Babcock & Wilcox Enterprises, Inc. (BW) Q1 2018 Earnings Report, Transcript and Summary

Good afternoon. My name is Josh, and I will be your conference operator today. At this time, I would like to welcome everyone to the Babcock & Wilcox Q1 2018 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question and answer session. [Operator Instructions] Thank you. Chase Jacobson, Vice President of Investor Relations, you may begin your conference.

Thank you, Josh, and good afternoon, everyone. Welcome to Babcock & Wilcox Enterprise's First Quarter 2018 Earnings Conference Call. I'm Chase Jacobson, Vice President of Investor Relations at B&W. Joining me this afternoon are Leslie Kass, B&W's President and Chief Executive Officer; and Jenny Apker, Senior Vice President and Chief Financial Officer, to discuss our first quarter results and 2018 outlook. During this call, certain statements we make will be forward-looking. These statements are subject to risks and uncertainties, including those set forth in our safe harbor provision for forward-looking statements that can be found at the end of our earnings press release and also in our annual report on Form 10-K and our Form 10-Q that are on file with the SEC and provide further detail about the risks related to our business. Additionally, except as required by law, we undertake no obligation to update any forward-looking statements. We also provide non-GAAP information regarding certain of our historical results as well as our forward outlook to supplement the results provided in accordance with GAAP. This information should not be considered superior to, or as a substitute for, the comparable GAAP measures. A reconciliation of historical non-GAAP measures can be found in our first quarter earnings release published this afternoon and in our company overview presentation posted on the Investor Relations section of our website at babcock.com. With that, I'll turn the call over to Leslie.

Thank you, Chase. Good afternoon everyone. Performance in our Power and Industrial segments was generally in line with our expectations in the first quarter. However, the performance in these segments was overshadowed by the previously announced cost increases on our rolling new-build contracts. Despite these challenges, progress is being made on all six Renewable projects and four are expected to be completed in the middle of this year. We're working with our customers in an effort to identify recoveries and other cost mitigating opportunities and are pursuing potential claims from other parties to partially offset these losses. Before providing an update on our operational highlights, I'd like to speak to three strategic actions and initiatives. First, as most of you are aware, last week, we completed a rights offering, raising $248.5 million. We appreciate the strong support of our shareholders and the backstop provided by Vintage Capital Management. We used approximately $215 million of the net proceeds to repay our second-lien term loan. Repaying this debt not only improves our balance sheet and reduces interest expense, but also improves our overall financial flexibility. Second, we’re continuing to make progress with the process for the potential sales of MEGTEC and Universal and hope to make an announcement in the future as we work to further improve our financial flexibility. Third, on March 21, we appointed Robert Caruso as our Chief Implementation Officer. Bob is a Managing Director at Alvarez & Marsal and has more than 25 years of experience helping companies improve their financial and operational profile. Bob and I are working closely together with all of B&W's management team to drive efficiencies and cost reductions throughout the organization. We expect to be able to provide more detail on this effort this summer. Turning to our operations. In line with our announcement in early April, we recorded a $52.6 million of net increased estimated costs to complete our Renewable projects. These were due to a number of factors, including schedule delays, subcontractor claim settlements and other costs associated with progressing the projects. We continue to make tangible progress on each side and are moving closer to the finish line each day. On the two projects in Denmark, construction is complete and we're working through final punch-list activities. One project is expected to be turned over to the customer in mid-2018, while the other one achieved partial turnover in March, with full turnover expected later in the year following planned seasonal outage work. In the U.K., two of the four loss projects, wood-bearing plants are in commissioning and those recently achieved a critical milestone at firing on oil. This is an important step as we work towards finishing these facilities and firing off wood. These projects are on track to be turned over to the customer in the middle of this year. Construction on the U.K. waste-to-energy project is progressing, and this plan is on track for turnover to the customer in the second half of 2018. And lastly, the project where we identified failure on a structural beam in late September is now fully back to work. This project accounted for the largest portion of the Renewable segment's increased estimated costs in the first quarter as we faced additional delays due to our construction partner filing for insolvency proceedings, and we waited on certain regulatory approvals that were required before we could get fully back to work. Construction is expected to complete later this year with turnover to the customer in early 2019. In our Power and Industrial businesses, the first quarter was a more positive story. Power had another solvent quarter of execution and with new awards of $271 million, its highest quarterly rate since late 2015. In the quarter, new bookings included a roughly $50 million retrofit contract on an existing coal-fired power plant in Midwest and a nearly $80 million project for replacement of environmental equipment and strong aftermarket parts bookings as well. In Industrial, profitability is showing signs of improvement as we continue to work through legacy contracts and refocus our business strategy at SPIG. Importantly, MEGTEC booked a large lithium ion battery coating equipment order for a battery production facility in Italy and, in line with our expectation, enjoyed robust organic revenue growth. With that, I'll now turn the call over to Jenny to provide more detail on our financial results.

Thanks, Leslie. Our first quarter consolidated revenues were $311 million, down 20% compared to the prior year, due to lower recognized revenue on our Renewable new-build projects and an expected year-over-year decrease in our Power segment. For the quarter, we reported a GAAP operating loss of $102.7 million. Adjusted EBITDA for the first quarter, which excludes the gain on the sale of our BWBC joint venture, an impairment charge related to our TBWES joint venture, restructuring and certain other costs, was a $62 million loss primarily due to the loss in our Renewable segment. Interest expense in the quarter was $13.4 million, up nearly $12 million compared to last year, reflecting a higher level of borrowings on our revolving credit facility and the second-lien term loan. We expect to significantly lower interest expense run rate for the remainder of the year following the repayments of our second-lien term loan, which was completed last week. Turning to our segment results. In Power, revenue was $159 million, down 19% year-over-year due mail to lower revenue on new build and environmental contracts, but partially offset by a modest increase in retrofit services contracts. Power's gross margin of 19.4% held steady year-over-year while the adjusted EBITDA margin of 7.1% was modestly lower compared to last year, largely as a result of lower volume. Based on the timing of contracts and backlog, our strong Q1 bookings and the normal cadence of revenue in the segment, we expect Q1 be the low point for Power segment revenue and profitability in 2018. In Renewable, revenue declined to $46 million in the first quarter 2018, reflecting the changes in estimated costs to complete new-build projects. Adjusted EBITDA in this segment was a loss of $62 million, mainly due to the increased estimated costs under six new-build projects and a higher level of SG&A to support the completion of those projects. In spite of the losses on the six headline projects, we continued to execute well on the balance of the renewable contracts in our portfolio and to generate profits in our O&M business. Industrial segment revenue in the quarter was $95 million, up modestly compared to the first quarter of 2017. Compared to last year, MEGTEC's environmental products produced strong revenue in the first quarter, driven by solid bookings throughout 2017 and improving end markets. This strength was partially offset by lower revenue at SPIG, where we focused on implementing a new business model in the second half of 2017, which impacted bookings over the last several quarters. Gross margin in the Industrial segment was 11.9%, down versus last year, but up when compared to the last few quarters, driven by fewer increases in costs to complete new-build cooling systems contracts. Adjusted EBITDA for this segment in the quarter was a $3 million loss. While we understand the desire for additional information on possible valuations and EBITDA contributions for our MEGTEC and Universal businesses, because of where we are in the potential sale process, we cannot provide that information at this time. For the first quarter, our adjusted effective tax rate was a negative 20%, reflecting both large foreign losses that accrued no tax benefits and the impact of the Tax Cuts and Jobs Act, which limits the deductibility of interest expense. These factors will continue to impact our effective tax rate for the balance of the year. In the quarter, we sold our interest in BWBC, our China joint venture were approximately $21 million and realized the gain on that sale of approximately $6.5 million. Also in Q1, we recognized an $18.4 million impairment in equity method investment related to our investment in TBWES, our India joint venture, following a preliminary agreement to sell our investment in that JV. This transaction is expected to close later in the year. Actions to sell interests in our Asian joint ventures are consistent with our strategy to shift our business more toward aftermarket and retrofit opportunities in the coal-fired power market and away from large international new build projects and to monetize noncore assets. Turning to our cash flow, balance sheet and liquidity. Free cash flow in the quarter, with the use of $88 million, generally in line with our expectations and mainly due to spending to advance completion of the Renewable new-build projects. We expect net cash outflows in each of Q2 and Q3 and net positive cash inflows in Q4. This forecast does not include any proceeds from contemplated asset sales or the effects of cost savings initiatives. We ended the quarter with $37 million of cash and cash equivalents net of restricted cash. Included in our restricted cash balance at March 31, was approximately $21 million of proceeds from the sale of BWBC. In early May, this cash was transferred from our restricted account into an unrestricted account allowing us to apply the cash to pay down the revolver. Total balances under our U.S. and international revolving credit facilities at March 31 were $181 million. As of May 8, 2018, following the release of the BWBC funds and the completion of the rights offering, this balance was $146 million. We are affirming our 2018 adjusted EBITDA guidance of $20 million to $40 million. Our guidance assumes solidly positive adjusted EBITDA in the second quarter with improving EBITDA each quarter throughout the year. I'll now turn the call back over to Leslie.

Thanks, Jenny. In closing, we believe that we're in the final stages for the Renewable projects. We're also taking actions toward our goal of improving B&W's overall business and driving stronger profitability and expect to provide an update on these activities over this summer. From a strategic viewpoint, we remain focused and are progressing on important initiatives. Over the last week, we completed the rights offering and repaid our second-lien term loan. We're continuing to make progress with the strategic process for MEGTEC and Universal. And our Chief Implementation Officer is onboard and helping with initiatives to improve our cost structure and define our strategy going forward. B&W has the most comprehensive portfolio of products and services for the coal-fired power market. This provides us with a competitive advantage and was demonstrated this quarter with robust bookings and solid margin performance within our Power segment. We're working with customers to develop or expand alliance agreements to ensure they have the services they need while providing us with increased visibility into our revenue stream. In Industrial, we're encouraged with the growth outlook for MEGTEC and Universal. And we continue to provide resources from across B&W to drive improved operational performance at SPIG. While we have lots of work yet to do, our position for the future is improving. With the support of our shareholders, we're building on B&W's strong foundation to ensure we continue to provide our customers with the high-quality engineered equipment and services they expect from our historic company. Finally, I would like to thank Jenny for her service as B&W’s Chief Financial Officer. It has been a pleasure working with you in this role for the last few months as well as in other positions over the years, and we wish you all the best in your retirement. With that, I will now turn the call back to Josh, who will assist us in taking your questions.

[Operator Instructions] Your first question comes from Bob Labick with CJS Securities. Your line is open.

Hi, it’s Craig Bibb on for Bob with CJS Securities. Could you tell – just what can you tell us about the sales process for Universal and MEGTEC?

Now we have to conclude it in the near future and I’m afraid that’s about all.

Okay. And then what are the margins on the bookings in the industrial backlog, the ballpark –

I think – I would – see, the margins on bookings is consistent with margins that we've given as kind of target margins for that segment for the rest of the year. There is nothing unusual or up or down that should be noted about those bookings margin.

Apart where we are now?

No, if you go back to the guidance we gave for margins in the industrial business for the full year, I think that's where you should look at the margins for the new bookings.

Okay. I mean, given the guidance, what should we look for cash burn for the remainder of the year?

We've given you some guidance as to the timing, but we've not given you specifics as to the quantum on a per year basis. There is a number of moving parts at this point in time, which include potential asset sales, include the potential for cost reduction, activities. It would be very challenging to give you a specific number right now in light of all of the moving pieces that are coming.

Okay. And just holding all the moving pieces as they are your guidance was that you will generate positive cash in Q4 and as far as you can go?

That is the forecast, yes.

Great. All right, thank you.

There are currently no further questions at this time. I will turn the call back to the presenters.

Thank you, everybody. We will look forward to following up with you in the coming days and weeks. A replay will be available for a limited time on our website later today.