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Edited Transcript of BW earnings conference call or presentation 8-Apr-19 9:00pm GMT

Q4 2018 Babcock & Wilcox Enterprises Inc Earnings Call and Discussion of New Financing Agreement

CHARLOTTE Apr 17, 2019 (Thomson StreetEvents) -- Edited Transcript of Babcock & Wilcox Enterprises Inc earnings conference call or presentation Monday, April 8, 2019 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Kenneth M. Young

Babcock & Wilcox Enterprises, Inc. - CEO

* Lou Salamone

Babcock & Wilcox Enterprises, Inc. - CFO

* Megan Wilson

Babcock & Wilcox Enterprises, Inc. - VP of Corporate Development & IR

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Conference Call Participants

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* Robert Cathey

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Presentation

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Operator [1]

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Good afternoon. My name is Chris, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Babcock & Wilcox Investor Call. (Operator Instructions)

Thank you. Megan Wilson, Vice President of Investor Relations, you may begin the conference.

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Megan Wilson, Babcock & Wilcox Enterprises, Inc. - VP of Corporate Development & IR [2]

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Thank you, Chris, and good afternoon, everyone. Welcome to Babcock & Wilcox Enterprises Investor Conference Call. I am Megan Wilson, Vice President of Investor Relations at B&W. Joining me this afternoon are Kenny Young, B&W's Chief Executive Officer; Lou Salamone, Chief Financial Officer; and Henry Bartoli, Chief Strategy Officer, to discuss our recent project settlements and financing arrangements as well as our fourth 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 recent press release and also in our annual report on Form 10-K 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 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 on our Form 8-K filed with the SEC today.

With that, I will turn the call over to Kenny.

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Kenneth M. Young, Babcock & Wilcox Enterprises, Inc. - CEO [3]

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Thanks, Megan, and good afternoon, everyone. Thanks for taking time to join our call.

When Lou, Henry and I joined the company in mid-November, we discussed and laid out our immediate priorities: one, turn over the remaining renewable EPC loss contracts; two, position ourselves to finance our working capital; three, reduce our overhead cost and focus on our plan to realize the profitability and cash flows of our underlying businesses, which have been hidden due to the significance of the renewable EPC loss contracts.

Over the past 4.5 months, we've been working diligently towards those objectives. Recent negative and speculative research had a different and inaccurate view of our company. And today, I'm pleased to tell you that what's over is the significant risk these EPC contracts held for B&W and what should be over is the speculation that B&W wouldn't be able to turn the corner and move towards a profitable company going forward.

Let's discuss the renewable EPC loss contracts and what has been accomplished to minimize the impacts of these one-off projects. First, as we have previously disclosed, we have turned over 4 of the 6 renewable EPC loss projects and reached settlements on the remaining 2 to vastly reduce our risk and cash burn to complete those projects. These settle historic claims, liquidated damages and associated high-risk provisions of those contracts. One of these projects is expected to turn over in May. For the other project, the settlement identifies specific scope or key systems to be completed going forward with cost not to exceed a fixed amount, which vastly reduces our potential losses and cash burn.

We have also reached a settlement regarding another legacy EPC renewable contract that has not been started by removing ourselves from the EPC role, which could have carried significant risk. As such, we have contained and significantly reduced our exposures to the EPC loss contracts going forward. We estimate these risks have had the potential to reach several hundred million in additional losses if we did not reach these settlements. Vølund and our Other Renewable businesses, apart from these specific contracts, 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. We are now working through reductions in overhead that was previously required to support the loss projects and expect that Vølund will emerge in a stronger position over the coming quarters.

Vølund's core strength has been and continues to be providing state-of-the-art technologies, grate boiler, conveyor and environmental control systems through design and supply, parts and services, operation and maintenance and licensing. That focus in the U.K. and worldwide markets remain stronger than ever, and we see a solid pipeline in the U.K. and around the world as we participate as a technology supplier.

I do want to emphasize, as it's been previously reported, we are not by any means exiting the U.K. market. We remain firmly committed and stronger than ever. This is what Vølund did before the decision to enter into these EPC contracts, and it is what we will do now in the U.K. and around the world. Again, as I stated, despite rumors, Vølund is not exiting the U.K. or other geographies. There are challenges and overhang from these loss projects, but we feel confident we will achieve profitable operations in Vølund as we enter 2020.

Second, we've secured financing to support our settlement agreements and just as important provide additional liquidity and working capital to put the company back on the road to profitability. As we mentioned Friday, B. Riley FBR has arranged an additional $150 million in secured financing through our last out term loan and has also agreed to provide an uncommitted incremental credit facility of up to another $15 million. This follows an additional $10 million in commitments from affiliates of B. Riley FBR under a last out term loan we announced in the latter part of March.

We greatly appreciate the support of our banks and shareholders to provide the financing and amendments necessary to unlock the value of our core businesses. We believe this demonstrates confidence in the value of our technologies, the strength of our employees and our ability to restore the company to a profitable and positive cash flow. We now have a much stronger balance sheet to support our operations going forward.

The financial challenges presented by the loss projects have overshadowed the core strengths of B&W for some time. With this financing, combined with the significant reduction of liabilities and risks from the EPC loss contracts through our settlements and plant turnovers, we believe we can now emerge from the shadow and focus on unlocking the real value and strong position of our Power business along with the core strengths of Vølund and SPIG.

With the combination of increased cost-cutting initiatives and the execution of our strategic plan, we are on a path to achieving profitable operations as we exit 2019.

In terms of cost cutting, since we joined the company in November, we've identified additional savings and increased the previous target of $62 million in annualized savings to a new target of approximately $100 million. At least $77 million of the cost-saving initiatives have been implemented to date, with the rest expected to be implemented over the remainder of this year. These cost savings have been identified at the corporate level and across all 3 segments, with an emphasis on eliminating unnecessary overhead. We'll continue to look aggressively to reduce unnecessary overhead and streamline our global operations going forward.

So now let's look forward. You might have seen a recent article with the headline Babcock & Wilcox: It's Over. Clearly, that speculation was wrong and the reality is quite opposite. This company has and always had strong underlying assets, industry-leading technologies, reputable global brands, talented people, a robust backlog and pipeline and great market access. This is a company with a vast installed base that will require aftermarket retrofits and services for decades to come. This is a company serving large, diverse power generation and industrial markets that need quality products and services that BW offers. These strengths have been overshadowed for some time, but those who take the time to remember our history, to look back to our performance before the effects of these EPC loss projects will recognize those underlying strengths have not changed.

Now with these settlements, financing and cost-cutting initiatives in place, we are focusing on what has been our strength in our core products and services for power and industrial markets, with an increased emphasis on retrofit and aftermarket services. We are focused on quality high-margin projects rather than chasing revenues. We are focused on profitability and cash flow. We've also identified a number of opportunities in each business line to capture more business and improve delivery to our customers. We are doing what we do best as a global market leader within these industries.

Our Power business, now called Babcock & Wilcox segment, continues to perform well with stable fourth quarter revenues, strong bookings and backlog at the end of the year, despite the pressures of our recent financial challenges. We greatly appreciate our customer support. Our employees have renewed energy as they focus on being a world-class leading supplier of boiler and environmental control technology to the utility, oil and gas and paper and pulp markets. Our installed base in the U.S. and globally and our Diamond Power business internationally puts us in a position of strength to support the robust global coal power generation fleet and related aftermarket and environmental equipment needs.

Our Pulp & Paper installed base represents a largely untapped potential for aftermarket services. Our Industrial packages boiler business offers great opportunity, and we are focused on maximizing these opportunities around the globe.

Internally, we're significantly reducing G&A and reorganizing the business to push ownership of cost and cash flow down into the lowest P&L level possible and giving the talented leadership in the business the power and incentives to optimize operation.

With the conclusion of EPC loss projects nearing, the Vølund business can focus on its core technologies, returning to business model as a designer and supplier that served it well and profitably for many years. As we previously discussed, the business is no longer bidding EPC scope projects. The business equipment-only and aftermarket businesses continued to be profitable in the fourth quarter, and we are now focusing the business on its equipment-only aftermarket licensing and operations and maintenance and optimizing cost and structure.

Our SPIG business had a challenging fourth quarter and a challenging 2018, primarily as a result of projects and bad debt write-downs. These were historical and not reflective of the core business. We expect actions taken in the later half of 2018 to stabilize the SPIG business. The actions include focusing on our sales on core products and geographies, restructuring, introduction of new management and an increased focus on project execution. At the end of the fourth quarter, the business also completed all but 2 of its legacy projects as a typical SPIG project can take 18 months to complete. Our change in strategy to focus more on selectively on higher-value projects within the select geographies results in a lower backlog for the business; however, the projects and backlog have better terms designed to drive improved performance in 2019 and beyond.

We believe our strategy will continue to improve performance throughout 2019, with the benefits becoming more evident in the second half of the year, as remaining cleanup related to Vølund loss projects and their impact trails off in the second quarter. We are targeting achieving a run rate adjusted EBITDA of around $100 million in 2020, not including corporate overhead.

I will now turn the call over to Lou to provide more detail on our fourth quarter financial results.

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Lou Salamone, Babcock & Wilcox Enterprises, Inc. - CFO [4]

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Thanks, Kenny. As Kenny mentioned, the company's 3 reportable segments, Babcock & Wilcox, Vølund and Other Renewables and SPIG, were formally reported as the Power, Renewable and Industrial segments, respectively.

Our fourth quarter consolidated revenues of $222.9 million were significantly impacted, as required by GAAP, by the effect of the settlement related to the fifth Vølund loss project that was reached in March of 2019.

For the quarter, we reported a GAAP operating loss of $137.7 million, again impacted by the $81.1 million effect of the settlement, which was partly offset by lower levels of losses on the other Vølund loss contracts. Operating losses were also due to the SPIG segment's increased estimated costs to complete new build dry cooling systems sold under its previous strategy as well as bad debt charges of approximately $7.9 million that were taken in the fourth quarter.

In the Babcock Wilcox (sic) [Babcock & Wilcox] segment, lower volume in the new build and parts businesses were partially offset by savings from restructuring actions. On a GAAP basis, we also continued to have costs and write-downs of restructuring actions and strategic as well as financial and advisory costs required under the terms of our credit agreement.

Adjusted EBITDA was negative $114.6 million for the quarter. However, pro forma to remove the impact of the Vølund settlement, the SPIG project losses and bad debt write-offs, adjusted EBITDA would have been a negative $2.8 million.

Now let me turn to our fourth quarter segment results. In the Babcock Wilcox (sic) Babcock & Wilcox segment, formerly the Power segment, revenue was generally steady at $206.6 million. We believe that the B&W's segment business was also negatively impacted by the concern over the company's negative financial performance as we believe many customers delayed or reduced their orders as the quarter progressed because of this concern.

Gross profit in the segment was $45.9 million, which was impacted by lower parts volume. The gross profit margin was 22.2%. And adjusted EBITDA in the fourth quarter was $34.1 million, impacted by the reduction in gross profit and the sale of the country's interest in its joint venture in China in 2018, which had contributed $3.6 million of equity income in the prior year quarter. This was mostly offset by reductions in SG&A cost. And the adjusted EBITDA margin was 16.5%.

In the SPIG segment, formerly the Industrial segment, revenues were $36.4 million in the fourth quarter, affected by lower volume of the new build cooling system projects outside the U.S., as expected, following a 2017 change in strategy that would improve profitability by more selectively bidding and focusing on core geographies and products.

Gross profit was negative $16.9 million in the fourth quarter, primarily due to increases in estimated costs within the new build cooling system contracts sold under the previous strategy, including one significant U.S. project and lower volume of aftermarket cooling system services.

Adjusted EBITDA was negative $28.7 million, primarily due to the lower gross profit and a $7.9 million in bad debt accruals. However, pro forma to remove significant projected losses and write-downs, the adjusted EBITDA would have been $2 million. As Kenny mentioned, new build cooling system contracts that were sold under the previous strategy were mostly completed by the end of 2018, with the exception of one significant U.S. project and one U.K. project that are projected to be completed by early 2020.

The fourth quarter results in the Vølund and Other Renewable segment, formerly the Renewable segment, were affected by the March 2019 settlement regarding the fifth European Vølund project, which reduced the estimated selling price of this project as of December 31, 2018, by $81.1 million. Revenues in this segment were a negative $10.3 million for the fourth quarter, primarily due to the impact of recording this settlement.

The segment gross profit was negative $101.2 million in the fourth quarter, again primarily due to the impact of the settlement and also due to lower licensing activity in the aftermarket business the -- and the Palm Beach Resource Recovery Corporation sale and higher direct overhead cost to support these loss projects.

Adjusted EBITDA in the quarter was negative $110.1 million, mainly due to lower gross profit from the settlement and partially offset by lower SG&A. However, pro forma to remove the settlement impact, adjusted EBITDA would have been a negative $28.9 million.

The segment's portfolio of other equipment-only contracts and aftermarket lines of business was profitable during the fourth quarter of 2018, with the exception of the operations and maintenance business due to the sale of the Palm Beach Resource Recovery Corporation.

In the fourth quarter 2018, net changes in estimated revenue and cost to complete the renewable EPC loss contracts were $104 million, including the effect of the March 2019 settlement of again $81.1 million. This was mainly due to differences in the actual and estimated costs and the issues encountered during the startup and trial operations.

Turning to our cash flow, balance sheet and liquidity. Cash flow from operations in the quarter was a use of cash of $68.4 million, mainly due to spending related to activity as we work toward completion of the Vølund loss projects. We ended the fourth quarter with $43.2 million in cash and cash equivalents related to our continuing operations net of restricted cash.

Total revolving debt at December 31, 2018, was $145.5 million. Interest expense in the quarter was $13.9 million, reflecting a higher level of borrowings. As Kenny mentioned, during the fourth quarter and in the year, we made a number of amendments to our revolving credit facility to provide incremental liquidity to the company, including a series of limited waivers in 2019 during negotiation of the settlements and financing arrangements, which Kenny earlier described.

Our most recent amendment was completed in conjunction with the $150 million financing Kenny discussed. The amendment provides $150 million in additional commitments from B. Riley FBR Inc. and its affiliates under our last out term loans as well as incremental uncommitted facility of -- an uncommitted incremental facility of up to $15 million. This was in addition to the $10 million of last out term loans that were provided by B. Riley FBR during the course of finalizing these agreements. The proceeds from the last out term loans have been used to pay the amounts due under the Vølund loss project settlement agreements and will be used for working capital needs going forward.

In connection with the financing agreement, we've agreed to seek shareholder approval for the following: execute $50 million rights offering at $0.30 per share within 6 months; exchange $35.1 million of the last out term loan held by Vintage Capital Management for common stock at $0.30 per share; issue approximately 16.7 million warrants, each to purchase 1 share of common stock at $0.01 per share; and execute a 1:10 reverse stock split. The amendment permits the company to repay up to $86 million of the last out term loans using the proceeds from the rights offering.

Also, in connection with the amendment, the maturity date for all last out term loans under the credit agreement will be extended to December 31, 2020. All of the terms of the agreement can be found in our 8-K filed with the SEC on April 5.

The amendment also, among other items, reduces our required minimum liquidity to $30 million from $40 million as a condition of the borrowing. It allows for issuance of up to $20 million of new letters of credit with respect to any Vølund -- any future Vølund projects, which allows us to grow that business further. It also permits letters of credit to expire 1 year after the maturity date of the revolving credit facility and creates a new event of default for the failure to terminate the existing credit facility on or prior to March 15, 2020. We fully intend to refinance the revolving credit facility as required.

As Kenny mentioned, we are now targeting $100 million in annualized savings through our cost-savings initiatives, roughly 3/4 of these savings measures have been implemented to date, with the balance to be implemented in 2019 and a small amount in 2020. Cost savings have been identified across all segments at the corporate level, and the implementation plan and savings are progressing in line with our expectations.

Finally, in the third quarter of 2018, the company announced that based on a number of ongoing asset debentures and other strategic actions, the company's previous guidance was no longer relevant and withdrew the company's previously stated 2018 financial guidance. Given the ongoing efforts associated with cost savings and other strategic initiatives, the company does not intend to provide guidance at this time.

I will now turn it back over to Kenny.

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Kenneth M. Young, Babcock & Wilcox Enterprises, Inc. - CEO [5]

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Thanks, Lou. Well, in summary, we've made significant strides toward positioning B&W for return to profitability and a healthy future. We can now step out from underneath the shadow of the renewable EPC loss projects and demonstrate the strength of our core Power business and our Vølund and SPIG technologies, all of us, from me to Lou, Henry, Bob, to every B&W employee I've met around the world, we are focused on quality, cash flow, profitability, and of course, safety.

We appreciate the continued support of our customers, vendors and employees and shareholders during these challenging times and look forward to working together to deliver for our customers and our core power and industrial markets in what we believe will be a much better 2019.

I will now turn the call back over to the operator, who will assist us in taking any questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We do have a question from Robert Cathey with SCW Capital.

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Robert Cathey, [2]

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I was wondering -- I know you're not giving guidance, but as it relates to the run rate EBITDA for 2020, if you could kind of break down those components for us? And I also think we've only seen corporate that was paid back to parent from the original spend. If you can maybe give us some context around what corporate costs look like?

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Lou Salamone, Babcock & Wilcox Enterprises, Inc. - CFO [3]

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Okay. We're not going to be able to give detailed guidance on the target we've mentioned. That's a target and we'll have guidance -- we're not going to do guidance as we indicated earlier. What was the second part of your question, Robert?

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Robert Cathey, [4]

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It's around corporate costs, but I guess that's irrelevant if you're not providing any guidance around that.

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Lou Salamone, Babcock & Wilcox Enterprises, Inc. - CFO [5]

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Well, we can state what the corporate costs were, but not give guidance. So if you're

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Robert Cathey, [6]

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Okay. What were they?

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Lou Salamone, Babcock & Wilcox Enterprises, Inc. - CFO [7]

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About $25 million after costs allocated outside of -- into the other segments.

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Robert Cathey, [8]

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Okay. Perfect. And then, I guess, just what I have, if you could maybe provide a little more context around SPIG, and I guess, what happened and what's been remedied and what that business will focus on going forward?

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Kenneth M. Young, Babcock & Wilcox Enterprises, Inc. - CEO [9]

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Yes, just to talk a little bit about it, I mean -- and again, at a high level, I think as we kind of alluded to in the conference call here, Robert, is SPIG had taken on, I think, an incredible amount to try and grow into many markets around the world. And we just peeled that back into what we think are the more focused markets that they should be focused on from a product standpoint, both wet and dry overall, and so look for opportunities that lend or tend to give follow-on aspects around maintenance and parts after the sale as well. So those are typically more higher-margin type opportunities, and we wanted SPIG to reduce the geography footprint, as there's cost obviously to maintain those geographies. And we wanted them to focus on the higher return opportunities, which typically have a follow-on capabilities around maintenance and other parts after the fact -- or aftermarket.

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Robert Cathey, [10]

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I know you inherited a really difficult situation. We appreciate all the hard work getting to where you are today.

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Kenneth M. Young, Babcock & Wilcox Enterprises, Inc. - CEO [11]

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Appreciate the support.

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Operator [12]

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(Operator Instructions) Okay. This does conclude the Q&A portion of today's call. I'll now turn things back over to the presenters for any closing remarks.

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Megan Wilson, Babcock & Wilcox Enterprises, Inc. - VP of Corporate Development & IR [13]

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

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Operator [14]

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