Babcock & Wilcox Enterprises, Inc. (BW) Q2 2020 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the Babcock & Wilcox Second Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session [Operator Instructions]. I would now like to hand the conference over to your speaker for today, Megan Wilson, Vice President Investor Relations. Please go ahead, ma’am.

Thank you, Chantal, and good afternoon, everyone. Welcome to Babcock & Wilcox Enterprises second quarter 2020 earnings conference call. I’m Megan Wilson, Vice President of Investor Relations at B&W. Joining me this afternoon are Kenny Young, B&W’s Chief Executive Officer and Louis Salamone, 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 Form 10-Q that was filed yesterday, and our Form 10-K that is 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 the comparable GAAP measures. A reconciliation of historical non-GAAP measures can be found in our second quarter earnings release published yesterday afternoon. With that, I will turn the call over to Kenny.

Thanks, Megan. Good afternoon, everyone, and thanks for joining. Like many companies around the world, our second quarter results were negatively impacted by COVID-19 here in the U.S. and internationally, as we saw delays in anticipated bookings and project deferrals across all three segments. Globally, we have and continue to take further steps to provide a safer working environment in our offices and manufacturing facilities and at our customers' sites. We greatly appreciate all the efforts of our employees they are taking to create a safer work environment, as well as the relentless support for our customers during this unprecedented time. Like other companies impacted by the pandemic, it is impossible for us to fully predict the extent or timing of further COVID-19 effects. However, based on current information from our customers, we expect the majority of our deferred projects to remobilize in late 2020 and throughout 2021, depending on certain location and project specific factors. More importantly, our pipeline is expanding with over $5 billion of identified projects that we expect to bid in the next three years, not including our parts and services. This pipeline is focused on renewable energy, environmental solutions and advanced technologies globally with roughly $2 billion for the B&W Renewable segment, $2 billion for the B&W Thermal segment, and $1 billion for the B&W Environmental segment. We continue to see significant opportunities to grow our business profitably with our improved project execution and efficient operational focus. Our focus is on bottom line results and strong cash management. As I've said before, during this challenging global pandemic, two key points encouraged and drive us forward at Babcock & Wilcox. We provide critical, essential infrastructure products and services, and our managers and employees are experienced, dedicated and more determined than ever. Our team continues to demonstrate their dedication as we navigate this crisis, and I'd like to thank them for their ongoing efforts. As we look toward our future, this is an exciting day at B&W. Today, we launched strategic organizational and branding initiatives, designed to leverage emerging markets, accelerate our growth and provide improved visibility into our expanding environmental and renewable technologies and services. Through these initiatives, we are aligning our market facing segments and financial reporting under three new segments; B&W Environmental, B&W Renewable, and B&W Thermal. We believe these three segments better reflect our core markets, products and strategies and highlight our offerings for sustainable energy and industrial infrastructure. We expect this strategic direction will improve our organizational structure and support our growth, as we expand our global sales team and geographical presence, particularly in the Middle East, Africa and Asia-Pac regions to identify when and execute on key growth opportunities in these areas. We are opening several offices in each region, including regional headquarters in Dubai; and Perth, Australia and hiring business development, field services and sales engineer personnel globally. As part of this initiative, Jimmy Morgan has taken on the role of B&W Chief Operating Officer. Jimmy joined B&W in 2016 with decades of experience in the energy and construction industries, and he was instrumental in our efforts over the last few years to complete the European EPC loss projects and drive our turnaround. Jimmy will be responsible for our strategic and operational performance under each of these new brands. We will further support our leadership and technology resources globally to drive the expansion of our renewable and environmental platforms through project wins and quality execution, as we build the next-generation Babcock & Wilcox. We recognize the world is changing rapidly. Our next-generation B&W is focused on meeting customer and market needs by providing technology solutions to help achieve a clean, sustainable energy and industrial infrastructure. We are also working with various governmental agencies and NGOs through funded projects to design and build new technologies that will improve our environment in years to come. We are increasing our focus on reducing the carbon footprint and low-emission technologies to create energy from waste. We believe we have the technologies and expertise and opportunities to expand our renewable and environmental platform significantly in the next few years, while steadily growing our traditional thermal business throughout our vast installed base. Globally, the market for our technologies is growing significantly, including opportunities in new waste-to-energy facilities, advanced thermal technologies and improved environmental standards. Our new market-facing brands are designed to align with these market drivers. So let's dive into them now. B&W Environmental supports a clean energy infrastructure by providing a full suite of best-in-class emissions controls, environmental solutions for utility and industrial steam generation applications around the world. B&W's broad experience includes systems for cooling, ash handling, particulate control, nitrogen oxide and sulfur dioxide removal; chemical looping for carbon control and mercury control. In the last 12 months, this brand has represented about 20% of our sales. We expect this brand to continue to grow worldwide as environmental regulations continue to drive us towards a cleaner energy future. B&W Renewable is a leader in developing ecological sound ways to use resources like biomass and waste to create clean renewable energy. Through this brand, we offer cost-effective technologies for efficient and environmentally sustainable power and heat generation, including waste-to-energy, biomass energy and black liquor systems for the pulp and paper industry. B&W's technologies support a circular economy diverting waste from landfills to use for power generation and replacing fossil fuels, while recovering metals and reducing emissions. In the last 12 months, this brand has represented about 27% of our sales. And we expect it to grow significantly worldwide as the demand for renewable waste energy and biomass systems continues to grow, and we expand our presence geographically. B&W Thermal provides proven steam generating products that are efficient, safe and reliable, including steam generation equipment, aftermarket parts and construction, maintenance and field services for plants in the power generation, oil and gas and industrial sectors. B&W has extensive global base of installed equipment for utilities and general industrial applications, including refinery, petrochemical, food processing, metals and others, and we continue working to grow our aftermarket business to support this installed base. In the last 12 months, this brand has represented about 53% of our sales. We expect it to grow steadily as we expand our aftermarket services and parts business within our own installed base as well as those of our competitors, while increasing our service capabilities worldwide. With our new organizational alignment and branding, combined with our efforts to broaden our global sales, service and business development presence, geographically, we expect growth from our expanding global pipeline and improved operational execution to drive significant earnings growth throughout 2021 and beyond. I'll now turn the call over to Lou to discuss the key points of our financial performances of the second quarter of 2020.

Thank you, Kenny. Our second quarter consolidated revenues were $135.4 million. COVID-19 negatively impacted all of the segments in our business by delaying or deferring anticipated projects and bookings into later in 2020 or into 2021. Our GAAP consolidated operating loss was $7.7 million, which included restructuring, settlement and advisory costs of $4.4 million. Our GAAP loss from continuing operations was $18.1 million. This represents a $10.2 million improvement compared to the second quarter of 2019. Our consolidated adjusted EBITDA was $1.4 million. Adjusted EBITDA was adversely affected, again, by the impacts of COVID-19 across all of the segments of our business, and also was offset by the completion of several large construction projects in the Babcock & Wilcox segment as they completed at the end of 2019 and early 2020. While the positive impacts of our cost savings efforts over the last year and half maybe masked by the adverse impacts of COVID-19, we continue to see the increasing benefits of our previously implemented cost saving initiatives. This affects both cost of our operations and our SG&A costs. These cost saving initiatives helped drive a $7.5 million reduction in consolidated SG&A expense in the quarter. This is a 17.8% improvement, compared to the second quarter of 2019. These initiatives also helped drive adjusted gross profit in the Babcock & Wilcox segment to 27.9% this quarter, as compared to 18.8% in the same period of last year. We expect to continue to see the benefits of our cost saving initiatives in 2020 and into 2021 as these savings from the changes implemented in 2019 are fully implemented over time. Turning to our cash flow, balance sheet, and liquidity. Cash flow from operations in the second quarter was a use of approximately $13.8 million, and this was primarily for working capital needs. We ended the quarter with unrestricted cash and cash equivalents of $36.8 million as well as approximately $40.3 million available for borrowings under our U.S. revolving credit facility. Total debt at June 30 was $338 million. $164.7 million was related to the revolver and $173.3 million to our last-out term loans. All of our senior debt is classified on our balance sheet as non-current. Interest expense in the quarter was $15.5 million, as compared to $26.8 million in the prior year quarter. The decrease was primarily driven by reduced deferred financing commitment and contingent consent fees related to our U.S. revolving credit facility. Further detail regarding our second quarter results, including comparisons with the second quarter of 2019 can be found in our related earnings release and the 10-K filed yesterday. Today, we're focused on managing our cost and cash flow as the global COVID-19 pandemic continues. While evaluating its effects on our business and the changing restrictions and other measures taken by various localities, we continue to support our customers in the long term. As we evaluate the impact of COVID-19 on our business, and while it's impossible to fully predict it, we expect deferrals and delays of certain projects to continue to affect our performance in 2020, and anticipate that the majority of the deferred projects will remobilize in late 2020 and throughout 2021. As part of our efforts to manage cost through this crisis, we've taken a number of measures, including temporary unpaid furloughs for certain employees, temporary deferrals of 50% of the service fees or salaries for certain members of our management team and 50% of the cash compensation payable to our Board of Directors. We've also suspended our 401(k) match for U.S. employees for the rest of the year. We've also participated in temporary rent payment deferrals for certain of our facilities and deferring in accordance with the CARES Act of 2020, the plan year pension contribution payments of $5.5 million each in April and July, as well as other measures to conserve cash. Looking forward, as we continue to strengthen our organizational structure under our new branding, we are also strengthening our internal systems as appropriate. In particular, we continue to modernize our IT infrastructure and have begun to move a significant amount of our IT systems and infrastructure to the cloud. We are also continuously pursuing further cost efficiencies, and we are continuing to pursue cost recoveries under various insurance policies and from subcontractors to recover some of the losses from these -- from the European EPC contracts. We expect to begin reporting our financial results under the new segments, starting with our full year 2020 results. I'll now turn it back over to Kenny.

Thanks, Lou. While we can't fully predict how COVID-19 will affect the timing of bookings and project progress in the near-term, we are seeing renewed opportunities emerging as many of our customers restart paused projects or undertake new projects and upgrades, leveraging our technology. We are pursuing and have won new grants and paid research opportunities to design and build new emerging technologies. Now with the launch of our new segmentation and organizational alignment, combined with the ongoing expansion of our geographic presence, our focus is on winning and executing quality projects as well as aftermarket services to serve our customers' needs for renewable energy, environmental solutions and efficient operations. We believe we have the technologies, expertise and opportunities to expand our renewable and environmental platform significantly in the next few years. And finally, before we close, I would encourage everyone to check out our new branding at www.babcock.com. I will now turn the call back over to the operator, who will assist us in taking your questions.

[Operator Instructions] Our first question comes from the line of a participant whose information was unable to be gathered. Caller, please state your name and company. Your line is open.

Hi. My name is David Kingsley [ph]. I'm an investor in BW. And my question, specifically, Kenny, is I was looking for an update on what's happening with potentially the Main Street lending program from the Fed and/or PPP loans that were available. I was hoping that you would try to get some relief federally. And I was wondering what the timing was? I know that it might have missed the end of the June 30 quarter.

Thanks, David. Like you, we follow very closely daily, as a matter of fact, all the developments in around the PPP programs, as well as -- and as Lou mentioned on the call, some of the payroll tax deferrals and other programs that have been provided through the COVID relief efforts by the U.S. government, as well as state and local governments as well, too, from that standpoint. So we do follow that constantly and closely as it relates to that. But many of those programs based on various conditions and other aspects don't apply to us. And so we continue to watch and monitor, which programs possibly could. And like other companies, we are more practical and possible voicing our references and concerns and priorities to our state and local officials as well as many of our federal officials as well, too, to try to get our voice heard in Congress, on Capitol Hill and in the state front as well, too. But -- so we do follow it very, very closely at this point in time as well.

Was PPP -- was BW just too large to get a couple of million dollars out of PPP? Was that the…?

Yeah. There's various aspects. PPP, we just -- we wouldn't qualify for or under at that point in time, other aspects in and around and some of the refinancing efforts that we had as well, too, put us in a position where we're not able to leverage some of those programs. So yeah, basically, we weren't able to take advantage of that. But we'll -- we do keep an eye, and hopefully some changes will take place that will open some of that back up.

Right. Okay. Thank you, Ken.

[Operator Instructions] There are no further questions at this time. I'll now turn the call back over to presenters 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.