BWX Technologies Inc. Q1 2023 Earnings Call
[music].
Okay.
Ladies and gentlemen, welcome to BW X technologies first quarter 2023 earnings conference call. 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'd now like to turn the call over to our host Chase Jacobson Bwxt's Vice President of Investor Relations. Please go ahead.
Thank you Anna good evening and welcome to today's call. Joining me are Rex <unk>, President and CEO , and Rob Lemasters Senior Vice President and CFO .
On today's call, we will reference the first quarter of 2023 earnings presentation that is available on the investors section of the BWXT website. We will also discuss certain matters that constitute forward looking statements.
These statements involve risks and uncertainties, including those described in the safe Harbor provision found in the investor materials and the company's SEC filings.
Frequently discuss non-GAAP financial measures, which are reconciled to GAAP measures in the appendix of the earnings presentation that can be found on the investors section of the BWXT website.
I would now like to turn the call over to Rex.
Thank you chase and good evening to everyone.
BWXT has started 2023 with good momentum.
Earlier today, we reported strong first quarter results that were ahead of our expectations are.
Our recent wins highlight that BWXT is at the forefront of the nuclear industry and is becoming more apparent that our technologies are in high demand as our government and commercial clients seek.
Seek to address their national security clean energy and medical requirements with nuclear solutions.
First quarter 2023 revenue was up 7% and adjusted EBITDA was up 17% compared to the first quarter of 2022, driven by solid volume good operational performance.
And higher performance fees in our technical services business line. Despite ongoing labor challenges adjusted earnings per share grew 2% adjusted EBITDA growth more than offset the unfavorable impact of non operating items as we had anticipated.
We are maintaining 2023 financial guidance and continue to believe we are positioning BWXT for long term sustainable growth.
While we had a strong first quarter, we are still early in the year and uncertainties persist in the macro environment. Accordingly, we still see the midpoint of our EPS guidance of $2 80 to $3 per share as the most likely outcome.
I'll start out with some highlights and government operations, where there have been a number of developments that highlight how our growth investments are bearing fruit.
First is the August Trilateral security agreement, which was jointly announced in early March by the President of the United States and the Prime ministers of the UK and Australia under the agreement Australia will procure at least three to five Virginia class submarines in the early 2000 <unk>.
Following that in Australia, where procure new submarine class the SSA in August for which the final design and industrial manufacturing investment necessary to build these units will be thoughtfully planned in the years ahead.
The recently announced updated 30 year Shipbuilding plan indicates a navy anticipates building additional Virginia class submarines in the 2000 <unk> as replacements for those that will be sold to Australia.
Although this has yet to be worked into the published schedule. We believe this thinking aligns well with the Navy's long term submarine fleet goals and BWXT will standby for a more comprehensive planning and decision making process from the Navy our allies in the Congress.
This strong naval spending backdrop serves as a good tailwind for our naval propulsion franchise.
BWXT.
But also lift the business prospects of the two acquisitions, we made almost one year ago to the day dynamic controls and <unk> are both important suppliers of precision parts to the U S and U K navies.
Both companies in the first quarter and I believe their unique and highly engineered proprietary.
Manifolds and fittings could expand our scope to both the U S and UK Navy right at the moment, a strong supplier base will be most needed.
While government operations performed well in the first quarter similar to the last few quarters staffing remains a challenge and could limit our ability to staff to the demands of our programs. The labor market remains tight and we are intensely focused on continuing to grow our workforce in the first quarter, we found ways to work efficiently despite hiring effort.
Starting a little slower than we had hoped.
Streamline hiring and training processes that we implemented over the last year begin to kick in and we integrate this less experienced workforce, we may see modest noise in the margin performance quarter to quarter over the near term.
There have been multiple positive developments for BWXT in recent months outside our enabled business specifically in April we announced two major contract awards.
<unk> is a five year $428 million contract from the National Nuclear Security administration for Phase II of uranium conversion version and purification services building on the pilot phase that we completed last year.
Hold the only category one license to handle and work with these special materials and the award shows and then SaaS confidence and Bwxt's ability to manage and execute critical programs on its behalf.
BWXT led joint venture was awarded the 10 year Hanford integrated tank disposition contracted by the department of energy this will potentially be the largest single contract in our government services business.
Also in the technical services group in early 2022, we transitioned onto the Savannah River mission completion contract alongside the same team. We are partnered with the Hanford one year into this contract we continue to receive excellent safety and contract performance scores in excess of our original forecast.
Turning to our advanced technologies and micro reactors business, we are making good progress on our $300 million contract with the strategic capabilities office called project Pele to build and deliver the first advanced mobile nuclear reactor in the United States.
Contract is largely on schedule and generating revenue the associated capital expenditures will be complete this year.
We continue to see ourselves in a strong position on Darvis Draco project. The first demonstration of a nuclear thermal rocket engine in space.
DARPA is expected to receive a significant increase in funding for this project based on the President's budget request for fiscal year 2024.
We are also seeing a growing interest in advanced reactors for commercial applications across a number of markets. This exciting opportunity for government investments to enable nuclear commercial markets is reminiscent of the naval reactors programs in the 19 fifties that kick started the commercial nuclear industry as we know it today BW.
<unk> has clearly established leadership position in naval nuclear applications, and we stand ready to support efforts to position nuclear to enable the global clean energy transition and for power and propulsion applications in terrestrial space in other domains.
Moving on to commercial operations are core nuclear power business grew nicely and performed well in the first quarter driven by an increase in refurbishment and life extension projects on a number of reactors in the Canadian fleet.
As I mentioned last quarter, the government of Ontario announced it support for operating extensions at units five through eight of the Pickering plant and is launching a feasibility study on the potential refurbishment of these reactors, which would extend these reactors operational wise. Another 30 years. Additionally, while still in the very early stages.
The government is exploring the potential for new large scale reactor deployment as it seeks to eliminate natural gas from the power grid by 2050.
And we continue to see growing interest in small modular reactors and are strongly positioned as a key player given our experience in the engineering design and manufacturer of nuclear components.
We formally announced our engineering contracts for the reactor pressure vessel for GE Hitachi as BW Rx 300, small modular reactor, Ontario power generation is constructing a grid scale project consisting of up to four of these reactors at the Darlington site with the expectation to have the first of these completed and on the grid by the end of the decade.
Other large utilities, including the Tennessee Valley Authority SaaS power in Canada, Fermi Energia in Estonia, and simple screen energy in Poland.
Publicly expressed interest in utilizing GE Hitachi is reactor as well.
We are excited about the opportunities for this and other small modular reactor technologies as we execute our newbuild strategy as a merchant designer manufacturer and supplier for multiple developers in the market.
Turning to nuclear medicine, the BWXT medical business had a solid quarter and is tracking for over 20% organic revenue growth in 2023.
We face the market as a full service player in radioisotopes with a base of diagnostic isotopes additional layers of therapeutic isotope manufacturing and contract drug manufacturing, which we will touch on later in.
In the near term, we continue to focus on our tech 99 product deployment. Our goal is to be fully ramped at commercial scale in 2024 with a generator product is essentially identical or superior to those on the market today.
The FDA conducted a preapproval inspection meeting in Kanata in early March and we believe we have a good handle on the gating factors for approval of our new drug application.
We are completing the work necessary to prepare for approval and commercialization with merge data and given the installation of the target delivery system. In February we now have <unk> radiated sample runs to supplement our filing depending depending on pending ongoing discussions with the FDA this enhanced data and our in depth exchanges with.
The FDA gives me confidence that our team will bring this important product to market on the schedule, we have forecasted and help stabilize the nuclear medicine ecosystem with this critical foundational diagnostic tool used in thousands of procedures every year.
As we continue to work towards commercializing the Tech 99 product in 2024, we also see expanded sales of key therapeutic active pharmaceutical ingredients like lutetium actinium that support.
<unk> and pharmaceutical companies and critical clinical trials and May ultimately give way to fully scalable quantities. If their therapeutic drugs are approved and on contract drug manufacturing. We are involved in several discussions that would meaningfully expand that component of our business beyond what we currently do today for Boston Scientific's proprietary.
<unk> cancer treating drug called their sphere.
To sum it up we are off to a good start in 2023 and are excited about the near and long term opportunities ahead of us. Despite the ongoing labor challenges that we're facing in the core Navy business. We are on track for robust high single digit adjusted EBITDA growth and a meaningful inflection in free cash flow. This year, we are growing.
Across the organization, providing a clear pathway to our medium term strategic and financial targets.
Let me now turn it over to Rob to discuss the first quarter financial results in more detail and to discuss our reaffirmed 2023 guidance.
Thanks, Brad and good evening everyone.
I will start with some total company financial highlights on slide four of the earnings presentation.
First quarter revenue was up 7% on a consolidated basis with government operations up 7% and commercial operations up 9%.
First quarter, adjusted EBITDA was up 17% to $111 million.
Driven by higher revenue and better margins in the government operations. This was partially offset by a lower contribution from commercial operations and slightly higher corporate expense as expected.
Adjusted EPS grew 2% to <unk> 70 per share as the strong adjusted EBITDA growth was mostly offset by lower pension income and higher interest expense.
We have an EPS bridge on slide five detailing the puts and takes for the quarter.
Free cash flow was a use of $43 million compared to a use of $58 million in the first quarter of 2022.
We had a modest use of operating cash in the quarter in line with seasonal patterns as working capital related to our long term government operations contracts generally built early in the year as well as higher cash taxes.
Capital expenditures were down to $30 million, consisting mostly of maintenance capex and modest spending related to growth initiatives.
Moving now to the segment results on slide six.
And government operations first quarter revenue was up 7% to $460 million driven by higher naval nuclear component production and micro reactor volume that was partially offset by lower long lead material.
First quarter adjusted EBITDA in the segment was up 22% year over year to $104 million as higher revenue favorable mix and timing of technical services performance fees was offset by inefficiencies due to the staffing shortfall discussed.
And commercial operations revenue was up 9% driven by higher component manufacturing sales and increased field service activity in our commercial nuclear business as well as higher BWXT medical revenue.
First quarter commercial operations adjusted EBITDA was down approximately $2 million as revenue was skewed towards component manufacturing and field service refurbishment activity and less outage work compared to last year.
This was partially offset by ongoing cost controls in the business.
Turning now to guidance on slide seven we are reaffirming our 2023 guidance for the five key metrics, we provided last quarter.
Project revenue of about $2 4 billion.
Up mid to high single digits organically compared to 2022 results.
We expect modest adjusted EBITDA margin expansion to approximately 20% leading to adjusted EBITDA of about $475 million.
Up high single digits compared to 2022, driven almost entirely by organic growth.
As we discussed when we provided our detailed guidance last quarter, we expect the lion's share of EBITDA growth to come from uranium processing and our core Navy business, including recovery of estimated cost on the manufacturing of non nuclear components.
The second driver of growth is from a full year of 2022 wins that are underway, such as Savannah River and project Taylor.
And the third bucket is from a mix of New awards in our services business, such as Hanford tanks contract, we recently announced and other ones. We believe are forthcoming.
Adjusted EBITDA growth in 2023 is expected to be offset by non operational items, such as lower pension income and higher interest expense consistent with what we've discussed over the last couple of quarters as such we expect adjusted pre tax income of around $350 million and adjusted EPS.
And the range of $2 80 to.
To $3 per share.
As we look forward, we remain confident in reaching our 2023 financial targets and we will continue to push on hiring new employees and training our workforce to enhance our position for the future.
This and the timing of potential cost recoveries and nonnuclear components will likely be the biggest swing factors in our guidance.
Looking forward on a quarterly basis, we now expect Q2 to essentially look how we originally thought Q1 would Q.
Q1, outperformance was driven by naval manufacturing efficiency TNT performance fees, we expected to hit later in the year and the timing of expenses compared to our previous forecast.
We expect that Q2 will now be about 20% of the full year EPS guidance midpoint, followed by subsequent increases in the third and fourth quarter otherwise.
Otherwise, we expect the year to play out essentially as we did.
When we first gave guidance at the start of the year.
Finally on cash flow, we see a clear path to achieving $200 million of free cash flow as we drive more operating cash flow and manage our capital expenditures.
Overall BWXT is growing across the portfolio and is building on strategic successes and competitive positioning that 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 your questions.
Certainly.
If you would like to ask a question. Please press star followed by one on your telephone keypad.
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Sir Paul again.
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One more question.
Hello, Sir birthday of questions registered.
The first question is from the line.
Pete just kubicki with.
Al Alembic Global you May proceed.
Hi, good evening, guys nice quarter.
Hey, thanks.
Keith.
Hey, rich.
Maybe you could quantify some of the labor trends Youre seeing it sounded like you were a little short in the first quarter on that hiring.
Can you can you give us a sense how sure you were and then maybe what the goal is on a net basis the balance of 2023.
Yes, hey, thanks for the question good to hear you.
Maybe I won't get too specific on that but let me talk about sort of the process and how we're thinking about it when you look at bringing new people into the business. We have to we have to build a pipeline of those people because there's a lot of steps in it including getting employees cleared doing the background checks and all that as you would know so.
We think about filling the pipeline, we think about the conversion rate from the pipeline into the business, having getting through all those steps through all of those gates and then of course, the third factor. There is the retention of the workforce and so you've got to worry about sort of a leakage against the against the first two.
I mentioned on the previous call and I think on the call before that that we had done kind of a kaizen event to sort of optimize the pipeline and conversion processes, taking time out of each step trying to eliminate eliminate some steps and I'd give us kind of an aid for that I think we've really got <unk> got the right process in place and so we've been filling that pipeline.
We started a little lower than we had a little slower than we had anticipated, but we've seen it inflect upward over the past few weeks and so I'm feeling pretty good pretty good about where we are.
So the pipeline is full of the conversion rate is pretty good the retention part of it is going to favorably as well.
Approached.
Nearly double digit voluntary turnover about this time last year and Thats moved a couple of hundred basis points in the favorable direction. So less leakage there too so, let's say a little bit behind schedule, but but generally in pretty good shape, yes, maybe I'll add something there just on the numbers of that because we track this on a daily and <unk>.
Basis, the way Im looking at it.
Statistics that are really showing through for US is as you build that pipeline as Ryan said, adding to the top of the funnel and then getting people quickly through where.
We have probably about the peak level of pending.
Potential employees in the clearance process as well as just through pending starts. So we're trying to find room for those two classes of people and those will really move through the pipeline here shortly and when I look at that number Thats a couple of hundred that we build too. So the progress that <unk> is talking about on the funnel and getting employees in is really starting to build.
The attrition also we've been dealing with coming into a new year. As you know you get retirement as kind of as you turn the calendar, yes bonus activity and employees decided to do different things before they move to a different location and that generally all happened kind of in the first and second quarter. So I'm also seeing attrition moving down from that double digit rate that we had seen a couple of.
Years ago back toward not all the way there, but back towards that kind of industry, leading mid single digit attrition rates. If we have the combination of those two we should really be able to turn the corner at some of our peers feel like they are turning the corner and we feel the same way that it could happen pretty quickly and so we're waiting for that to come through and Thats one of the reasons we're a.
A little bit conservative on just how the year is going to develop and specifically the second quarter as we see those new employees those do come with a little bit of inefficiency. So if we're right on the hiring front that could be a positive ultimately for the company and could just put a little bit of strain on on Q2. So we're pretty excited about where we sit here today.
Yes, Okay that makes sense it sounds like Theres, some real momentum there and I'll just ask one last one guys just on government backlog, it's been declining for four or five quarters. Now are you guys close to re upping. Your next kind of three year order and should we expect anything different from that new order when it happens.
Yes, I think you can expect more of the same peak, we are still working through that process, so nothing surprising or negative going on there.
Got it full.
Set of components in that next pricing agreement and we're working through some of the details. There are some complicating factors. This time through obviously trying to deal with with labor inflation commodity inflation and then also there is there are some discussions around Columbia acceleration. So all of those factors of complicated a bit and we are we will.
Clearly sort through that with our customer and get to an endpoint in the fairly near future.
Okay I appreciate the color guys. Thank you.
Thanks Pete.
Thank you.
The next question is from Peter.
Arment with Baird you May proceed.
Thanks, Good afternoon Rexroth chips.
Hey, Rick.
<unk> been pursuing a lot of these.
Kind of service related awards.
Okay.
Hanford Savannah could you maybe walk us through a little bit how you expect this to kind of ramp up our win when do we hit kind of a steady state on some of these contracts.
Yes, sure Peter maybe I'll change altitude and give you a little backdrop on this when I came into the business.
And in 2015, we were at a pretty low point, because we were coming off the Y 12 pantex issues in.
And had to rebuild the portfolio with some with some performance history trouble.
We pivoted over to the environmental market really sort of rebuild rebuild that portfolio and have had I think striking success in that equity income contribution from that business approach $50 million last year.
And the way that that business builds as we've characterized it when you look at these large ones like Savannah River Hanford Y 12, Pantex and others, you can think of those as contributing $10 million to $20 million each.
Maybe a little more in equity income and as you know that shows up below the line because we are not consolidating revenue and so think of that as an EBITDA booster.
One of the reasons, we like this business right you get margin you get margin accretion with its capital there is no capital intensity at all and.
And so it's a very high ROI kind of business. So so you layer in 10% to $20 million for those big ones and then we've got a bunch of not a bunch, but we've got a handful of smaller contributors were involved in the Portsmouth environmental a follow on we're involved in.
<unk> called OS MFS, which is a depleted uranium hexafluoride conversion contract at Portsmouth, Ohio in Paducah, Kentucky.
And those would be anywhere from a few million dollars to maybe about $10 million, depending on the scale of those.
So I think it builds and builds for US we really are in a very strong position in environmental remediation market and now we're pivoting back to that period of time, when we're getting into the re competes on the national Nuclear Security administration side with the <unk> contracts and so why 12 is coming of Pantex is coming first probably this year.
Next year, and then Y 12 to follow by about a year and then ultimately obviously youll have the recompete side at Los Alamos liver more sandy.
Nevada test site all of those that are out there so.
We're really building it is really built pretty strongly and I think we have nice opportunities ahead.
I appreciate I appreciate those details and then just one quick one.
Unrelated on SM ours, just Westinghouse was out with a new 300 FMR.
Week or so is there any opportunity here do you see to work with them and then maybe just any updates you want to give on kind of the answer Mark's conversations youre having.
Yes, I would say.
Peter that as I said in the script here the way we face the market is.
We don't have our own reactor to take to market.
That's a pretty long putt to make I think generally and so we've positioned ourselves at the top of the supply chain and we like to provide design services component manufacturing ultimately, maybe fewer manufacturing servicing and that kind of thing and so thats the part thats.
That's the position we occupy in supply chain and in that position because we havent picked a winter and haven't made equity investments there. We're in a position to support any number of players we've been public about our relationship with GE, but there are others that we work with and so I would think of Westinghouse as one of those one of a handful of of legitimate opportunities to really.
<unk> meaningfully in the growth of that market.
The people, who are who are promoting their own designs and.
And hoping to build reactors talk about very large quantities for those things.
And who knows we'd certainly like to run along with them and benefit from the growth in that market.
Yes, Peter maybe I'll add depreciate, we find ourselves in a unique position, where because we have such a stable business in Canada, because Canada has really had the foresight to invest ahead of some of these trends as the SME.
Market develops we should have excellent manufacturing capabilities as you know we have a stable Canadian business that we've had for years they've been doing the refurbishment. So that's the second part of the market that we've been servicing and then Canada has really been a leader in terms of selection of an <unk> with engie Hitachi So all of those lineup.
To sort of build build backlog and capability for us.
Ahead of some of our peers and now.
Canada is also obviously, taking a look at large scale greenfields of future candidate plants. So thats, even a fourth area for us. So we're kind of uniquely positioned in Canada, given that backdrop, and so we'll help Canada as well as other FMR designers as that market develops.
I appreciate all the calls nice results.
Thanks Peter.
Thank you Mr. Armen.
The next question is from Bob <unk> with CJS Securities You May proceed.
Thanks, Good afternoon, and congrats on all the exciting news you've announced.
Thanks, So I wanted to start.
Sure absolutely yeah, I wanted to start with.
With isotope smile.
The 99 process with the FDA I think it's been about six months since you announced the priority review. So just curious I know you said you're on track I have a bunch of questions. But you are on track to be launched commercially fully next year et cetera, what what has been the feedback so far kind of what are the next steps here and what might be here over the next six months.
As it relates to the approval process.
Yes, Bob I don't think much has changed in our perspective since the last call. We are on that six to nine month clock as we discussed so we're kind of standing by the mailbox to see the to see the outcome of our pre approval inspection.
So so that hasnt changed where in a regular dialogue with the FDA I won't be too specific about that but we.
We're in a good we're in a good dialog with the FDA and it has a positive tone to it. So we're standing by for the results of that pre approval inspection.
Okay, Great and you touched on the LPG, Darlington Mali, as well and I guess is it still is it safe to say you are still kind of in that holding pattern in there to decide.
When that May.
Go to approval with the FDA or how should we think about that timeline.
Yes, that's a good question and Thats, a subtlety that debt.
We certainly need to make clear.
The.
The FDA new drug application was submitted with data for.
For targets that we are radiated, Missouri University research reactor because of the flux that we get in that reactor at that side on those targets.
A limited amount of.
Generators, we can offer to the market down on the small end a few theories and.
So the LPG a radiation is where we really really need to move our targets. So that we can offer the.
The full spectrum of targets our strategy had been to go ahead and go through the FDA process with <unk> and do a supplemental with with targets that are irradiated at the LPG side on the Darlington reactor and we've been having some internal dialogue and some discussions with with FDA about whether we might go ahead and supplement.
Our filing now with targets that are irradiated.
With the full spectrum at <unk>, so that we could maybe move to market, a little faster and get that full product offering.
And the first part of 2024 as we had forecasted so that's the discussion that's going on and we'll see how that goes and if we could pull that off then we would avoid a supplemental filing and we could just sort of wrap it up it would have some implications on the timeline for formal approval, but but it might be.
Positive effect in terms of the full commercial offering.
Okay, Great that's exciting I guess, we'll just.
Sit back and wait and see how it all plays out but it sounds like in general things are moving ahead.
At least as planned if not potentially faster with okay alright.
Alright.
Yes, we yes, we feel we're in a good position on it and we're standing by.
Yes.
Okay great.
I think we got a RASM being commercial with a full scale product right.
It's really why we focus on that in the transcript, but any deviations of paths. If you will are supplemented with data we view that as we would only do that if that ultimately was accretive to our timeline and so that's what we're trying to judge so.
We'll be in communication to FDA in order to make sure that that we can bring this product frankly for the market really needs of this product and so.
We want to make sure that we get through all those hoops to ultimately present the market with a full fledged product. So that's what we're focused on.
Okay Super and then just shifting gears and kind of following up on the last discussion on SMS can you just give us a sense right now.
I mean, it's got to be a relatively small tam right now in sales for you, but what is the ramp period for revenue and the opportunity for you.
And your Tam I know, it's changing is seemingly a year ago was almost nonexistent. That's much bigger now, but can you frame the opportunity set this year next year in <unk> for you and then three to five years, and then like without painting single year or a quarter. Just how do you think this plays out and how big of an opportunity can it be.
Five to 10 year period.
Yes, let me try a little bit on that one.
I would say when you think about where we are in small modular reactors, we'd be involved in design activities. For example on the BW Rx 300, the GE Hitachi one.
We're designing the reactor pressure vessel I think it's somewhat likely will design other components for that reactor and then of course, our goal is to move from manufacturing and into design, which would mean ordering forgings doing machining operations at our Cambridge plant in some other locations that we're looking to expand to get more capacity and so when you think about.
The developmental cycle on a plan to the design and component manufacturing occurs really on the sort of on the front end of that timeline. So think of a seven or eight year timeline, let's call. It when you think about the LPG wanted to get that first reactor on the grid. So I'd say our activities are kind of on the in the sort of mainly the front half of that.
With some sustaining activities in the back half of it so and we also said that for that particular reactor. We think of our scope is about 100 million per reactor. So.
If <unk> goes to a four pack up there you can get a sense of the scale of that opportunity I would think that second units two three and four would feather in.
Couple of years, each behind the first one let's call it.
That's certainly up to the utility.
And then the other ones TVA is looking at this same reactor at clinch river, they're going through an environmental assessment right now and doing is doing some some some studies of that I can see that one following the LPG one lagging that one by a couple of three years.
So.
It's just going to.
Layer up that way.
Maybe not so unlike our navy business, it's very long cycle and it layers in over years.
I can't put a number on it today, but I think it could be a substantial part of our business our commercial business in Canada in years to come.
Okay Super I appreciate the extra detail. Thank you.
Youre welcome Thanks, Paul.
Thank you Mr. Robert.
Our next question is from the line of Scott <unk> with Credit Suisse. You May proceed.
Hey, good afternoon guys.
Thanks, Matt.
Rob something you touched on briefly in the prepared remarks is the assumption in guidance that youll get an equitable adjustment on certain contracts.
I think this is in your prior quarter.
So as well, but maybe just baseline us on why you think youll get that and then the timing for when you expect to receive it.
Yeah. Thanks for the question, yes. So.
It is true that we brought that up last quarter, and we're tracking to working with that customer or working with the navy to get equitable adjustments specifically in the missile tubes program as you know last year we.
A charge of a little bit over $10 million and frankly, we've been at that contract for the past couple of years different different changes that have been made to that contract that we've won.
Worked with our customer to just essentially expedite and in the interest of standing up that capability on U S. Shores, we did all of that work to make sure that that was all accomplished.
On time and within their plans and so now as that contract is wrapping up we plan to actually ship our final missile tube here in the next couple of months.
We'll ultimately be wrapping that up and so thats the time, where we need to circle back on not only that charge that we took last year, but the pain that we've.
Experienced the past couple of years of delivering on that contract and so we're working with that customer to try to.
Itemize those changes trying to figure out the best way to find a solution and we find them to be very reasonable and so that's the process. We're going through right now we're not exactly sure of the timing that's why I wanted a little bit of flexibility of when that is.
Got it and then the dialogue with the customer at this point on this specific item is trending favorably.
There is some suggestion that they will actually give you this relief.
That's right the discussion has always been constructive.
There is a legal matter, so I'm not going to get in front of it but I definitely feel like the communication is good.
They've they've paid other other suppliers of different instances and so we know that they are a critical part of it so yes, we plan to.
To get something there.
Okay, and then Rex just on Hanford tank.
Maybe you can give us a sense for what protects this award from an unfavorable protest outcome.
If you did one this award before and it got protested and sustain so I'm just curious if anything changed in the government's designed in the RFP or how long are you evaluating responses to the RFP in a way that we can as analysts kind of rely that this award will actually further through to EBIT upside for <unk> next year.
Yes, Scott I'll have to speculate a little bit here, but.
And just one minor correction there in the last case the protests wasn't sustained what happened was there was a protest that was registered the government sort of rethought its position and decided to withdraw that award and add some additional scope to it and Thats. The reason you see the scope going from what was a $13 billion award at the time, we received the last.
<unk> announced $45 billion. So they did change the scope pretty pretty significantly on it and they were dealing with.
We're dealing with them with.
Some complexity in the protest for certain.
Who knows who can say how this would come out I would say that we have a very strong and a very experienced team and so we feel good about our position. We are certainly hopeful that the customer has decision conviction around that award.
<unk> that we have on this one is the same team that we assembled for the Savannah River won that award survive without protest about this time last year actually about a quarter before that before.
Before this quarter last year and so we're certainly hopeful.
It's not uncommon not uncommon for contracts on this scale to go through protest periods and typically what that does is delay the timeline by about a about a quarter. It would be typical so we're prepared to endure that but.
Certainly hope hopeful about the outcome.
Okay, and then just last housekeeping question for Rob anything to offer on second quarter cash flow expectations.
We have guidance, specifically quarterly cash flows, but as you know we're sort of building Q1 was always expected to be a negative cash flows we have higher tax payments higher bonus payments to our.
Employees retain ages that we deal with in the first quarter and then it slowly builds definitely the third and fourth quarter are larger than either the acute Q1 big negative or Q2.
But it will slowly build over the course of the year.
Okay. Thank you.
Thanks Scott.
Thank you Mr Vishal.
The next question is from the line.
Michael.
Molly with Shire you May proceed.
Hey, good evening guys. Thanks for taking the question nice results.
Thanks Rex.
Just.
I guess on the labor front.
In government.
What can you parse out maybe what specific programs.
Our commanding the most labor resources is it sort of the bread and butter of Virginia class Columbia ramping up or is it more you need heads for for some of these new awards and new programs Youre working on.
Yes, it's actually all of the above Mike It's I would say it's concentrated in our Navy programs, where we've got obviously the Columbia ramp.
Combined with the constitute Virginia's and then of course forward as always.
<unk> component there so just sort of climbing that hill of growth in this post COVID-19.
In this post Covid macro environment has been has been challenging and for whatever reasons. The problems that we've had have been more acute on the U S side than on the Canadian side. So I'd say the concentration has been more around the Navy business, but we do we certainly are challenge to get all the engineering talent and technical.
Technical talent that we need on for example, Pele.
Should we prevail on Draco.
You have to go up another ramp so it's all sort of growth problems, but we're getting our arms around it.
Got it got it and then are you guys are you guys actually on time with your Virginia class I know, we keep hearing chatter from the Navy theyre not not delivering two per year. It's more like one eight but are you sort of on track on the barriers.
Reactors youre working on for the various hubs.
Yes knock on wood, we've tended to.
We've been able to stay off the critical path relative to to shipyard need dates.
But we certainly have to put our shoulder into it every day to stay that stay off that critical path.
Okay, and then just shifting I guess to commercial.
The margins I think you called out mix, but.
They were certainly at a multiyear low and just anything else.
Any other color you can give there around those margins it may be.
I'm, assuming there's a pretty big profit drag tied to the TC 99 is that part of the driver here in terms of some of the margin pressure.
Yes, it's Rob I'll take that one yes. It was actually the margin and the result of ourselves in terms of EBITDA.
Pretty much in line with what we thought.
The quarter was going to play out the first quarter always has a little bit lower for us. If you look back the past couple years.
In the first quarter, we experienced a pretty significant outage in our medical business, specifically at one of our facilities in Vancouver, and so that limits, our ability to sort of grow the medical businesses and as you know thats a higher margin business. So over the next three quarters.
Variance of ramp in medical that really we didn't experience in the first quarter as well as because of the outage and then the second factor, which we touched on is that within again again plan for us and in line with how we were thinking about it the first quarter really experienced a significant.
Amount of refurbishment field.
Yield services work, which is lower margin for us than than EBIT, even other types of field services work around outages or otherwise. So that's just how the calendar worked.
As you look at Q2, Q3, and Q4, you could even check last year, we do have quarters, where we experienced mid teens margins. So it can be choppy as different projects flow through is different product flows through and as the medical business ramps. So we're not worried about the first quarter, obviously had a great revenue result.
<unk>.
In the first quarter too that we're proud of.
Okay got it and then last one housekeeping I think I heard you Rob you said.
<unk> EPS, 20% of four years, so that puts you at I guess 50, 860 cents down sequentially down year over year, but it sounds like you just had more of those benefits pulled into the first quarter and obviously everything remains on track with a little bit more of a backend loaded ramp.
That's exactly right and in fact, that's how it pencils out our EPS. That's why we guided actually the first quarter and really what happened was I mean it.
At first quarter, we had two things really happened in our <unk> business, where we really outperformed.
On the core naval business, we've just had great timing mix.
Volume and very good performance, so that was about a half of the the outperformance in terms of Geo and so thats sort of a pull in if you will into the first quarter, which then leaves you a hole in the second quarter because the volume is just not there. So you don't get as good absorption.
The first factor and then the other half of the outperformance from a margin standpoint is we had PSG performance fees that really fell in the first quarter and we thought that was going to feather in over the second and.
And then potentially later in the year as well as just great expense control in our advanced Technology group, where we're building the micro reactor program, so as that sort of levels out in that business ramps. We also see that sort of building.
And then the final factor that I'd, just say is that our marriage from.
Employee standpoint kick in on April one and so that's.
That's a headwind that ultimately we will just grow through during the second quarter and then the final thing which.
Talked about was as we bring in increased workforce that could put a strain on.
On the second quarter, so we're trying to be conservative there.
Right in line all of those are transitory Q Q1 goodness in Q2, a little badness in that we feel just as we thought for the third and fourth quarter.
Got it perfect. Thanks, a lot guys.
Thank you.
Thank you Mr terminally.
The next question is from Ron Epstein with Bank of America Christine.
Okay.
Okay.
That's bad so far but maybe.
Maybe a couple of places we can go.
In terms of potential New awards coming down.
Right here.
What should we be looking for that you guys were looking for in <unk>.
<unk>, if you could speak to maybe some of the.
Other things that are going on in terms of.
The resurgence of nuclear power kind of.
Post what happened in the Ukrainian and so on and so forth that.
That would be great.
Okay, Hey, Ron yes, so.
And the pipeline and by the way, maybe it's worth saying that.
We've had multiple targets to go get over the over the past few years Savannah River Hanford Taylor.
And many other things on the commercial nuclear side of the business for example, and we've been.
We've been.
Remarkably successful in converting those opportunities into wins for us and so I feel really very good about the the foundation of growth that we've built when you look at what else is in the pipeline.
And.
Risk my credibility here, because we've been saying this for a couple of quarters, but Draco Award. We believe is imminent and we feel well positioned for that one so that ones in the pipeline.
There is a contract called OS Ms and this has to do with.
Uranium hexafluoride conversion services I mentioned earlier in an answer.
With the department of energy the Port Smith, environmental remediation contract is out there.
On the medical side and I said this in the script, we'd be looking at.
Potentially announcing supply agreements around lutetium 177, perhaps other actinium ones and to other active pharmaceutical ingredients or contract manufacturing opportunities and then in commercial power.
There's a whole slew of things there are other small modular reactor opportunities that we have we've got opportunities to participate very meaningfully in the pickering refurbishment projects and and the potential new builds the big the large reactor new builds.
Canada become interested in deploying new can do we'd be well positioned to support that not to mention international nuclear newbuild opportunities. So there is there is a bunch out there.
And we have an opportunity to meaningfully address a lot of it so I'm pretty excited about that.
The second part of your question around would you repeat that one I wasn't sure I caught it.
No you got it there you kind of hit everything.
That so maybe just maybe changing gears and we've talked about recruiting people but.
What have you seen in terms of labor inflation, I mean, where do you actually have to do to attract people and retain them and how is that hitting your bottom line in terms of your personnel costs.
Yes, well I mean, we've certainly seen pressure there.
And.
We're certainly having to respond to it to attract them.
What kind of people and retain the right kind of work at high quality workers.
We certainly will try to reflect those cost changes in our pricing agreements and we will certainly try to get backlog relief on any of those changes, but that all has to be worked out and so far I think you'd have to say that.
That we're bearing up through it pretty well I think we've been able to manage supply chain costs and labor costs.
And in managing it to the point that it's that our results are.
Sales are holding up well enough Robb you may wish to add no.
Our supplier front I really hats off to that group as you know.
One of those pricing agreements, we try to race out.
<unk> as much of the material down because we have such foresight, we took a look at the backlog and.
About 90% plus of the backlog, we already have either purchased the supplies hedged or the phrase of risk on our customer or otherwise so stand really good there on the labor front <unk> is exactly right I think we always had a pretty compelling package for our employees, but we've addressed.
What we've heard in the market as I just mentioned to the prior on the prior question, we're absorbing that starting April one the merit increases that we have.
At different sites are bleeding into the business and we're absorbing that and moving on and so we're pretty proud to be able to hit the type of growth that we're experiencing on EBITDA and even on the earnings basis with those inflation of our employees ratcheting up.
Got it got it and then maybe on the capital deployment front.
Are you guys looking at any M&A at all.
If you are how has it worked out there.
What are you seeing.
Yes.
Not a lot has changed in terms of our overall view that within our goal is to acquire within our core franchises. There is some dream deals that we always want to do.
And so we always try to maintain some capacity so if any of those shake loose specifically on the naval side, we're prepared for that there is always.
Different year say that those assets could break loose and so we stay close to that situation outside of that we have growth market in micro reactors nuclear medicine and fuels and so we're always looking at accretive acquisitions that would accelerate those.
That's where the where we're spending most of our time and most of those would be tuck in acquisitions, we're not looking to add another layer of growth as you can see from our growth last year underlying <unk>.
The 9% plus on EBITDA and this year, 8%, we're really are setting ourselves out an organic growth story and all of that Capex is really coming to bear. So we're focused on our core businesses on executing our organic growth and M&A is the cherry on top that will do it but we do not plan to three.
So any hail marys here on the M&A front.
Got it thank you.
Thank you thanks Ron.
Thank you Mr. Epstein.
Next question is from David Strauss with Barclays. You May proceed.
Thanks, Good evening.
Hey, Dave.
Hey.
So hanford or is that still I think previously you had quantified that as a $55 million.
Kind of equity income opportunity is that still the right way to think about it and if this doesn't get protests or even if it does what could that do I guess over the near term the numbers and do you have anything in numbers for it this year.
Yes and to be clear the $55 million was the total JV and maybe I'll tell you a little bit of how we think about it there was a headline number at $45 billion.
Sure.
Some headline KC 10 years really Theres a performance period of 15 years.
It's one thing to note. The second thing is that the $45 billion. It does include scope.
Potentially be outside of.
Pier, earning product for ourselves. So when you will note that down and just kind of what the annual run rate will be and it will build as we see it as sort of a $2 billion annual run rate to the JV and then we make a percent and then some amount of that is subject to performance and so forth then we make a margin on that and then ultimately.
We share that with our partners and so when you do that math down you can kind of see that wrecked.
We're just talking about any one of these opportunities to BWXT can be $10 million to $20 million of operating profit I would say when you pencil through that math.
That's getting a significant share and us having a good margin on this I would say, it's going to be in the upper end of that.
$10 million to $20 million, and we will build to that and who knows in the next couple of years as we performed well it could even inch over that.
Okay.
Great that's helpful and then.
I might have missed this but how as pele going or are you kind of pacing to that $10 million.
Monthly kind of revenue run rate on Pele.
Yes, it's going it's going fine David.
We're ramping that program.
A specific revenue number in my head, but it's but it's in that order.
Okay, and Rob any anything special on the working capital front.
This quarter, obviously was a big drag and then maybe maybe an update on kind of the longer term.
Objective two to bring down net working capital.
Yes, thanks, it's a topic near and Dear to my heart. So yes. So we've been really looking at this really in three buckets.
Working capital opportunities.
We have the accounts receivable front, we have the accounts payable and then our Unbilled, which is basically sip.
Offset by advanced billing.
And so when we look at all three of those were just kind of chartering that out and seeing where we could get more.
More and more efficient and so on the on the receivable side take for instance, we're looking at building efficiency and lining up milestones and thinking about how we're working in billing specifically related to milestones on the AP front, we're actually surprisingly enough. We don't have a vendor portal yet and so we're in the process of building that to get more.
Efficient payments with some of our vendors and lining that up with our contracts.
And then on the Unbilled side, we're just working on optimizing workflow and being aware of as we signed new contracts really focusing on cash soon its where all those three up really that's leading to operating cash flow. This year, which working capital is frankly, the part that we can control other than the P&L, which come through.
Net income and we are working hard obviously on that that's what the calls all about on the working capital side, we really see a path to getting a day a day and a half each each year by by the combination of those factors were in the <unk>, we've been as low as the low fifty's and so if we take out a day and a half maybe two.
Two days per year, we're slowly going to be adding back working.
Working capital and I think that's a good target to basically push the $300 million plus each year by a day or two and so we'll see growth plus that that incremental step up.
Great. Thanks, a lot.
Thank you.
Thank you Mr Strauss.
Our last question is from Tate Sullivan with Maxim Group you May proceed.
Hi, Thank you can you talk about the 428 million specialty metals contract you announced last month and when the phase two of that contract might start how it relates to Y 12.
<unk> been down in terms of downplaying capability.
Yes, Hi, Jay.
It relates exactly to that capability. It at Y 12, and 90 212 facility down there.
Its stockpile maintenance activity and we think of it in the OE has described it as a bridge contract. We are already in the phase two on that and in fact, we had a bridge.
A modest bridge contract between phase, one and phase two so that we would have continuity of our workforce and our and our activity from one phase to the next and so it's already in.
It's already in motion.
Okay. Thank you very much.
Thanks, Ed.
Thank you Mr. Sullivan.
There are no additional questions waiting at this time I will turn the call over to.
Chase Jacobson for any further remarks.
Thanks to everyone for joining us today and for your interest in BWXT. We look forward to speaking with many of you and seeing you at upcoming Investor events. If you have any questions you can reach us at 90, 80365, 4300 or by email at investors at BWXT Dot com. Thank you.
That concludes today's conference. Thank you for your participation you may now disconnect your lines.
Okay.