Q3 2024 BWX Technologies Inc Earnings Call
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Speaker Change: Ladies and gentlemen, welcome to BWX Technologies third quarter 2024 earnings conference call. At this time, all participants are in a listen only mode. Following the conference prepared remarks, we will conduct a question and answer session.
Speaker Change: and instructions will be given at that time. I would now like to turn the call over to our host, Chase Jacobson, BWXT's Vice President of Investor Relations. Please go ahead. Thank you.
Chase Jacobson: Thank you, Ron. Good evening and welcome to today's call. Joining me are Rex Geveden, President and CEO, and Robb LeMasters, Senior Vice President and CFO. On today's call, we will reference the third quarter 2024 earnings presentation that is available on the investor 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 in the company's SEC filings.
We will frequently discuss non-GAAP financial measures, which are reconciled to GAAP measures in the appendix of the earnings presentation that can be found on the investor section of the BWXC website. I would now like to turn the call over to Rex.
Rex: Thank you, Chase, and good evening to all of you. This afternoon, we reported strong third quarter results that were ahead of our expectations.
Rex Geveden: We delivered 14% organic revenue growth, which combined with solid operational performance led to 19% adjusted EBITDA growth and 24% adjusted earnings per share growth
Rex: Given our strong year-to-date performance and despite weather-related challenges stemming from Hurricane Helene and other events, we are raising our 2024 Adjusted Earnings-per-Share guidance to about $320,000.
Rex: The high end of the previous guidance range and we are maintaining our free cash flow guidance of 225 to 250 million dollars
Rex: As we look to 2025, we expect another record year with continued growth in government operations, complemented by accelerating growth in commercial operations.
Rex: Our preliminary 2025 outlook is for mid- to high-single-digit revenue, EBITDA, and earnings-per-share growth compared to 2024, with expectations for at least 10% free cash flow growth.
Speaker Change: Before I jump into our quarterly results and market outlook, I would like to spend a few minutes on our special materials portfolio and the acquisition of AOT announced today.
Special materials is a strategically important line of business for BWXT and one that I would suggest is underappreciated by some investors.
Rex: The foundation of our special materials portfolio is our Navy fuel business in East Tennessee. Through this business line, BWXT is the only commercial enterprise in America to hold a Category 1 NRC license.
Rex: which permits BWXT to handle special nuclear materials.
Rex: We have leveraged this credential to develop unique infrastructure and retain some of the top radiochemistry talent in the world to execute high-value national security programs for the Department of Defense and Department of Energy.
Over the previous decade we have built a portfolio of businesses around our Navy fuel franchise including the expansion of our down blending product line
Rex: growing our business in specialized nuclear fuel elements for university and government research reactors.
Rex: Securing a contract to convert scrap material into usable HALU for advanced reactor fuel.
Rex: and standing up a new production line to purify and process uranium metal and oxides for the NNSA.
Rex: And in October, the DOE announced that BWXT was one of several companies selected to provide HALU deconversion services that will be a linchpin in fuel fabrication for advanced nuclear reactors.
Rex: Simply put, we have one of the broadest sets of capabilities in the uranium fuel processing cycle and our customers place immense trust in BWXT to support national security missions and novel civil applications.
Rex: building off that foundation.
Rex: Today we announce the acquisition of AOT from L3Harris.
Rex: Based in Tennessee, AOT is a former aerojet business that is the sole manufacturer of depleted uranium and other specially finished metals.
Rex: used in a variety of defense applications. From a strategic viewpoint, AOT is a bullseye. It is a natural extension of our special materials portfolio and fits perfectly with BWXT's unique business characteristics.
Rex: End users of AOT products are mainly the Department of Defense and Department of Energy, including the National Nuclear Security Administration. Sales in this business are expected to be about $40 million in 2024, and the combination of its market position, program exposure, and micro-level supply and demand factors all create good visibility into future top-line growth at solid mid-teens EBITDA margins.
Speaker Change: We are targeting to close this roughly 100 million dollar transaction by the end of the year and are excited to welcome AOT to BWXT and to add another important product line to our unique special materials portfolio.
Speaker Change: As you know, Robb and his team look at many M&A opportunities but act on few, as companies that meet our stringent criteria are hard to come by and often demand premium purchase multiples.
Speaker Change: With a stronger than ever corporate finance infrastructure and a solid balance sheet, we remain active with M&A diligence activities to complement our organic growth with interesting inorganic opportunities to maximize our exposure to growing strategic government and commercial nuclear markets.
Speaker Change: Turning now to a discussion of segment results and market outlook, government operations had a strong quarter with 17% revenue growth and 18% adjusted EBITDA growth, driven largely by outperformance in our naval propulsion and technical services businesses.
Speaker Change: Enable propulsion. Our teams are keenly focused on execution as we seek to level load our plants.
Speaker Change: while we work through the Ford-class aircraft carrier lull that will be with us through 2025 and maybe 2026.
Speaker Change: The agreement is on track for a formal contract award by the end of the year, pending final government approval of the term sheet and the contract.
Speaker Change: In technical services, after a lengthy appeal process and being awarded the contract multiple times.
Speaker Change: and to outsize the market share for environmental remediation and management and operations of DOE and NNSA sites. In microreactors, our current projects continue apace.
Speaker Change: Last quarter, we discussed the Defense Innovation Unit, RFP, for micro-reactors on Army bases, an opportunity that continues to be intriguing. And beyond that, we are seeing tangible interest.
Speaker Change: from other defense agencies and emergency relief organizations.
Speaker Change: With our foundation of recurring businesses and in-hand opportunities we see playing out in the near term, we anticipate modest organic growth in the government operations segment in 2025, consistent with the trajectory contemplated in our medium-term guidance.
Rex: This will be complemented by the AOT acquisition, ultimately leading to mid-single-digit revenue and EBITDA growth in 2025. Our focus remains on driving operational excellence throughout the organization and providing our customers
Rex: with high-quality nuclear solutions that enable some of the government's most critical missions.
Rex: Turning now to commercial operations, revenue was up modestly, driven by robust medical and commercial nuclear components growth, partially offset by lower field services activity.
Rex: In commercial nuclear power, consistent with our prior view, demand is continuing to grow from traditional nuclear utilities and now the emergence of new customers investing directly in first-of-a-kind nuclear to secure long-duration, clean baseload power.
Rex: Many of these customers are signaling a newfound appetite for nuclear, given unprecedented levels of electricity demand growth and nowhere else to turn for reliable green energy.
Rex: Over the past several months, some of the largest companies in the world, including Microsoft, Amazon, and Google, have announced investments in nuclear power.
Rex: These investments range from restarting decommissioned large-scale nuclear plants like Three Mile Island and Palisades to investing in new advanced reactor technologies such as SMRs.
Rex: This newfound demand is evolving rapidly and the shape is uncertain, but it is a clear indication of the growing demand and broadening public support for nuclear power.
Rex: For BWXT, our breadth of experience and capabilities around nuclear technologies that stem from decades of experience in naval propulsion and commercial nuclear power position us as a merchant supplier to the market.
Rex: The foundation of our commercial nuclear power business is in large-scale can-do reactors. However,
Rex: We are also supplying SMR projects with large, complex components, including the reactor pressure vessel for the GE Hitachi BWRX-300 project in Canada, and molten salt heat exchangers for TerraPower's Natrium reactor in Wyoming.
Rex: Further, BWXT has the potential to play a key role in the advanced reactor fuel supply chain by providing tri-cell fuel, HALU deconversion, or other manufacturing services.
Rex: We are also working with parties like the Wyoming Energy Authority and the state's mining industry to potentially build micro-reactors to address off-grid power needs, leveraging our experience in the Pele and Draco prototypes.
Rex: New investment in nuclear is no doubt exciting, but I want to emphasize the strength of our existing commercial nuclear power business.
Rex: Current projects including the life extension of Ontario Power Generation's Pickering Units 5 through 8.
Rex: Reactor Pressure Vessel work on the SMR project at Darlington, and heightened demand for field services to ensure the fleet can run longer and harder, are all ballasts that will enable BWXT to quietly deliver solid double-digit growth in 2025.
Rex: In the near term, our operational focus is on building our workforce and executing on the capacity expansion of our Cambridge facility to ensure we are well positioned to capture the dynamic growth we see in this important market.
Rex: and PET imaging markets, both of which are experiencing increased patient volumes, as well as higher contract drug manufacturing volumes for TheraSphere. We expect these trends to support similar growth in 2025 for these product lines, which represent most of our medical revenues today.
Rex: Specific to our Tech 99 development program, we continue to test and perfect our product and build the commercial relationships necessary for future growth. Notably, we have successfully tagged our product with every cold kit on the market and have finalized our first supply agreement with a radio pharmacy network.
Rex: FDA communications and commercialization efforts are consistent with the update we provided you last quarter, and we continue to anticipate disciplined market entry with spot volumes in 2025 and a full annual run rate of contracted volumes in 2026 and beyond.
Rex: In therapeutics, we continue to support our customers' clinical trials with Actinium-225.
Rex: and are taking initiative to prepare for higher volumes, including new production modalities.
Rex: With that, I will now turn the call over to Robb, and I will come back with closing remarks.
Robb LeMasters: Thanks, Rex, and good evening, everyone. I'll start with some total company financial highlights on slide four of the earnings presentation.
Robb LeMasters: Third quarter revenue was $672 million, up 14% organically, with growth in both segments.
Robb LeMasters: Adjusted EBITDA was $127 million, up 19% year over year, driven by robust government operations growth, which was partially offset by lower commercial operations EBITDA due to project timing and the mix of revenues.
Robb LeMasters: Unallocated corporate EBITDA was lower compared to last year due to cost management and timing of health care costs.
Robb LeMasters: We continue to expect full-year corporate EBITDA expense to be relatively flat compared to 2023.
Robb LeMasters: Adjusted earnings per share of $0.83 increased 24% compared to $0.67 in the prior year quarter.
Robb LeMasters: As shown in the EPS bridge on slide 6, growth is largely driven by operations as slightly lower interest expense was offset by lower pension income and a slightly higher tax rate.
Robb LeMasters: Our adjusted effective tax rate in the quarter was 23.1% and 22.8% year-to-date. We expect our full year tax rate to be approximately 23.0%, a touch lower than our initial guidance.
Robb LeMasters: I would like to tip my hat to our TACS team, which has embraced our culture of operational excellence.
Robb LeMasters: focusing on driving continuous improvement wherever possible. They're finding small but consequential items to generate incremental value for the shareholder and frankly, I see more value in this area as we challenge ourselves further and come through various tax planning exercises.
Robb LeMasters: Free cash flow in the quarter was the use of $8 million as the timing of contracts impacted our working capital during the quarter. Despite that, we are reaffirming our full year free cash flow outlook of $225 million to $250 million.
Robb LeMasters: As you likely know, East Tennessee, where our nuclear fuel services facility is located, is one of the areas that was impacted by flooding and widespread power outages caused by Hurricane Helene.
Robb LeMasters: This devastating weather event resulted in an over three-week shutdown of our Navy fuel processing facility and the UMETL construction project from late September through mid-October.
Robb LeMasters: As such, large customer payment milestones that we have anticipated in fourth quarter 2024 may be pushed into early 2025, putting the upper half of our free cash flow guidance at risk.
Robb LeMasters: To be clear, these opportunities are not lost and may simply move into 2025, and we are working with our customers to see what is possible in light of this highly disruptive weather event.
Robb LeMasters: No matter where we land, I am proud of our team and their focus on improving working capital and free cash flow conversion, laying the groundwork for another year of at least 10% or greater free cash flow growth in 2025.
Robb LeMasters: Capital expenditures in the quarter were $40 million and $101 million year-to-date.
Robb LeMasters: We continue to expect 2024 CapEx to be similar to last year's level of about $150 million.
Robb LeMasters: We have begun the expansion of our large commercial nuclear component manufacturing facility located in Cambridge, Ontario.
Robb LeMasters: Moving now to the SIGMA results on slide 7.
Robb LeMasters: In government operations, third quarter revenue was up 17% to $560 million, driven by increases in naval nuclear components, long-lead materials, U-metal, and microreactors.
Robb LeMasters: Adjusted EBITDA in the segment grew by 18% to $117 million as higher revenue was complemented by solid operational performance.
Robb LeMasters: EBITDA margin in the segment was 20.9% compared to 20.7% in the same quarter last year.
Robb LeMasters: Consistent with the view provided last quarter, we expect full year Geo segment EBITDA margin to be just over 20%.
Robb LeMasters: Turning to commercial operations, revenue was up modestly driven by our portfolio of BWFD medical products and strong growth in commercial nuclear power components, fuel, and fuel handling systems.
Robb LeMasters: which was partially offset by lower commercial field services revenue.
Robb LeMasters: Solid execution was offset by revenue mix and growth investment in the commercial nuclear power and medical business lines.
Robb LeMasters: Turning now to guidance for the remainder of 2024 and our preliminary outlook for 2025.
Robb LeMasters: We are maintaining our segment level operating assumptions, but we'll note that the summation of our revenue is likely to be just slightly higher. As such, you will notice we've raised our consolidated revenue guidance accordingly to approximately $2.7 billion.
Robb LeMasters: Moving now to our preliminary outlook for 2025, which includes a modest contribution from the AOT acquisition we announced today.
Robb LeMasters: Overall, we expect to see another solid year that is in line with our medium-term outlook.
Robb LeMasters: In 2025, we expect mid- to high-single-digit revenue, EBITDA, and EPS growth, with at least 10% free cash flow growth compared to our 2024 guidance.
Robb LeMasters: In government operations, we expect mid-single-digit revenue and EBITDA growth, which consists of low single-digit organic growth plus a marginal contribution from AOT.
Robb LeMasters: Organic growth will largely be driven by our special materials and technical services portfolios, while naval propulsion will be relatively flat as growth from increasing Columbia-class production is offset by the aircraft carrier volume blow in 2025.
Robb LeMasters: Government EBITDA margin is anticipated to be relatively consistent with a strong 2024 rate as revenue mix, a greater amount of early stage programs, and lower volumes of aircraft carrier work are offset with off X initiatives and seasoning of our much expanded workforce.
Robb LeMasters: In commercial operations, we anticipate double-digit growth in both commercial power and medical.
Robb LeMasters: To sum it up, we had a robust quarter, and we are on track for a strong end to 2024 and another year of likely record earnings and cash flow in 2025.
Robb LeMasters: I would like to thank all of our over 8,000 employees whose hard work and dedication helped to drive our results and position BWXP for continued success.
Robb LeMasters: I will now turn it over to Rex for final remarks. Thanks, Robb.
Rex Geveden: Let me close by taking a moment to recognize our employees and their families at our nuclear fuel services site in Irwin, Tennessee, who were impacted by Hurricane Helene.
Rex Geveden: many of whom experience loss of personal property and in some cases friends and loved ones. We have and will continue to provide support for this region as it rebuilds.
Robb LeMasters: I'm extremely proud of how our teams navigated this extreme weather event, in addition to other shorter-term power outages and flooding at several of our other sites in the Midwest throughout the summer.
Rex Geveden: Our workforce at all locations demonstrated their preparedness for emergencies by taking immediate action to ensure the safety of all employees and the safeguarding of special nuclear materials.
Rex Geveden: Severe weather events like these are also a stark reminder of the impacts of climate change and the obvious need for clean, reliable baseload nuclear power.
Rex Geveden: In conclusion, despite these weather events, it is an exciting time at BWXT. Over the past several years, we have invested in our people and our infrastructure and instilled a culture of innovation and operational excellence.
Rex Geveden: There are secular tailwinds supporting our key defense, clean energy, and nuclear medicine markets, and there are tangible signs of accelerating demand for nuclear solutions that will lead to steady earnings, free cash flow, growth for BWXT.
Rex Geveden: Our focus remains on providing our customers high quality solutions to address their most critical missions, and we will continue to invest organically and inorganically to position BWXT for ongoing success. And with that, we look forward to taking your questions.
Speaker Change: John MacQuarrie, John MacQuarrie,
Speaker Change: At this time, I would like to remind everyone, in order to ask a question, press star, then the number 1 on your telephone keypad. We will pause for just a moment to compile the Q&A roster.
Speaker Change: Your first question comes from the line of Pete Skabitsky with Alembic Global. Please go ahead.
Speaker Change: Steve Szebeski with Alembic Global. Please go ahead.
Steve Szebeski: Sorry about that. Nice quarter, guys.
Steve Szebeski: I thought I would start out, you know, we're seeing a lot of supply chain issues at the shipyards due to, you know, things like steam turbines and such for submarines and carriers.
Steve Szebeski: Has that impacted you guys at all, or is the systems guys in the Navy kind of keeping you guys level-loaded?
Steve Szebeski: and the supply chain issues aren't impacting you guys.
Speaker Change: Yeah, Pete, a couple things I would say about that. One is, you know, you obviously know that our build schedule is a couple of years ahead of the shipyards because of the advanced procurement and the reactor delivery times.
Speaker Change: and so I think we feel well-positioned to do what we need to do for completing our products. In terms of the supply chain that we use,
Speaker Change: Again, we sort of worked our way through that, through the periods of COVID, and managed that successfully, in my view, and so I'm not, we're not seeing, we're not seeing pressures in our supply chain in that way.
Speaker Change: Okay, that's great. And just one clarification for me.
Speaker Change: In government discord, you had the strong growth. Was there some materials ordering that kind of drove that? I know sometimes in the past, the outsized growth has a material aspect to it. And then...
Speaker Change: You know, maybe that was kind of pulled ahead from the fourth quarter. Could you just maybe clarify that?
Speaker Change: No, I don't think anything to particularly call out. It was the strongest growth rate we had all year. You know, we're really hitting night stride in advanced technologies as we have both Project Pele and Draco coming through.
Speaker Change: We're hitting nice performance in some of the ramp-up of those immature programs, just in general, kind of ramping those. So nothing, just general good execution across the board.
Speaker Change: I would say some of our naval fights are, you know, digesting all the labor that they brought in and doing that nicely both at the margin as well as the top line so kind of consistent drivers across the board really
Speaker Change: I would like to remind everyone to please limit yourselves with one question and one follow-up. The next question comes from the line of Bob Labick with PJS. Please go ahead.
Speaker Change: Hi, good afternoon. It's Pete Lucas for Bob. You covered a lot and I do appreciate that. Just a couple of broad questions. In terms of, given the
Pete Lucas: Renewed interest or newfound interest as you mentioned in the nuclear space, can you remind us of your main competitive advantages other than experience, i.e. your licenses, your commercial capabilities, and kind of how this compares and lets you stand out from competitors?
Speaker Change: I'd say there are multiple aspects to how we're differentiated in the market. I mean, among them are, we are really the market leader in
Pete Lucas: in advanced nuclear fuels, coated fuels in particular that we make for the space application, and Trisol fuel, which has pretty exciting potential commercial outlets.
Pete Lucas: for all these advanced reactors. That'd be one thing. We talk often about the fact that
Pete Lucas: We're sort of the last man standing when it comes to large component manufacturing in North America. Our Cambridge side is capable of making
Speaker Change: large pressure vessels, which we use for steam generators, pressurizers.
Speaker Change: and heat exchangers and the like and that's the site where we're manufacturing the reactor pressure vessel for the GE small modular reactor. It is an SMR by definition but because of that technology it's actually quite a large vessel.
Speaker Change: So we have that, those two things. I would say in addition to all that, there's kind of a, you might say, a sort of a steady supply of experiential qualifications that we have that would be unlike a lot of competitors in the sense that we've been performing on nuclear projects.
Speaker Change: for decades without interruption, particularly because of our commercial capabilities in Canada and because of our naval nuclear propulsion capabilities in the States. We've delivered literally...
Speaker Change: of 415 reactors to the nuclear navy. And so that stream of business never stops, and there's really no one that can talk about experiential qualifications that would stand up to something like that. There are probably multiple others that I could cite, but we are differentiated in pretty deep and serious ways.
Speaker Change: Very helpful, thanks. And then just the last one for me. You talked a little bit about some of the incremental growth and preceding nice, making nice strides in Pele and Draco, but can you walk us through a time frame for that growth in the isotopes, microreactors, and SMRs specifically? When do we look for that to kind of bolster the PNL in a more meaningful way?
Speaker Change: Yeah, so I would say it's pretty, it's a pretty interesting situation. You know, a lot of that really is now, right? We've, we've built a portfolio in nuclear medicine that is really growing nicely, the therapeutics are starting to take off.
Speaker Change: In the midterm, I would say micro-reactors, even though we're doing work there now.
Speaker Change: as you get into production programs and commercial opportunities, I think you start to see that one rise. And then I'd put AUKUS in that midterm bucket too, because we'll start to see, you know, interesting growth from that one over the next few years.
Speaker Change: and then on the long horizon we've got enrichment opportunities for the national security application and perhaps commercial angles there that I think are really exciting. I think we can build an entire new franchise.
Speaker Change: just on the on the national security component of enrichment.
Speaker Change: And then you're going to see, and it's going to happen fast, you're going to see, I believe,
Speaker Change: You know, there's not just data center and AI, and I've talked about this a lot before, but there's the electrification of everything, transportation, industrial processes. We drive toward clean energy solutions that puts immense demand on the grid.
Speaker Change: and it's going to require a mix of technologies to address that need, but most especially, I believe, large commercial nuclear reactors will come around. And so we've got three-time horizons where we see growth coming. All of those are going to blend together to create
Speaker Change: I believe, everlasting, almost, growth signals for this company, growth opportunities for this company. And so we see these secular trends that we've talked about persisting for decades, certainly.
Speaker Change: The next question comes from the line of Scott Duchelle with Deutsche Bank. Please go ahead.
Scott Duchelle: Hey, good afternoon.
Scott Duchelle: Here you go.
Speaker Change: Thanks for the question, Scott. As you know, we traditionally do have a significant fourth quarter dynamic.
Speaker Change: All year, frankly, we've been, you know, just sort of bringing some of that goodness, what we normally see in the fourth quarter. We never know how it's going to, you know, sort of play out for the year. So we're always banking on that happening, of course, by the fourth quarter. And you just think about different events that have happened throughout the year.
Speaker Change: Robb LeMasters, Chase Jacobson, Chase Jacobson, Chase Jacobson, Chase Jacobson, Chase Jacobson,
Speaker Change: The other impact that I think you just need to be aware of is there will be a little bit of a sequential headwind from the activity we saw down in Tennessee. We were offline for three weeks.
Speaker Change: Not only do you have that sort of headwind, if you will, but you have the ramp up going into the rest of the year. And so we're just working our way through that. There's fits and starts of that. And so if you just think about the sequential
Scott Duchelle: Q4 versus Q3, that factor alone really would cause you to sort of step down.
Speaker Change: The last smaller thing is, I think you know, that our...
Scott Duchelle: Robb LeMasters, Chase Jacobson, Chase Jacobson, Robb LeMasters, Chase Jacobson, Robb LeMasters,
Chase Jacobson: Okay, that's a helpful bridge. Then, Robb, you know, excluding Tech 99, are you expecting growth to slow at the rest of B2XT Medical next year, or should we expect the base B2XT Medical business?
Chase Jacobson: To continue to drive this 25% type growth next year. Rex's comments kind of seem to be alluding to that, but I just wanted to check
Scott Duchelle: Frankly think at the profit level is relatively neutral as it relates to 2025, but your question specific for set sales We do not bank on
Scott Duchelle: tech in order to hit that sort of similar growth as what we're experiencing here in 2024. The portfolio is really strong across the pet products. Therasphere is strong, so it's really the underlying portfolio that's going to drive that.
Speaker Change: The next question comes from the line of David Strauss with Barclays. Go ahead.
David Strauss: Thanks. Good evening.
David Strauss: In terms of the Navy Pricing Agreement, can you give some additional color? I know it will layer in over time with the other contracts you're currently working on.
Speaker Change: Yeah, David, that's certainly what we hope. As you know, we negotiate those into the low-mid teens as a starting point off the cost baseline, and then drive OPEX, try to gain advantages in materials pricing and other such things.
Speaker Change: and certainly with a high focus on operational excellence, maybe volume adders to drive it into the high teens as we've done traditionally. So that's our model and that's what we hope to achieve.
Speaker Change: Yeah, maybe I'll offer just a specific on the on the margin, you know, the dynamic that we saw in 2024 was strong underlying performance on the geo basis, right? Basically fighting through mix all through the year, but holding that constant. And then we obviously had the missile tube.
Speaker Change: that we sort of held our own underlying exomissile tube. That's how I'm really sort of thinking about the 2025.
Speaker Change: Very similarly, of course, you have some immature programs that are ramping, whether it's microreactors or
Speaker Change: Special Materials. We obviously have the the AOT acquisition small on revenue, but a touch lower in terms of Margin, and so we're really looking to hold underlying margins Which is like saying look you're fighting mix and you're growing on underlying margin to offset the mix
Speaker Change: That's how I see 2025 margins for Geo.
Speaker Change: Got it. Okay. And Rex, your comment about the carrier lull potentially extending into 26. What's the background there?
Rex Geveden: Yeah, we've talked about that before, David, for a few quarters now. It has to do with the shipbuilding plan that the Navy published.
Speaker Change: and when they intend to procure that next carrier.
Speaker Change: But it's what we've been signaling for a few quarters now. Yeah, two quarters ago, we announced the shipbuilding plan slightly changed, adding that third year. Of course, you know, as long ago as, you know, two investor days ago, we talked about that ordering cadence being a two-year thing.
Speaker Change: to effectively, as you know, we sort of, you know, all of our facilities are meant for various types of volume and so our customer is very focused on finding ways to drive as much volume as they can for a fixed cost infrastructure like we have and I hope to be successful there.
Speaker Change: The next question.
Speaker Change: comes from the line of Peter Arment with Baird. Please go ahead.
Peter Arment: Comments about 2025 double-digit organic growth and commercial nuclear just
Peter Arment: Is that, how do we think about kind of the building blocks? Is it, you know, obviously a pickup and refurbishment activity? Are you starting to see already contributions from Pickering? And is there a material, you know, revenue change, you know, tied to kind of what you're doing with GE Hitachi?
Speaker Change: Sure, yeah, maybe I'll start by just saying that's exactly right. The big drivers we see in the commercial nuclear business, of course, there's two segments there. We've already talked about the medical, which will be a really nice driver of growth in the CO segment in general.
Speaker Change: as it relates to commercial nuclear, you know, we have...
Speaker Change: Ways that we can play across the value chain, if you will, of nuclear. We have the large position in Canada. We have the medium reactors, if you will, with the SMRs, and then you have the micro reactor play increasingly being of interest to people in the
Speaker Change: in that part of the market. And when you think through the large, medium, and small presence we have,
Speaker Change: On the large side, we're really seeing both refurbishments with pickering, some pickup of thinking a little bit about greenfield activity. That'll be a little further out, but that's where we're going to see some growth there over time.
Speaker Change: probably doesn't bleed into 2025. It's mostly about pickering there as well as just generally the Canadian fleet seeing good growth and we have that recurring business.
Speaker Change: That will pick up steam as we enter 2025, so we'll get kind of a full year of that.
Speaker Change: and then a lot of cats and dogs in and around that that that we're doing for other Competitors and trying to get some scope there and different engineering work for for various companies
Chase Jacobson: And then just on the micro-reactor, I think, Rex, I mean, you made a comment about the Army RFP that was out there. Is there any, you know, update on timing? And then just lastly, on 2025 CapEx, is it still, Robb, the kind of 100 plus million of maintenance plus the 40 million-ish of kind of growth CapEx? You know, just any thoughts on that. Thanks.
Speaker Change: Yeah, on that first opportunity, Peter, with the Army, sorry, with the Defense Innovation Unit, we submitted a proposal, we think a compelling one with a pretty interesting team. I know there was a lot of industry interest in that one and we haven't heard back from the government yet, so we're standing by for what we think is an interesting opportunity.
Speaker Change: Yeah, and I can deal with the CapEx question, so...
Speaker Change: You know, we guided free cash flow to be up. We really haven't disaggregated the operating cash flow from the CapEx. We'll provide you more.
Speaker Change: guides on that next quarter. I will say a couple things.
Speaker Change: One, you know, you just look at our Q4 cadence to finish out this year. It's a step up from the past couple quarters. Why that is, is related around to the Cambridge expansion.
Speaker Change: As you know, we're trying to bring as much of that forward, just given all the demand signal we're seeing for the BWRX 300, as well as all the growth in Canada. So we're trying to wrap our heads around how that sort of feathers into 2020.
Speaker Change: Five said that that's that's one factor I think the second factor that you just need to be aware of it as we sign this this term sheet We're trying to decipher sort of the operating cash flow if you will versus the capex
Speaker Change: given what our customer wants in terms of accelerating Columbia.
Speaker Change: No matter what the scenario is, we're sticking with our free cash flow, right? That's kind of how we guide the overall company. And so we'd really ask you to focus on the free cash flow. And we'll deliver either operating cash flow or capex to perform at that level that we guided you to for 2025.
Speaker Change: The next question comes from the line of Ron Epstein with Bank of America. Please go ahead.
Ron Epstein: Hey, guys.
Ron Epstein: Just a big-picture question for you. When we've seen the shipyards report this quarter, and it's been really, really challenging for them, particularly on Virginia and Columbia. And you guys have been doing great on it.
Ron Epstein: And like you mentioned, you've got a lead time on that.
Ron Epstein: Wait.
Ron Epstein: When does that catch up to you? I mean meaning like or doesn't it if they're you know They're still building that what one and a third maybe one and a half the Virginia class a year
Ron Epstein: And it just seems like how much advanced procurement for power plants can the Navy actually do given that the shipyards are so far behind where maybe anybody hoped they would be at this point?
Speaker Change: Yeah, thanks Ron. So a couple things I would say, yeah I'll reiterate the point that we're kind of a couple of years ahead of the shipyards when it comes to
Speaker Change: Robb LeMasters, Chase Jacobson, Chase Jacobson, Chase Jacobson, Chase Jacobson, Chase Jacobson,
Ron Epstein: They really see around corners and they supported us.
Speaker Change: some talent acquisition capabilities.
Speaker Change: and some other kinds of depth, including some digital transformation dollars that we needed. And so that's been extremely helpful to us. We're grateful to that, to what we get from our customer there. They help us think.
Speaker Change: They're just not achieving the shipbuilding tempo that's required by the Navy, so they're going full steam ahead, and the supply chain is going full steam ahead, and I don't think there's any world in which you could conceive of just stopping the supply chain to let the shipyards catch up.
Speaker Change: you would literally lose the capability. And so I think the wisdom of the Navy, the wisdom of...
Speaker Change: the appropriators is we've got to keep the supply chain going even if there are challenges at the shipyard, you just got to bet that the shipyards are going to get it sorted out and they'll get up to the production rates that are required for our defense needs and I believe that they will I certainly believe you got to bet on that outcome
Speaker Change: But you can't just ask your supply chain to go and take a vacation for two or three years. And so I think we're going to continue to produce at the levels that are appropriate for our business, including, you know, the idea of level loading our factory and letting our customer take full advantage of the rates that go with that.
Speaker Change: How much of that could you guys actually capture and if you know how much of SMR is your business today and where could we expect it to be in five or ten years?
Speaker Change: So, that is a big picture question.
Speaker Change: It may be a little tough to speculate, but I'll give you maybe some some ways to think about it.
Speaker Change: that we could put ourselves into a partnering configuration with a reactor developer and capture more scope.
Speaker Change: as kind of the baseline consideration for our growth with the possibility of sort of leveraging our capabilities with a partnering kind of approach.
Speaker Change: Yeah, I might add a couple other just, you know, sort of call options in that space. You know, some of those platforms demand
Speaker Change: fuel solutions, so we have really good expertise.
Speaker Change: in that area, be it Triso and so forth. And so we do have plays that we can't actually get the component manufacturing that Rex talked about underlying those. We're certainly going to be ready and willing to help other players on the fuel side, and that's a very challenging part of their equation. And so as they ramp,
Speaker Change: We're ready and able to satisfy some of those SMR demands on the fuel side.
Speaker Change: to have U.S. capacity.
Speaker Change: And so as those customers in the U.S. start to show themselves and look for solutions where they want a domestic supply chain, I think there's other options that you're going to see more from us in the near term in terms of manufacturing capability in the U.S. in addition to our expansion in Canada.
Speaker Change: The next question comes from the line of Andre Madrid with BTIG. Please go ahead.
Andre Madrid: Hey everyone, thanks for taking my question.
Andre Madrid: I wanted to ask a quick one.
Andre Madrid: Late October, the DOE selected four providers for domestic
Andre Madrid: High SA low enriched uranium production. I think the max was about like 2.7 bill Was this something that you guys were bidding on? I know you want a similar award earlier in the month for D conversion But I wasn't sure if there are other ways you guys were looking to play, you know, the newfound demand for domestic uranium
Speaker Change: Yeah, so that's an opportunity we did not submit a proposal for. That's really about developing commercial capability.
Speaker Change: in the enrichment space, and there are other companies that are better suited to do that. So, there are places where we can play. We have some nice niches in deconversion, for example, that you mentioned, but our intention was not to get into large-scale commercial fuel enrichment. That's not where we play.
Speaker Change: Got it, got it. And then, I think Amentum was selected for a decommissioning contract in Lithuania. It was pretty small, but I kind of saw it and looked at it as a good opportunity to look at, you know, revisit where you guys were exploring international opportunities moving forward and how those could contribute to the broader business.
Speaker Change: around decommissioning.
Speaker Change: Or just international opportunities at large too, decommissioning and at large.
Speaker Change: Okay, so maybe two different, maybe I'll parse that one a little bit. From the standpoint of decommissioning or environmental remediation, we haven't really looked much to international scope and certainly we're not interested in exposing ourselves to the risk that comes with sort of the fixed price.
Speaker Change: Robb LeMasters, Chase Jacobson, Chase Jacobson, Chase Jacobson, Chase Jacobson, Chase Jacobson,
Speaker Change: And so I don't think you'd see us doing decommissioning in Lithuania or places like that.
Speaker Change: The commercial nuclear power development opportunities in international are pretty intriguing. I mean, I think if you look at the can-do footprint, we already work in places like Romania and to a limited extent in Argentina and in South Korea.
Speaker Change: and I think those refurbishment projects in Romania and new reactors there that are around the can-do technology are exciting and important for us for growth.
Speaker Change: And, you know, there's interest in scaling that CANDU technology to a gigawatt-scale reactor called Monarch.
Speaker Change: Ron, can you open for the next question please?
Speaker Change: Michael Chermouli, with Cherokee Securities. Please go ahead.
Michael Chermouli: Hey, good evening guys. Thanks for taking the questions. Nice results.
Michael Chermouli: Just to dig a little deeper on the EBITDA margins, it sounds like you're grappling with some of the hurricane-related disruption this year, and I know you called out mix, but
Speaker Change: Maybe what specifically is dilutive? Because I guess at the consolidated level, the margins are going to be flat next year. I would have thought maybe you get a little bit more lift in medical. Is anything materially changing with mix that's creating some of that?
Speaker Change: I guess, lack of margin expansion.
Speaker Change: Yeah, we've been talking about this all year. I mean, the easiest examples you have is the microreactor programs that we have. We're not looking to take risk and make a lot of margin there, right? So, we signed up the two most important contracts in Project Pele and Project Draco. And so, those come in at
Speaker Change: maintain a lead by, you know, having those prototype contracts. That's a 2024, you know, impact as well as into 2025.
Speaker Change: You also have a few special materials.
Speaker Change: Contracts that come in, we're constructing a line around Umetal, as you know, that comes in at a lower margin versus the other business.
Speaker Change: We also are just dealing with mix as it relates to the core naval segment, you know that we're going through the lull And so we've been actually done a quite a nice job of moving business around We're seeing actually our Lynchburg plant do an excellent job
Speaker Change: of moving between upper tier and lower tier components. And ultimately, that's driving us to continue to maintain margin, despite a relatively sort of tide going out, if you will, right? And our enabled business, as you can expect, is also a good margin business for us. So.
Speaker Change: Yeah, all of that just makes us, you know, sort of have to grind through and maintain margins So it's mixed and a little bit of just core underlying You know softness just given, you know, you're not you're not just don't have an abundant volume which generally helps a business like ours
Speaker Change: Got it. That's fair. And just quickly on Pele, I think the initial contract is like $300 million and it probably runs its course in 2025. Do you get additional funding for that or do you kind of complete your portion of the work in 2025, I guess?
Speaker Change: You know, I've seen the press releases out there, you know, with their kind of testing and construction sites. But what has to happen in terms of pay lay and your funding and next steps?
Speaker Change: Yeah, it's Robb. I'll take that. Yeah, so you're right. That was the initial contract. Now, the customer, we work with the customer as they have expanded their scope and different things that they want as part of that. That will not end in 2025. We continue to see.
Speaker Change: different interest in different features. We see different spending as we move it out to Idaho. And so that's not gonna be a program that terminates in 2025. So there will be a tail and I wouldn't be surprised that it runs higher than the $300 million.
Tate Sullivan: The next question comes from the line of Tate Sullivan with Maxim Group. Please go ahead.
Tate Sullivan: Hi Rex, you mentioned the potential to turn the enrichment to build a new franchise on the security portion of enrichment. Do you have the potential to be a sole source supplier in this market or will it be mostly be a design effort or technical services opportunity?
Speaker Change: So take the we were the sole awardee of that contract that they did have
Rex Geveden: The government did say they could award to multiple contractors, but they just awarded to BWXT. So, it's possible we could be the sole supplier for both the centrifuges and for the enrichment capability. But, you know, that depends on what the government wishes to do in the long term here, but it's a very interesting opportunity for us.
Speaker Change: And is the next step, according to press release from August 29th, related to submitting a report on the potential costs and timeline to build a pilot enrichment facility? Yeah, that's exactly.
Speaker Change: That's exactly right. We started the contract in August this year. So it'll run through late summer next year, and we'll deliver our report on the concept for the manufacturing site for the centrifuges and other such things.
Speaker Change: and then hopefully go into phase one.
Speaker Change: That concludes our Q&A session. I will now turn the call back over to Chase Jacobson, Vice President of Investor Relations. Please go ahead.
Chase Jacobson: Yeah, thanks everybody for joining us today. We look forward to seeing and speaking with many of you at conferences and other events over the next quarter. If you have any questions, please feel free to reach out to me at investors at bwxt.com. Thanks.
Speaker Change: Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.
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