announced they will be collaborating on this program to demonstrate a nuclear thermal rocket engine it space, enabling capabilities for both space exploration and other potential applications, including National security.
We believe that our history with NASA nuclear thermal propulsion work combined with our innovative technology solutions creates a favorable competitive position for our company.
This program would be similar in size to project Pele and would have similarly aggressive program goals.
Lastly on the government side in early 2022, we successfully transitioned the Savannah River mission completion contract and had a year of excellent safety and contract performance, resulting in higher site scores and income than we originally forecasted.
'twenty three we look forward to the award of the Hanford integrated tanks disposition contract, which if successful would likely be the largest single contract in our government services portfolio.
Switching gears to commercial operations are based in nuclear power business grew nicely in 2022, we saw higher volume of service work related to life extension projects for a large portion of the Canadian fleet.
<unk> the government of Ontario announced support for the continued operation of part of the Pickering plant that was originally slated to shut down in 2024 and 2025 under the new plan here.
Units five through eight we will continue to operate through most of 2026, given the recent successes in other life extension projects to utility plants to updated feasibility study on the potential refurbishment of those Pickering reactors, which would extend the operational life. Another 30 years.
Both the near term extension and the potential for longer term reform refurbishment up cycle improve an already favorable outlook for our can do business lines.
Beyond traditional nuclear power, we established a meaningful stake in the small modular reactor market on the last call I said that we are under an engineering design contract for GE Hitachi.
W. Rx 300 with high interest and Decarbonising electrical grids, we anticipate continued growth in interest coming into 'twenty three.
Ontario power generation intends to fuel this reactor by the end of the decade and I had mentioned in the past that the Tennessee Valley Authority began the planning and preliminary licensing for the potential deployment of the same reactor at the clinch River site.
Power also announced that it has selected the BW Rx 300 for potential deployment in the mid 2000, <unk> and just the other week Fermi energy announced that it has also selected this design for SLR deployment and Estonia.
BWXT remains positioned to support SMB designers with engineering services and critical nuclear components manufacturing for these projects in fact, we anticipate receipt of our first SMA production order sometime later this year.
There's a broad consensus now that nuclear power will play a significant role in global clean energy production. This combined with a renewed focus on energy security in the wake of the Russian invasion of Ukraine is driving intense interest in grid scale nuclear power.
Now turning to the nuclear medicine side of commercial operations, we saw a string of successes in 2022, our base business grew double digits and our tech 99 generator FTE application was submitted accepted and granted a priority review status.
Next week, the FDA will be conducting an implant preapproval inspection of our tech 99 generator line and we look forward to working with the FDA to support this review.
While our FDA submission is based on targets irradiate, the Missouri University research reactor, which limits activity levels and restricts our product offering to small generators. Our ultimate solution is to irradiate targets on a can do commercial power reactor, which will enable production of large generators comparable to those in the market today.
Last month, we announced the completed installation of our target delivery system on the LPG candid reactor through our collaboration with <unk> Energy partners. We have now conducted irradiation test runs of our moly targets and as expected. These tests demonstrate that our process will yield high specific activity material needed to produce these long.
<unk> generators pending final FDA approval, we will enter the market with a product that has all the attributes of our future customers have grown to expect and this is a very exciting milestone for this foundational product.
Beyond Tech 99 generators, we made substantial progress in 2022 on other products, most notably in therapeutic isotopes.
Building on its heritage for innovation BWXT medical executed agreement with triumph.
The manufacturer of high purity actinium based products and followed up with the announcement of a commercial agreement to supply Bayer with Actinium 225, We also announced a partnership with fusion pharmaceuticals to supply this isotope and supportive their exciting portfolio of targeted therapies.
We expect growth in this business to accelerate driven by therapeutics and contract drug manufacturing opportunities to add new layers to BWXT medical.
Overall 2022 was a year of meaningful strategic milestones for BWXT, accompanied by consistent operational outperformance I am energized by the tailwind we see across the portfolio coming into 2023, and the future trajectory of this business.
This year, we see near term opportunities in every market as we approach our experienced inflection points in EBITDA growth return on invested capital and free cash flow. This provides a clear pathway to the strategic and financial targets, we articulated at our Investor day 16 months ago.
Let me turn it over to Rob to discuss 2022 financial results in more detail and to walk through the components of our 2023 guidance.
Thanks, <unk> and good evening everyone.
I'll start with some total company financial highlights on slide five and six of the earnings presentation.
Fourth quarter revenue was up 5% on a consolidated basis with government operations up 8%, which was partially offset by commercial operations being down 6%.
Fourth quarter, EBITDA was up 6% to $130 million, driven by higher revenue and better margins and government operations, Despite lower recoverable pension income.
Lower corporate expense also contributed to the growth in EBITDA, which was partially offset by a lower contribution from commercial operations.
Higher effective tax rate and more interest expense resulted in an earnings per share a decline of 2% for the fourth quarter to 93.
Notably, we generated $44 million of free cash flow in the fourth quarter, a little shy of our expectations as we had higher tax payments and lighter accounts payable balances due to year to end of year activities.
A solid fourth quarter drove full year 2022 revenue to $2 $2 3 billion.
Up 5% with equal growth rate contributions from both operating segments.
Full year 2022, EBITDA was also up 5% to $439 million, despite a $17 million pension headwind.
On an ex pension basis underlying operational growth was nine 5% and at the high end of our original operating guidance range for the year.
These results were driven primarily from government operations growth and lower corporate expenses.
Despite higher interest rates and other headwinds to non operational items earnings per share grew 2% to $3 13 for the year.
We finished the year with $245 million of operating cash flow a little lower than we had anticipated we have laid the groundwork to improve working capital management by tracing procurement to pay processes across our company. However in the fourth quarter, we advanced some payments given the rapid installation work we did.
At year end on our target delivery system in Canada.
Another consideration in evaluating total cash flow as it relates.
As it relates to FX hedging activities.
In an effort to hedge balance sheet items, and offset potential negative impacts to operating cash flow, we arrange foreign exchange contracts that seek to dampen any currency fluctuations.
The net impact of those hedge contracts settlement flow through the financing section of the cash flow statement and not through Ocs.
Given that dynamic we saw a $24 million inflow, which allowed us to ultimately deliver total cash flow in line with our expectations.
Additionally, we successfully brought capital expenditures down over $100 million.
<unk> finished the year with $198 million of Capex.
We have an EPS bridge on slide seven details all the puts and takes for the year.
I'll now move onto 2023 guidance on slide eight.
As we look to provide guidance for 2023, we want to focus you on five key metrics that taken together show a clear picture of a growing and high margin enterprise.
So let me walk you through those on the left hand side of this page and then I will provide some detailed color and assumptions behind those key metrics.
We project 2023 revenue of about $2 4 billion.
Growing mid to high single digits versus 2022 results.
Adjusted EBITDA is anticipated to be about $475 million up high single digits year over year, and driving EBITDA margins of about 20%.
We expect adjusted pre tax income of around $350 million, resulting in an anticipated EPS range of $2 80.
The $3 per share down year over year, Dear due to significant non cash non operational items that we will discuss later.
Finally on cash flow, we see a clear path to achieving $200 million as we drive more OTF and finish up our two largest capex projects.
This free cash flow growth represents a significant step up from our 2022 result.
So those are the major metrics that accurately depict the solid financial picture BWXT foresees as we entered 2023. So I will offer you some color on the assumptions that underpin that guidance.
For revenue, we anticipate government operations to be up mid to high single digits year over year.
This is driven by a slightly growing navy business as we build out our workforce to meet increasing demand.
Most of the revenue growth, however is anticipated to come from micro reactors and uranium processing.
We have clear near term visibility on micro reactor growth with a full year run rate on project Pele.
We could see an additional wedge of micro reactor growth. This year. If we are successful on NASA and DARPA as in space reactor demonstration project called <unk>.
The other major component of government growth as the transition from uranium conversion and purification phase one to phase III.
Which is an expansion of that capability.
In commercial operation, we expect low to mid single digit growth.
This growth is expected to be driven mostly by modestly by commercial nuclear power, including some SME revenue and strong nuclear medicine growth in response to robust demand for our current offering as well as the introduction of new product market.
For total company EBITDA, we expect strong growth and modest segment margin expansion, which would be partially offset by a return to more normalized corporate expenses versus last year.
And government operations I will make a few comments on EBITDA growth and margins.
First the lion's share of Geos EBITDA growth is anticipated to come from our core Navy business.
As Rex mentioned, we are seeing.
Seeing early green shoots of progress from our hiring and training initiatives and we expect that to drive modest growth.
We're also expecting to see a pickup from our uranium processing contract as we enter our second phase of that program.
And then the last growth component within this naval segment will be driven by income, we expect to get from cost recovery and non nuclear components. These.
These items taken together are anticipated to make both EBITDA growth and modest margin expansion.
The second Geo driver will come from a full year of growth from 2022 wins that are already under contract, including our Savannah River services effort as well as project Pele.
Taken together these will have a relatively neutral margin mix impact.
And then the third bucket of growth and margin will be derived from some mix of new awards in our services and micro reactor businesses.
We believe we are tracking well to pull through a few key wins later in 2023.
Then for commercial operations, we expect modest EBITDA growth driven by the strength of BWXT medical being partially offset by the mix of field services work that propelled the nuclear power business in 2022.
For other items, we see three headwinds going into 2023, which are not much different from what we have described on the last couple of earnings calls.
Those items include first.
We will see about a $40 million noncash pension headwind driven by the increase in discount rates and negative performance of our pension assets in 2022.
This will take the other income line below Oi down to about $10 million in 2023.
Second there is an anticipated $15 million headwind in interest expense driven by an expected 300 basis point increase in interest rates year over year and.
And thirdly, we will encounter about a $10 million headwind to depreciation and amortization as new capital to put to work.
We see a consistent tax rate in 2023 compared to what we saw in 2022 and have assumed share repurchases sufficient to offset any dilution.
On free cash flow guidance, we anticipate that 2023 operating cash flow will return to more normal levels, which has been trending towards a $300 million Mark that we saw in 2021 and on most LTM look backs.
So starting with that approximately $300 million as a base level, we anticipate adding growth in line with the high single digit EBITDA growth from operations and topping that off with some modest benefits from our working capital initiatives, which should yield a solid operating cash flow step up in 2023.
On the Capex side, we are currently expecting another material step down year over year with maintenance capex level maintenance levels of Capex and most of our businesses micro reactors capital in the tens of millions of dollars and a small tail of medical capex as we finish up that major investment.
Given the macro dynamics, we experienced last year I want to provide some overall assumptions embedded in the 2023 guidance.
On the labor front, we anticipate modest progress on hiring and attrition in line with what we have been seeing for the past several months.
We're also assuming that interest rates remain fairly stable in line with the forward one month sulfur curve, which is a close proxy to derive interest expense on our variable rate debt.
And lastly, we continue to anticipate minimal supply chain disruptions also in line with what we have experienced through the COVID-19 pandemic and in recent history.
Overall BWXT is growing across the portfolio and it's building on strategic successes and superior competitive positioning.
Enable another strong year of operational growth and position us to accelerate and achieve our medium term financial targets and with that we look forward to taking some of your questions.
Thank you.
I will begin the Q&A session, if you'd like to ask a question on today's call you can do so by dialing star one.
Any reason you would like to turn that question you can dial star two.
Again to ask a question it is star one please.
Please remember to pick up your handset when asking your question.
We'll pause here briefly to allow questions to generate in Q.
The first question is from the line of Pizza Kubicki with Alembic Global you May proceed.
Hey, good evening, Rexam, Rob and Mark.
And then Rex maybe right, maybe you could start with giving us a little more color on the labor outlook, it's a little tough to see from the outside.
Just for 2022.
Sure did you end up on net hiring for the year and what's kind of the goal for 2023.
And then on.
Understanding you hire people, but then what's kind of the.
In terms of training, how long does that take to really get to get the guys up and productive.
Yes. Thank you.
Good evening to you. So last year, we were trying to net higher about 500 people and we thought we'd need to get maybe a thousand people given our historical.
Sure.
Attrition rates to get that net 500 feet, but as it happened attrition was higher than normal we reported about that reported on that throughout the year. So what happened was we did hire a thousand.
But we lost about 700, so we netted about 300.
Against that goal of getting 500, so think of that as 200 short and most of that was in government operations, where we have about 5000 employees and so if you think about that.
That's kind of 4% short on that on that workforce. The head count as you translate that to marginal revenue on roughly the same ratio and you think about the income fall through its not an insubstantial impact.
But that's but that's how it came out so coming into this year. We've got that 200 deficit and then we're trying to hire another 500 because of how much growth we have on top of the 200. So we need to net 700. This year. So I think of it as a pretty high hurdle that said as.
As we discussed on the call, we've really revamped our hiring processes went through an intense kaizen kind.
Kind of activity to figure out how to take steps out of it and to streamline it.
Bob Duffy, who runs administration has been in charge of all that.
And we're seeing big results from that were daily monitoring yeah, we can.
Beefed up our recruiting staff and availed ourselves to various other recruiting services.
And so we're seeing we're seeing a turnaround that area getting a weekly report on the last one I got on Monday, we were up 89 net for the year and Thats a good pace that would get us there.
So thats the kind of challenge that we face.
And I do see it improving overall.
Now in terms of in terms of any training.
There is a bit of a learning curve, particularly on our naval reactor side, where we have to train welders and assemblers and inspection technicians, and so think of that is weeks or months to go through kind of the training component of that so there's a little bit of drag on revenue and income until the until those workers are fully qualified that said, we've got good support from our customer for those trade.
Programs, and we expect that to and we expect to work our way to our way through that piece of how we model that as we know that.
You come off a pretty challenging period at the start of the year as people retire and then we slowly ramp up in all of our efforts on building were seeing good data and so we track were tracking to our budgeting, but we're sort of slowly building to that and we have a lot of inefficiency as we ramp up so.
It's all taken into consideration the inefficiency of how that ramps up.
Have you had to increase salaries sort of inflation plus type of level.
I assume some of those you could pass through your contracts maybe.
Yes, there is some of that going on but we're trying to keep it as youre trying to keep a lid on that and still attract the right kind of work for us and I would say that what we have in store for.
For our pool and raise pool throughout the year is kind of consistent with what youre seeing across the U S economy.
Okay. Okay understood. Okay. Just last one for me then.
Sometimes it's hard to predict for you guys.
Some of the material purchases.
The seasonality aspect of that as it flows through the year. So I don't know maybe Rob if you could give us a sense of how revenue is expected to kind of flow this year with the.
The puts and takes that you guys kind of typically.
Progress through.
Yes, sure happy to do that Pete. Thanks. Thanks for the question, yes, as we look out over the year. It is difficult as you know, it's kind of splotchy quarter to quarter in terms of different activity, but I think we see the year shaping up as <unk> seen in the past couple of years, where you start a little bit lower and build over time. The past couple of years, we've generally seen about 20% of earnings if you will.
EPS in the first quarter and then we build over the course of the year generally end up at almost 30% of our of the full year results kind of hitting in the fourth quarter. So that's the way I see it playing out it's about 20% and then you probably would build over the course of the year, it's actually pretty sequential because you kind of bring on the workforce you get some of the awards.
Later, you have outages early on and so I see sort of 20% and building to almost about a dime every every quarter thereafter, and just while we're on it because we're pretty focused on matching up that earnings to also.
And operating cash flow, we're really trying to look at that just to help you on seasonality. There Likewise, we start out a little slow in the first quarter. That's when we pay our bonuses. That's when you have lower income and so as we looked back youre your bottom probably reflects the since we went public I guess the past seven years six of the past seven years, we started out with.
Negative result in the first quarter to the tune of about $20 million outflow and operating cash flow and the.
First of all and then we build thereafter, so that's kind of the same seasonal trend that we're seeing in earnings cash flow down through operating cash flow.
Okay very helpful. Thanks, guys.
Sure Yeah. Thanks Pete.
Thank you.
The next question is from the line of Michael <unk> with <unk> you May proceed.
Hey, good evening guys. Thanks for thanks for taking my questions.
Maybe Rex just on you kind of touched on it with your prepared remarks in terms of everything that's happening in the commercial.
Nuclear market, but there is certainly there is a lot of activity between.
Legacy plant builds new asmr's multiple players in the marketplace the need for fuel.
I think you've kind of.
<unk> talked about maybe getting your first order later this year, but can you just give us maybe the lay of the land I know were expecting slower growth in commercial.
This year, but it certainly seems like the growth opportunities are pretty prevalent there.
Segment that you think can see some significant growth acceleration.
Yes, I really do really do Michael it's a it's a pretty interesting. It's a very interesting time for nuclear power because of what I said in the script, which is this convergence of energy security with de Carbonization of the grid is really driving a global trends here.
Powerful interest in nuclear in fact, we we literally literally yesterday morning, we did a comprehensive strategic review with our board of directors on commercial nuclear power. So lot of interest a lot of interest here within our board.
And I would say.
We think of it in kind of three layers first off we are.
We have that incumbency that very strong base business it centered around Canada with the can do fleet.
Servicing and products that we have there so can do fuel as you know, we do field services, particularly around steam generators and <unk>.
And fueling and services servicing fueling equipment.
We do spend a fuel waste containers in that market and so that's been a good market for us historically, but it really sort of got jet fuelled by this refurbishment campaigns going on both at Darlington and Bruce site and that's the reason that business has grown so significantly over the last let's call. It four or five years now as I mentioned in script Theyre looking at.
At refurbishing that Pickering.
Set of reactors at Pickering, which would be the same set of opportunities for us steam generator manufacturing theaters.
Various other components that we do heat exchangers in Hawaii.
Refurbishment up cycle, you could imagine going all the way out to maybe <unk> 2040, or something now instead of $2 32, which is what we had modeled so.
So thats going on it and by the way the global sorry, the can do business as a global business Theres candour reactors in Romania appear from there Theres, one in Argentina and <unk>.
<unk> in South Korea, So we do have a global footprint there.
And there is talk about refurbishing that that Romanian reactor in churn of voter now so thats, our base business and its pretty interesting and then you add on that refurbishment opportunity that up cycle with it and then the new layers of growth or what you referred to in your question, which are is a lot of interest in small modular reactors and I'd say were kind of in the <unk>.
We'll position at the top of the supply chain for the small modular reactor in that reactor that presently has the most traction in the market. The BW Rx 300, which is ge's reactor Darlington LPG Darlington has committed to building one of those by the end of the decade, they probably build a four pack there eventually SaaS powers.
Interest in that reactor in wood.
Wood and wood installed that one in the mid 2000 <unk> is what they are talking about in the TBA opportunity I mentioned and the others and where we are with that one as we are under a design contract to.
To design the reactor vessel there are other design opportunities for us and will almost certainly have the.
The opportunity to manufacture the components that we design and we expect to do that but that's not the only one we sit there in the top of the supply chain as a merchant supplier and so there are multiple other small module reactor opportunities that we have that we haven't disclosed yet that are kind of in that same.
Sort of in that same.
Opportunity space of designing reactor vessels heat exchangers.
And and the like so.
Very very interesting opportunities, there and I really like where we are on it.
And then sort of maybe it's surprising demand signals that we're seeing here in the last couple of months.
Michael is that suddenly.
Globally. There is an interest in large reactors because I think people get that you really can't decarbonize the grid by 2050 or whatever your goal is by building five small modular reactors you need you need to mix in some large reactors and so can do Scott new life for.
For possible large reactor build and you've heard about AP 1000 and others.
And obviously, we've got a very strong position on can do.
And then maybe a little further out there or what is the future of micro reactors. We're in the position now in.
In the pole position on micro reactors with Pele contract.
Where we've got a government sponsored for the development of that thing, but we also have a commercial derivative called banner.
That has interesting applications in places like the oil Sands, where you need high density power.
Industrial applications island economies and all those things that that gets discussed and so there could be a commercial endpoint to to micro reactors to now that's a little further out there.
But the opportunities for small modular reactors are now.
We are under contract now for the design aspect of it.
We expect to have the production program pretty shortly on that.
So it's a whole new world.
Year ago, we had one order now.
Now, even an order, but an announcement that Darlington was going to build one and a lot has changed in that last year or two years ago. There was nothing so I would say that commercial nuclear power has unusual lift now and maybe more so than we anticipated.
Got it.
Extremely helpful. And then maybe just one more Rob just thinking about commercial as well.
The operating margins weak in the quarter.
They've kind of trended lower as you look at the opportunities in commercial and even looking into next year. How should we think about this commercial maybe I guess I'm just keeping it to the nuclear side I guess I would assume once once some of the medical starts to hit that would that would give you more of a margin lift.
How do we think about this this kind of commercial nuclear margin opportunity going forward as well.
Yes, I think we see margin lift across the business, particularly in 2020 modest margin.
Left.
We talked about how both at both the segment levels Youre going to see that lift and then that's offset by a little bit of pressure as we have a rebound in our corporate expenditures. When you look when you look at the commercial margin specifically as you said you have that mix of higher margin medical.
Sort of drifting higher overtime, that's growing a little bit faster and then you have the lower margin what we used to refer to as you know to the NPG legacy business and then Youll always have mix within that.
You look out to 2023 nothing to call out that.
That's super important.
There is some push out that we had in terms of signing our fuel contract in 2022 into that that will be a contributor in 2023.
We see.
Good.
We see mix and the field services business.
Comparable to what we've seen the past couple of years. So I don't think a lot within that segment.
Up or going down and then you have the mix up of the medical is sort of on top of that is how I would think about that segment for 2023 versus 2022.
Got it helpful. Thanks, guys I'll jump back in the queue.
Thank you.
The next question is from the line of Scott <unk> with Credit Suisse. You May proceed.
Hey, Good evening, guys Rex has the FDA come back to you with any supplemental data requests since they started the priority on tech 99.
So no we'll know a lot more in the next.
The next weeks and months Scott as we go through as they go through the pre approval inspection they'll send us a formal request for for data at that time.
We'll see what we have and when we kind of understand where we are with the FDA.
Okay, and then Rex Rolls Royce is going through a strategic review I think they have some overlap with you all in a couple of areas. So curious to get your thoughts there if youre willing to say anything kind of whether you see anything in their portfolio that might be of strategic value to BWXT.
Yes, let's say much about that other than say other than to say, we actually enjoy quite a nice strategic relationship with rolls, we operate obviously in different geographies and we have very little competitive overlap.
And so we do have some some collaboration areas and novel nuclear that we've worked on obviously naval nuclear propulsion, certainly an interesting overlap of capabilities, serving our own our own.
Sort of domestic needs. So there's certainly a lot there that's interesting to us and we keep an open dialogue with them.
Okay, and then Rob maybe just what's your latest thinking on when you look to take out this variable rate debt and the timing for when you do that obviously, it's creating a bit of an overhang in terms of estimates given the stickiness of inflation in that short term rates continuing to creep up so curious for your thoughts there. Thanks.
Yes, I mean the.
Fixed rates that we're seeing on all companies are seeing rate has kind of blown out I mean, we issued our bonds in the low fours right.
Our debt is trading I think is around 7%. So we think that as rates come down that would provide an opportunity. We're in no rush to term that out we have $500 million liquidity just in general.
So we're actually in a great position as you know we just.
Did a transaction in September that gave us some extra flexibility, which you can see in the 10-K so I.
Currently we've got plenty of dry powder and we're looking at <unk>.
Largely looking at tuck in acquisitions, So we don't need to do anything to set ourselves up for anything gigantic. So we'll just kind of wait until the market settles in.
That's kind of our posture now as it relates to the balance sheet.
Okay got it thanks guys.
Thanks Scott.
Thank you.
The next question is from the line of Bob <unk> with CJS Securities You May proceed.
Yes, hi, good afternoon, it's Pete Lucas for Bob.
You guys have covered a lot answered most of his questions here I just wondered if I get a little more detail on the target delivery system at Darlington and what's happening now are you running weekly batches, how's that going and I think you've kind of covered where you stand with the FDA there.
Yes.
Installed and fully validated that system on the Darlington reactor unit two.
That was certainly a comprehensive campaign to assemble that thing and then test it we have run target material through it at different times, we've done Mollie targets I believe at one and two and three week different.
Different soap times and retrieve those targets and we're going to test those targets as we said so what we've done has proven that the system works that we can move material in and out of there and I think certainly the LPG is confidence in that system now.
The important output of all of that was the activity level of those targets that we took out of the system, which do support as I said in the script that full spectrum of.
Of generators that we would deliver to the market ultimately.
I would note too that up and running.
Yes, I would note that now that we have that up and running we're testing that as it relates to attack Theres also a lot of potential to use that system for other isotopes.
The TCM or otherwise and so now that we've got that up and we can start working with it we're starting to explore how we use that for all those margins. So there's some real potential of the scale of that.
Equipment and what we can do it goes far beyond tech.
Extremely helpful. Thanks, I'll jump back in the queue.
Thank you.
The next question is from the line of Rob <unk> with Bank of America. You May proceed.
Hi, This is Andre.
And in general for Ron Epstein quick.
Quick question could you just detail.
Free cash flow bridge from 'twenty two to 'twenty three sorry, if you went over it already I got kicked off the call.
No. That's fine so what we talked about is doing about $200 million of free cash flow in 2023, which is up.
Very very significant from around $50 million this year that will be driven by operating cash flow.
Up at a $300 million plus level.
It's going to be driven by is.
Rebound from the levels that we saw this year.
Some working capital some growth and just the underlying business, so that should drive a $300 million plus certain number on the operating cash flow side, and then the offset obviously to get down to the $200 million level would then be capex, we've talked about trying to return to a maintenance capital level, which we've commonly talked about at about.
$100 million and then last year. We described how we had a significant win in the project Pele and that would generally be about 20% to $30 million incremental we only spent a small slice of that in 2022. So you can expect a decent bit of that we continue to have growth.
Our nuclear medicine business, where we're doing.
One or two growth projects. So I would say the $100 million plus if you will to ultimately get to an operating cash flow minus that of around $200 million.
Alright, that's helpful I'll jump back in the queue. Thanks.
Okay. Thank you.
There are no questions in queue. So as a reminder, the star one to ask a question.
The next question is a follow up from Pete Kubicki with Alembic Global you May proceed.
Yeah, guys I figured maybe we could talk a little bit more about August .
Just because it.
It seems like most of the congressional shipbuilding guys are pretty nervous with regard to kind of a lack of incremental capacity you had the submarine yards, Ryan I think Thats fair right now so.
Are you seeing in your talks.
Potential that.
Australia can be kind of SaaS fine with what they need.
They're ways.
As opposed to.
Our actual yards building more subs.
Maybe using your reactors in different ways or any other pads I got a good benefit of BWXT.
Yes, so there's a lot of speculation in the trade press about this one right now Pete maybe maybe I won't say much.
We do expect some some details here in the middle of March and we're hopeful about it but thats about all I could really say at this juncture.
Okay. That's fair I'll sneak in one last one then.
I was little confused you got the actinium agreement with bear that you had and now it looks like the same same drug with fusion.
Those are two separate revenue opportunities with the same drug is am I understanding that right.
Yes think about it this way if Pete.
So there's the radioisotope.
Frequently called the active pharmaceutical ingredient.
Which is sort of the payload and then there is the drug that are developed generally by large pharma which are the.
Are the missile, let's call that's call it instead of the warhead and those drugs are our biochemicals that that have affinity for proteins that are produced by particular types of cancers and so the combination of those things that drug plus the radioisotope or the active pharmaceutical ingredient as what you inject a pace.
With and so in this particular case.
Bayer has their own drugs to biochemicals, they've been developing for certain indications.
And certain conditions, and we would supply the radioisotope to Bayer for those clinical trials fusion has a different set of drugs that have been developing for different indications in different conditions and different and different approaches and we would supply again, the radioisotope or active pharmaceutical ingredient to them. So it's just the isotope there are.
And so we can supply that isotope to a whole number of different drug developing companies. There also.
The businesses that we're layering on as I said in the script <unk>.
Or around that the therapeutic isotopes, but we also have an opportunity to do the contract manufacturing like we do with Boston scientific for <unk>, where we would take that drug and our radioisotope and combine it at our plant and then take care of the logistics and distribution to the radio pharmacies. So it's kind of early days on actinium, but there could be multiple customer.
As for our for our particular radioisotope.
Okay, Okay, great look forward to hearing more in the future. Thanks guys.
Yes, Thanks Pete.
Thank you.
Again as a final reminder, Thats star one to ask a question.
There are no additional questions waiting in queue I would like to hand, the call back over to Rex evident for concluding remarks.
Thanks, Joe wanted to say as we close here that I'm proud of the entire <unk>.
BWXT team of 7000 employees in the accomplishments that we realize together in 2022, we do have a healthy and growing business and we positioned ourselves for new <unk>.
Meaningful opportunities and even in the face of public health economic and geopolitical distractions. Our employees remained steadfast in our mission to provide safe and effective nuclear solutions and I do commend them for helping us run and grow this remarkable business. So I just want to say to them. Thank you for your continued focus and dedication.
Rob would you have anything to add yes. Thanks, Rx I'd echo that sentiment we are remarkably resilient team and it showed up in our financial results. This year I'm energized and can continue to be amazed by the way. The employees here are tackling evolving challenges and seeking to take this company to higher heights, So with that we thank everyone for joining us this even.
As always if you have any further questions you can reach us by phone at 980, $365 40 to 300 or E mail us through investors at BWXT Dot com. Thank you.
That concludes today's conference call. Thank you for your participation. Please enjoy the rest of your day.