Babcock & Wilcox Enterprises, Inc. (BW) Q1 2019 Earnings Report, Transcript and Summary

Good morning. My name is Jessa, and I will be your conference operator today. At this time, I would like to welcome everyone to the Babcock & Wilcox Enterprises First Quarter 2019 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks there will be a question-and-answer session [Operator Instructions] Thank you. Megan Wilson, Vice President, Investor Relations, you may begin your conference.

Thank you, Jessa, and good morning everyone. Welcome to Babcock & Wilcox Enterprises First Quarter 2019 Earnings Conference Call. I’m Megan Wilson, Vice President of Investor Relations at B&W. Joining me this morning are Kenny Young, B&W’s Chief Executive Officer; Lou Salamone, Chief Financial Officer; and Henry Bartoli, Chief Strategy Officer to discuss our first quarter results. During this call, certain statements we make will be forwardlooking. 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 to supplement the results provided in accordance with GAAP. This information should not be considered superior to or as a substitute for comparable GAAP measures. A reconciliation of historical non-GAAP measures can be found in our first quarter earnings release published yesterday. With that, I will turn the call over to Kenny.

Thank you, Megan and good morning everyone. Thanks for joining.Today, we’d like to take a slightly different approach to our earnings call. From a company standpoint, we feel strongly about the positive direction Babcock & Wilcox is trending and Lou, Henry and I want to share our thoughts about how we view the company’s transformation going forward and what we and all of our employees are working so diligently to achieve over the next several months. Our employees have been relentless in their dedication to our customers throughout the past several months as we’ve transitioned the company towards delivering our core technologies across our three segments: Babcock & Wilcox, Vølund and SPIG. We have taken significant steps to write off or write down our historical challenges, significantly reduce our risks, position ourselves for a profitable future, improve our balance sheet and put this company in the best position to increase market share, refinance our debt and begin the process to recognize value for our customers, our employees and our shareholders. Although we will have bumps in the road at times and we will still face challenges, we do see a clear pathway to improve cash flows as we complete the remaining commitments under our EPC loss contracts. We see opportunities to increase market share on a global basis, leading toward improved margins and building on an already strong and loyal customer base. Although we can’t give explicit guidance quarter-by-quarter in 2019 and it’s too early for greater details on 2020, we can say we see solid indications for increased returns throughout 2019, which should serve as the foundation to achieve our longer-term objectives as we enter 2020. About a month ago, we held an investor call to explain certain loss project settlements financing and made it clear that all of B&W's underlying performance will soon emerge from the shadow of those historical losses. We are working closely with our customers to finalize and complete our remaining obligations to close out these agreements. Now as we discuss our first quarter 2019 results, you'll see that we are turning the corner and starting to realize the benefits of our recent strategic action. We still have a way to go, but now we have real momentum on our path towards profitability. As Lou, Henry and I have previously discussed, we are taking the necessary steps to ensure we execute on our strategy over the next several quarters. The company now has identified and initiated over $100 million of cost-saving initiatives, which includes previously announced corporate actions for cost reduction. Our philosophy is to identify unnecessary systems, processes and cost that offer little value in supporting our customers and remove as much as practical from our overhead. Then we push accountability down to the lowest level and structure incentives that drive customer and shareholder value and reinforce a culture of safety at the project and manufacturing levels. Our safety results have improved over the past few years, and this continues to be top of mind for all our employees. We have flattened the organization to leverage the strength of our industry experts and tap new leadership from inside the company that has been hidden. By applying this philosophy, each quarter should improve over the previous as we unlock more and more of our bottom line value by removing unnecessary costs that have created barriers for our company. Today, I'll further explain our strategy to get from where we are today to our target, which is a run rate adjusted EBITDA of $100 million in 2020. But first, our results. The Babcock & Wilcox segment continues to perform well with a strong backlog and pipeline. Our changing strategy for SPIG segment is beginning to drive results, and we expect our Vølund segment will soon put the EPC loss projects behind it. As I said, we're turning the corner on our path to profitability. I'll now turn the call over to Lou to discuss the first quarter of 2019 in detail.

Thanks, Kenny. We had a very busy first quarter in 2019. We carried out many of our strategic actions and are continuing to implement them. We significantly improved our operations and profitability. And we achieved the financing that provides additional liquidity to execute our plans. Let me now get into the results of the quarter. The first quarter consolidated revenues were $231.9 million. They were down about 8.4% as compared to the 2018 quarter. The decrease, however, was primarily the result of several EPC contracts being in the final stages of completion in the first quarter and, therefore, generating lower revenue than in the prior -- in the 2018 quarter. The GAAP operating loss in the first quarter of 2019 was $74.4 million lower than the 2018 quarter. The loss in 2019 was $32 million compared to an operating loss of $106.4 million in the first quarter of 2018. Prior to the first quarter of 2019, the most significant drivers of the company's operating losses were the charges for the 6 European EPC loss contracts. In the first quarter of 2019, the most significant drivers are our operating losses or settlement costs related to certain EPC contracts, restructuring activities and advisory fees. Adjusted EBITDA loss was $72.6 million lower in the first quarter of 2019 at a negative $5 million as compared to $77.6 million negative in the first quarter of 2018. In the first quarter of '19, the company changed its calculation of adjusted EBITDA to exclude net pension benefit, foreign currency exchange effects and exclude other income and expense so, all references to adjusted EBITDA both on a comparable basis and a consistent basis going forward will be calculated on that basis and as additionally as we disclose it in the reconciliation. Now let me turn to our first quarter segment results. The Babcock & Wilcox segment, formerly the Power segment, revenues increased 18.5% to $188.6 million in the first quarter of '19 as compared to $159.1 million in the prior year period. This increase was mainly driven by larger construction, new build and industrial projects. The gross profit in the Babcock & Wilcox segment in the first quarter of '19 was $31.1 million as compared to $30.9 million in the prior year-end. This percentage-wise lower gross profit reflects a higher mix of lower margin construction revenue in the 2019 quarter as a percentage of our total revenue, and it includes the construction services performed at no margin for the SPIG segment on its single loss project in the U.S. The gross profit margin was 16.5% in the '19 quarter as compared to 19.4% in the same quarter last year. And again, this was impacted, as I explained above, by the project mix of a greater amount of construction in our revenues in the first quarter. Notwithstanding this lower gross profit percentage in the '19 quarter, adjusted EBITDA for the quarter of 2019 increased 115% to $9 million as compared to $4.2 million in last year's quarter. This increase is mainly attributable to the impact of our cost-saving initiatives, and those cost-saving initiatives were partially offset by approximately a $2.3 million increase in the level of corporate overhead that's absorbed by this segment compared to the prior quarter. The adjusted EBITDA margin also improved in the 2019 quarter to 4.8% as compared to 2.6% in the same period last year, so a strong quarter for our Power business. In the SPIG segment, formerly called the Industrial segment, revenues decreased 21.3% to $28.9 million in the first quarter of '19 as compared to $36.7 million in the 2018 quarter. This was mainly due to lower volume of new build cooling systems, and this was expected following a 2017 change in strategy to improve profitability by more selectively bidding and focusing on core geographies and products and driving for more profitability in our contracts rather than just increases in revenue. Gross profit improved to a positive $3.7 million in the first quarter of 2019 compared to a gross profit a negative gross profit of $2.8 million in the prior period, the improvement was primarily from the effects of the new strategy and from continued progress achieved on the small number of remaining legacy new build cooling system contracts that were remained in the quarter without incurring significant increases in that in their estimated cost, whereas in the first quarter of 2018 there were higher estimated costs to complete those projects. Adjusted EBITDA improved to an $8 million positive to $700,000 compared to a negative $7.3 million in the same period last year. Again, this is driven by the improvement in gross profit from our strategic change in strategic direction and from the implementation of cost-saving initiatives that we’ve taken at SPIG. Moving on to Vølund, our Vølund segment. First quarter revenues in the Vølund segment, formerly the Renewable segment, were $29.5 million in the first quarter of 2019 compared to $60 million in the first quarter of 2018. The first quarter revenues were lower compared to the prior year quarter as several of the European EPC loss contracts were in the final stages of completion in 2019 resulting in lower construction revenue being recognized than was recognized in 2018. Additionally, the March 29, 2019, settlements on certain of the EPC contracts resulted in a reduction of revenue recognition in the first quarter. The variance was also driven by the sale of the Palm Beach Resource Recovery Corporation in September of 2018 and limited bidding on Vølund renewable energy contracts as we made an overt decision to not bid on full EPC contracts. The segment gross profit improved by $47.5 million to a negative $2.9 million in the first quarter as compared to a $50.4 million negative reported in the first quarter of 2018. In the first quarter of 2018, the segment recorded a $52.6 million in net loss, resulting from changes in estimated revenues and cost to compete in the six European EPC contracts as compared to a $4.1 million of losses recorded in the first quarter of 2019 and this includes the effects of the 2019 project settlements. Beyond the effect of the loss contracts, the first quarter 2019 gross profit was affected by lower levels of direct overhead support and warranty expense, offset by the absence of gross profit from the Palm Beach Resource Recovery Corporation that, as I mentioned, was sold in the third quarter of 2018. The adjusted EBITDA loss in the quarter improved was lower by $52.9 million to a negative $8.9 million compared to negative $61.8 million in the first quarter last year. Again, this was due mainly to reduced gross profit losses experienced in the EPC contracts as well as lower SG&A cost reflecting benefits of our restructuring and cost reduction activities. Let me now turn to cash flow, our balance sheet and liquidity. Cash flow from operations in the quarter was a use of $37.7 million. This was mainly due to the spending related to progress toward completion of the EPC loss contracts as well as the settlement cost, restructuring cost and advisory fees, offset by strong cash flow from the Babcock & Wilcox and SPIG segments working capital. We ended the first quarter, March 31, 2019, with $43.5 million of unrestricted cash and cash equivalents. That number is before the financing that we achieved subsequent to the end of the first quarter. Our total revolving debt was $175.3 million at the end of the first quarter, and our interest expense was $11.1 million as compared to $13.5 million in the prior year quarter. As previously discussed in our filings and press releases in the first quarter of -- in the first quarter and in April of 2019, we entered into a number of amendments on our revolving credit facility and borrowed an additional $160 million through last-out term loans as described in those filings. The proceeds from the last-out term loans were used to pay amounts due under the EPC loss project settlement agreements and our debt placement fees and expenses and some paydown of our revolver. The remainder is available for future working capital needs. On April 8, after closing of the $160 million of last-out term loans, repayment of a portion of the revolver, repayment of the settlement due under the EPC loss contracts settlement agreements and the payment of debt placement fees, the company had liquidity of approximately $54 million made up of unrestricted cash on hand plus borrowing availability under its revolver. As part of our most recent amendment, we agreed to seek shareholder approval to execute a $50 million rights offering at $0.30 per share within six months; exchange all of the principal of the last-out term loan held by Vintage Capital Management for common stock at $0.30 per share; approximately -- issue approximately 16.7 million warrants, each to purchase 1 share of common stock at $0.01 per share to B. Riley or its designee; and execute a reverse stock split. We are now preparing to seek shareholder approval for these actions as this relates to curing our New York Stock Exchange continued listing criteria deficiency. Based on the expected timing of the Annual Shareholder Meeting, we have been permitted under the NYSE rules to go beyond the six month cure period to request required shareholder approval on the corporate action that we plan to take. Our most recent amendment, also among other things, permits us to repay up to $86 million of the last-out term loans using the proceeds from the rights offering. It increases our borrowing capacity by reducing our required minimum liquidity to $30 million from $40 million and requires that we refinance the existing credit facility by March 15, 2020. As Kenny will discuss further, we've identified and begun implementation of approximately $100 million in annualized savings through our cost-saving initiatives. Roughly three fourth of these cost-saving measures have been implemented to date and with the balance being implemented over the remainder of 2019 and into early 2020. The 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, as previously stated, based on a number of ongoing strategic actions and cost savings initiative, the company does not intend to provide guidance at this point in time. I'll now turn it back over to Kenny to discuss our strategy going forward.

Great. Thanks, Lou. So as you can see from the results, BW's strengths are beginning to emerge from the shadow of the European EPC loss projects. The Babcock & Wilcox segment more than doubled its adjusted EBITDA this quarter compared with the prior year with strong bookings, a robust pipeline and reduced overhead costs. The SPIG segment returned to profitability with no additional charges on its few remaining legacy projects as its new strategy and management team are gaining traction. The Vølund segment with the limited remaining obligations on the EPC loss projects soon to be behind us is returning to its core technology strengths and rebuilding its pipeline and backlog. We continue to target a run rate adjusted EBITDA of about $100 million in 2020. So let's talk about how we'll get there. There are three parts to our strategy that we have talked about previously and begun implementation. One, focused on cost-saving initiatives, one, focused on improved cash flows, and one focused on our cost strengths with improved project execution. From a cost savings perspective, as Lou said, we're targeting and have identified about $100 million in annualized savings, the majority of which we've already implemented or have begun implementation. We are continuing to evaluate our cost structures to identify additional savings, and across the company, we've challenged our teams to find an additional $30 million of cost reductions. We're working through this process even as we speak. Our incentive programs align with these efforts and support the outcomes expected by our customers and our shareholders. We're focused on eliminating unnecessary overhead, and we'll continue to look aggressively to reduce unnecessary costs, streamline our global operations and drive more of our gross profit to the bottom line. To put this in perspective, in 2018, the Babcock & Wilcox segment had over $140 million in gross profit so eliminating more overhead helps bring more of this growth profit to the bottom line. From a cash flow perspective, with our new financing, we are reestablishing our financial credibility with our lenders, our customers and our suppliers. Ultimately, as we return to a more stable operational and financial environment over the next few quarters, we will position the company for refinancing as soon as possible under more advantageous terms and reduce our leverage ratio after using proceeds from our rights offering to pay down our debt. In this new position, we expect to avoid a substantial settlement amendment, restructuring and advisory fees that have come to our, with our recent financial challenges. To put this in perspective, in the first quarter of 2019 alone, settlement costs, advisory fees, restructuring costs were roughly $20 million. We also had $2.9 million in cash interest expense and $6.7 million in amendment fees. We expect this improvement will also position us for improved terms with our customers, suppliers and improve our bookings and pipeline going forward. Finally, let's focus on our strengths and execution. Across the company, we are focusing on our core products and services for Power and Industrial and with an increased emphasis on retrofit and aftermarket services. We are focused on quality, high-margin projects rather than chasing revenues. We've identified opportunities in each segment to capture more business and improve execution. As I said before, the Babcock & Wilcox segment more than doubled its adjusted EBITDA over the same quarter last year while carrying more of our corporate overhead cost than previously. We saw strong bookings and a robust pipeline in the first quarter and expect bookings to accelerate as we regain financial credibility with our customers. Our employees are focused on being a world-class leading supplier of boiler and environmental controltechnologies to the utility, oil and gas and pulp and paper markets. Our vast installed base around the world puts us in a unique position of strength to support the global coal power generation fleet and related aftermarket and environmental equipment needs. Our pulp and paper installed base represents a largely untapped potential for aftermarket services. Our industrial package boiler business offers great opportunity. Going forward in the domestic market, we expect to continue to serve our installed base with aftermarket services while tapping into our competitors installed base and aggressively pursuing our underserved industrial installed base as well. Internationally, we see growth in the international boilers and environmental new build equipment along with services. Meanwhile, the segment has continued to aggressively pursue additional cost reductions above the $100 million in consolidated savings already identified. Our SPIG business returned to profitability in the first quarter of 2019, the results of significant efforts by the segment’s new management team to drive the few remaining legacy projects forward without additional losses in the quarter. As we begin to reap the benefits of our change in strategy, the business is stabilizing. We are now focused on our core products and geographies, selectively bidding on higher-value projects with better terms like I said, chasing profitability not revenues. We also are driving improved project execution. We continue to evaluate cost and drive forward further cost reductions within SPIG. The Vølund segment, apart from the specific EPC loss projects that will soon be behind us have been leaders in renewable technology for grates, boilers, conveyors and environmental control systems. The underlying business has been relatively steady and maintained solid margins. As we’ve previously discussed, the business is no longer bidding EPC spill projects. The Vølund business can focus on its core technologies, design and supply returning to the business model and operator that served it well and profitably for many years. We see a solid pipeline in the U.K. and around the world to participate as the technology supplier. Meanwhile, we are working through reductions in overhead that were previously required to support the loss projects and expect that Vølund will emerge in a stronger position over the coming quarters. We have reduced the risk associated with the EPC loss projects from potentially hundreds of millions down to just a few millions and our teams are working diligently to close out the remaining tests and tasks required under certain EPC agreements. Taken together, we believe this focus on our strengths, project execution and improved cash flow and refinancing and continued cost saving initiatives position us well to return to our profitability as we exit 2019 with the benefits becoming more evident in the second half of the year. As we look forward to 2020, we believe this strategy offers a clear path to achieve our $100 million run rate adjusted EBITDA target. We appreciate the continued support of our customers, vendors and employees. The past couple of years have not been easy and we still face challenges, but we look forward to working together to deliver our core power and industrial markets in what we believe to be a much better 2019 and 2020. For more than 150 years, one of our greatest assets has been the Babcock & Wilcox name. We literally wrote the book on steam. The company defines world-class technology. We continue to take pride in that name and that legacy, and we look forward to demonstrating that for Babcock & Wilcox, it's not over. In fact, we're just getting started. So now I'll turn the call back over to the operator who'll assist us in taking your questions.

There are no questions at this time. I'll turn the call back over to management for closing remarks.

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.