BWX Technologies, Inc. (NYSE:BWXT) Q4 2023 Earnings Call Transcript

BWX Technologies, Inc. (NYSE:BWXT) Q4 2023 Earnings Call Transcript February 27, 2024

BWX Technologies, Inc. beats earnings expectations. Reported EPS is $1.01, expectations were $0.94. BWXT isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Ladies and gentlemen, welcome to BWX Technologies Fourth Quarter and Full Year 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. Following the company’s prepared remarks, we will conduct a question-and-answer session and instructions will be given at that time. I would now like to turn the call over to our host, Chase Jacobson with BWXT’s Vice President of Investor Relations. Please go ahead.

Chase Jacobson: Thank you, John. 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 fourth quarter and full year 2023 earnings presentation that is available on the Investors section of the BWXT website. We will also discuss certain matters that constitute forward-looking statements. These statements involve risks and uncertainties, including those described in the Safe Harbor provision found in the investor materials and the company’s SEC filings. 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 Investors section of the BWXT website.

I’d also note that we’ll be hosting an Investor Day tomorrow in New York City. The event will be stream live beginning at 8:30 AM Eastern and you can register on the Investor Relations website at investors.bwxt.com. Because of the Investor Day, we will be focusing our comments on today’s call to our fourth quarter and full year results and our 2024 guidance. I would now like to turn the call over to Rex.

Rex Geveden: Thank you, Chase. Good evening to everyone and I’m looking forward to seeing many of you in-person tomorrow at our Investor Day. This afternoon, we reported good fourth quarter results. It was a strong finish to a record year for BWXT with all guidance metrics at or above the targets we originally set. We reported a very strong 16% organic revenue growth in the fourth quarter, with double-digit growth in both segments. This brought our 2023 revenue to $2.5 billion, up 12% compared to last year with growth across all major business lines. Adjusted EBITDA was up 13% in the quarter and up 7% for the year. This includes double-digit EBITDA growth in our government operations segment and a turn to positive EBITDA at BWXT Medical.

This led to fourth quarter adjusted earnings per share of $1.01, up 8% compared to last year, and full year adjusted earnings per share of $3.02, down slightly from last year, as operating earnings growth was more than offset by non-operating items such as lower pension income reported in other income and higher interest expense. As we expected, free cash flow for the year was a robust $212 million, a fact of which we are proud as we have increased focus and improved processes around working capital management. Our efforts here may take time to fully pay off, but we are making good progress and will continue to drive this priority through the business, underpinning our good financial performance and not always as visible, we are pleased to have achieved some important operational goals in the quarter and throughout the year.

First, I want to highlight workforce growth. Over the past year, we reengineered and invested in our talent acquisition process, leading to a remarkable 10% growth in total headcount, in line with the aggressive goal we established at the beginning of the year and roughly matching the strong revenue numbers we reported. Considering the growth opportunities we see ahead for BWXT, we view talent acquisition and management as foundational components of our operating strategy. Looking at our business units and our special materials franchise within government operations, we recently announced a $122 million two-year extension of our down blending contract with the Tennessee Valley Authority to support the National Nuclear Security Administration’s defense program objectives.

This has been an enduring program for BWXT and it will now run through mid-2027. In the fourth quarter, we were also awarded a $300 million contract for the manufacturing of naval nuclear fuel through mid-2025. This is the first step in finalizing the other elements of our next multi-year pricing agreement for naval propulsion reactors and components, which we expect to complete once all assumptions on the exact product mix and rates are confirmed by BWXT and our naval reactors customer. We continue to expand our special materials portfolio outside of naval fuel and down blending as well, about which you will hear more at our Investor Day tomorrow. This includes strategic programs such as a five-year contract for uranium conversion and purification for the NNSA and a contract to recycle scrap material from the Y-12 National Security Complex into high assay, low-enriched uranium or HALEU, which may serve as feedstock material for the DOE’s advanced reactor development program.

These are highly technical programs where BWXT has a unique competitive advantage given its licensing and experiential qualifications, further strengthening our position in the nuclear industry and driving future growth. Despite onboarding efficiencies and higher labor costs that we experienced throughout the year, our government operations team performed quite well. Notably, we completed the missile tubes program on a strong footing despite some challenges along the way. In the fourth quarter, we finished better than expected delivering a positive final EAC related to that close out, in addition to a final settlement with our customer to account for the previous cost growth that was driven by out of scope changes and absorbed by BWXT over the past couple of years.

Finally, we continue to see the benefits from our intense focus on operational excellence initiatives throughout the organization, including remarkable gains in operational equipment effectiveness and the use of digital tools and supply chain management to drive solid underlying margin performance. Turning to our Commercial Operations segment, growth prospects remain strong, in our commercial nuclear power group, we continue to see robust demand for our market leading manufacturing, engineering and design and field services capabilities. Utilities around the world are increasingly turning to nuclear for their electricity generation needs. As many of you have seen, nuclear was put on the global stage at the COP28 Conference at the end of December, with more than 20 countries signing a declaration to triple nuclear energy by 2050.

At the same time, BWXT signed the net zero nuclear industry pledge along with many other industry participants calling for the same goal. We expect this increased focus on nuclear energy and support from the global industrial base will translate into longer-term demand for BWXT as countries around the world look to add new grid scale nuclear capacity with small modular reactors and large reactors. In the larger grid scale, nuclear reactor market in which we play, at the end of January, Ontario Power Generation announced that it will proceed with a long-term life extension of its Pickering site units five through eight as the province remains committed to meeting growing electricity demand with clean energy and put significant investment into its can do nuclear fleet.

This is a significant opportunity for BWXT that will likely provide another ten years or more of visibility into our existing backlog of life extension work in the region that started almost a decade ago. We also continue to see growing demand in the SMR market, where we are well positioned as a merchant supplier, which we will talk more about at Investor Day tomorrow. At BWXT Medical, growth in our base diagnostic and contract drug manufacturing business remained strong in the fourth quarter and throughout last year. Full year revenue in that business was just over $70 million, which is a strong 25% growth compared to 2022. And that is even before sales kick in from our new tech-99 product line. As we have discussed previously, we continue to see healthy demand for our diagnostic isotopes and expect similar growth in 2024 that will be complemented by increasing sales of therapeutic isotopes such as actinium and lutetium, as our customers work to bring novel cancer treating therapeutic drugs to the market.

We continue to work with the FDA through the approval process for our tech-99 generator product and continue to expect commercialization in 2024. So overall, we had a great 2023 with strong financial performance. We achieved key operational and business development objectives and our end markets continued to gain momentum. This positions us well for 2024. Our guidance calls for mid-single-digit revenue and EBITDA growth and improving free cash flow performance. Our focus remains on innovation and operational excellence as we work to provide our customers with nuclear technologies to solve their most important challenges in the global security, space, clean energy and medical markets. I look forward to articulating our strategy and outlook at Investor Day tomorrow.

And with that I will turn it over to Robb to provide more detail on our fourth quarter and full year results and walk through the details of our 2024 guidance.

Robb LeMasters: Thanks, Rex, and good evening, everyone. I’ll start with some total company financial highlights on Slide 4 of the earnings presentation. Fourth quarter revenue was a robust $725 million, up 16% organically on a consolidated basis and up about 16% in each segment as well. Adjusted EBITDA was up 13% to $148 million in line with our expectations given solid performance from both business segments. As we had discussed throughout the year, our fourth quarter EBITDA benefited from the closeout and final recovery on our past missile tube contract. At the segment level, our adjusted EBITDA expanded modestly compared to last year, largely driven by improved performance in medical, which, as Rex mentioned, is now in a positive EBITDA position.

However, our consolidated adjusted EBITDA margin in the quarter was slightly lower compared to last year. This was mainly due to higher year-over-year corporate costs. I will remind you that corporate costs in 2022 was unusually low, because of retirements, healthcare underruns and captive insurance releases. 2023 also had a step up in corporate costs related to digital systems and human capital investments in HR and finance to posture for the exciting growth ahead. Adjusted earnings per share was $1.01, up 8% from $0.93 last year. As you can see in the EPS bridge on Slide 5 of our presentation, the majority of our EPS growth came from operations, but was also helped by a lower effective tax rate and a modest FX currency benefit in the quarter, which was partially offset by higher interest expense and lower pension income as was the case throughout the year.

Compared to our implied fourth quarter guidance, one-time tax and FX currency benefits contributed $0.03 to our final EPS result. Our fourth quarter effective tax rate was 22.5% due to the timing of discrete items around state taxes, including prior year true ups. Without those true ups, our tax rate would have been about 23% in the quarter. Our full year effective tax rate was 23.2% and we expect a tax rate of approximately 23.5% in 2024. Full year 2023 adjusted EPS was $3.02, down from $3.13 in 2022. The EPS bridge on Slide 6 of our earnings presentation shows a similar trend to that of our fourth quarter results. Operationally, 2023 adjusted EBITDA was up 7% year-over-year. Although, this was offset by the lower pension income and higher interest expense that I previously mentioned.

Free cash flow was certainly a bright spot for us in the quarter and we believe that we have now turned the corner and we’ll see an upward climb in free cash flow. Free cash flow was $171 million in the quarter and $212 million for the year, up significantly from 2022. This was driven by strong working capital management and some modest positive collections late in the quarter that ultimately led to a solid beat versus our initial target of about $200 million that we provided in early 2023, which was the first time we had guided free cash flow in our history. Our capital expenditures were $150 million for the full year. This was consistent with maintenance CapEx requirements and select investments to support growth in our microreactor programs.

We will provide a deeper dive into our longer-term expected free cash flow growth prospects at Investor Day tomorrow. Moving now to the segment results on Slide 7. In Government Operations fourth quarter revenue was up 16% to $602 million, driven by growth in nearly all of our business lines. Adjusted EBITDA in the segment was $131 million, up 13% from last year. Government Operations EBITDA margin was 21.8%, down slightly from 22.4% in the fourth quarter of 2022. First, I will note that while we recognize the missile tube recovery in the fourth quarter of 2023, last year’s fourth quarter also benefited from strong EAC performance. The elements that contributed to the modest year-over-year margin decline were: One, outsized growth in our cost reimbursable microreactor projects and in our new special materials programs, two, we continued to experience labor inefficiencies related to the rapid growth of our workforce and three, on a relative basis, we had a modestly lower contribution from technical services income.

In Commercial Operations revenue was up 16%, driven by increases in commercial nuclear field services and nearly 40% medical growth. That was partially offset by lower commercial nuclear component volume, mainly because of timing. Fourth quarter Commercial Operations adjusted EBITDA was $21.3 million compared to $13.6 million last year. The increase was largely driven by improved profitability in medical. Commercial operations EBITDA margin was 12.9% in 2023, which we anticipate will trend toward the mid-teens throughout 2024 as commercial nuclear field services mix is less of a headwind and the benefits of higher margin medical sales contribute more to the segment’s overall margin profile. Turning now to our 2024 guidance on Slide 8 and 9, which is generally in line with the preliminary outlook we provided last quarter.

On the top line, we expect mid-single digit revenue growth to over $2.6 billion, with growth in Commercial Operations outpacing that of Government Operations. Government Operations growth is expected to be in the low to mid-single digits as increasing production of Columbia class submarines, growth in microreactors and higher special materials revenue is offset by the lull in aircraft carrier work due to the cadence of the navy’s ship ordering schedule. Commercial Operations revenue is expected to grow in the high single to low double digits with solid growth in commercial nuclear complemented by accelerating growth in medical. We also expect adjusted EBITDA to grow mid-single digits to approximately $500 million and an EBITDA margin of about 19% in line with the 2023 level.

The impacts of program mix and the absence of any recoveries we experienced in 2023 in the non-naval components business will lead to slightly compressed Government Operations margin on a year-over-year basis. This will be offset by higher Commercial Operations margins. We project this will lead to adjusted earnings per share of $3.05 to $3.20. Included in this forecast is a D&A step up of approximately $10 million, slightly lower other income and a tax rate of approximately 23.5%. At this juncture, we expect earnings per share to be slightly weighted toward the back half of the year. On a quarterly basis, we would expect relatively consistent EPS performance in the first and second quarters and building thereafter. Lastly, we expect free cash flow growth to be in the range of $225 million to $250 million reflecting about 80% free cash flow conversion at the midpoint.

This will be driven by further working capital improvement and disciplined capital expenditure investment. We expect CapEx to be about flat to slightly lower compared to 2023 as we manage our maintenance CapEx at around 4% of sales, with select near-term and visible growth investments pushing that to near the level we saw in 2023. As I mentioned, we believe we have turned the corner and are now at a point where we will see steady increases in free cash flow growth ahead. To sum it up, we had another solid quarter to end a strong year and expect continued growth in 2024. Demand trends across our global security, clean energy and medical end markets remain strong and our unique capabilities and infrastructure position us well to benefit from these trends.

We are committed to driving more predictable earnings and free cash flow conversion with a balanced capital allocation approach that we believe will continue to drive meaningful shareholder value. I look forward to seeing many of you and providing a more in depth perspective on our strategy, growth prospects and financial targets at our Investor Day tomorrow.

Chase Jacobson: Thanks, Robb. Before I turn it over to John to open the line for Q&A, I would kindly ask that you please limit your questions to our fourth quarter and full year results and our 2024 guidance, as we’ll be providing more in depth commentary on our outlook and strategy tomorrow. Ready to open it up for Q&A, John.

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Q&A Session

Operator: Thanks, Chase. [Operator Instructions] Your first question comes from the line of Bob Labick from CJS Securities. Please go ahead.

Bob Labick: Good afternoon. Thank you for taking our questions. We’re looking forward to seeing you tomorrow as well.

Rex Geveden: Great. Thank you, Bob for resume.

Bob Labick: Sure. Yes. So to stick with your rules, I’ll just ask about next year. You obviously had very strong growth in BWX Medical this year and getting to EBITDA breakeven or better. And I think you were forecasting equally strong or very strong growth in medical next year as well. Can you kind of dig down a little and talk about which isotopes are driving that or which like related drugs are driving that? And how much, if any, moly, do you have baked into your medical growth for next year?

Rex Geveden: Yes, I’ll take that one, Bob. We – really all the product lines are growing within medical. The diagnostic side of the portfolio, where we have germanium-strontium is growing very strongly. Of course, we’re in the actinium market. I think it’s correct to say we’re the only commercial supplier of actinium in the market today. And so that’s been a good product for us. And TheraSphere, which is a contract manufactured product for Boston Scientific continues to kind of gallop along and compound at a 10% rate, so really, all the products across the portfolio growing quite nicely. And I think we’ve said this before, we didn’t forecast any tech-99 in the 2024 year. Maybe flip it over to Robb for any additional comments?

Robb LeMasters: No, I think that’s right. We don’t require any meaningful contribution for tech to hit the forecast that we laid out for you earlier today.

Bob Labick: Okay, super. Great. And then I guess just last one for me. I’ll jump back in queue. How are you treating the Hanford Tank project in guidance? And what are the other kind of big wild cards that could impact the year given almost everything else is pretty much locked in and strong with your strong visibility.

Robb LeMasters: Yes, I think that’s right. We do have actually the year, if you note we gave a range of $0.15 this year, whereas in prior years we’ve given as much as $0.20. I think we have increased fidelity just on our overall forecasting process. So I note that. I would also say you’re right. There are not a lot of wild cards that we have this year. We have a pretty predictable set of businesses. We’re doing the same thing, Bob in our guidance, where we essentially predict a set of items that we probability and time adjust, one of those would be Hanford. We have included something in there and probability adjusted, but it’s really not meaningful. And if just like last year, right, certain items fell out. Certain items came in.

And so that’s not something, again like tech that we’re sort of biting our nails about. If that comes in, I’m sure something else will fall out. So we’re kind of have a lot of sticks in the fire and we have multiple ways to get there.

Bob Labick: Super. Thanks so much. Looking forward to seeing you tomorrow.

Rex Geveden: Yes, see you tomorrow.

Operator: Your next question comes from the line of Peter Arment from Baird.

Peter Arment: Yes. Good afternoon, Rex, Robb, Chase. Hey, Rex, thanks for your color on the Pickering commentary. Is that – when they do the units five through eight, is that something where we actually start to see backlog this year associated with that? Thanks.

Rex Geveden: Yes, I’d say modest amount of backlog for that this year. As you know from our business characteristics, Peter, we tend to be involved in – both on the Navy side and the commercial side, we tend to be involved in some of the advanced procurement or long lead items. So we expect to make, for example, steam generators for those Pickering reactors, and there are 48 in total for those four. And so, yes, I think we’d start to see a little bit of a ramp on that this year.

Peter Arment: That’s great. That’s great. And then just – Robb, just quickly, just so I understand on the medical, it’s great to see that it’s turned profitable. So I assumed that because there’s no tech-99 kind of baked in this year that we wouldn’t see any of that depreciation cost kind of kicking in that you had originally talked about way back.

Robb LeMasters: That’s right. What we talked about, even on the last call or the call before, was the fact that the depreciation comes on, first of all, in a couple of phases. It’s not all in one block. So it kind of phases in, in terms of different assets getting deployed. And then the assets getting deployed is really mostly based on commercial activity. So again, if we’re just running samples for ourselves or getting into the market and we’re not commercial yet, we don’t turn on that depreciation. So to the extent that we’re successful and get in the market, say, in late 2024, yes, that would come with a little depreciation and frankly, offset that sale. So that’s why it’s not meaningful for ultimately hitting, say, our EPS target, because either you get the sales or you get the D&A at the same time. So we’ll ramp up slowly from a profit standpoint.

Peter Arment: I appreciate all the color. I look forward to tomorrow. Thanks, guys.

Rex Geveden: Yes. Thanks, Peter.

Robb LeMasters: Yes. Thanks.

Operator: Your next question comes from the line of Scott Deuschle from Deutsche Bank. Please go ahead.

Scott Deuschle: Hey, good evening.

Rex Geveden: Hey, Scott.

Robb LeMasters: Hey, Scott.