BWX Technologies Inc (BWXT) 2021 Q2 法說會逐字稿

Ladies and gentlemen, welcome to BWX Technologies Inc. Second Quarter 2021 Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the call over to our host, Mark Kratz, BWXT's Vice President of Investor Relations. Please go ahead.

Thank you, Andrea. Good evening, and welcome to BWXT's Second Quarter 2021 Earnings Call. Joining me are Rex Geveden, President and CEO; and David Black, Senior Vice President and CFO.

On today's call, we will discuss certain matters that constitute forward-looking statements. These statements involve risks and uncertainties, including those described in the safe harbor provision found in today's earnings release and the company's SEC filings.

We will also discuss non-GAAP financial measures, which are reconciled to GAAP measures in the quarterly materials that are available on the BWXT website.

With that, Rex, I will turn the call over to you.

Thank you, Mark, and good evening, everyone. Earlier today, we reported solid second quarter results with earnings of $0.62 a share on over $0.5 billion of revenue as we prepare for a strong second half. Although down on a comparative basis, year-to-date earnings are where we anticipated as we cross the midpoint of 2021, and we have clear line of sight to the balance of the year. Beyond operational performance, we remain focused on achieving key milestones that will position the company for continued growth.

So before I turn the call over to David to discuss financial details and guidance, let me give you an update on the state of the business and initiatives across the BWXT portfolio.

The Nuclear Operations Group continues to reliably produce strong results amidst COVID and capital build-out disruptions while maintaining a high operational tempo. 2021 also represents a transition year compared with 2020 where we are moving to higher labor production volume and lower long-lead material procurements. The business is executing well against those milestones while maintaining impressive cash generation as it prepares for a strong second half this year. As we have noted in the past, the timing of certain milestones and accounting for improvements in the Navy business can be somewhat uneven with a number of factors in play.

In addition to normal business lumpiness, we saw COVID absences impact us early this year, which put some pressure on production. Another unique but temporary factor includes the complications of a significant capital build-out running concurrently with operations. For instance, at one of our NOG sites, we integrated 5 large machine tools into the factory recently, which disrupted production somewhat and required agile workarounds. The good news is these bottlenecks are improving as we near the end of this capital campaign.

In Canada, the medical business is returning to pre-pandemic levels as we saw a 60% top line growth in the second quarter. We expect this positive trend to continue through 2021 as we press forward on commercialization efforts for technetium-99 generators. Overall, the new technetium-99 generator production line has transitioned from construction to initial testing as the systems come to life at the Kanata facility. Three of the 4 major milestones are substantially complete, including in-cell radiochemistry equipment installation, major facility modifications and the target delivery system that has been assembled and is being factory tested for installation on a Darlington reactor in the future.

The complex and automated radiopharmacy line is the last major system and it is nearing completion. As the program fully transitions to testing, we will be exercising the integrated system with cold chemistry before moving to hot chemistry runs. The program remains on track to submit FDA reference batches and required documentation around the end of the year as we seek a priority review.

On the Nuclear Services side, we await new awards that should occur later this year, including the Pantex and Y-12 management and operations contract and the Savannah River integrated mission cleanup contract. Should we prove successful on some of these, the Nuclear Services segment would see significant income growth in the near and medium term with the objective to grow that segment back to its historical prominence. With our nuclear operations pedigree, we have a competitive advantage to succeed as a leader in this market as evidenced by the recent track record of wins and a strong pipeline of new opportunities, particularly for larger contracts.

Turning to other growth initiatives, we remain excited about the trajectory of nuclear microreactor development for government applications. A few weeks ago, BWXT, with partner Lockheed Martin, was selected to advance the design for a nuclear thermal propulsion system for a joint effort with NASA and the Department of Energy. Under this new award, the team will focus on maturing the design for the reactor, including the fuel, reactor core, shielding, instrumentation and control systems as we leverage corporate investments to integrate into a conceptual design.

This program builds upon the years of work that BWXT has already accomplished with NASA on nuclear thermal propulsion technology. Recently, that work included the testing of multiple coated low-enriched uranium fuel types for a reactor leading to a final fuel design next year. This project gets us one step closer to a demonstration mission that would illustrate the fundamental advantages of using nuclear technology for power and propulsion for space applications, which BWXT is uniquely suited to provide.

In addition to working with NASA, we are finalizing our contract with the DOE as part of the Advanced Reactor Demonstration Program. This program accelerates the development of technology required for the next generation of nuclear power production and a variety of high-temperature industrial applications. We also continue to make progress for the DOD microreactor program in the areas of fuel and reactor design.

Together, this comprehensive set of programs for high temperature gas nuclear reactor design, manufacturing and test continues to differentiate BWXT and positions the company to successfully participate in these exciting emerging markets in the future.

From a government budget perspective, we continue to monitor and are encouraged by the bipartisan support for recapitalization of the naval nuclear fleet and BWXT programs across the board as House and Senate Appropriations Committees prepare their fiscal year 2022 markups. We were also reassured that during the Senate Armed Services Committee confirmation hearing for the administration's nomination for the Secretary of the Navy, Carlos Del Toro pledged to continue the evaluation of strategies to increase the production rate of Virginia-class submarines and reaffirmed his support for Columbia as the Navy's top procurement priority.

Beyond the defense budget, we are also encouraged by the administration's posture on nuclear energy given its investments in nuclear energy research and consideration of accommodative policies. The White House's National Climate Advisor, Gina McCarthy, publicly outlined nuclear energy's role in renewables at a White House press conference in April. This was quickly followed up by the President's government fiscal year '22 budget request, which saw several important proposals, including a plan to increase the Office of Energy Efficiency & Renewable Energy by 65%, increase the Office of Nuclear Energy by 22% and increase the funding for DOE's Advanced Reactor Demonstration Program, or ARDP, by nearly 50%.

As we have discussed in the past, we plan to participate in the commercial nuclear market differently than we have approached to other markets where the government, customers' intentions and funding are more visible. Generally, we intend to support commercial advanced reactor development by participating in the supply chain as a designer and manufacturer of components and fuel, while finding opportunities to devote capital and resources in our proprietary technologies through customer RFPs that have more visible outcomes and require more modest investments. For example, last December, we were 1 of 5 companies that was chosen for the Department of Energy's ARDP risk-reduction awards. Through a 20-80 cost share program, BWXT and the DOE will smartly invest over $107 million into research and development of risk-mitigating technologies in fuel and manufacturing to mature American-made small modular reactors.

Similarly, we are also quite enthusiastic about what we see in Canada. The Canadian government is facilitating the creation of a Canadian small modular reactor industry to meet its clean energy standard. Canadian Nuclear Laboratories have set aside considerable funds for advanced nuclear reactor research and development funding and formed a closer relationship with the U.S. Nuclear Regulatory Commission to facilitate faster deployment. One of the major Canadian utilities, Ontario Power Generation, hopes to field advanced reactors by about the latter part of the decade, setting the stage for a strong market in which we could grow as a Canadian domestic supplier of choice.

In recent years, many commercial players have delayed investments given headwinds from low power prices and subsidies from alternative renewables. But owing to our patience, persistence and very long-term view, we have maintained our capabilities in this market, including the only North American facility and infrastructure capable of supplying large nuclear components. So as responsible nations race to confront climate change, we expect a renewed focus on nuclear solutions where BWXT is well positioned to be a major player in an expanded supply chain to help solve these global problems. David?

Thanks, Rex, and good evening. I will start on Slide 4 of the earnings presentation with total company results.

Second quarter revenue was $505 million, about even compared with the second quarter last year as strong increases in the Nuclear Power Group were offset by declines in Nuclear Operations and Nuclear Services revenue. Second quarter earnings per share were down 13% to $0.62 as a result of lower operating segment earnings, higher commercialization costs related to the tech-99 generator line, higher interest and a higher tax rate. Those headwinds were partially offset by higher pension income and foreign exchange gains.

Operating income and margins were also down in the quarter primarily from the timing and lumpiness of favorable contract adjustments in the Nuclear Operations Group, which we described in the segment results. Year-to-date consolidated revenue was down 1%, and earnings were down 10% per share in the first half of 2021 compared with a robust first half in 2020. Second quarter and year-to-date EPS bridges can be found on Slides 5 and 6, moving to second quarter and year-to-date segment results on Slides 7 and 8.

The Nuclear Operations Group generated $381 million of revenue, down about 7% compared with the prior year period primarily from lower long-lead material production, which was partially offset by higher production volume. NOG operating income was $69.2 million, down 20% from the prior year period. As Rex mentioned, operating income was disproportionately lower than revenue due to a combination of lower volume and fewer favorable contract adjustments that are primarily attributed to timing. NOG operating margin was 18.1% in the second quarter, which we expect to strengthen in the second half of the year through a combination of realized cost savings and more regular workflow as capital project bottlenecks abate.

Year-to-date, NOG generated $783 million of revenue, down about 6% compared with a robust first half performance in 2020. First half operating income was down 19% on lower revenue, which included less long-lead material production and fewer favorable contract adjustments due to a combination of timing and COVID disruptions. Year-to-date operating margins are 18.3%. We continue to anticipate the typical high-teens margins with upside from pension reimbursements for the full year, similar to 2020 results.

In the Nuclear Power Group, second quarter revenue was $102 million, up 50% compared with the second quarter last year driven from a combination of higher field service activity, fuel production and fuel handling in the commercial nuclear power business as well as a strong rebound in BWXT Medical, which was up nearly 60% off COVID lows from the second quarter last year.

NPG operating income was up significantly driven primarily by higher volume and some additional government funds to offset expenses related to COVID. This resulted in a 10.6% operating margin for the segment in the quarter. Year-to-date, the NPG segment is up 34% of revenue, and operating income was nearly double the amount compared with the first half of 2020. And although year-to-date margins are trending lower than guidance, we anticipate pickups in the back half of the year from a more favorable mix, higher fuel sales and a continued rebound of medical isotopes.

Lastly, the Nuclear Services Group generated $5.8 million of operating income in the second quarter, up from the same period last year primarily from better contract performance. Year-to-date, NSG income is even with the first half of 2020. And it is difficult to see strong second half results in the segment due to award fee true-ups. And we anticipate potential new wins could start to positively influence the financials depending on the timing of those awards.

Overall, we are reiterating 2021 guidance on Slide 9, while making some minor updates to other information based on year-to-date actuals. As we discussed on the last call, we continue to anticipate higher development and commercialization expenses associated with the preparation of the tech-99 generator product line and are specifically offering guidance of approximately $30 million of expense reported in Other under segment income. The offsetting adjustment is recorded in Other net outside of operations, which we expect to be $5 million higher than previously forecasted due to year-to-date FX gains. This line item is now anticipated to be $55 million to $60 million of income for the year. The majority of Other net is comprised of pension income, and there has been no change to the pension income assumptions for 2021.

And as Rex mentioned, we have line of sight into the work in the second half of the year with the expectation that earnings have more significant acceleration towards the end of the year driven by timing and milestones that influence profitability across all 3 segments.

Lastly, I will close my remarks by turning to the balance sheet. As we outlined on the last call, we issued $400 million in senior notes due in 2029 with the intent to redeem the senior notes due in 2026. Following the end of the quarter, we did just that, which will result in less interest expense on fixed debt. The company continues to be well positioned on the balance sheet with no long-term fixed debt due until the latter part of the decade, and we still maintain good balance sheet flexibility.

In the current attractive interest rate environment, we will carefully consider utilizing the balance sheet more aggressively to either opportunistically invest back into BWXT through share repurchases or to deploy additional capital to amplify our strategic intentions.

And with that, I will turn it back over to Rex for closing remarks.

Thank you, David. As David mentioned, we have some real flexibility with the balance sheet, and that's driving us to take a close look at some opportunities to utilize it more effectively. When one excludes the significance of the 2 large capital initiatives in naval reactors and nuclear medicine, the company is generating very strong underlying free cash flow. These 2 intense capital campaigns are set to wind down late next year, and we are beginning to consider how to take advantage of that flexibility. Given our confidence in the future growth of the company, as we evaluate future uses of capital, David and I will continue to use the risk-adjusted returns we can readily achieve investing back in ourselves by buying back shares as a good benchmark and considering alternative opportunities.

And lastly, we look forward to hosting our Investor Day on November 16 in New York City where we plan to offer greater insights into the company's growth initiatives, and our strategy to move BWXT through the rest of its first decade as a publicly traded company and our aspirations beyond that.

And with that, I will ask the operator to open the line for questions.

(Operator Instructions) And our first question will come from Bob Labick of CJS Securities.

I wanted to start with the moly technetium discussion from earlier. Could you elaborate on what's necessary to get the radiopharma line complete? And then what other steps after that are necessary to get the generator submitted to the FDA?

Sure. Thank you, Bob. There are just a couple of steps left on the radiopharma line. We have to install the terminal sterilization technique. It's e-beam technology, electron beam. And that equipment is near ready for installation. Then we integrate all that and test it in the radiopharma line. We have all the hot cells we need. We've integrated most of that equipment into those hot cells. So it's really down to sterilization.

And then in terms of getting ready for an FDA submission, we basically have to -- we intend to run cold chemistry runs through the radiochemistry and radiopharmacy line. That means it's unirradiated material, which is fine because the chemistry doesn't change when it's irradiated. So we'll do cold runs and then we'll follow that with hot runs, which will be the runs of record, and assemble the data required to go with the reference batches and submit the package to the FDA.

Got it. And have you decided yet if you're going with irradiated moly from the MURR reactor? Or is this still OPG? Or when does that decision get made?

So that decision has been made, Bob. And our intention from the beginning when we brought on MURR as kind of a backup provider was to begin the initial ramp with MURR. It's a bit easier to irradiate there for various reasons. But the full production volume that we require would put us onto the Darlington reactors with OPG. And so the long-term solution is to irradiate on the CANDU reactor at Darlington.

Okay. Great. And then just last one for me. You just mentioned, obviously, some nice margin progression in the back half in the NPG group. It seems like it jumped to the 15%, 16% level. Just so we don't overextrapolate on that, how does that kind of play out over the next, I don't know, 4 to 6 quarters? Because I believe as moly does ramp up, you'll have more depreciation coming on. So might it continue to be lumpy? Or how should we be thinking about modeling that over the next period of time?

Yes. So we're spending in the range of $0.25 billion of capital on that moly line. And so most of that is long-lived equipment that you would depreciate over, let's say, 12 or 15 years. And so you've got a depreciation hurdle in the range of $15 million to $20 million that you need to overcome. You've also got some start-up expenses in that line. And so in the beginning, there's certainly a bit of a drag on profitability as we ramp up the production. But over the course of time, obviously, we overcome that. And as we gain market share and complete the ramp, we expect it to be a profitable program with -- as we characterized it before, we expect gross margins in the 50% range. And we expect to get very significant share in the North American market. So some hurdles in the beginning but, ultimately, we believe a very, very profitable program.

The next question comes from Robert Springarn of Credit Suisse.

So just a follow-up on that FDA discussion. Once you're in review, what's the timeline look like, either a priority review or a normal review?

Yes. We're requesting a priority review, Rob, and the timeline on that is -- 9 months is the timeline that the FDA self-imposes, and they're required to give you a thumbs up or thumbs down -- unless there's a request for additional data from the applicant, and then it extends, it resets the clock on that. But we're hopeful of getting approval within that window, so up to 9 months.

Okay. And then just on the benefit of the small reactors, the flexibility and security of the power supply that they provide, is this benefit -- how do you think about the cost per kilowatt hour potential from a competitive standpoint versus other power sources? And how should we think about that as this evolves?

Yes. So Rob, I'll maybe change altitudes here a little bit on that question. So we don't -- the economics for small reactors, small modular reactors and even microreactors, are not well understood yet, particularly the latter one. But on the small modular reactors, I think you can think of the overnight cost being in the range of $6,000 to $7,000 a kilowatt. And that's expensive, in my view, relative to other alternatives. And so there's a cost gap that I think the industry needs to close for both small modular reactors and microreactors. To be competitive with solar and natural gas and other things, I believe you're going to have to get down in the $2,000 or $3,000 per kilowatt range. I'm talking about installed -- the cost of installed capacity, in order to be considered for use on the grid.

Okay. And your confident that we can get there?

Well, I believe so. And I'm particularly optimistic about these advanced reactors, the high-temperature gas reactors and other things, where you've got higher efficiency in smaller packages. You've got some natural advantages from that. And not only that, but you can use the output of those reactors, the high-temperature gas, for industrial processes. For example, people talk about cracking hydrogen with those. Because of the temperatures at which they run, they are uniquely suited to support certain industrial gas processes and so -- industrial heat processes. So you can -- it improves the business case when you can do that, obviously. So I'm optimistic about it, but it's early days.

Okay. And then just one more for me, and I don't know if you discussed, I just hopped on from another call. But the hiring situation, I think you're starting to work on another Columbia core next year. So are you in the process of onboarding more people ahead of that? And how is the positioning for bringing in new people, just given the labor constraints in the environment today?

Yes, Rob, we absolutely are hiring. We continue to have hundreds of open requisitions and we tend to fill them. We are somewhat concerned about what we hear about the labor market, but I would reiterate what I'd normally say about this, which is that in the geographic locations where we have BWXT plants: Lynchburg, Virginia; Erwin, Tennessee; Mount Vernon, Indiana; 2 plants in Ohio, we tend to be an employer of choice. We tend to pay well. We have good benefits. But kind of more importantly, we have such visibility into our backlog that potential employees can see their futures. These programs have decades-long viability to them. And so we tend to get high-quality applicants. We tend to get plenty of applicants. And so we're keeping our eye on that. We're watchful about it, but I'm not especially concerned at this point about being able to hire up for it.

The next question comes from Peter Arment of Baird.

Just -- you mentioned the -- in your opening commentary, and David, I think you also mentioned about, just the stronger second half. Anything to call out Q3 versus Q4? And then also related to -- you're kind of 70% through your kind of CapEx plans through the first half, is that level loaded in the second half? How should we think about that?

So I'll take the Q3, Q4 and the second-half picture, maybe ask David to comment on capital. So 2021 is shaping up a lot like -- it will look familiar to you -- it's shaping up a lot like 2019. And that year, 2019, we had a 43-57 kind of split for operating income. And this year, it looks like 44-56. And so we've kind of been to this movie. The factors that are influencing the strong second half are sort of by segment. In NOG, we have a continuing ramp in volume. We've been ramping generally around the Columbia program and, of course, the fact that we went to a permanent 2-Virginia tempo a few years ago. And we've been doing this capital campaign to accommodate that level of volume. So we're still ramping. And so you can expect generally higher volume in the second half of the year as compared to the first half.

And then another factor here is that, as we start on the second Columbia, which is -- which begins early next year, late this year, you'll see much heavier long-lead materials. And that strongly influences Q4. And so as David said, we've got this sequential build from Q3 to Q4. And Q4 is quite a bit stronger than Q3. And that's due to the fact that we've got long-lead materials layered in on top of what's an already increasing production ramp. So that drives NOG.

In NPG, the second half has much heavier component manufacturing in it, also increased sales in fuel and fuel handling systems out of our Peterborough operation. That operation is doing quite well, and we'll see that manifest in the second half.

We will see continued growth in isotopes. And just so you know, there's a -- generally speaking, there's a bit of cyclicality in that business that always favors the second half because the large cyclotron that we use in Vancouver is shut down for maintenance for a period of time in the first half of the year. So that favors the second half, along with the recovery from the pandemic and general increases in demand for the products that we make there. So we're expecting isotopes to be quite a bit stronger in the second half, and then generally just better mix at NPG. The first half margins were below average. We expect recovery to sort of that 12% level -- 12%, 13% overall as we execute the second half of the year.

And then finally, in NSG, that's always biased to the second half as well because we true up the site performance, profitability in the TSG business in the fourth quarter, so you almost always see a big pop in 4Q in that business. And then, as David has mentioned, should those TSG awards happen in a timely fashion and should we succeed with them, then that would move the needle for us, too. We get some absorption benefit, perhaps a bit of profit from that and then, obviously, a full year of that in the next year. So a lot going on in the second half, and we're running hard and executing well at the moment and staying on our guidance.

And Peter, to take the capital question, you've asked about capital for the remainder of the year. We said about $250 million for the year. We said next year, which is '22, would be less than that. Then in '23, we would be at our maintenance capital, which is 3.5% to 4% of revenue. So the rest of this year is still going to be strong. We had $137 million in the first 6 months, so you're going to pretty much duplicate that. And then you've got -- the timing between the 2 is going to be roughly just as strong. And then you could always have some timing issues between this year and next year. But I think over the next 4 quarters, you're still going to have a strong amount of capital to get done what we need to get done.

(Operator Instructions) And our next question will come from Michael Ciarmoli of Truist.

I did jump on a bit late. But on the -- just trying to get -- the $30 million now for the commercialization expense on the Tc-99, I think you called it out as greater than 1%. So I guess it increased by a couple of million. How do we think about, I guess, that other expense as that begins to subside? And how do we think about the potential tailwind once the spending stops there? I mean just does that go back to, I guess, your normal other expense probably ran about $22 million, $23 million farther back. Maybe it was a little bit below $20 million. But how do we think about that trending? And is there -- do you think you've contemplated all the expenses at this point?

Yes. So I mean, obviously, we're trying to ramp up for the moly-99 product line. So our normal corporate expenses would hang around there, $20 million, $22 million or so. That's increased some because of the addition of cost. Once we get into -- late into the production time frame for moly-99, then this will all be part of the moly-99 product. So that will go back to what we would assume a corporate level cost would be.

Got it. Okay. And then just in terms of that FDA approval, I think Rex, you said you're going to be using MURR first. I mean are there any risks? Or do you need to submit additional documentation? Or is all that kind of contemplated in the full submission using MURR first, then going back to Darlington? Or do you see that as a potential risk factor that the FDA might flag?

Yes, you have to do that in 2 pieces, Michael. So we will -- when we submit the reference batches and the other documentation, it will be particular to that configuration, which is MURR irradiation, our radiochem line, our radiopharma line, our shipping containers and so on. And so when we move over to the Darlington one just a little bit later in the game, it does require a bit of a supplemental to the original application. But that's relatively minor, and it has a much shorter approval timeframe on it. So we don't regard it as particularly risky.

The next question comes from Ron Epstein of Bank of America.

Just a couple of quick ones. On the Virginia class, what are you seeing there in terms of long-lead items? And is the drumbeat increasing at all for the additional boat that they've been talking about?

Ron, our strategic forecast has been for 2 Virginias for a number of years now, and we've never layered in that third Virginia in our thinking. Should that come about, that kind of might help you get to the upper end of our medium term -- intermediate guidance range. But we're not planning for it, and we're not hearing that much support for it right now. And I don't believe that anything we're hearing out of authorization or appropriation would lead to one going into this appropriation cycle. We stand ready for it. And should that come about, we could accommodate it with pretty modest capital investment, but we just aren't planning for it right now.

Got it. Got it. And then could you just shed a little light on the thermal nuclear propulsion stuff you're doing with NASA, where that stands and where that could go? And will you have a spacecraft actually at some point here, flying with that on it?

It's my most fervent hope that we will. We're very interested in nuclear applications for space, Ron. What we've been doing with NASA for -- since 2016 is developing -- mainly developing fuels that would be suitable for a nuclear thermal propulsion system. And those systems run at very high temperatures, and they have very high -- very challenging requirements for materials and for fuel. So we've been developing and testing various fuel types for the last several years, and it's been a very interesting and a very challenging and productive program for us.

This last award that we talked about here in the script is one where NASA has turned to the idea of going ahead and designing the reactor in the spacecraft and systems in anticipation of a future demonstration mission. And so I think the idea is that NASA -- and there has been discussion about NASA collaborating with DARPA to do this mission. But the idea of putting a full nuclear thermal propulsion system onto a spacecraft and executing some kind of a mission to demonstrate the efficacy of the NTP technology. So that's -- I think it's -- I think it will happen. I'm not sure about the timeframe, but we are certainly postured to support it.

And on top of that, NASA is looking at fission surface power as being a nuclear technology. And that -- we expect something from NASA on that in the fairly near term because they do have robust demands for power on the lunar surface, and fission surface power is the preferred solution for that. So there's a lot to come there, and it's all relatively exciting.

This concludes our question-and-answer session. I would like to turn the conference back over to Mark Kratz for any closing remarks.

Thanks, Andrea. This concludes today's conference call. We will be sending save-the-date reminders for the Investor Day on November 16 with formal invitations to follow. If you have further questions, please call me at (980) 365-4300. Thank you, again, for joining us this afternoon.

The conference has now concluded. Thank you for attending today's presentation, and you may now disconnect.