Babcock & Wilcox Enterprises, Inc. (BW) Q3 2018 Earnings Report, Transcript and Summary

Good afternoon. My name is Christine and I will be your conference operator today. At this time, I would like to welcome everyone to the Babcock & Wilcox Q3 2018 Earnings Conference Call. [Operator Instructions] Thank you. Megan Wilson, Vice President of Investor Relations, you may begin your conference.

Thank you, Christine and good afternoon everyone. Welcome to Babcock & Wilcox Enterprises’ third quarter 2018 earnings conference call. I am Megan Wilson, 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 third 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 provides 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 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 third 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 will turn the call over to Leslie.

Thank you, Megan. Good afternoon, everyone and I apologize for my voice. I am recovering from a bad cold. During the third quarter and over the last several weeks, we have continued to make progress on strategic actions, which are designed to provide us with adequate liquidity to complete our remaining renewable projects and focus on providing quality products and services to our customers in our core power and industrial end markets. I will discuss a few of these actions with you today and provide an update on our challenged renewable energy projects. First, in terms of strategic actions, in mid-September, we closed the sale of our operations and maintenance business at the Palm Beach Resource Recovery Center in Florida, the Covanta, for $45 million and in early October, we closed the sale of our MEGTEC and Universal businesses to Dürr for $130 million. These actions, combined with the sale of our interest in our JV in India earlier this year, resulted in $190 million of gross proceeds. In the third quarter, we also completed our previously announced strategic planning process. This process affirmed our strategy to focus our business on core products and services for power and industrial markets with an increased emphasis on retrofit and aftermarket services. We also identified a number of opportunities in each business line to capture more business and improve delivery to our customers. The strategic planning process also took another look at our previously announced cost savings program, leading us to increase our annualized cost savings target from $54 million to $62 million. We begin to implement $38 million of these cost savings initiatives in the second and third quarters and expect to implement the remaining $24 million in the fourth quarter. We started to see initial benefits of this program in the third quarter. Finally, we made a number of amendments to our credit facility to support our liquidity and provide the time required to complete the renewable loss projects, which Joel will discuss in more detail. Turning to our business performance, completion of our renewable energy projects have taken longer than expected with operational challenges at each of the sites as we moved into startup and trial operations. However, we continue to make progress and we turned over one of the projects, a biomass plant in Denmark to the customer in October. That project is now in the warranty phase. In the UK, 3 of the 4 projects are in startup with all trial operations underway or expected to start shortly. All three of these units have generated power to the grid and all three are expected to be turned over to the customers by the end of the year. The other project in the UK with the previously disclosed steel beam failure progressed in line with expectations in the third quarter and we continue to expect that project to be turned over in the third quarter of 2019. The remaining project in Denmark is fully operational and will be turned over pending customer negotiations. As we have discussed before, we are working with customers, suppliers, insurers and others to seek recoveries on these projects where possible. The renewable segment’s other business lines, including its portfolio of equipment-only contracts and aftermarket services continue to be profitable. In power, we performed well despite decreased retrofit sales due to delays caused by uncertainty in U.S. environmental regulations. Bookings exceeded our expectations with bookings for both the quarter and year-to-date up compared to the prior year and we continue to see growing strength in our parts and industrial business lines. Gross margin and EBITDA margin were both up for the quarter compared to the same quarter last year, which shows the impact of our efforts to reduce SG&A costs. We continue to target adjusted EBITDA of roughly $100 million for the power segment in 2019. While our SPIG business had a challenging quarter, actions taken in the last several months, including restructuring, new management and increased focus on project execution, appear to be stabilizing the operations outside the U.S. as the legacy projects wind down. Our 2017 change in strategy to focus on wet technology in the EMEA region and aftermarket growth and a more selective approach to the projects we pursue resulted in a lower backlog for the business. However, these projects and backlogs had better terms designed to drive improved performance in 2019. I will now turn the call over to Joel to provide more detail on our financial results.

Thanks, Leslie. Our third quarter consolidated revenues were $295 million, down $61.9 million or 17% compared to the prior year quarter due to many of our European renewable projects being in late stages of completion and lower sales volume across all business segments. For the quarter, we reported a GAAP operating loss from continuing operations of $45.1 million mainly due to a higher level of charges and increased support cost to complete the renewable energy projects in Europe. The quarter results were also negatively impacted by higher financial advisory expenses, lower volume in the renewable segment’s other equipment-only contracts and aftermarket lines of business and increased cost to complete legacy newbuild cooling systems in the industrial segment. These were partially offset by lower SG&A cost, reflecting the benefits of cost savings initiatives. Adjusted EBITDA was negative $26 million compared to negative $14.4 million in the third quarter of 2017. I would like to point out there are several non-cash items that affected our GAAP results during the quarter, including a $4.9 million foreign currency loss related primarily to intercompany loans, a $4.2 million pension mark-to-market gain due to the sale of West Palm Beach Resource Recovery Corporation, and a $99.6 million non-cash income tax charge to record a valuation allowance against our remaining net deferred tax assets. While our analysis of the valuation allowance at September 30, 2018 resulted in a judgment that a full valuation allowance against our net deferred tax assets was warranted, this does not limit our ability to use these deferred tax assets in the future and such an allowance can be reversed in the future. Now, turning to our segment results, in the power segment, revenue was $191.1 million, down $11.1 million or 5.5% compared to the prior year quarter. This was primarily due to the anticipated lower revenue on retrofit contracts in the U.S. and delays in projects caused by uncertainty in U.S. environmental regulations, such as the coal combustion residual regulations. Power’s gross profit margin was 18%, slightly up from 17.5% in the same quarter last year as lower volume of revenue was partially offset by the benefits of cost savings initiatives. The segment’s adjusted EBITDA in the third quarter was $21.9 million, in line with expectations, compared to $21.6 million in last year’s quarter. A slight decrease in gross profit was more than offset by reductions in SG&A costs. EBITDA margin for the quarter was 11.5% compared to 10.7% in the same period last year. In the renewable segment, revenue was $65.5 million in the third quarter of 2018, down $32.1 million or 30% compared to the prior year quarter. Revenues were lower because several of the European renewable contracts were in late stages of completion when fewer costs are incurred relative to the main construction phases. The segment’s other equipment-only contracts and aftermarket lines of business also saw lower sales volume. Gross profit for the segment was negative $17.1 million, down $17.3 million mainly due to changes in the estimated cost to complete the six loss contracts and increased support cost to progress these projects as well as lower sales volume in the segment’s other equipment-only contracts and aftermarket lines of business. The increased charges on the loss projects were mainly due to issues encountered during commissioning in startup operations and resulted in $19.1 million of incremental costs during the quarter. As Leslie mentioned, we are continuing to pursue potential insurance recoveries and work with our customers to seek relief from losses on all these loss projects where possible. Adjusted EBITDA was negative $25.6 million, down $25.2 million due to the decrease in gross profit activity offset by lower SG&A costs due to our recently announced cost savings initiatives. Also the segment’s portfolio of other equipment-only contracts and aftermarket lines of business continue to be profitable. During the quarter, we closed the West Palm Beach Resource Recovery Corporation sale for $45 million subject to adjustment. And as a consequence of that sale, our renewable bookings in the third quarter include a reduction of approximately $467 million related to the long-term O&M contracts associated with that business. Revenue in our Industrial segment, which now consists of our SPIG business, was $34.8 million, down $12.7 million or 26.6% compared to last year, mainly due to lower volume in newbuild cooling systems following a 2017 change in strategy to improve profitability by more selective bidding and focus on core markets and geographies and products. Adjusted EBITDA for this segment was a loss of $11.2 million due to increases in estimated costs to complete legacy newbuild cooling systems sold under the previous strategy, lower sales volumes and a bad debt reserve for a bankrupt customer. Newbuild cooling systems contracts sold under the previous strategy are mostly expected to be complete by the end of this year. Also the sale of our MEGTEC and Universal businesses to Dürr AG for $130 million, subject to adjustment, closed on October 5. This sale, combined with the sales of our West Palm Beach O&M operations and our investment in the joint venture in India during the third quarter are consistent with our strategy to refocus our business on our core Power and Industrial products and shift more towards aftermarket and retrofit opportunities as well as to monetize non-core assets to reduce the balance on our revolving credit facility. Turning to our cash flow, balance sheet and liquidity, cash flow from operations in the quarter was a use of $62.9 million, mainly due to spending related to activity as we work towards the completion of the renewable newbuild projects. We ended the quarter with $32.5 million cash and equivalents related to our continuing operations, net of restricted cash. Total balances under our U.S. and international borrowing credit facilities at September 30 were $194 million. Since then, net proceeds from the sale of the MEGTEC and Universal sale on October 5 have been primarily used to reduce these balances. Interest expense in the quarter was $10.4 million compared to $7.3 million last year, reflecting a higher level of borrowings on our revolving credit facilities. As Leslie mentioned, during the third quarter and in October, we made a number of amendments to our revolving credit facility to provide incremental liquidity to the company, extend certain milestone dates and reset our financial covenants. A few key elements of the amendments include a last-out term loan under which the company has now received $30 million of net cash proceeds and a provision that allow the company to retain $25 million from the Palm Beach Resource Recovery Corporation sale proceeds, cumulative reductions in the minimum liquidity covenant that provides the company access to $30 million of incremental liquidity and increasing the $35 million once certain loss project milestones are achieved. The most recent amendment extended the deadline to February 15, 2019, for a requirement to obtain certain concessions from our Renewable loss contract customers to generate at least $25 million of incremental benefits to the company. While we have secured commitments for concessions from a number of customers, we are still in discussions to secure additional concessions. In addition, the most recent amendment included modifications to customer turnover milestones in connection with the 4 Renewable loss contracts. With the turnover of the one of the projects, we have achieved one of these completion milestones. With respect to the 3 other milestones, the turnover dates were extended 31 days. As Leslie also mentioned, we are now targeting $62 million in annualized savings through our cost savings initiatives. The new savings target of $62 million has an estimated cost to achieve of $12 million. During the third quarter, we realized approximately $8 million of the cost savings and expect $11 million to be realized during the fourth quarter, with the balance in 2019. Cost savings have been identified across all segments and at the corporate level. And the implementation plan and savings are progressing in line with our expectations. Finally, last quarter, we announced that based on the number of ongoing asset divestitures and strategic actions, we withdrew the company’s previously stated 2018 financial guidance. Given the ongoing efforts associated with these divestitures, cost savings initiatives and other strategic actions, the company does not intend to provide guidance at this time. I’ll now turn the call back over to Leslie.

Thanks, Joel. We remain laser focused on completing the renewable projects and we were able to make progress on this objective with one project now turned over and at least three more expected to be turned over by the end of the year. As Joel mentioned, last quarter, we withdrew guidance due to the number of ongoing changes in our business. However, we understand that our investors and stakeholders are interested in our completion of the renewable projects and we intend to provide updates going forward when the remaining projects are turned over. We have made significant strides towards positioning B&W for the future. We have recently announced that we shifted our headquarters from Charlotte, North Carolina to Ohio and that we expect to move to a new lease facility in Akron next year. This move will help reduce costs, better meet our space and operational needs and provide our current and future employees with a much more collaborative and dynamic place to work. We have streamlined our business through asset sales and pursued cost-cutting activities with an improved target of $62 million. With the completion of our strategic planning process, we are driving initiatives to improve our product delivery and serve expanding markets to increase our profitability and cash flow for the long term. With all these actions in place, we expect to see improvements next year led by a strong performance in our core power business. We appreciate the continued support of our customers and employees during these challenging times and look forward to working together to deliver energy and environmental technologies and services in what we believe will be a much better 2019. I will now turn the call back over to Christine who will assist us in taking your questions.

Thank you for joining us. That concludes our conference call. A replay will be available for a limited time on our website later today.

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