Babcock & Wilcox Enterprises, Inc. (BW) Q2 2018 Earnings Report, Transcript and Summary

My name is Tim, and I will be your conference operator today. At this time, I would like to welcome everyone to the Babcock & Wilcox Q2 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, Tim, and good afternoon, everyone. Welcome to Babcock & Wilcox Enterprises second 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 Joel Mostrom, Interim Chief Financial Officer, to discuss our second quarter results. 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 statement. 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 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. During the second quarter, we've taken a number of actions to improve B&W's financial flexibility, which helps us remain in the strong position to continue to serve our customers. These actions along with the financing arrangement we announced this afternoon, should provide us with adequate liquidity to complete our renewable projects and continue to focus on enhancing our product and service offerings for customers and our core power and industrial end markets. I'll discuss a few of these actions with you today. First, in early June, we signed an agreement to sell our MEGTEC and Universal businesses for $130 million. This transaction is expected to close in the next few weeks. And today, we announced an agreement to sell our operations and maintenance business at the Palm Beach Resource Recovery center in Florida to Covanta for $45 million. Also in June, we began implementing additional cost savings actions that are expected to generate $34 million of annual savings. Costs to achieve these savings will be approximately $5.5 million. We expect to recognize $15 million of the savings this year with the remainder being recognized in 2019. As part of our strategic timing process that we will complete in the coming months, we're continuing to evaluate our cost structure and are targeting additional savings of at least $20 million that we expect to implement in the fourth quarter for a total targeted savings of $54 million. Finally, today, we announced a new financing arrangement that demonstrates support for the strength of our underlying business by providing us with the financing commitment that gives us flexibility we need to finish the renewable projects. The combination of these items should provide us with sufficient liquidity and position us for improved profitability and cash flows, once the renewable projects are fully complete. Turning to our business performance. We've recognized that the renewable projects continue to be a disappointment and have significant increases in estimated cost to complete in the quarter, but the projects are continuing to progress towards completion with four of the six units expected to be turned over to customers in the next three months. The most significant charges came from the plants that required structural beam repairs. When the beam repairs were complete and work was released inside the [indiscernible] estimates were updated to include equipment damage related to exposure to the elements during the nine months delay and to ensure pricing for the remaining construction work was based on updated vendor bids. In the UK, three of the four projects are in startup and trial operations. One unit has already generated power to the grid and will be soon be moving to the final trial operations period. The other two units are expected to generate power to the grid this month and follow a similar process to achieve turnover to the customers. The project with the steel beam issue is fully staffed, construction is underway and turnover to the customer is planned for the third quarter of 2019. The two challenged plants in Denmark are fully operational and should be turned over to customers in the coming months. One, finishing with [ph] guidance during the scheduled plant outage that should be complete in the next few weeks, and the others completing its contractual trial operations period. Both sides have demonstrated successful operations. Consistent with our previous disclosure we're working with customers, suppliers, insurers and others to seek recoveries on these projects. In power, we generally performed well, though our gross margin was lower than expected in the quarter, due to fewer favorable contract close-outs compared to last year and higher warranty expense in select projects. We had solid bookings in the first half of 2018 with several large projects in Q1 and good aftermarket bookings in both Q1 and Q2, which keeps up largely on track for our previously stated targets for the year. While our B&W SPIG business had a challenging quarter, it's continuing its recovery this year, as we have worked to refocus this business on corvette technology in the EMEA region, and aftermarket growth. With this change in strategy and a more selective approach to the projects we pursue, SPIG has a backlog of solid projects. Combination of new projects with improved charms and economics and the significant restructuring activities that are currently underway are expected to drive improved performance in 2019. With that, I'll now turn the call over to Joel to provide more detail on our financial results.

Thanks, Leslie. Our second quarter consolidated revenues were $291 million, down $14.9 million or 5% compared to the prior year, mainly due to lower revenue in the power segment, which was generally in line with our expectations. For the quarter, we reported a GAAP operating loss from continuing operations of $137.4 million, mainly due to the increase in estimated costs to complete the renewable energy contracts in Europe and goodwill impairment charges related to our SPIG business. Adjusted EBITDA for the second quarter which excludes the goodwill impairment of our SPIG business, the loss on extinguishment of our second-lien loan was a $96.2 million loss, primarily due to the loss of a renewable segment and or unfavorable currency impact on the Company's intercompany loans, primarily related to renewable segment. Interest expense in the quarter was $11.8 million compared to $6.2 million last year, reflecting a higher level of borrowings on our revolving credit facilities and the interest associated with the second lien loan into early May of this year. I'd also like to point out there are several major noncash items that are affecting the GAAP results during the quarter including the aforementioned $37.5 million goodwill impairment for SPIG, a $49.2 million loss on the extinguishment of debt, a $20.2 million foreign currency loss related to the intercompany loans, and a $72.3 million impairment charge related to the MEGTEC and Universal sale that is included in the discontinued operations. Turning to our segment results. In the power segment, revenue was $197.8 million, down $16 million or 7% compared to the prior year. This was due mainly to the anticipated lower revenue on retrofit service contracts as a result with fewer projects associated with the cold combustion residual regulations in the U.S. which benefit our business in 2017, as well as lower sales in industrial steam generation systems. Additionally, year-over-year comparisons in power are adversely impacted by our sale of emissions monitoring business, KVB-Enertec. Power’s gross margin was 15.2%, down from 20.5% last year due to an increase in estimated warranty costs on certain projects in the current period, favorable contract close-outs and reduction of employee benefit expenses, which benefited last year’s margin performance. Nevertheless, we continue to anticipate power gross margin of roughly 20% in 2018. Power EBITDA was 8.6%, compared to 12.6% last year as the items previously mentioned were mitigated by ongoing cost management actions in that business. In the renewable segment, revenue was $55 million in the second quarter. Adjusted EBITDA in the segment was a loss of $78.6 million, mainly due to $57 million of additional estimated costs to the renewable energy contracts in Europe. The largest portion of the costs related to greater than expected costs to restart work at the site with the previously announced steel beam failure and the remainder of the increased costs relate to increases expected warranty expense and other commissioning costs with the other projects. Also booked during the quarter, we established a reserve for a $15 million insurance receivable book in the third quarter of 2016. The insurance provider has dispute the coverage on the claim. So, we believe the dispute is without merit and intend to aggressively pursue full recovery under the policy and have filed for arbitration. As Leslie mentioned, we are also working with our customers to seek relief from losses and are pursuing potential claims where available from other parties. Revenue in our industrial segment, which now consists mainly of our SPIG business, was $46 million, essentially flat compared to last year as an increase in new build systems was offset by decline in aftermarket services. Adjusted EBITDA for this segment was a $6.2 million loss due to increases in estimated costs to complete new build cooling system projects and legal expenses related to a legacy litigation matter. Because of the ongoing losses in the SPIG business and the impact on its forecast, we impaired the remaining goodwill related to the business, resulting in a $37.5 million charge in the quarter. We’ve previously announced that we signed an agreement with Dürr AG to sell our MEGTEC and Universal businesses for $130 million subject to adjustments. The transaction is currently undergoing regulatory reviews, and we expect will close in the coming weeks. Additionally, as indicated our first quarter results, we sold our investment in TBWES, our Indian JV for $15.5 million, which followed the sale of our Chinese joint venture earlier in the year. Selling our interest in the Asian joint ventures is consistent with our strategy to shift B&W more towards aftermarket and retrofit opportunities in the coal fired power market and away from large international new build opportunities as well as monetize non-core assets. Turning to our cash flow, balance sheet and liquidity. Free cash flow in the quarter was a use of $67 million, mainly due to spending related to activity working toward the completion of the renewable new build projects. We ended the quarter with $28.5 million cash and equivalents related to our continuing operations net of restricted cash. Total balances under our U.S. and international revolving credit facilities at June 30 were $200 million. We expect to use the net proceeds from the sales of MEGTEC and Universal and the West Palm business to reduce these balances. As Leslie mentioned -- also mentioned, today, we amended our first-lien revolving credit facility to provide incremental liquidity to the Company and reset our financial covenants. A few key elements of the amendment include a commitment for a new Last Out loan that will result in the Company receiving $30 million of net cash proceeds, a reduction in the minimum liquidity covenant that effectively provides the company with access of up to $35 million of incremental liquidity relative to the prior terms of our credit facility and a requirement that the Company must achieve certain concessions from our renewable lost contract customers by September 30th that will generate at least $25 million of incremental benefits to the Company. it also includes the provision that allows the Company to retain $25 million from the West Palm Beach sale proceeds. The provider of the commitment is Vintage Capital and they informed the Company that subject to the consent of the agent bank, they intend to syndicate all or a portion of the commitment, which will continue to be backstopped B. Riley FBR, Inc. Finally, based on a number of recently announced asset divestitures, strategic actions and the overall strategic review of the business, the Company's previous guidance is no longer relevant and the Company's withdrawing its previously stated 2018 financial guidance. I will now turn the call back to Leslie.

Thanks, Joel. We've taken several actions in the last few months to position B&W for the future. We've identified asset sales of approximately $190 million, cost cutting activities with the target of $54 million, and are working with our Chief Implementation Officer to complete the strategic review of our entire Company that when fully implemented is expected to streamline our business and improve our profitability and cash flow for the long term. In the near term, we’re focused on executing are work in our backlog, continuing to serve our customers and core power and industrial markets with high quality engineered equipment and services, and driving the renewable project to completion. While it was a challenging quarter, we made progress on the renewable projects, remained focused on delivering for our customers and continued to drive cost control efforts to improve our bottom line. We expect to see improvements next year, led by our core power business that's targeting EBITDA generation in the range of $100 million in 2019. And we'll continue to work to strengthen our business across the board. As I close out our prepared remarks today, I also must note that this is Chase Jacobson's last call with us. On behalf of the leadership team, I'd like to thank Chase for his excellent work to help improve our communications and support of our investors during his time with B&W. We appreciate and admire his professionalism and dedication. With that, I'll turn the call back over to Tim, who will assist us in taking your questions.

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

Hi. Good afternoon. It's Pete Lukas for Bob. In your prepared remarks, you mentioned 2019 goal for power of $100 million adjusted EBITDA. Just wondering how much of that would be related to pension contribution.

Approximately $24 million.

Great. Thanks. And then, sticking with power, is it still the expectation to fold SPIG into power, and are their savings that can come from that?

So, that is certainly one of the options that we're looking at as part of our overall strategic review that we’ll complete here in the next couple of months. But power is definitely a good fit for SPIG with the good overlap in customers and the technology blends in nicely.

And then, sticking with SPIG. Any update on operations as far as timing to get that back to mid-teens gross margins?

Yes. So, we're still working down the backlog, it’s trouble projects that were in that. And we really expect to see improved results latter half of this year, trending into next year, having a much stronger performance.

Great. Thanks. And just a couple quick ones on renewables, as far as -- you’ve laid out the timing of finishing up the projects there. But any expect -- sorry, expectations on cash burn on the remaining projects?

Bob, as we said earlier we’re really in a position now where we're not going to be providing that type of guidance on a forward-looking basis.

Thank you. [Operator Instructions] And there are no further questions at this time. I’d now like to turn the call over to Chase Jacobson for closing remarks.

Thanks, Tim. And thanks, everybody, for joining the call today. That concludes the conference call. A replay will be available for a limited time on our website later today, and I look forward to following up with many of you in the coming weeks. Thanks.

This concludes today's conference call. You may now disconnect.