BWX Technologies, Inc. (BWXT) on Q2 2021 Results - Earnings Call Transcript
Operator: Ladies and gentlemen, welcome to BWX Technologies Second Quarter 2021 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. Please note this event is being recorded. I would now like to turn the conference call over to our host, Mark Kratz, BWXT’s Vice President of Investor Relations. Please go ahead.
Mark Kratz: Thank you, Andrea. Good evening and welcome to BWXT’s second quarter 2021 earnings call. Joining me today are Rex Geveden, President and CEO; and David Black, Senior Vice President and CFO.
Rex Geveden: Thank you, Mark and good morning everyone. Earlier today we've reported solid second quarter results with earnings of $0.62 a share on over a $0.5 billion of revenue as we prepare for a strong second half. Although down on a comparative basis, year to year -- year-to-date earnings are where we anticipated as we crossed 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 to 20 -- 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 impact us early this year, which puts 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 five 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 60% topline 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.
David Black: Thanks Rex and good evening. I will start on slide four 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 rates. 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 contracts 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 2022. Second quarter and year-to-date EPS bridges can be found on slides five and six.
Rex Geveden: 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 two large capital initiatives in naval reactors and nuclear medicine, the company is generating very strong underlying free cash flow. These two 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, the 16th 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: We will now begin the question-and-answer session. And our first question will come from Bob Labick of CJS Securities. Please go ahead.
Bob Labick: Good afternoon. Thanks for taking my questions. Wanted to the start with a Moly-Technetium discussion from earlier. Could you elaborate on what's necessary to get the radio form of line complete? And then what other steps after that are necessary to get the generator submitted to the FDA?
Rex Geveden: Sure, thank you, Bob. Good afternoon. There are just a couple of steps left on the radio farm 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 radio farm. 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 tend to run cold chemistry runs through the radiochemistry and radiopharmacy line, that means it's unirradiated material, where -- which is fine, because the chemistry doesn't change when it's irradiated. So, we'll do cold uns, and then we'll follow that with hot runs, which will be the runs of record and assemble the data required to go with reference batches, and submit the package to the FDA.
Bob Labick: Got it. Have you decided yet if you're going with the radiated Moly from the MURR reactor, or is this still OPG? Or when does that decision get made?
Rex Geveden: So, that decision has been made, Bob, and our intention from the beginning when we on MURR as kind of a backup provider was to begin the initial ramp with MURR to 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.
Bob Labick: Okay, great. Great, thank you. 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 a jump to the 15%, 16% level. Just so we don't over extrapolate on that, how has that kind of play out over the next, I don't know, four to six quarters, because I believe as Moly does ramp up, you'll have more depreciation coming on. So, might it be -- continue to be lumpy or how should we be thinking about modeling that over the next period of time?
Rex Geveden: Yes, so we're spending in a range of a $0.25 billion 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 that you need to overcome. You've also got some startup expenses in that line. And so in the beginning, there's certainly a bit of 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 characterize it before, we expect gross margins in the 50% range, and we expect to get very significant share in the North American market. So, it's some hurdles in the beginning, but ultimately, we believe a very, very profitable program.
Bob Labick: Super. Thanks very much.
Operator: The next question comes from Robert Spingarn of Credit Suisse. Please go ahead.
Robert Spingarn: Hello, good afternoon.
Rex Geveden: Good morning Robert.
Robert Spingarn: Just a follow-up on that FDA discussion, once you're in review, what's the timeline look like either priority review or a normal review?
Rex Geveden: Yes, we're requesting a priority review, Rob and the timeline on that is nine months is the timeline that the FDA self-imposes and they're required to give you a thumbs up or a thumbs down unless there's a request for additional data from the applicant, and then an extended resets the clock on that, but we're hopeful of getting approval within that window, -- so up to nine months.
Robert Spingarn: Okay, and then 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 of kilowatt-hour potential from a competitive standpoint versus other power sources? And how should we think about that as this evolves?
Rex Geveden: Yes, so Robert, maybe change altitudes here a little bit on that question. So, we don't -- the economics for small reactors -- small modular reactors and even micro reactors are not well understood. Yes, particularly the latter one. But on 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 micro reactors. To be competitive with solar, natural gas, and other things, I believe you're going to have to get down into $2,000 or $3,000 per kilowatt range -- I'm talking about installed capacity -- the cost of installed capacity, in order to be considered for use on the grid.
Robert Spingarn: Okay. And you're confident that we can get there?
Rex Geveden: 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 and 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 the temperatures at which they run, they're uniquely suited to support certain industrial gas processes and so -- industrial heat processes. So, you can -- and it improves the business case when you can do that, obviously. So, I'm optimistic about it, but it's early days.
Robert Spingarn: 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?
Rex Geveden: 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 normally say about this, which is that in the geographic locations, where we have BWXT plants, Lynchburg, Virginia, Irwin, Tennessee, Mount Vernon, Indiana, two 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. They -- 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.
Robert Spingarn: Okay. Thanks Rex.
Rex Geveden: Thanks Rob.
Operator: The next question comes from Peter Arment of Baird. Please go ahead.
Peter Arment: Yes, good afternoon, Rex, David, Mark.
Rex Geveden: Good afternoon.
Peter Arment: 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 your kind of 70% through your kind of CapEx plans through the first half, is that level loaded in the and second half, how should we think about that?
Rex Geveden: So, I'll take the Q3 Q4, and the second half picture, maybe ask David to comment on capital and good afternoon to you to Peter. So, 2021's shaping up a lot like -- it'll look familiar to you -- it's shaping up a lot like 2019 and in that year, 2019, we had a 43/57 kind of split for operating income. And this year, it looks like we're at 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 two 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 layer it in on top of what's an already increasing production ramp. So, that's -- 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 -- 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 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, its 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 QQ 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 we -- that would move the needle for us too. We get some absorption benefit, perhaps better profit from that, and then, obviously, a four year that in the next year. So, a lot going on in second half and we're running hard and executing well at the moment and staying on our guidance.
David Black: And Peter to take the capital question, you've asked about capital for the remainder of the year, we said about 250 for the year, we said next year, which is 2022 would be less than that. Then in 2023, we would be at our maintenance capital, which is 3.5%, 4% of revenue. So, the rest of this year is still going to be strong, we had 137 in the first six months, so you're going to pretty much duplicate that. And then you've got the timing between the two is going to be roughly just as strong. And then you could always have some timing issues between this year next year. But I think over the next four quarters, you're still going to have a strong amount of capital to get to done what we need to get done.
Peter Arment: Appreciate all the details. I'll jump back in queue. Thanks.
Rex Geveden: Thanks Peter.
David Black: Thanks.
Operator: And our next question will come from Michael Ciarmoli of Truist. Please go ahead.
Michael Ciarmoli: Hey, good evening, guys. Thanks for taking the questions here.
Rex Geveden: Hey Mike.
Michael Ciarmoli: 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 call that out it's greater than 1%. So, I guess, it increased by a couple million? How do we think about that, I guess, that 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 round about $20 million to $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?
David Black: Yes, so I mean, obviously, we're trying to ramp up for the Moly 99 product line. So, our normal corporate expenses that would hang around there, $20 million, $22 million or so, that's increased some because of the additions cost. Once we get into -- late into the production timeframe for Moly 99, then this will be part of the Moly 99 product. So, that will go back to what we would assume a corporate level cost would be.
Michael Ciarmoli: 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 resolve 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?
Rex Geveden: You have to do that in two 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 radiation, radiocehm, our radio farm line, our shipping containers, and so on. And so when we move over to the Darlington 1 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.
Michael Ciarmoli: Got it. Got it. All right guys. Perfect. Thanks a lot. I'll jump back in queue.
Rex Geveden: Thanks, Michael
David Black: Thanks Michael.
Operator: The next question comes from Ron Epstein of Bank of America. Please go ahead. Ron, your line is open on our end. Did you mute your end?
Ron Epstein: Sorry, I was on mute. Guys, sorry about that. Just a couple 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?
Rex Geveden: Hey, Ron, our strategic forecast has been for two 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.
Ron Epstein: Got it. Got it. And then can you just share a little light on the thermal nuclear propulsion stuff you're doing with NASA. Where that stands? And where that could go? And would do you have a spacecraft actually, at some point you're flying with that on it?
Rex Geveden: It's my most fervent hope that we will. I'm very interested in nuclear applications for space run. 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 very interesting and 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 collaborative -- 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 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're certainly postured to support it. And on top of that, you know, 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.
Ron Epstein: Great. Thank you very much.
Rex Geveden: Thanks Ron.
David Black: Thanks Ron.
Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Mark Kratz for any closing remarks.
Mark Kratz: Thanks Andrea. This concludes today's conference call. We will be sending save the date reminders for the Investor Day on November 16th 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.
Operator: The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.
