BWX Technologies Inc (BWXT) 2020 Q2 法說會逐字稿

Ladies and gentlemen, welcome to BWX Technologies second quarter earnings conference call. (Operator Instructions)

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

Thanks, Jason. Good morning, and thank you for joining BWXT's Second Quarter 2020 Earnings Call. Joining me today are Rex Geveden, President and Chief Executive Officer; and David Black, Senior Vice President and Chief Financial Officer.

On today's call, we will discuss certain matters that constitute forward-looking statements that involve risks and uncertainties, including those described in the safe harbor provision found in yesterday's earnings release and our SEC filings. We will also provide non-GAAP financial measures, which are reconciled to GAAP measures in the quarterly materials. Copies of these documents, along with today's earnings presentation are available on the Investors section of our website.

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

Thank you, Mark, and good morning, everyone. Yesterday, we reported strong second quarter results with non-GAAP earnings per share of $0.71, up 15% on 7% revenue growth while delivering robust free cash flow of $111 million, 3x the second quarter last year. These results extend BWXT's exceptional first quarter and producing very strong first half performance with non-GAAP earnings per share up 33% on 18% revenue growth and positive free cash flow despite substantial capital investments to lay the foundation for future organic growth. This performance leads us to increase 2020 earnings per share guidance despite negative impacts related to COVID-19 in the commercial business lines.

Second quarter and year-to-date outperformance were driven by the Nuclear Operations Group through the Columbia Class product line ramp and accelerated work volume in long lead material production. These were bolstered by contract performance improvements through operational excellence as we execute against the robust backlog.

Over the last several months, both the House and Senate have made significant progress on the 2021 NDAA. Budget authorization is trending well for BWXT programs, particularly for a second Virginia class nuclear propulsion system in 2021. Both the House and Senate passed the bills containing increased funding for the Virginia program, with the House adding an incremental $272 million and the Senate allocating $472 million for long lead items for a second Virginia ship. Additionally, the House Appropriations Committee's FY '21 defense appropriations bill includes the same $272 million increase for Virginia advanced procurement.

As I discussed on the last earnings call, there was a scenario where the entire second Virginia class submarine is not ordered, but the nuclear propulsion equipment for a second submarine is ordered. This is the action by the Senate thus far with the House fully funding the program. Consequently, the actions of both chambers are trending favorably for BWXT to maintain production cadence on the Virginia program.

Beyond Navy programs, we are pleased with the support for DOE site funding and new nuclear technology programs, including microreactors for the strategic capabilities office, DARPA and NASA, along with TRISO fuel.

In the second quarter, NOG was awarded a $26 million competitive contract to expand and upgrade the TRISO nuclear fuel manufacturing line. This win adds to the string of events and progress for this fuel production line that is unique to BWXT. We anticipate future production options for the fabrication and delivery of TRISO fuel for DOD and NASA demonstration missions.

We are also pleased with the progress in the other government segment, the Nuclear Services Group. In May, a BWXT-led team was awarded the DOE's $13 billion Hanford Tank closure contract. This hallmark win demonstrates the company's deep nuclear operations pedigree that is a key differentiator for nuclear remediation projects. Shortly after the award, the win was protested, which will impact transition timing. In light of the protest timing, we see incremental pressure on NSG operating income guidance for the year, but nonetheless, we remain optimistic about future growth in this segment.

Beyond Hanford, the DOE opportunity pipeline remains attractive, as we have outlined in the investor presentation materials. In fact, some opportunities have accelerated, namely the recompete for the National Nuclear Security Administration's uranium hub at Y-12 and the central assembly and disassembly site for nuclear weapons at Pantex. Last week, the Department of Energy released a pre-solicitation notice for the management and operations of Pantex and Y-12, and we expect a request for proposal to follow later this year with a potential award in the fall of 2021.

And lastly for NSG, we recently divested the U.S. commercial services business, which we view to be a subscale and noncore, as we look to sharpen our focus on government nuclear remediation projects and site operations in this segment. The facility we obtained in the transaction is located adjacent to the major NOG production site in Lynchburg, Virginia and would allow for much needed shop floor capacity for anticipated future expansion into space and defense microreactors as that government-driven market matures.

As anticipated on the last call, second quarter Nuclear Power Group results were down as customer-driven COVID-19 impacts were most evident in this commercial segment.

Within Canadian commercial power, utility customers continue to navigate the COVID-19 environment to limit personnel exposure and have pushed out some refurbishment and service outage activities. However, we believe most of this impact is behind us and are well positioned for business recovery to begin in the back half of the year through the resumption of service outages and increased fuel demand. I have also tasked the business to look for incremental opportunities and to evaluate all possible cost actions at our disposal during this extended disruption. We will also consider any potential government reimbursement programs that could offset negative financial pressure from carrying a fuller set of resources as we maintain a posture that is aligned with a return to more normal future conditions.

In the medical radioisotopes business, we witnessed weaker demand for products in the second quarter as hospitals prioritized resources for COVID-19 and doctors continue to limit patient exposure. This trend is more difficult to predict as we move into the second half of the year and may continue as COVID-19 cases are on the rise for a second time in certain geographies. On the other hand, we are progressing as planned on the moly-99 product line. The radiochemical and radiopharmacy designs are complete, and facility modifications and construction are well underway.

Overall, I am well pleased with the progress the team is making as we rapidly retire costs and schedule contingency with each step towards production readiness. The mid-2022 product introduction target, which includes schedule and cost margin for any unforeseen risks is, on track. And I look forward to providing future progress updates.

Lastly, I want to emphasize my gratitude to the 6,600 BWXT employees for their professionalism in dealing with the COVID-19 work environment. We remain committed to protecting employee health and safety first while also maintaining business viability. Company protocols continue to demonstrate effectiveness in minimizing employee exposure and business interruption as evidenced by the limited number of cases within the company and the absence of workplace transmission. We remain cautiously optimistic about the trajectory of the business through the remainder of the year as we navigate through this unprecedented pandemic.

And with that, I will turn the call over to David.

Thanks, Rex, and good morning, everyone. Starting with total company results on Slide 4 of the earnings presentation. Second quarter and year-to-date revenues were up 7% and 18%, respectively, and as Rex mentioned, were driven primarily from outperformance in the Nuclear Operations Group. The strong execution this year resulted in second quarter earnings per share up 15% and year-to-date EPS of $1.50, up 33% when compared with the first half of 2019.

First half operating margins expanded 140 basis points to 17.7%. So year-to-date earnings growth was dominated by segment operations, which is depicted on Slide 5 of the presentation. Operating segments drove $0.28 of improvement and corporate cost controls resulted in $0.04 of improvement. Lastly, we drove $0.05 of EPS improvement through higher pension income and lower interest expense.

Our year-to-date cash generation has been strong, resulting in lower borrowings. And the actions we took in the first 6 months this year to restructure debt has resulted in more liquidity, a credit facility with lower rates and an extended debt maturity schedule with no debt due until 2025.

Moving to second quarter segment results on Slide 6. Nuclear Operations Group delivered another solid quarter with revenue up 14% to $410 million. We continue to see accelerated material production in the second quarter, including higher volume from the Columbia product line as well as higher volume from naval nuclear fuel and downblending. NOG operating income was $86 million, resulting in a 21% operating margin for the quarter.

The Nuclear Power Group produced $68 million of revenue in the second quarter, a 22% decrease when compared with the second quarter last year primarily driven by lower components manufacturing and commercial nuclear power and lower medical isotope volume as demand for procedures remain depressed due to COVID-19.

NPG second quarter non-GAAP operating income was $2.4 million, resulting in a non-GAAP operating margin of 3.5%. Operating income and margin were down significantly when compared to the second quarter 2019 for several reasons: First, COVID-19 impacts drove lower demand in both commercial nuclear power outages and services and medical isotopes. Second, we had an unfavorable shift in product line mix, including the absence of the China steam generator project when compared with the prior year period. And lastly, the segment was impacted by higher foreign exchange rates between the Canadian and U.S. dollar.

The Nuclear Services Group delivered operating income of $5.1 million in the second quarter, up $3.3 million versus the prior year period as a result of lower expenses associated with business development activities.

Turning now to year-to-date results on Slide 7. Nuclear Operations Group year-to-date revenues were up 26% and operating income was up 33%. Year-to-date, NOG margins were robust at 21.1%. Year-to-date nuclear power revenues are down 9% and segment margins were 7.1%, in part from the business impacts of COVID-19. And Nuclear Service Group is trending well, up about $8 million in operating income year-to-date through a combination of increased income from U.S. commercial services early in the year and lower costs from bid and proposal activities.

As Rex mentioned, we are increasing our 2020 guidance shown on Slide 8. NOG has had exceptional performance year-to-date, and so we now expect that segment revenue to be about -- up about 10% versus our prior expectation of about 9%. NOG first half performance has offset some negative pressure from COVID-19 in the commercial businesses. As we look to the balance of the year, we felt it was prudent to increase our earnings estimates. We are now providing a non-GAAP EPS guidance range of $2.80 to $2.90 to account for certain unknowns, largely in the commercial business lines, but still represents upside from our original EPS guidance and results, and a modest increase with an EPS midpoint of $2.85. All other components of guidance remain consistent with our prior outlook on the year, and we have updated the 2020 guidance bridge on Slide 9 to reflect the change driven primarily from upside in operations.

Lastly, I would like to conclude with some remarks on cash, liquidity and capital allocation. The company generated robust cash of $162 million from operating activities in the second quarter, about 2.5x that of the second quarter last year. Cash and short-term investments remained solid at $65 million at the end of the second quarter and we are well positioned with over $700 million in total liquidity.

We continue to return cash to shareholders through a combination of dividends and share repurchases and have returned nearly $57 million year-to-date. As we progress on our current capital allocation, priority to invest in the business over the near term and navigate through the COVID-19 environment, we continue to evaluate the best use of cash to generate long-term value for our shareholders as we look to a strategic allocation of capital.

We are progressing well on our capital investments for future organic growth. We have diligently spent $115 million year-to-date and remain on track to spend the expected $270 million in capital expenditures for 2020. We still anticipate elevated CapEx levels in 2021 and expect to return to near maintenance levels in 2022.

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

(Operator Instructions) The first question is from Pete Skibitski from Alembic Global.

Just on the strong first half growth at NOG. Coming into this year, did you guys kind of expect this? It's very strong growth. I know most of it is, I think, Columbia-related. I don't know if you expected more of a -- coming in or more of a kind of a level load across the year or if some materials purchases have just kind of been pulled in from 2021. I'm just wondering how surprised you are or kind of in line with expectations this phenomenon is because it obviously implies kind of a weaker relative second half of the year.

Yes. Pete, yes. Certainly, we outperformed relative to our expectations in the first half. And as we said, some of that's contract performance through operational excellence. A good amount of that is long lead materials. And so it's a bit surprise -- a bit of an upside surprise in the first half. And I would say that one of the reasons we give annual guidance instead of quarterly guidance is because the materials component of our performance can be pretty lumpy and a little bit unpredictable. And the reason for that is because a lot of that comes through suppliers, who are making, for example, forgings and alloys for the business, and they can pull in their backlog and book and bill to us. We can take percentage completion credit on that and book and bill our customer. So there is that amount of unpredictability in it and certainly a pleasant surprise in the first half. And I wouldn't expect the same kind of upside in the second half, but we should have a good second half as well.

Okay. Okay. That makes sense. I appreciate it. And then just on the NPG margin guidance of 11%. You're calling for a big ramp in the second half. What's going to kind of drive those margins higher in H2?

There's about 3 things going on there, as we discussed in the script. We've had currency pressure that's drifted back in our favor in the last quarter or so. The conversion rate got as low as $1.40; it's $1.34 today. So that's helping a little bit. So that may give us a little bit of lift. We expect and we certainly hope for a rebound in the isotope business. That's -- I mean there's still some pressure there, but that's a high gross margin business. And so that one cuts both ways with a little bit of lift. That will improve margins substantially, Pete.

And the other part of it is the Nuclear Power Group. The commercial nuclear component of the Nuclear Power Group was weak in the first half. Some of it was COVID-related because some service outages got pushed from the first half into the second half of the year. The original bias on service outages was going to be 5 in the first half and 2 in the second half, and now it's 3 in the first half and 4 in the second half, if I recall correctly. So there will be -- sorry, got that reverse. There will be more service outages in the second half than there were in the first half. And we've got good production tempo on our component manufacturing in the second half as well. So I think just about all 3 of those things conspire to give us more lift in the second half, Pete.

Okay. I appreciate all the color, guys. One last quick one. On the Hanford protest, do you have a date when that's supposed to be adjudicated by?

No. I think that's a little bit unpredictable. So we don't know. I don't expect we'll get much of anything out of that in 2020 at this point though.

The next question comes from Robert Spingarn from Crédit Suisse.

I wanted to first ask on Nuclear Operations Group, just on the back of the comments that were just made in Pete's question. But with respect to Virginia funding that Rex talked about earlier and the overall visibility that you have in the business, I'm wondering if there's anything that you can say to help us level set in terms of growth for next year. Especially, you talked about the material purchases and the trend this year, first half to second half. How do we think about NOG growth next year with potentially the second Virginia and, again, the cadence on the material purchases?

So Rob, we're certainly not going to get into forecasting '21 at this juncture. We do expect some growth there. We've got some residual growth from the accelerated Ford aircraft carrier procurement, but we'll characterize our 2021 at a later time.

All right. And then just separately, we saw some news regarding the possibility of the U.S. developing nuclear-powered icebreakers. I'm wondering if that's a real possibility, if there's anything you can offer in terms of the time line or value of such a thing.

Yes. Rob, I think it absolutely is a possibility. As you know, the White House asked the Coast Guard to go and develop plans for some nuclear-powered icebreakers. And that plan is due to the White House this month actually, literally. There are only a couple of active icebreakers in the Coast Guard fleet right now operating in the Arctic region. And so the administration has said it would like to -- would like to have a fleet of about 10. The mix between nuclear and nonnuclear, I don't think is clear at this point. They're certainly on a path to add some nonnuclear icebreakers in the next -- in the first half of this decade.

So I think it's an interesting possibility if that should transpire. We would certainly be in a position to supply those reactors to that application. But I wouldn't expect anything meaningful to happen until probably the second half of this decade, when we might see some order activity should that opportunity transpire.

The next question comes from Peter Arment from Baird.

Rex, I just want to come back to Rob's question a little bit on your growth for '21 in NOG. Just because when we think about how your backlog converts, there's quite a bit of a step-up in the backlog conversion for next year. So is there something that offsets that? Or is it just the timing of the way the revenues flow through?

Reframe that question for me, Peter. I didn't get it.

In terms of you're trying to think about the growth profile for 2021, just because we see in the backlog, there is a -- what you're planning to recognize next year in 2021 in the Q for NOG certainly shows like a big step-up. I'm just wondering if there's something that maybe offsets that growth or just it's timing related. Just trying to understand a better profile for growth in '21.

Yes. Peter, this is David. As you look at our backlog, obviously, we do provide that and we provide future runoff there. As we look at NOG, there's a couple of things going into play here. One of the things is, as Rex mentioned, there was some pull-ahead of some materials. So that will have some offset depending on what we forecasted last year or next year to this year. But Rex also said there is growth in next year. We're just, at this point in time, not defining what that growth is at this time, and we'll do that when we talk about the 2021 guidance.

Okay. That's helpful. And just -- and then just, David, just quickly on your -- kind of your cash outlook. Really strong free cash flow in 2Q. CapEx still ramps. Are you expecting this year still to be kind of around the breakeven level? Or what's your thoughts on how the timing is there?

Breakeven on the cash?

Yes. On free cash flow.

Yes. So I mean, once again, we are forecasting $270 million of CapEx for the year. And you know the other elements of what we're forecasting. So because of the high CapEx we're still forecasting, we haven't given the operating -- or the free cash flow number. But as you have forecasted, that number has not changed.

The next question comes from Michael Ciarmoli from Truist Securities.

Maybe I'll take another swipe at the NOG in second half and '21 here. I mean is it fair to say guys that the positive developments with Virginia class -- and you didn't really mention the impacts of potentially a multiyear contracting for the Columbia Class, but it sounds like the visibility for NOG improves in the second half.

And then if we think about -- I guess, Rex, you talked about the forging and other casting suppliers. Some of those guys also cater to the commercial aerospace markets. Maybe they're directing more resources towards defense now. I mean is it fair to say that your visibility and momentum as we sit here today is a lot better than where you were 3 months ago?

I don't think we've seen a material change in our visibility, Michael. It's a very long cycle and somewhat predictable business. And I think if you look at what's happening with the Congress on the second Virginia for 2021, that certainly stabilizes our outlook. And so we still expect -- and this is in the absence of the Navy shipbuilding plan, but we still expect to stay on that tempo of 2 Virginias, 1 Columbia when we get into the normal tempo on that one and the Ford's every -- on 5-year intervals. So I think our visibility is really unchanged.

Okay. What would be the implications of that -- a multicontract with the Columbia class? Will that accelerate?

Yes. I think it would be just the kind of the same effect as the advanced Ford procurement, the 2 Ford carrier buy. We would be able to order materials earlier. We'd be able to offer some potential savings to our customer on that, which would be the appeal of it. So I think it did pull forward some volume in a way that would be meaningful to the business.

Got it. Perfect. And then any additional color on where we stand with missile tubes in terms of how you guys are thinking about that market going forward? Do you think you're going to have some leverage to get the pricing and the margins you want if you stay in that? Or have you kind of definitively made a decision to pump on that business?

Yes. In terms of the missile tube, maybe 2 categories of an answer here, Michael. The -- on the repairs, that's going according to plan. We feel quite good about where that is. And we'll be starting to ship completed missile tubes pretty shortly. In terms of future opportunities, I think it just doesn't have the margin profile that we want to see in the business. And so we're not likely to pursue that in the future.

(Operator Instructions) Next question is from Ron Epstein from Bank of America.

Yes. Just a question on, when you look at the National Nuclear Security administration budget and the request for 2021, it's up relative to 2020. And if you actually look for the preceding maybe 4 years, it's gone up every year. And then the projections going out have got up a lot, too. So what kind of opportunity does that present for you guys? Because if you look at the 2021 and then as a budget relative to 2020, it is materially higher than the 2020 budget. So what's that presenting for you guys?

So Ron, I think most of that opportunity for us lies in the area of management and operations of DOE NNSA site. And so what you see there is largely increased funding in places like Los Alamos and Livermore and Sandia, Nevada and then Pantex and Y-12. And so it shows up at the labs for the most part, and the opportunity for us is a significant boost in equity income around the management of those sites for DOE. That's the most tangible, I think, opportunity for us in that budget trajectory.

Got you. Got you. And then maybe just a detail on the R&D amortization change that's going to happen in 2022, if it were to happen in 2022 as stated. What impact do you expect that to have on your cash flow then? I mean we've heard from other contractors that relatively big numbers relative to their operating cash flow. I don't know if you guys thought about it or if you're comfortable to talk about it. But if the R&D amortization were to change like it's supposed to, if the law doesn't change, what impact would that have on your cash flow?

Now when you look at our R&D, we're less than 1% of our revenue. So it's not as much of an impact for us as it would be others. But once again, when we see the change, then we'll talk about what that does to us. But if the amortization changes, then you get the same benefits that others get, ours will just be a lot smaller.

The next question comes from Matt Akers from Barclays.

Can you talk a little bit about working capital and how that could trend either in terms of absolute dollars or days or percent of revenue kind of as we go through the Columbia ramp, and if that could be -- can have a meaningful impact to free cash flow?

So anytime we build up in the business, you're going to have additional working capital to support that build of your manufacturing. You've got to remember that when we talk about our largest customer, the U.S. government, we do have terms by which we bill twice a month. And when we bill, we get paid very quickly. So there is an initial pop of working capital, but we tend to manage that. And so there is some fluctuation change there. Now when we look at -- to the future and we look at the isotope business, there will be changes in working capital there and the commercial line of businesses. But once again, our biggest impact being the government, there doesn't tend to be a long-term working capital issue.

Got it. And then I guess on tax. I think under the CARES Act, you get to defer some of the payroll taxes that -- from 2020 into 2021. Can you give us what the impact of that would be for this year?

So we've included a forecast of tax. We're -- and you've seen year-to-date where we are. So we've got everything built in. We are, from us, from a tax perspective -- from a cash perspective, we're allowed -- part of the reason why our free cash flow is up is because we've delayed payments of that until next year. So that helps us from a free cash flow perspective. Tax range, we're trending and expecting that our tax range is about the same as we forecasted for the year.

Got it. And then I guess just one more following up on the missile tube question. I mean you're getting out of that business. I think you talked about maybe repurposing some of that -- some of those facilities for other uses. Is that something you could still do? And if so, when that -- does that have any sort of positive offset versus CapEx that you might otherwise spend?

Yes. We certainly will repurpose that facility. That's at Mount Vernon, Indiana, which is the production site for some of our largest components for naval reactors. And so there's plenty of volume there. So we'll repurpose that entire facility for those large components that are coming through. And there is a bit of a benefit on CapEx, not striking, but it's incrementally positive to the business.

Operator. We'll take our last question.

The last question is a follow-up from Michael Ciarmoli from Truist Securities.

Just on the Columbia Class, Rex. If the second one is going to get ordered in '24, when should we expect you guys to start booking some revenue for the long lead materials there?

Yes. So Michael, you know that for the reactor components, those precede the ship procurement schedule by -- the shipyards by 2 years. So for the 2021 Columbia, the first one, that business began to pick up for us in 2019, as an example, and we ramped that through last year. So for the 2024 Columbia, you'll see that start to hit our business in 2022 and then ramp up through that year and pick up beyond that. And so from our investor deck, you see how those Columbias layer into our future business. And on a 7-year delivery tempo, you see some accumulation of volume over the course of time.

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

Thank you, and thank you for joining us this morning. This concludes our second quarter 2020 conference call. If you have further questions, please call me at (980) 365-4300.

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