BWX Technologies Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
November 4, 2024

Key Takeaways

  • Strong Q3 results: Delivered 14% organic revenue growth, 19% adjusted EBITDA growth and 24% adjusted EPS growth, raising 2024 adjusted EPS guidance to $3.20 per share.
  • Robust 2025 outlook: Expecting mid-to-high single-digit revenue, EBITDA and EPS growth with at least 10% free cash flow growth next year.
  • Acquisition of AOT: Announced a ~$100 million deal to add a depleted uranium and specialty metals manufacturer with ~$40 million in 2024 sales and mid-teens EBITDA margins to its Special Materials portfolio.
  • BWXT-led joint venture H2C received notice to proceed on the 10-year Hanford Integrated Tanks disposition contract, becoming the largest award in its Technical Services segment.
  • A three-week shutdown of its Navy fuel processing site due to Hurricane Helene may push some expected Q4 free cash flow into early 2025, creating timing risk for the upper end of guidance.
AI Generated. May Contain Errors.
Earnings Conference Call
BWX Technologies Q3 2024
00:00 / 00:00

There are 10 speakers on the call.

Operator

Ladies and gentlemen, welcome to BWX Technologies Third Quarter 2024 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.

Speaker 1

Thank you, Ron. Good evening, and welcome to today's call. Joining me are Rex Jevidin, President and CEO and Rob Lemaster as Senior Vice President and CFO. On today's call, we will reference the Q3 2024 earnings presentation that is available on the Investors section of the BWXT website. We will also discuss certain matters that constitute forward looking statements.

Speaker 1

These statements involve risks and uncertainties, including those described in the Safe Harbor provisions found in the investor materials in 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 would now like to turn the call over to Rex.

Speaker 2

Thank you, Chase, and good evening to all of you. This afternoon, we reported strong Q3 results that were ahead of our expectations. We delivered 14% organic revenue growth, which combined with solid operational performance led to 19% adjusted EBITDA growth and 24% adjusted earnings per share growth. Given our strong year to date performance and despite weather related challenges stemming from Hurricane Helene and other events, we are raising our 2024 adjusted earnings per share guidance to about 3.20, dollars the high end of the previous guidance range and we are maintaining our free cash flow guidance of $225,000,000 to $250,000,000 As we look to 2025, we expect another record year with continued growth in government operations complemented by accelerating growth in commercial operations. Our preliminary 2025 outlook is for mid to high single digit revenue, EBITDA and earnings per share growth compared to 2024 with expectations for at least 10% free cash flow growth.

Speaker 2

Before I jump into our quarterly results and market outlook, I would like to spend a few minutes on our Special Materials portfolio and the acquisition of AOT announced today. Special materials is a strategically important line of business for BWXT and one that I would suggest is underappreciated by some investors. The foundation of our special materials portfolio is our Navy Fuel business in East Tennessee. Through this business line, BWXT is the only commercial enterprise in America to hold a Category 1 NRC license, which permits BWXT to handle special nuclear materials. We have leveraged this credential to develop unique infrastructure and retain some of the top radiochemistry talent in the world to execute high value national security programs for the Department of Defense and Department of Energy.

Speaker 2

Over the previous decade, we have built a portfolio of businesses around our Navy Fuel franchise, including the expansion of our downblending product line, growing our business in specialized nuclear fuel elements for university and government research reactors, securing a contract that converts scrap material into usable HALO for advanced reactor fuel and standing up a new production line to purify and process uranium metal and oxides for the NNSA. Further, over the past few months, we have announced 2 new important contracts that strengthen this portfolio. In September, we announced that BWXT was the sole awardee of a contract to study the build out of a national security uranium enrichment capability. And in October, the DOE announced that BWXT was one of several companies selected to provide HALO deconversion services that will be a linchpin in fuel fabrication for advanced nuclear reactors. Simply put, we have one of the broadest sets of capabilities in the uranium fuel processing cycle and our customers place immense trust in BWXT to support national security missions and novel civil applications.

Speaker 2

Building off that foundation, today we announced the acquisition of AOT from L3 Harris. Based in Tennessee, AOT is a former Aerojet business that is the sole manufacturer of depleted uranium and other specialty finished metals used in a variety of defense applications. From a strategic viewpoint, AOT is a bull's eye. It is a natural extension of our special materials portfolio and fits perfectly with BWXT's unique business characteristics, customer base and special materials handling and processing capabilities. End users of AOT products are mainly the Department of Defense and Department of Energy, including the National Nuclear Security Administration.

Speaker 2

Sales in this business are expected to be about $40,000,000 in 2024 and the combination of its market position, program exposure and micro level supply and demand factors all create good visibility into future top line growth at solid mid teens EBITDA margins. We are targeting to close this roughly $100,000,000 transaction by the end of the year and are excited to welcome AOT to BWXT and to add another important product line to our unique special materials portfolio. As you know, Rob and his team look at many M and A opportunities, but act on few as companies that meet our stringent criteria are hard to come by and often demand premium purchase multiples. With a stronger than ever corporate finance infrastructure and solid balance sheet, we remain active with M and A diligence activities to complement our organic growth with interesting inorganic opportunities to maximize our exposure to growing strategic government and commercial nuclear markets. Turning now to a discussion of segment results and market outlook.

Speaker 2

Government operations had a strong quarter with 17% revenue growth and 18% adjusted EBITDA growth, driven largely by outperformance in our Naval Propulsion and Technical Services businesses. In Naval Propulsion, our teams are keenly focused on execution as we seek to level load our plants, while we work through the Ford class aircraft carrier lull that will be with us through 2025 and maybe 2026. In any case, I'm pleased to report that we have completed negotiations and signed a term sheet with our customer on the next multi year pricing agreement for naval nuclear reactor components with terms that are in line with today's supply chain and labor environment. The agreement is on track for a formal contract award by the end of the year pending final government approval of the term sheet and the contract. In Technical Services, after a lengthy appeal process and being awarded the contract multiple times, the BWXT led joint venture H2C received a notice to proceed on the 10 year plus Hanford Integrated Tanks disposition contract in mid October.

Speaker 2

With this transition, the Hanford Tanks project becomes the largest contract in our technical services portfolio and punctuates our long term strategy to convert our unmatched capabilities and nuclear operations into outsized market share for environmental remediation and management and operations of DOE and NSA sites. In micro reactors, our current projects continue apace. Project Pele is maturing nicely and continues to receive good funding support. In fact, Idaho National Laboratory where the reactor will be final assembled and powered recently kicked off construction of the Pele testing facility, highlighting concrete progress on this key project. Last quarter, we discussed the Defense Innovation Unit RFP for micro reactors on Army bases, an opportunity that continues to be intriguing.

Speaker 2

And beyond that, we are seeing tangible interest from other defense agencies and emergency relief organizations. With our foundation of recurring businesses and in hand opportunities we see playing out in the near term, we anticipate modest organic growth in the Government Operations segment in 2025, consistent with the trajectory contemplated in our medium term guidance. This will be complemented by the AOT acquisition, ultimately leading to mid single digit revenue and EBITDA growth in 2025. Our focus remains on driving operational excellence throughout the organization and providing our customers with high quality nuclear solutions that enable some of the government's most critical missions. Turning now to commercial operations, revenue was up modestly driven by robust medical and commercial nuclear components growth, partially offset by lower field services activity.

Speaker 2

In commercial nuclear power, consistent with our prior view, demand is continuing to grow from traditional nuclear utilities and now the emergence of new customers investing directly in first of a kind nuclear to secure long duration clean baseload power. Many of these customers are signaling a newfound appetite for nuclear given unprecedented levels of electricity demand growth and nowhere else to turn for reliable green energy. Over the past several months, some of the largest companies in the world, including Microsoft, Amazon and Google have announced investments in nuclear power. These investments range from restarting decommissioned large scale nuclear plants like Three Mile Island and Palisades to investing in new advanced reactor technologies such as SMRs. This newfound demand is evolving rapidly and the shape is uncertain, but it is a clear indication of the growing demand and broadening public support for nuclear power.

Speaker 2

For BWXT, our breadth of experience and capabilities around nuclear technologies that stem from decades of experience in naval propulsion and commercial nuclear power position us as a merchant supplier to the market. The foundation of our commercial nuclear power business is in large scale CANDU reactors. However, we are also supplying SMR projects with large complex components, including the reactor pressure vessel for the GE Hitachi, BW RX300 project in Canada and molten salt heat exchangers for TerraPower's Natrium reactor in Wyoming. Further, BWXT has the potential to play a key role in the advanced reactor fuel supply chain by providing TRISO fuel, HALU deconversion or other manufacturing services. We are also working with parties like the Wyoming Energy Authority and the state's mining industry to potentially build micro reactors to address off grid power needs, leveraging our experience in the Pele and Draco prototypes.

Speaker 2

New investment in nuclear is no doubt exciting, but I want to emphasize the strength of our existing commercial nuclear power business. Current projects including the life extension of Ontario Power Generation's Pickering Units 5 through 8, reactor pressure vessel work on the SMR project at Darlington and heightened demand for field services to ensure the fleet can run longer and harder are all balanced that will enable BWXT to quietly deliver solid double digit growth in 2025. In the near term, our operational focus is on building our workforce and executing on the capacity expansion of our Cambridge facility to ensure we are well positioned to capture the dynamic growth we see in this important market. Turning to BWXT Medical, we had another good quarter. Year to date growth is in line with our full year expectations of about 25%.

Speaker 2

This is driven by our base diagnostics portfolio that supports the SPECT and PET imaging markets, both of which are experiencing increased patient volumes as well as higher contract drug manufacturing volumes for TheraSPHERE. We expect these trends to support similar growth in 2025 for these product lines, which represent most of our medical revenues today. Specific to our TECK99 development program, we continue to test and perfect our product and build the commercial relationships necessary for future growth. Notably, we have successfully tagged our product with every cold kit on the market and have finalized our first supply agreement with the radiopharmacy network. FDA communications and commercialization efforts are consistent with the update we provided you last quarter and we continue to anticipate disciplined market entry with spot volumes in 2025 and a full annual run rate of contracted volumes in 2026 and beyond.

Speaker 2

In therapeutics, we continue to support our customers' clinical trials with Actinium-two twenty five and are taking initiative to prepare for higher volumes, including new production modalities to increase capacity and provide better surety of supply as these drugs move through the pipeline and closer to commercialization. Similarly, our strategy tek99 irradiations making that investment more value enhancing than our original business case. With that, I will now turn the call over to Rob and I will come back with closing remarks.

Speaker 3

Thanks Rex and good evening everyone. I'll start with some total company financial highlights on Slide 4 of the earnings presentation. 3rd quarter revenue was $672,000,000 up 14% organically with growth in both segments. Adjusted EBITDA was $127,000,000 up 19% year over year driven by robust government operations growth, which was partially offset by lower commercial operations EBITDA due to project timing and the mix of revenues. Unallocated corporate EBITDA was lower compared to last year due to cost management and timing of healthcare costs.

Speaker 3

We continue to expect full year corporate EBITDA expense to be relatively flat compared to 2023. Adjusted earnings per share of $0.83 increased 24% compared to $0.67 in the prior year quarter. As shown in the EPS bridge on Slide 6, growth is largely driven by operations as slightly lower interest expense was offset by lower pension income and a slightly higher tax rate.

Speaker 2

Our adjusted effective tax rate in

Speaker 3

the quarter was 23.1% 22.8% year to date. We expect our full year tax rate to be approximately 23.0 percent, a touch lower than our initial guidance. I would like to tip my hat to our tax team, which has embraced our culture of operational excellence, focusing on driving continuous improvement wherever possible. They're finding small but consequential items to generate incremental value for the shareholder. And frankly, I see more value in this area as we challenge ourselves further and come through various tax planning exercises.

Speaker 3

Free cash flow in the quarter was the use of $8,000,000 as the timing of contracts impacted our working capital during the quarter. Despite that, we are reaffirming our full year free cash flow outlook of $225,000,000 to $250,000,000 As you likely know, East Tennessee, where our nuclear fuel services facility is located, is one of the areas that was impacted by flooding and widespread power outages caused by Hurricane Helene. This devastating weather event resulted in an over 3 week shutdown of our Navy fuel processing facility and the Umetto construction project from late September through mid October. As such, large customer payment milestones that we have anticipated in Q4 2024 may be pushed into early 2025, putting the upper half of our free cash flow guidance at risk. To be clear, these opportunities are not lost and may simply move into 2025 and we are working with our customers to see what is possible in light of this highly disruptive weather event.

Speaker 3

No matter where we land, I am proud of our team and their focus on improving working capital and free cash flow conversion, laying the groundwork for another year of at least 10% or greater free cash flow growth in 2025. Capital expenditures in the quarter were $40,000,000 $101,000,000 year to date. We continue to expect 2024 CapEx to be similar to last year's level of about $150,000,000 We have begun the expansion of our large commercial nuclear component manufacturing facility located in Cambridge, Ontario. This combined with other select growth initiatives sets us up for similar capital spend in 2025. Moving now to the segment results on Slide 7.

Speaker 3

In Government Operations, 3rd quarter revenue was up 17% to $560,000,000 driven by increases in naval nuclear components, long lead materials, U metal and micro reactors. Adjusted EBITDA in the segment grew by 18% to $117,000,000 as higher revenue was complemented by solid operational performance. EBITDA margin in the segment was 20.9% compared to 20.7% in the same quarter last year. Consistent with the view provided last quarter, we expect full year geo segment EBITDA margin to be just over 20%. Turning to commercial operations.

Speaker 3

Revenue was up modestly driven by our portfolio of BWST medical products and strong growth in commercial nuclear power components, fuel and fuel handling systems, which was partially offset by lower commercial field services revenue. Adjusted EBITDA in the segment was $13,500,000 compared to $13,900,000 in the same quarter last year. Solid execution was offset by revenue mix and growth investment in the commercial nuclear power and medical business lines. Turning now to guidance for the remainder of 2024 and our preliminary outlook for 2025. We are raising our 2024 adjusted EPS guidance to about $3.20 the high end of the guidance range we set in the beginning of the year.

Speaker 3

We are maintaining our segment level operating assumptions, but we'll note that the summation of our revenue is likely to be just slightly higher. As such, you will notice we've raised our consolidated revenue guidance accordingly to approximately $2,700,000,000 Moving now to our preliminary outlook for 2025, which includes a modest contribution from the AOT acquisition we announced today. Overall, we expect to see another solid year that is in line with our medium term outlook. In 2025, we expect mid to high single digit revenue, EBITDA and EPS growth with at least 10% free cash flow growth compared to our 2024 guidance. In Government Operations, we expect mid single digit revenue and EBITDA growth, which consists of low single digit organic growth plus a marginal contribution from AOT.

Speaker 3

Organic growth will largely be driven by our Special Materials and Technical Services portfolios, while Naval Propulsion will be relatively flat as growth from increasing Columbia Class production is offset by the aircraft carrier volume low in 2025. Government EBITDA margin is anticipated to be relatively consistent with the strong 2024 rate as revenue mix, a greater amount of early stage programs and lower volumes of aircraft carrier work are offset with OpEx initiatives and seasoning of our much expanded workforce. In commercial operations, we anticipate double digit growth in both commercial power and medical. EBITDA growth is anticipated to outpace revenue growth as better EBITDA contribution from medical and higher commercial power revenue is partially offset by project mix and investment in our facilities and workforce to support the growth we see ahead. To sum it up, we had a robust quarter and we are on track for a strong end to 2024, another year of likely record earnings and cash flow in 2025.

Speaker 3

I would like to thank all of our over 8,000 employees whose hard work and dedication helped to drive our results and position BWXT for continued success. I will now turn it over to Rex for final remarks.

Speaker 2

Thanks, Rob. Let me close by taking a moment to recognize our employees and their families at our nuclear fuel services site in Irwin, Tennessee who were impacted by Hurricane Helene, many of whom experienced loss of personal property and in some cases friends and loved ones. We have and will continue to provide support for this region as it rebuilds. I'm extremely proud of how our teams navigated this extreme weather event in addition to other shorter term power outages and flooding at several of our other sites in the Midwest throughout the summer. Our workforce at all locations demonstrated their preparedness for emergencies by taking immediate action to ensure the safety of all employees and the safeguarding of special nuclear materials.

Speaker 2

Severe weather events like these are also a stark reminder of the impacts of climate change and the obvious need for clean, reliable baseload nuclear power. In conclusion, despite these weather events, it is an exciting time at BWXT. Over the past several years, we have invested in our people and our infrastructure and instill the culture of innovation and operational excellence. There are secular tailwinds supporting our key defense, clean energy and nuclear medicine markets and there are tangible signs of accelerating demand for nuclear solutions that will lead to steady earnings free cash flow growth for BWXT. Our focus remains on providing our customers high quality solutions to address their most critical missions and we will continue to invest organically and inorganically to position BWXT for ongoing success.

Speaker 2

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

Operator

Your first question comes from the line of Pete Skibitski with Alembic Global. Please go ahead. It's Kubitsky with Alembic Global. Please go ahead.

Speaker 4

Sorry about that. Nice quarter guys. Thought I would start out, we're seeing a lot of supply chain issues at the shipyards to do things like steam turbines and such for submarines and carriers. Has that impacted you guys at all? Or is the systems guys in the Navy kind of keeping you guys level loaded and the supply chain issues aren't impacting you guys?

Speaker 2

Yes, Pete. I would say a couple of things I would say about that. One is you obviously know that our build schedule is a couple of years ahead of the shipyards because of the advanced procurement and the reactor delivery times. And so I think there's some sense in which we get maybe a couple of years early visibility into problems like supply chain and materials and wage pressure and all of that. And so I think by and large, we've worked our way through some of those issues in pretty in reasonably good shape.

Speaker 2

And so I think we feel well positioned to do what we need to do for completing our products. In terms of the supply chain that we use, again, we sort of worked our way through that during through the periods of COVID and managed that successfully in my view. And so I'm not we're not seeing pressures on our supply chain in that way. And I think we feel sort of well equipped to deliver what we need to, to our customer.

Speaker 4

Okay. That's great. And just one clarification for me. In government this quarter, you had the strong growth. Was there some materials ordering that kind of drove that?

Speaker 4

I know sometimes in the past, the outsized growth has a material aspect to it and then maybe that was kind of pulled ahead from the Q4. Could you just maybe clarify that?

Speaker 3

No, I don't think anything to particularly call out. It was the strongest growth rate we had all year. We're really hitting nice strides in the advanced technologies as we have both Project Pele and DRACO coming through. We're hitting nice performance in some of the ramp up of those immature programs just in general and kind of ramping those. So nothing, general good execution across the board.

Speaker 3

I would say some of our naval sites are digesting all the labor that they brought in and doing that nicely both at the margin as well as the top line. So kind of consistent drivers across the board really.

Operator

I would like to remind everyone to please limit yourselves with one question and one follow-up. The next question comes from the line of Bob Labick with CJS. Please go ahead.

Speaker 5

Yes. Hi, good afternoon. It's Pete Lucas for Bob. You covered a lot and do appreciate that. Just a couple of broad In terms of given the renewed interest or newfound interest as you've mentioned in the nuclear space, can you remind us of your main competitive advantages other than experience, I.

Speaker 5

E. Your licenses, your commercial capabilities and kind of how this compares and lets you stand out from competitors?

Speaker 2

Yes. I'd say there are multiple aspects to how we're differentiated in the market. I mean among them are, we are really the market leader in advanced nuclear fuels, coated fuels in particular that we make for the space application and TRISO fuel, which has pretty exciting potential commercial outlets for all these advanced reactors. That'd be one thing. We talk often about the fact that we're the only we're sort of the last man standing when it comes to large component manufacturing in North America.

Speaker 2

Our Cambridge side is capable of making large pressure vessels, which we use for steam generators, pressurizers and heat exchangers and the like. And that's the site where we're manufacturing the reactor pressure vessel for the GE small modular reactor. It is an SMR by definition, but because of that technology, it's actually quite a large vessel. So we have that those two things. I would say in addition to all that, there's kind of a you might say a sort of a steady supply of experiential qualifications that we have that would be unlike a lot of competitors in the sense competitors in the sense that we've been performing on nuclear projects for decades without interruption, particularly because of our commercial capabilities in Canada and because of our naval nuclear propulsion capabilities in the States.

Speaker 2

We've delivered literally 4 15 reactors to the Nuclear Navy. And so that stream of business never stops and there's really no one that can talk about experiential qualifications that would stand up to something like that. There are probably multiple others that I could cite, but we are differentiated in pretty deep and serious ways.

Speaker 5

Very helpful. Thanks. And then just the last one for me. You talked a little bit about some of the incremental growth and proceeding nice making nice strides in Pele and DRACO. But can you walk us through a timeframe for that growth in the isotopes, microreactors and SMRs, specifically when do we look for that to kind of bolster the P and L in a more meaningful way?

Speaker 2

Yes. So I would say it's a pretty interesting situation. A lot of that really is now, right? We've built a portfolio in nuclear medicine. It is really growing nicely.

Speaker 2

The therapeutics are starting to take off and our imaging products are really growing very in a very robust way. Micro reactors, we have 2 prototype programs that are ongoing. And in small modular reactors, we're clearly active with the GE product and with TerraPower's Natrium reactor. And so maybe I'd sort of bucket into 3 time horizons. In the near time horizon, I would say nuclear medicine and small modular reactors are contributing to growth, the most growth near term.

Speaker 2

In the midterm, I would say micro reactors, even though we're doing work there now, as you get into production programs and commercial opportunities, I think you would start to see that one rise. And then I'd put AUKUS in that midterm bucket too because we'll start to see interesting growth from that one over the next few years. And then on the long horizon, we've got enrichment opportunities for the national security application and perhaps commercial angles there that I think are really exciting. I think we can build an entire new franchise just on the national security component of enrichment. And then you're going to see and it's going to happen fast.

Speaker 2

You're going to see, I believe, announcements about large scale nuclear reactors for grid scale applications, obviously, to meet the emerging power demands. There are there's not just data center and AI and I've talked about this a lot before, but there's the electrification of everything, transportation, industrial processes. We drive toward clean energy solutions that puts immense demand on the grid and it's going to require a mix of technologies to address that need, but most especially, I believe large commercial nuclear reactors will come around. And so we've got 3 time horizons where we see growth coming. All of those are going to blend together to create, I believe, everlasting almost growth signals for this company, growth opportunities for this company.

Speaker 2

And so we see these secular trends that we've talked about persisting for decades certainly.

Operator

The next question comes from the line of Scott Dussiel with Deutsche Bank. Please go ahead.

Speaker 3

Hey, good afternoon.

Speaker 6

Hey, Scott.

Speaker 3

Rob, the 2024 guide implies a sequential decline in EPS from 3Q to 4Q. I think that's a bit contradictory to your typical seasonality in the business though. So I wanted to see if you can walk through what's going to drive EPS to decline in the Q4 from the Q3? Thanks.

Speaker 2

Yes. Thanks for

Speaker 3

the question, Scott. As you know, we traditionally do have a significant 4th quarter dynamic. All year, frankly, we've been just sort of bringing some of that goodness, what we normally see in the 4th quarter. We never know how it's going to sort of play out for the year. So we're always banking on that happening of course by the Q4.

Speaker 3

And you just think about different events that have happened throughout the year, performance fees at TSG or performance on different microreactor contracts. And so you just think about all that and we've kind of almost taken some of that into the numbers, so that derisks the 4th quarter number specifically. The other impact that I think you just need to be aware of is there will be a little bit of a sequential headwind from the activity we saw down in Tennessee. We were offline for 3 weeks. Not only do you have that sort of headwind, if you will, but you have the ramp up going into the rest of the year.

Speaker 3

And so we're just working our way through that. There's fits and starts of that. And so if you just think about the sequential Q4 versus Q3, that factor alone really would cause you to sort of step down. The last smaller thing is I think you know that our corporate expenditures generally bump off because of just cadence around healthcare that has an impact in the Q4. So that causes a sequential move down for the Q4 versus Q3.

Speaker 3

Okay. That's a helpful bridge. And then Rob, excluding TECK99, are you expecting growth to slow at the rest of B2XT Medical next year? Or should we expect the base B2XT Medical business to continue to drive this 25% type growth next year? Rex's comments kind of seem to be alluding to that, but I just wanted to check.

Speaker 3

Yes, that's right. The underlying growth is really how we guided preliminarily to say, look, ex tech, we have a very small slice of spot volumes that I frankly think at the profit level is relatively neutral as it relates to 2025. But your question specific for sales, we do not bank on tech in order to hit that sort of similar growth as what we're experiencing here in 2024. The portfolio is really strong across the pet products, TheraSPHERE is strong. So it's really the underlying portfolio that's going to drive that.

Operator

The next question comes from the line of David Strauss with Barclays. Please go ahead.

Speaker 7

Thanks. Good evening.

Speaker 8

Hi, David.

Speaker 7

Hey. In terms of the new or the Navy pricing agreement, can you give some additional color? I know it will layer in over time with the other contracts you're currently working on. But does that pricing construct, if that kind of holds going forward with future contracts, does that allow the government operations EBITDA margins to kind of stay in that 20% or so range?

Speaker 2

Yes, David. That's certainly what we hope. As you know, we negotiate those into the low mid teens as a starting point off the cost baseline and then drive OpEx, try to gain advantages in materials pricing and other such things, and certainly with a high focus on operational excellence, maybe volume matters to drive it into the high teens, as we've done traditionally. So that's our model and that's what we hope to achieve.

Speaker 3

Yes. Maybe I'll offer just a specific on the margin. The dynamic that we saw in 2024 was strong underlying performance on the geo basis, right, basically fighting through mix all through the year, but holding that constant. And then we obviously had the missile tube issue last Q4. So when you exclude that, that we sort of held our own underlying ex the missile tube.

Speaker 3

That's how I'm really sort of thinking about the 2025. Very similarly, of course, you have some immature programs that are ramping, whether it's micro reactors or special materials. We obviously have the AOT acquisition, small in revenue, but a touch lower in terms of margin. And so we're really looking to hold underlying margins, which is like saying, look, you're fighting mix and you're growing underlying margin to offset the mix. That's how I see 2025 margins for GEO.

Speaker 7

Got it. Okay. And Rex, your comment about the carrier lull potentially extending into 2026, what's the background there?

Speaker 2

Yes, we've talked about that before David for a few quarters now. It has to do with the shipbuilding plan that the Navy published and when they intend to procure that next carrier. And so depending on how the advanced procurement pays out, it could have it could lead to an extra year of that same low. We're hopeful and we're working it certainly and we would like to avoid the supply chain disruption that that creates. But it's what we've been signaling for a few quarters now.

Speaker 3

Yes. 2 quarters ago, we announced the shipbuilding plan slightly changed to adding that 3rd year. Of course, as long ago as 2 investor days ago, we talked about that ordering cadence being a 2 year thing. And then the new shipbuilding plan as it came out was a 3rd year. And so we just highlighted that to investors.

Speaker 3

That was pretty far off when we did that 2 quarters ago. And as Rex said, we'll continue to as we do this pricing agreement and the next one, try to look effectively. As you know, we sort of all of our facilities are meant for various types of volume. And so our customer is very focused on finding ways to drive as much volume as they can for a fixed cost infrastructure like we have and I hope to be successful there.

Operator

The next question comes from the line of Peter Arment with Baird. Please go ahead.

Speaker 9

Yes. Good afternoon Rex, Rob, Chase. Nice results. Rex and maybe Rob want to comment also Just maybe thinking about you made comments about 2025 double digit organic growth in commercial nuclear. Just is that how do we think about kind of the building blocks?

Speaker 9

Is it obviously a pickup in refurbishment activity? Are you starting to see already contributions from Pickering? And is there a material revenue change tied to kind of what you're doing with GE Hitachi?

Speaker 3

Sure. Yes. And maybe I'll start by just saying that's exactly right. The big drivers we see in the commercial nuclear business, of course, there's 2 segments there. We've already talked about the medical, which will be a really nice driver of growth in the CO segment in general.

Speaker 3

As it relates to commercial nuclear, we have ways that we can play across the value chain, if you will, of nuclear. We have the large position in Canada. We have the medium reactors, if you will, with SMRs and then you have the micro reactor play increasingly being of interest to people in that part of the market. And when you think through the large, medium and small presence we have, on the large side, we're really seeing both refurbishments with Pickering, some pickup of thinking a little bit about greenfield activity that will be a little further out, but that's where we're going to see some growth there over time. Probably doesn't bleed into 2025.

Speaker 3

It's mostly about Pickering there as well as just generally the Canadian fleet seeing good growth and we have that recurring business. On the medium side, our project at Darlington as early as the BWRX 300 That will pick up steam as we enter 2025. So we'll get kind of a full year of that. And then a lot of cats and dogs in and around that that we're doing for other competitors and trying to get some scope there and different engineering work for various companies. And then the small, we don't have a huge presence yet on the commercial side, but obviously what we're seeing with Pele and DRACO educates ourselves on how to play in that market.

Speaker 3

So I wouldn't be surprised if you get a little bit of at least some work that we're going to start to think about over the medium term.

Speaker 9

Got it. And then just on the micro reactor, I think Rex, you made a comment about the Army RFP that was out there. Is there any update on timing? And then just lastly, on 2025 CapEx, is it still Rob the kind of $100,000,000 plus of maintenance plus the $40,000,000 ish of kind of growth CapEx? Just any thoughts on that.

Speaker 9

Thanks.

Speaker 2

Yes. On that first opportunity, Peter, with the Army sorry, with the Defense Innovation Unit, we submitted a proposal, we think a compelling one with a pretty interesting team. I know there was a lot of industry interest in that one and we haven't heard back from the government yet. So we're standing by for what we think is an interesting opportunity. Yes.

Speaker 3

And I can deal with the CapEx question. So we guided free cash flow to be up. We really haven't disaggregated the operating cash flow from the CapEx. We'll provide you more guidance on that next quarter. I will say a couple of things.

Speaker 3

One, you just look at our Q4 cadence to finish out this year. It's a step up from the past couple of quarters. Why that is, is related around to the Cambridge expansion. As you know, we're trying to bring as much of that forward just given all the demand signal we're seeing for the BWRX 300 as well as all the growth in Canada. So we're trying to wrap our heads around how that sort of feathers into 2025.

Speaker 3

So that's one factor. I think the second factor that you just need to be aware of is as we sign this term sheet, we're trying to decipher sort of the operating cash flow, if you will, versus the CapEx. Several of our peers on the shipbuilding side have been there are certain triggers of profit, if you will, or different cash flow that makes somewhat fungible between operating cash flow and CapEx. It's a small thing, but we're kind of coming through that and deciding where we need to invest on the naval side given what our customer wants in terms of accelerating Colombia, in terms of preparing for international growth and so forth. And so those are all factors that still puts you in and around the level that we've been running this year, maybe a touch higher.

Speaker 3

And we'll provide more guidance as we roll into 2025. But no matter what the scenario is, we're sticking with our free cash flow, right? That's kind of how we guide the overall company. And so we really ask you to focus on the free cash flow and we'll deliver either operating cash flow or CapEx to perform at that level that we guided you to for 2025.

Operator

The next question comes from the line of Ron Epstein with Bank of America. Please go ahead.

Speaker 6

Hey, guys. Rex, so just a big picture question for you. When we we've seen the shipyards report this quarter and it's been really, really challenging for them, particularly on Virginia and Columbia. And you guys have been doing great on it. And like you mentioned, you've got a lead time on that.

Speaker 6

When does that catch up to you? I mean meaning like or doesn't it, if they're they're still building that what 1.3rd, maybe 1.5 in Virginia class a year. And it just seems like how much advanced procurement for power plants can the Navy actually do given that the shipyards are so far behind where maybe anybody hoped they would be at this point?

Speaker 2

Yes. Thanks, Ron. So a couple of things I would say. Yes, I'll reiterate the point that we're kind of a couple of years ahead of the shipyards when it comes to environmental labor conditions, all of that. So that gives us a little bit of an advantage and I think it's helped us to contend with those complex issues.

Speaker 2

I would add to that that we have a very sophisticated customer in Naval Reactors and they really see around corners and they supported us a few years ago with some submarine industrial based funding that enabled us to go and add some training capabilities to add some workforce, some talent acquisition capabilities and some other kinds of depth, digital transformation dollars that we needed. And so that's been extremely helpful to us. We're grateful to that to what we get from our customer there. They help us think. Guess the other thing I would say about it is look the shipyards are not slowing down.

Speaker 2

They're just not achieving the shipbuilding tempo that's required by the Navy. So they're going full steam ahead and the supply chain is going full steam ahead. And I don't think there's any world in which you could conceive of just stopping the supply chain to let the shipyards catch up to the supply chain, right. So if you stood down the supply chain for 2, 3 years or whatever it was, you would literally lose the capability. And so I think the wisdom of the Navy, the wisdom of the appropriators is we've got to keep the supply chain going even if there are challenges at the shipyard and you just got to bet that the shipyards are going to get it sorted out and they'll get up to the production rates that are required for our defense needs.

Speaker 2

And I believe that they will. I certainly believe you got to bet on that outcome, but you can't just ask your supply chain to go and take a vacation for 2 or 3 years. And so I think we're going to continue to produce at the levels that are appropriate for our business, including the idea of level loading our factory and letting our customer take full advantage of the rates that go with that.

Speaker 6

Got it. Got it. Got it. And then maybe changing gears a little bit. At the Investor Day, you guys mentioned that you thought maybe the SMR market could be $300,000,000,000 by 2,040.

Speaker 6

How much of that could you guys actually capture? And if how much of SMR is your business today and where could we expect it to be in 5 or 10 years?

Speaker 2

So that is a big picture question. Maybe a little tough to speculate, but I'll give you maybe some ways to think about it. You look at the GE BWRX 300, we've said that we thought we would get maybe $100,000,000 of content on that $100,000,000 of content on that reactor U. S. We've got work going with TerraPower now on the Naturium reactor and contract there that could lead to maybe tens of 1,000,000.

Speaker 2

And so I think on a per unit basis, you can think about it in those terms, Ron. I mean it's possible that we could put ourselves into a partnering configuration with a reactor developer and capture more scope. And certainly, we have those kind of conversations. But when you think about our role as a merchant supplier to the market, that's how I would scale it. And so take that number of units and multiply it with those kinds of numbers as kind of the baseline consideration for our growth with the possibility of sort of leveraging our capabilities with a partnering kind of approach.

Speaker 3

Yes. I might add a couple other just sort of call options in that space. Some of those platforms demand fuel solutions. So, we have a really good expertise in that area, be it TRISO and so forth. And so, we do have plays that we can actually get the component manufacturing that Rex talked about underlying those.

Speaker 3

We're certainly going to be ready and willing to help other players on the fuel side and that's a very challenging part of their equation. And so as they ramp, we're ready and able to satisfy some of those FMR demands on the fuel side. The other thing that I would say is that we've expanded our facility to accommodate the BWRX 300 and the Canadian growth. And as growth continues to show itself up in the U. S, you can imagine that our sites that are principally government sites in terms of component manufacturing in the U.

Speaker 3

S. Are very able to have U. S. Capacity. And so as those customers in the U.

Speaker 3

S. Start to show themselves and look for solutions where they want a domestic supply chain, I think there's other options that you're going to see more from us in the near

Speaker 8

term in terms of manufacturing capability in the U. S. In addition to our

Speaker 3

expansion in Canada.

Speaker 8

Hey, everyone. Thanks for taking my question. I wanted to ask a quick one. I think it was late October, the DOE selected 4 providers for domestic high assay low enriched uranium production. I think the max was about like 2.7 bill.

Speaker 8

Was this something that you guys were bidding on? I know you want a similar award earlier in the month for deconversion, but I wasn't sure if there are other ways you guys are looking to play the newfound demand for domestic uranium?

Speaker 2

Yes. So that's an opportunity we did not submit a proposal for. That's really about developing commercial capability in the enrichment space and there are other companies that are better suited to do that. So there are places where we could play. We have some nice niches in deconversion for example that you mentioned, but our intention was not to get into large scale commercial fuel enrichment.

Speaker 2

That's just that's not where we play.

Speaker 8

Got it. Got it. And then, I think, Amentum was selected for a decommissioning contract in Lithuania. It was pretty small, but I kind of saw it and looked at it as a good opportunity to look at revisit where you guys were exploring international opportunities moving forward and how those could contribute to the broader business?

Speaker 2

Around decommissioning?

Speaker 8

Or just international opportunities at large too, decommissioning and at large.

Speaker 2

Okay. So maybe 2 different maybe I'll parse that one a little bit. From the standpoint of decommissioning or environmental remediation, we haven't really looked much to international scope. And certainly, we're not interested in exposing ourselves to the risk that comes with sort of the fixed price large scale decommissioning projects that are out there. We just haven't chosen to play there.

Speaker 2

We like the decommissioning and environmental remediation work in the DOE space. It's cost reimbursable. The risk is bounded there. It's something that we understand and I think it contribute meaningful value to. And so I don't think you'd see us doing decommissioning in Lithuania or places like that.

Speaker 2

The commercial nuclear power development opportunities in international are pretty intriguing. I mean, I think if you look at the CANDU footprint, we already work in places like Romania and to a limited extent in Argentina and in South Korea. And I think those refurbishment projects in Romania and new reactors there that are around the CANDU technology are exciting and important for us for growth. And there's interest in scaling that CANDU technology to a gigawatt scale reactor called Monarch, and we certainly have a role to play there. And we believe there will be an international footprint for that Monarch reactor and others, right?

Speaker 2

There are things out there like the AP1000 and others where you could see us contributing. So I think the international opportunity is significant and we'll find ways to play.

Speaker 1

Ron, can you open for the next question please?

Operator

Michael Ciarmoli with Kroger Securities. Please go ahead.

Speaker 1

Hey, good evening guys. Thanks for taking the questions. Nice results. Maybe Rob, just to dig a little deeper on the EBITDA margins. It sounds like you're grappling with some of the hurricane related disruption this year.

Speaker 1

And I know you called out mix, but what maybe what specifically is dilutive? I guess at the consolidated level, the EBITDA margins are going to be flat next year. I would have thought maybe you get a little bit more lift in medical. Is anything materially changing with mix that's creating some of that, I guess, lack of margin expansion?

Speaker 3

Yes. We've been talking about this all year. I mean, the easiest examples you have is the micro reactor programs that we have. We're not looking to take risk and make a lot of margin there, right? So we signed up the 2 most important contracts in Project Pele and Project Draco.

Speaker 3

And so those come in at lower margins with really solid revenue and allows us to maintain a lead by having those prototype contracts. That's a 2024 impact as well as into 2025. You also have a few special materials contracts that come in. We're constructing a line around new metal as you know. That comes in at a lower margin versus the other business.

Speaker 3

We also are just dealing with mix as it relates to the core naval segment. You know that we're going through the low. And so we've been actually done quite a nice job of moving business around. We're seeing actually our Lynchburg plant do an excellent job of moving between upper tier and lower tier components. And ultimately, that's driving us to continue to maintain margin despite a relatively sort of tide going out, if you will, right?

Speaker 3

And our enabled business, as you can expect, is also a good margin business for us. So immature programs as well as just general non robust volumes, which we've been well choreographing for the 1st couple of years of our medium term guidance until that aircraft carrier lull dissipates. All of that just makes us sort of have to grind through and maintain margins. So it's mix and a little bit of just core underlying softness just given you're not just don't have an abundant volume, which generally helps a business like ours.

Speaker 1

Got it. That's fair. And just quickly on Pele, I think the initial contract was like $300,000,000 and it probably runs its course in 'twenty five. Do you get additional funding for that or do you kind of complete your portion of the work in 'twenty five? I guess, I've seen the press releases out there with their kind of testing and construction sites.

Speaker 1

But what has to happen in terms of Pele and your funding and next steps?

Speaker 3

Yes. It's Rob. I'll take that. Yes. So you're right.

Speaker 3

That was the initial contract. Now the customer we've been working with the customer as they have expanded their scope and different things that they want as part of that. That will not end in 2025. We continue to see different interest in different features. We see different spending as we move it out to Idaho.

Speaker 3

And so that's not going to be a program that terminates in 2025. So there will be a tail and I wouldn't be surprised that it runs higher than the $300,000,000

Operator

The next question comes from the line of Tate Sullivan with Maxim Group. Please go ahead.

Speaker 3

Hi, Rex. You mentioned the potential to turn the enrichment, to build a new franchise on the security portion of enrichment. Do you have the potential to be a sole source supplier in this market or will it be mostly be a design effort or technical services opportunity?

Speaker 2

So Tate, the we were the sole awardee of that contract. They did have the government did say they could award to multiple contractors, but they just awarded the BWXT. So it's possible we could be the sole supplier for both the centrifuges and for the enrichment capability. But that depends on what the government wishes to do in the long term here, but it's a very interesting opportunity for us.

Speaker 3

And is the next step we're recording the press release from August 29 related to submitting a report on the potential costs and timeline to build a pilot enrichment facility?

Operator

Yes, that's exactly

Speaker 2

right. We started the contract in August this year. So it will run through late summer next year and we'll deliver our report on the concept for the manufacturing site for the centrifuges and other such things and then go into hopefully go into Phase 1.

Operator

That concludes our Q and A session. I will now turn the call back over to Chase Jacobson, Vice President of Investor Relations. Please go ahead.

Speaker 1

Yes. Thanks everybody for joining us today. We look forward to seeing and speaking with many of you at conferences and other events over the next quarter. If you have any questions, please feel free to reach out to me at investorsbwxt dotcom. Thanks.

Operator

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.

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