BWX Technologies, Inc. Price & Performance (BWXT)

Ladies and gentlemen, welcome to BWX Technologies' Fourth Quarter and Full Year twenty twenty four 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, BWXT's Vice President of Investor Relations. Please go ahead. Thank you, Gail.

Evening and welcome to today's call. Joining me are Rex Javid, President and CEO and Rob Lemasters, Executive Vice President and CFO. On today's call, we will reference the fourth quarter twenty twenty four 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 for provisions found in the investor materials and the company's SEC filings. 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 BWX website I would now like to turn the call over to Rex.

Thank you, Chase, and good evening to all of you. This afternoon, we reported better than expected fourth quarter earnings capping off another strong year for BWXT We generated record revenue, adjusted EBITDA, adjusted earnings per share and free cash flow all meeting or exceeding the full year guidance metrics we set last year Demand in our end markets is unprecedented. Major players in national security, clean energy and medical end markets view nuclear technologies as novel solutions for their mission needs. BWXT is well positioned to benefit from this accelerating demand which drove our extremely strong fourth quarter and full year bookings We ended 2024 with a backlog of $4,800,000,000 up 21% year year from large contract awards in both of our operating segments In addition to the focus on growth, we are obsessive about improving the business in all its we call this the BWXT battle plan. It has five elements that intertwine with one another. Which are sustain and grow the core, invest strategically expand into adjacent markets drive performance and deliver the mission. The battle plan is our operating system and I use it to communicate our purpose and to drive the focus on execution every day.

With that backdrop, let me take a few minutes to highlight how we are executing under this framework and how this is positioning BWXT for continued success in 2025 and beyond.

First, we are investing strategically, organically and inorganically across our business lines These investments create capacity, expand our capabilities with new products and services and importantly increase customer confidence in choosing BWXT to support their most critical needs. In government operations, we recently completed the expansion of the BWXT Innovation Campus the home of our advanced nuclear business line. This facility located adjacent to our naval reactor manufacturing home to over 300 employees and has state of the art capabilities for the design and manufacturing of micro reactors and advanced nuclear fuels for defense and commercial applications.

We have spoken extensively about the major While the largest are behind us, we continue to make these strategic in our infrastructure to meet the current and future demands of our naval reactors customer. This includes maintaining a steady production rate of Virginia class reactor cores increasing the cadence of Columbia class submarine production as we enter a serial ordering pattern over the next decade and capacity expansion for August. Further, in the first week of the New Year, we completed the acquisition of AOT, expanding our Special Materials business line into the depleted uranium assay with exciting new capabilities in R and D prototyping testing and production for major customers including the Department of Energy and Department of Defense. We are already uncovering interesting opportunities at AOT that would drive growth beyond the acquisition business case. In commercial operations, it is a similar story. Demand signals and commercial nuclear power, and medical markets are strong and visible and we are investing in plant capacity and workforce to address that demand. The ongoing expansion of the Cambridge manufacturing plant just outside of Toronto positions BWXT to pursue more projects for large heavy nuclear Beyond this investment, we are assessing options for additional capacity North America as demand from utilities and nontraditional high-tech buyers for green baseload power generation precipitates In early January, to complement and enhance our commercial nuclear power business, we announced an agreement to acquire Conetrix Incorporated, which we expect to close in mid-twenty twenty five.

Conetrix offers a comprehensive specialty service portfolio to commercial nuclear players globally covering key stages of the project lifecycle that we have covered in from reactor design and site licensing on the front end to testing, analysis and materials management throughout the life of a plant through to decommissioning support at the end of a plant's life.

We have received unequivocally positive feedback on the announcement from our customers whom we will be able to serve more effectively with a larger portfolio of services. Kinetrix also has an interesting play in nuclear medicine isotope radiation services and stable isotope enrichment for the production of the most important oncology radiotherapeutic on the market Lutetium-one 77. This complements BWXT's capabilities and isotope production system and processing and provides us exposure to the largest and most advanced pipeline of drugs in nuclear medicine. Our investments extend beyond operations. Over the last year, we have taken on a full digital transformation initiative better collaboration tools, ERP consolidation, elimination of redundant on premise IT systems, and vastly improved financial integration tools enabling faster and better decisions business decisions. Overall, our investments to enhance capabilities drive growth and improve efficiency are paying off.

We remain committed to an active and disciplined capital deployment strategy. How does all this translated to our results and future growth? As I noted in 2024, we achieved record financial performance.

Adjusted EBITDA grew 6% adjusted earnings per share were up 10% and free cash flow was nearly 20% higher driven by strong operations and supported by many of the financial initiatives Rob and his team have implemented. In government operations, despite multiple severe weather disruptions and a tough year over year comparison, we delivered revenue and adjusted EBITDA growth in line with our expectations. We continue to hire and drive productivity through lean manufacturing processes and increased use of technology. Mitigating the impact of higher labor costs and a business mix shift toward less mature therefore lower margin programs. During the year, we delivered multiple critical components to naval reactors, and drove progress in our microreactor and special materials programs such as Pele, Draco and U Metal processing. In the fourth quarter, we booked our next pricing agreement for naval propulsion reactors and components. Through the year, we also secured several long term technical services contracts In November, we took responsibility for management and operation at the Pantec site and just today, we assumed full responsibility for environmental restoration at the Hanford Tank site after successful four month transition period Both contracts boost the bottom line and provide added earnings visibility over a multi year Further in September, we announced that BWXT was the sole awardee of a contract to study the build out of a national security enrichment plant a vital strategic capability that The U. S. Does not presently possess This could blossom into a new and exciting long term opportunity for BWX.

Which which would enhance the security and energy independence of The United States. These wins with our existing book of business provide foundation for continued growth in government operations in 2025. In commercial operations, we delivered double digit revenue and adjusted EBITDA growth in 2024 driven by strong growth in commercial power in the commercial power and medical end markets, commercial power revenue grew by more than 10% driven by steam generator deliveries and services to the Bruce Power Life Extension project which will persist through the early 2030s we are entering the final phases of the Darlington refurbishment, one of the highest performing nuclear projects in the world, over the past decade We are particularly proud of this project as it serves as a proof point against the misapprehension that all nuclear projects experience cost and schedule overruns. The positive precedent set by these projects led OPG to commit to extending the life of its Pickering B reactors for which BWXT has been selected to provide 48 steam generators. Finally, earlier in the year, we were awarded a contract to manufacture the reactor pressure vessel for the BWRX 300 small modular reactor project at the Darlington site and we continue to anticipate multiple follow on orders in Canada USA and Europe.

Having booked the RPV and a considerable portion of the Pickering contract in the fourth quarter, commercial operations enters 2025 with a record backlog of nine thirty million up 19% supporting our expectation for another year of Looking ahead, the opportunity set in commercial power is rich to say the least. In Canada, Ontario Power Generation recently announced that it is assessing adding up to 10 gigawatts of new nuclear capacity at Port Hope. Bruce Power is evaluating technologies to add up to five gigawatts of new capacity and in The United States, the Tennessee Valley Authority along with a group of industry partners in announced that it is seeking DOE support to build SMRs at the Clinch Riverside BWXT Medical continued its strong growth trajectory Revenue grew 23% in 2024 and EBITDA turned more meaningfully positive. This was driven by CDMO and pet diagnostic business lines and increased sales of therapeutic isotopes. For 25 clinical trials. We signed our second Tech99 commercial agreement with a key distributor during fourth quarter, further affirming industry appetite for our brand and our product and keeping us on track for contracted volumes in 2026. Overall, we expect 2025 medical revenue to grow at a similar rate to 2024.

In conclusion, we are executing on our strategy and delivering Demand for nuclear solutions is strong and we are driving performance through the organization to maintain our competitive edge improve financial performance, serve our customers and build on the momentum we have generated Thanks, Rex, and good evening, everyone. I'll start with some total company financial highlights on Slide four of the earnings presentation.

Fourth quarter revenue was $746,000,000 up 3% organically with growth in commercial operations offsetting a modest decline in government operations. Adjusted EBITDA was $130,000,000 compared to $148,000,000 in the same quarter last year. As growth in commercial operations was offset by lower government operations and timing of quarterly corporate expense accruals. Corporate EBITDA expense in the quarter was higher.

Primarily based on the timing of healthcare, and other expenses following several quarters of below average expenditures. On an annual basis, corporate EBITDA expense was $16,900,000 slightly lower compared to 2023. In 2025, we expect another slight decline in Adjusted earnings per share were $0.92 compared to $1.01 last year due to the operating items previously This was partially offset by slightly higher pension income and lower interest expense, as well as the lower tax rate.

Last quarter, I have plotted the efforts of our tax team has been hard at work finding ways to improve our tax rate.

After a thorough evaluation and infield analysis of certain expense activities we determine that many tasks that we engage in are considered qualified research expenditures under IRS definition. This effort will release meaningful cash tax savings as we amend returns and recover money for past tax years. This will permanently reduce our tax rate by over 100 basis points per year compared to historical levels. As such, we recognized the $6,000,000 benefit to our tax provision in the fourth quarter on both a GAAP and non GAAP basis related to this favorable tax planning change which accounts for the accruals for fourth quarter as well as what we should have been accruing over the course of the year.

This led to an adjusted effective tax rate of 18.9% in the quarter and 21.7% for the full year. A favorable outcome compared to our guidance of approximately 23%. In addition to the benefit related to the 2024 tax provision, we also recorded a roughly $7,000,000 benefit to GAAP earnings only.

For refunds we expect for the 2020 through 2023 tax years. Said differently, we have excluded the positive benefit from prior years from our non GAAP results as we deemed it to be non recurring.

As we look to 2025, we expect our tax to be approximately 22%, a notable decrease from the 23% to 24% we observed in twenty twenty two twenty twenty three, however, slightly higher than twenty twenty four's non GAAP tax rate 21.7%. This slight increase is due to a geographical earnings mix shift toward Canada, a higher tax jurisdiction compared to The U. S. Given our expectation for outsized organic growth in Canadian commercial nuclear power and medical operations.

Free cash flow in the quarter was $224,000,000 bringing full year free cash flow to $255,000,000 up 20% year over year. During the quarter, our intense focus on working capital management and timing of cash receipts associated with strong bookings allowed us to exceed the high end of our original free cash flow guidance.

Our capital expenditures in 2024 were 5.7% of sales, $154,000,000 in line with our expectation. In 2025, we anticipate capital expenditures to remain in the range of 5% to 6% of sales we continue to see our maintenance CapEx at 4% and anticipate spending 1% to 2% on select growth initiatives. Major capital projects in 2024 will include the previously announced expansion of our Cambridge commercial nuclear manufacturing plant as well as incremental capital investment into our U. S. Facilities including the support of increasing production as Rex mentioned.

I would note several similar to several other defense peers, while heightened investment in certain naval programs runs through our CapEx, it is often recovered through operating cash flow or working capital releases. Despite likely higher cash of operating cash flow leading to free cash flow growth We anticipate $265,000,000 to $285,000,000 of free cash flow as we continue to progress toward our medium term target of 90% free cash flow conversion. Moving to the segment results on Slide seven. In government operations, fourth quarter revenue was down slightly $295,000,000 Adjusted EBITDA was $117,000,000 leading to adjusted EBITDA margin of 19.6%. Down from last year, mainly due to a tough comparison and shifting mix toward less mature programs. On an annual basis, government operations revenue was up 8% and adjusted EBITDA was up 3%, yielding adjusted EBITDA margin [indiscernible] slightly higher than 20%. Our underlying performance in our largest facilities as measured by efficiency and utilization remained solid. However, our year over year margin comparisons continue to be impacted by a mix shift toward cost reimbursable micro reactor projects and contracts that are earlier in their lifecycle providing less opportunity to recognize cost savings.

We anticipate that this dynamic will remain with us through 2025 and therefore we expect GEO segment margin to be relatively flat compared to 2024. Turning to commercial operations, revenue was hundred and $52,000,000 up 23% year over year with double digit growth in commercial power and medical. Adjusted EBITDA in the segment was $23,700,000 up 11% as good execution and improving medical profitability was offset by mix with less outage work in the quarter and growth investment. Turning now to our 2025 guidance on Slide eight, and nine of the earnings presentation. On an organic basis, our preliminary outlook we provided last quarter. However, we have all included a contribution from the Connectrix acquisition which we are still targeting to close in mid-twenty twenty five. On the top line, we expect revenue of approximately $3,000,000,000 In government operations, we expect mid single digit growth consisting of low single digit organic growth plus a contribution from the acquisition of AOT. Organic growth will be led by our Special Materials business with flatter revenue in micro reactors and naval propulsion as we enter our second year of the forward carrier lull. In commercial operations, we expect significantly higher revenue with mid teens organic growth plus a contribution from the pending acquisition of Kinetrix.

As a reminder, we expect Kinetics to generate revenue of slightly more than $300,000,000 annually in 2025 with approximately half of a year included in our guidance Given an expected midyear closing, This continues the mid to high single digit organic growth trend Kinetrix has exhibited the past couple of years as an independent company. Additionally, I will note that our commercial op of approximately 5% due to the strength of the U. S. Dollar versus the Canadian dollar.

For adjusted EBITDA, we are guiding $550,000,000 to $570,000,000 inclusive of solid organic growth plus the incremental contribution from AOT Kinetics, As mentioned in government operations, we expect EBITDA to grow at a similar rate to revenue.

And in commercial operations, we anticipate EBITDA margin to be in the 14% to 15% range compared to 14.1% in 2024 as the increase of higher margin medical sales will be somewhat offset by the large contribution of acquired commercial power rent. Moving to non GAAP EPS, we are introducing 2025 guidance of $3.4 to $3.55 As you can see in the detailed guidance bridge on slide nine of our presentation, we expect higher EBITDA to be largely offset by non operating items.

Including a roughly $0.08 headwind from lower pension and other income and $0.08 to $0.1 from higher interest expense related to the funding of the AOT and Kinetrix acquisition.

I will also note that beginning in the first quarter of twenty twenty five, our non GAAP EPS will exclude acquisition related amortization for these acquisitions. Looking at the quarterly cadence of earnings, we we expect first quarter EPS to be flat to up modestly year over year. Beyond that, we anticipate the remainder of the full year earnings per share to be evenly distributed across the second third and fourth quarters.

This could be moderately affected by when the Connectrix acquisition closes and the resulting impact on non operating items such as interest expense and pension income in the other net on the P and L. To sum it up, we had a solid finish to a record year. BWXT has a strong competitive position in growing markets supported by our unique infrastructure, capabilities and a robust workforce. We are focused on execution and have a strategy in place that we believe will allow us to effectively and efficiently capitalize on market opportunities and therefore continue to drive shareholder value.

And with that, we look forward to taking your questions.

The question Okay.

So your first question comes from the line of Scott Dushell with Deutsche Bank. Please go ahead.

Rob, can you offer an update on where medical profitability was for the full year 2024 and how we should be thinking about the incremental EBITDA margins in medical from here?

Yes.

So I'll remind you that in 2023, BWX sort of slightly turned positive and then built upon that in 2024 I think as far as we want to go is that we're really seeing the margins in that particular part of the commercial at or slightly above where the overall segment is. So that was accretive to margin. And I think that margin upside we'll see as ultimately the tech business continues to grow and the revenue grows. So right now, it's a really nice contributor. To both EBITDA and revenue. Okay. And just to clarify, it grew about 2524% on your expecting the similar amount of growth in 2025 or is that not correct? That's exactly right. We actually in the transcript BWX specifically said it was 23% and we saw the same rate looking at 2025.

Okay. And then Rex, if Ghee Hitachi were to get some SMR orders here from U. S. Customers like Tennessee Valley Authority, Just curious if would you be able to service that manufacturing work out of your facilities in Canada? Or do you think you'd be required to build out capacity for U. S. Customers in The United States particularly given some of this tariff risk overhang?

I mean, sort of setting the tariff risk aside for a moment, Scott, yes, we would be able to service that out of our Cambridge plant. In fact, that's what that capacity expansion is about. It's about the ability to to build all the Pickering steam generators concurrent with reactor pressure vessels and other things that we have moving through that plant. And so we designed it so that we have an output capacity of about three reactor pressure vessels a year So I think all things being equal, we would want to fill that plant up before we would move to expand in The U. S. So we have plenty of capacity for say a four pack at Clinch River completing the Darlington Reactors and maybe some opportunities in Poland. Okay. And then how are you thinking about that tariff for us I guess, both on the commercial nuclear side and on the medical side?

Yes. So I'll start this and maybe flip it over to Rob.

It's obviously concerning to us most particularly in our medical business because we export a good amount of products into The U. S. Of course, that that import tariff is paid BWX the by the customer, but it might put some might splash in pricing pressure back onto our medical products. The commercial power business is really kind of self contained in Canada. Obviously, the labor is there and a lot of the components are manufactured there and sold there. So there's not as much effect there, but but it is a concerning thing and we're evaluating it and keeping a close eye on it.

That I'll flip it over to Rob. Yes.

Maybe to put some we've been analyzing that. Is this day by day we're monitoring and there's some headlines even even earlier today So we're just assuming that this will be a headwind and of course Canada is likely to respond as well The way we're looking at it, Scott, is that about 75% of our earnings comes from the government side of the business, as you know, and 25% for for commercial.

On the 75%, that's really a self sustaining in market business, right? That's how you build a defense business is to be. Able to source everything domestically to the extent you can or at least know that you can get supplies from a couple of different areas. So that puts us in a pretty good position where our supply chain and ultimately where our workforce and sales are are all kind of within The U. S. Then looking at the 25%, I think Rex is exactly right that just dividing that into the two different parts, the power business, which again is majority of that businesses revenue and profits today is also, I guess, one could say self sustaining commercial power in Canada was always derived to be sustaining. I actually think it could be interesting to just look at the competitive dynamics where ultimately the utilities themselves want to even more source in Canada. So I think that puts us in a pretty good position Within the power, we've evaluated the supply chain for for some of those products and occasionally BWX get stuff from overseas or from The U. S, but it's a minority. And frankly BWX can replace it.

So don't see a lot of pressure there. Rex talked about the medical business. We are concerned about the medical business because mostly that's a manufacturer in Canada and sell into The U. S. And sometimes into Europe. And the way we're thinking about it is that if this goes through, we need to contact our our customers and really make a strong case that the supply supply chain really only has a couple of players. We're standing up capacity. We need to work with our customers and this is not going to be some short term thing. So we're going to try to evaluate whether or not there's ways we or our customers can work together There's also a factor in the medical business, which is this is a pretty high margin business for some of our customers. So the COGS and a relatively small high gross margin. So that's where you'd want to if you were a supplier into an industry you'd want to sort of have that kind of dynamic where even if we have to pass along our price onto their COGS, it's not going to hurt their profitability a whole lot. So we'll work with our customers.

We're looking to to be long term players with them. We hope they're viewing the same way. And if we have to pass along price, we will. Thank you.

We kindly ask with each analyst limit your question to one question and one follow-up only so that we can ensure that everyone gets a chance to ask and receive a response. Thank you very much for your understanding.

Your next question comes from the line of Thomas Merrick with Janney Montgomery Scott. Please go ahead.

Good afternoon. Thanks for the time. Rex, you mentioned expanding into adjacencies being a part of the battle plan. I'm curious how you think about the possibility of expansion into hexafluoride conversion whether that's organically or through acquisitions?

So BWX have the capability internal to BWXT to do conversion and deconversion. And so BWX it would require some additional plant capacity capacity and a new process line. So it's not the sort of thing I think we would think about acquiring. It's something we would we would sort of stand up organically if we were to do that.

And then second one for me is really on kind of win rate after the Kinetrix acquisition and just how to think about the commercial win rate improvement that the Connectrix acquisition could could bring? And specifically, also thinking about the banner project and potentially options for micro reactors at industrial facilities or data centers, things like that. Just kind of the overall package that you now have with the acquisition? And that's it for me. Thanks.

Sure. I would say Maybe I would respond in a little different way than you framed the question. What the Conetrix acquisition brings to us is a spectrum of capabilities that round out what BWXT does. We do engineering and component manufacturing and and spit fuel waste containers and fuel manufacturing Kinetics has a number of interesting and different complementary capabilities like licensing on the front end safety based analysis, and they've got some tail end things as we said in the script such as supporting particularly testing support for decommissioning and some things we don't even have like distribution transmission. And so what it really does it gives us a pretty interesting vertical stack of capabilities So Kinetrix has on its own a very high win rate. We BWXT, our Canadian commercial power business has a very high win rate on its own on its own. And I don't think that would change. I think what would change is that the common of those two gives you this vertically integrated offering that you could take to customers and maybe take on something completely bigger and completely different. You had anticipated before. And so I think it's it's a powerful combination that maybe enables us to climb the value chain in ways that I think are going to be powerful in the long run. [indiscernible] Your next question comes from the line of Bob Labick with CJS Securities.

Great. Good afternoon. Thanks for taking our questions.

Hey, Bob. Hey, Bob. Hi.

I just want to start with a quick one first and I have slightly longer one for my follow-up. But in terms of Molly, you mentioned another contract win or potential for contracting for 'twenty six contract season. Can you just give us kind of latest update on your the process with the FDA where and timeline and I guess if the '26 contracts season is towards the very end of this year, you have still plenty of time ahead of you, but how is that process playing out?

Yes, Bob. So yes, we signed a second supply agreement radiopharmaceutical chains The U. S. So good news for us. As I said, it demonstrates appetite for our product and I think for our brand In terms of the the tech development, I think I mentioned on the last call that we've been working through a few dozen items taking and tying those off. We are really sort of down to the to the short strokes on this one. We've been spending quite some time perfecting our formulary because you need to we got to make trade offs between Ellucian efficiency and Moly breakthrough for example. So we're perfecting that product making sure we have it exactly right before we submit our final data package. And I feel quite good about where we are I do anticipate approval this year so that we can be in production contracts in 2026.

Okay, great. Thank you.

And then, obviously, you started off the call, a tremendous year last year and you have consistent and steady long term growth outlook and several opportunities over the medium term. So So the diversity of the growth is great. I was hoping you could help focus us a little bit on the biggest contributors in dollars, you don't have to tell us the dollars, but just rank them, biggest contributors in dollars over the next five years. And I'll throw out a few and then just tell me what I'm missing or rank them for us. But the recovery in the aircraft cadence, the increases in the Columbia rates, Canadian refurbishment growth, Molly Sales, You Mentioned The New Builds In Canada, microreactors, SMRs, Give us a sense of the rank order of I'm talking five years out, the dollar contributors and how you think about the variability around those those medium term drivers?

Yes. This is Rob. I can kind of think about how we build up our gone through going through a strategy planning cycle where we look out over ten years. Of course look out over one and then three years in our kind of near term planning cycle. But as we look out over the longer term, Maybe I'll start with kind of the near term, medium term and then long term. What I really see is building the biggest growth drivers in the near term All of our base businesses are just going to kind of grow nicely, but what comes on top in the near term, I think, is an increased expansion of SMRs as well as nuclear medicine.

I think both those two are really primed over call it the next one to three years to really kind of BWX incremental to how people are thinking about the pretty steady organic growth we have in our core Over the medium term, I see more around August specifically. I think that will pick up quite nicely. I also see a play for micro reactors, either us helping others or us getting into business. So that's sort of a medium term driver In that bucket might be also a play around fuel for for micro reactors, TrISO. Specifically. And then as I think about sort of the longer term, I think some of the biggest franchises are still to be had are around enrichment. I think we're just getting going there and it takes a little bit of time, but I think that that will be a significant incremental growth driver around as you said that five year time time horizon. And the last one I put on the list is Greenfield commercial nuclear sort of large scale reactors.

So again, start off kind of slow with the things that we're on. The medium term being more about micro reactors, [indiscernible] In the longer term, it just takes a long time to get the engine really going. But once we get it going on enrichment and commercial nuclear large scale reactors, I'm pretty excited. I guess you could also say that therapeutics over that time is kind of feathered in across all of those.

Super. That's great. Thank you so much.

Sure.

Our next question comes from the line of Pete Skibitski with Alembic Global.

Hey, good evening guys. Maybe just following on Rob's comments on micro reactors. Could you guys talk more about I feel like we haven't heard a while on batter Maybe you could talk about if there's any dependency on banner from Pele, if that builds on it? And you've got I think this LOI with Tata as well. And it seems like we've had a proliferation of micro reacting micro reactor kind of planning globally, right? So I was wondering if you could give us kind of a real kind of overview of where you're at there with Banner. Sure. I'll do that. I'll take that one, Pete.

So Banner is part of the Advanced Reactor Development Program.

Contract award from the Department of Energy that we that we won probably four years ago now and it's one of those eightytwenty cost shares where we're investing at the 20% level and the government takes the other 80% So it's quite beneficial to us from that perspective. Banner you can think of as a commercial derivative of Pele but it's in a little different size class. Pele we can say, is in that one to five megawatt class of power output electrical and you can think of banner as more like in the 15 to 20 megawatt electrical power output. There are some real differences here Pele is designed to fit into a standard Connex box and could be air shipped or rail shipped, you wouldn't have that same kind of constraint with like banner And so therefore, banners in some ways simpler and probably certainly going to be more cost effective from the standpoint of the scale economics of scale but also the packaging and would be suitable for things like those applications we've talked about in Wyoming that would support Trona Mining with Tata And also it would fit into that class of reactors for which the DIU, the Defense Innovation Unit is soliciting for to power S. Military bases.

So that's the relationship between the two. There's a ton of learning between Pele and Banner and it's essentially the same team. And so we have a semi permeable membrane where where employees move back and forth as necessary and we take the lessons learned and apply them to Banner So it's a good dynamic there and we're hopeful of some positive commercial outcomes.

And I guess Pele is the first prototype, is that expected to be up and running next year? Is that the timeline I guess maybe banner would be on a somewhat similar timeline, is that what you're thinking?

Yes, I'd say our customers aren't publishing schedules on that actively right now, but Pele and Banner both undergone some scope increases, particularly around testing And so they'll continue over the next couple of years and we're not certainly not approaching a cliff on either of those.

Maybe just just to provide a little perspective on why Microreact to come next, at least in my opinion, you look at the commercial nuclear market, you really see a trend where we've gotten going on the refurb [indiscernible] That has given way to greenfield activity, right? That's the next thing that's having their you're seeing a lot of activity on the SMR side and maybe the next generation in my opinion could be micro reactors. You just think about getting further out on experimental products, if you will, And then the last sort of analogy I would give you is that the Gen three reactors that are popping up in the SMR world are also starting to lay the groundwork for advanced reactors, which are based on HALO or different fuels. So when you really think about refurbs giving way greenfield, that's Mars to micros, you can start seeing that you're starting to get an ecosystem of people doing a lot of things that are paying the bills here and now with solutions at work, but also looking out over the next couple of years. And I see micro reactors as kind of the next thing [indiscernible] For the overview guys.

Thanks Pete.

Your next question comes from the line of Michael Charmoli with Truist Securities. Please go ahead.

Hey, good evening guys. Thanks for taking the question. Good results. Rob, just on the EBITDA bridge into next year, what's what's the assumption from Conetrix? Should we assume about $20,000,000 And I guess does that imply that the organic core margins are down 60 basis points or so? I know the corporate was going to be down, but is that the right math we should be thinking about? Let me take those in two different buckets. So as you recall, we acquired Connectrix, which we haven't closed yet.

Expecting a midyear closing that's going nicely. We talked about it having a little bit under $300,000,000 of revenue.

That's U. S. Dollar. And if about a little under $40,000,000 of EBITDA We said those would grow nicely in 2025. So slightly over 300 and slightly over $40,000,000 BWX as we always have described in all of our guidance, we take different scenarios whether we close two months from now, three months from now or five months from now, but I think the way you set it up there is actually a reasonable way to think about sort of half a year of call it, $40,000,000 of EBITDA depending on on how that flows through.

Of course, don't forget that when that timing comes in, that's going to come with it interest as well as some pension expense, which rolls down into other income.

So we've always said that's only going to be slightly accretive in the first year. So if you think about it, you modulate EBITDA and you modulate the interest in other income to really be relatively neutral. Said differently, no matter when it kind of closes, we've sort of included all those scenarios in our on how we thought about EPS given the neutrality ultimately on EPS.

And then as the margin goes, I didn't exactly follow you on the 60 basis points because here's how I'm thinking about is that we end the year in 2024 at 14.1% We guided 14% to 15% You have the mix up impact of medical [indiscernible] you then have some headwind from the fact that you're commercial nuclear business, the existing business grows less than 25%, right, because that's medical. So that would always have a pull down because that has a margin essentially in line with the overall CO segment. And then you get a huge amount of Kinatrix are huge meaning a large new dose of similarly commercial power EBITDA margin. So you're still growing margin even in the face of increasing your commercial nuclear power mix tremendously, right, with both Conetrix as well as the implied growth that we have in our core business. So I'm pretty proud of that mix up for the overall CO margin. And I'll say lastly, of course, company level, we can't outgrow when you're essentially guiding to nearly 50% growth in commercial, which frankly will always probably have a lower margin overall than government, you're always going to have a mix down at the company level, right?

If you have years like this where you're where you're taking on a huge amount of commercial.

That's just a function of that. We don't need to look We look at geo margins, we look at CO margins, we'd encourage you to do that. Okay, fair. And then just one last one. Rick, what's the latest on Draco? It looks like that problem or that program's kind of had some maybe challenges on testing, Are you still getting revenue there? Any expected headwinds or how should we think about that one?

Yes, it's actually the contrary, Michael. BWX there's a desire to do some more comprehensive ground testing before that. Launches and most of that scope comes into our contract because it's around testing the new engine. So it's there's certainly going to be some schedule implications for that. That's new scope that comes into our program and so it's business for us.

Okay.

Okay. So no issues there.

Okay. Perfect.

Thanks, guys. Your next question comes from the line of David Strauss with Barclays.

Please go ahead.

Hi, good afternoon. This is Josh Korn on for on for David. Just wanted to ask about the new Navy contract.

Any color you could provide and how that might flow through to margins over the next couple of years? And then in the same vein, if you've gotten helped by any of the shipbuilding funding from the CR?

I'll answer the latter one and then maybe flip it back to Rob on any impact of the pricing agreement on margins. We don't have any we're not getting any direct funding from any of the shipbuilding submarine industrial based funding that's coming through this time or we We did we were the beneficiaries of some of that funding a few years ago to help in workforce development and it was quite positive for us, but we don't have particulars on the latter one. Yes. And maybe I'll just address the recent price agreement. I don't think you're going to see any kink up, if you will, from the signing that, as you know, we signed agreements every two to three years and the agreements that we signed pre COVID frankly, we've been working through the economic realities of workforce and inflation and so forth. And so we've been chewing our way through that. So we're pleased that we got a new contract but it will take a few years to even dive into that one. You will. We always talk about layers of the cake. [indiscernible] six years ago, we signed one, four years ago, signed one, two years ago, we signed from all those layers of the cake are really what we're eating out of now Yes, it's true that we'll start eating out of a layer of the cake that I think better probably reflects some of the realities of the economic environment that been dealing with the past couple of years BWX also it raises the bar in us, right?

We're actively working with our customer to reflect all the been working on the past couple of years. And so we continue to try to set the bar higher on ourselves and work with our customer. We're in a fixed price incentive fee contract there. And during these times, I think we look quite favorable where we're working with our customer to share in that profit and really be judged by a very scrupulous customer that's looking to have us always improve our margins. So no kink up. I think that we're really pleased with contract that we reached and we believe our customers Okay, thanks. And then if I could just follow-up, if you could quantify the cash tax benefit from the tax change you mentioned during the prepared remarks? Thanks.

Yes. So two impacts. First, going forward, you will, the 100 basis points applied to our profit before taxes is really the way to think about what happens through our book and taxes said differently 100 basis points right against our PBT would be about $6,000,000 over the next couple of years And so that's really going to help both our ETR hundred to 150 basis points is really what we see over time slowly building, but that level over a couple of years from the benefit. You take a reserve in the early and then you work that down. So we see 100 basis points plus and that would would be a positive to our P and L. Income going forward to be at that 22% and the cash.

So really on a going forward basis, we'd have that As we look back, we talked about that we've been reviewing what we did in the 2020 through 2023 timeframe in order magnitude. We were getting R and D tax credits of a minimal amount We'll review that with the IRS and ultimately try to release, if you will, the past couple of years of that $5,000,000 or $6,000,000 So ultimately to release all that money, we're going to have to work through that.

And that will be a couple of years in the making. But we'll work through the path and then ultimately we get a permanent benefit for ETR and tax savings going forward.

Great. Thanks for all the help.

Your last question comes from the line of Andre Matrini with BTIG. Please go ahead.

Hey, everyone. Thanks for taking the question. One of the focus specifically on the regulatory environment with all the news, recent NNSA firings and rehirings. And I know you guys put out a release not long after that, but just trying to talk broadly, is those really something that we're going to have to need to worry about moving forward? I mean, I thought with regard to BWX things would be pretty secure just given the the high priority of the work that you guys do? Yes, I'll comment to that. I would say certainly, we have our eye on it and it's caused for some concern But I think we're kind of built for this. We don't we're not a staff augmentation company or anything like that. We're not wide writing white papers over here. I think you could argue that everything we do is high value add. For the government. So we're making nuclear fuel and making reactor pressure vessels and doing environmental restoration of cold war sites think it's meaningful work. And I would add that in the case of naval reactors in this sole source position, have an open book contract with them. And so they're examining and scrutinizing our costs every day.

So it's a Doge like environment to begin with. [indiscernible] So BWX are we obviously have our eyes on it, but I think I think we're in as good a position as you could be under the circumstances. Yes. Maybe I'll just offer. I mean, I think you touched on something that concerns us here, which there is a lot of change going on in DC and we're concerned about an air pocket just in general, right, as everybody gets back to work and understand what their priorities are, we think we're going to fare, as Rex said, quite well versus the competition But it's that sort of not knowing that causes different piece of business that we're going after to potentially get delayed. But we're not worried about that over the long term. As you said, we're sort of Bill, for this, BWX think all of our programs and all the recent medias of where they're looking to make adjustments would most likely not affect us. To Rex's point, just to put numbers around it, it is in our 10 ks that I think we filed earlier today. We are 80% fixed price incentive fee and or firm fixed price already, right?

Within our government business, we break it out in the 10 ks So you'll see that for 2024. So as Rex talked about, 80% of our business is highly scrutinized by a very informed customer we're a sole supplier and in many circumstances, we're actually showing that cost to our to save ourselves money and give that back to the government. So again, really nicely aligned with all the themes that we've been reading about.

No, that's very helpful. And you both for breaking that out. And I guess on a similar note, Thinking about the prospect of a full year CR, what could the potential impact be for GovOps specifically? I mean, does the long lead nature of the work and its priority within the DoD kind of help offset any potential impact there? It's kind of in a similar vein to the question I just asked, but put a different way.

The thing that you worry about in a year long CR is whether or not you have programs of record. The programs of record to get funded at some percentage of the prior fiscal year is the typical formula and all of our major programs are programs of record. That would include obviously naval reactors Virginia, Ford, Columbia, [indiscernible] So from that perspective, it's not too worrisome. You do worry about new program and new starts. That said, since the advent of of this administration, The changeover in the White House and in the new fiscal year, we have received authority to proceed on our [indiscernible] authority to proceed on our Hanford Tanks project. So there's a bit of a business as usual theme going on in the business and so we're comforted by that. And hopeful that it won't be disruptive to us overly.

Excellent. Rex, Rob, thanks so much for your comments. I'll leave it there. [indiscernible] Your next question comes from the line of Peter Armentz with Baird. Please go ahead. Good afternoon, Rex, Rob, Chase.

Hey, I'll be brief and it was a long call and a lot of questions have been asked. But just Rob, maybe you could just remind us or Rex, on I'm looking at all this really good organic growth on the commercial operations. BWX we and we know you're just beginning to really ramp up with Pickering.

How does the overlap go with Bruce and kind of the refurbishment work there? Do we have kind of an overlap for a few years or how do we think about that?

Yes. So again, a little history story here is that we had Darlington really announced first. We talked about in the call that that will be rolling off here or the lion's share of that work over the next that's been very positive for us.

We then got into the thick of the Bruce and then now so that will sort of we're in the thick of that one.

And then ultimately, we'll have the Pickering Reactor refurb That one is actually juicy for us quite juicy for us on the Bickering side. We've asked 48 steam generators moving through our plants. It's product that we know a lot about. You can really get stable conditions there and you can feel good about that work. And so I don't see that as I mean, I sort of view it as one slightly rolling off and then getting into two different refurbs that are just as juicy, if not juicier for our book of business.

Layer on top of that, what's going on with the first SMR and I think there's going to be a decision here over the next couple of quarters if not sooner about moving forward in Canada on that. That would be work again that wouldn't be first of a kind, it would be second, third and fourth So I'm feeling pretty good about the book of business that we're looking at. So I'm not worried about a roll off of [indiscernible] Yes. And I might add to that, Peter.

I might add, Peter, that the Darlington opportunity was smaller for us than the Bruce opportunity because they didn't replace steam generators over there.

And we had a feeder contract and we had some other very interesting work. But Bruce has The Bruce refurbishment involved replacing steam generators for those reactors. So BWX had [indiscernible] steam generators, heat exchangers, primary coolant pump motors And the Pickering, so it looks more like Bruce than it does like than like Darlington. As Rob said, it's a little media for us. Little richer opportunity set. So that could accelerate a little BWX? I mean, not in terms of the overall segment, just in general, that mix of business just given size of the Pickering operation?

Yes. I think as we look out toward, I mean, it's a good question because even in our guidance, right, and Peter for 2025 is an acceleration in the core non Kinetrix. I think BWX you could parse through if you took out the medical business this year and kind of looked at the underlying nuclear power growth in twenty twenty four. And then you look at 2025, you're seeing a slight acceleration into the double digits on the power side.

I think that will be we're not guiding '26 and Seven At This Point, But I Think With All Those Drivers Of SMRs And Pickering And Yes, Darlington will roll off, I think we have a really good shot at continuing to grow as we said at Investor Day. Mid to high single digits organically. Conatrix also Rex talked about that there should be some opportunities to help our customers and hopefully they select us not only for the work that they plan to give us, but maybe those hand off points will be easier for us to help our customers with. So I wouldn't be surprised if that helps ultimately our sales. So I look forward to seeing the positive impact to that. And I think you're premise of your question does seem possible.

Appreciate all the color. Nice results guys. Thanks. Thanks, Peter. Thanks, Peter.

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Sorry for that. I will now turn the call over back to Chase Jacobsen, Please go ahead.

Yes. Thanks everybody for joining us today. We look forward to seeing many of you and speaking with you at upcoming investor events or on the phone. If you have any questions, you can reach us at investorspwxc dot com.

Have a nice day, everyone.

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