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

Q2 2019 Babcock & Wilcox Enterprises Inc Earnings Call

CHARLOTTE Sep 1, 2019 (Thomson StreetEvents) -- Edited Transcript of Babcock & Wilcox Enterprises Inc earnings conference call or presentation Thursday, August 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

* Louis Salamone

Babcock & Wilcox Enterprises, Inc. - CFO & CAO

* Megan Wilson

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

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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 Babcock & Wilcox Q2 2019 Earnings Conference 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 Second Quarter 2019 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; Lou Salamone, Chief Financial Officer; and Henry Bartoli, Chief Strategy 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 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 this morning.

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. Good afternoon, everyone, and thanks for taking the time to join. Last quarter, we shared our thoughts regarding the company's transformation and what all of our employees are working so diligently to achieve through an intense commitment to deliver our core technologies across our 3 segments: Babcock & Wilcox, Vølund and SPIG. During this quarter, we've made real progress on our path towards sustained profitability with a significant improvement in our operating loss, which returned the company to profitability on an adjusted EBITDA basis. We remain fixated on reducing our risks, positioning ourselves for sustained profitability, improving our balance sheet, exceeding our customers' expectations, growing profitable revenues and starting the process of refinancing our debt. Although we still face challenges, we are on a rigorous path to improve cash flows and have started recognizing recoveries from insurance claims.

We are bidding on new opportunities and see real potential to increase market share on a global basis and building on an already strong and loyal customer base. We fully anticipate we will see an improved bottom line throughout 2019 and establish the foundation for our longer-term objectives in 2020.

We are taking concrete steps to ensure we execute on our cost reduction strategy over the next several quarters. The company has identified and initiated over $119 million of annualized cost-saving plans, which includes previously announced corporate actions. We've identified unnecessary systems and are removing as much as practical from our overhead. We're pushing accountability down to the lowest level and structuring effective incentives that drive not only value but safety. We expect each quarter to improve over the previous one as we remove unnecessary costs.

We've also completed our equitization transactions, including a rights offering, which Lou will discuss in more detail later. These transactions, which deleveraged our balance sheet, put us in a good position to refinance our debt, as planned, and put the company on a significantly stronger financial foundation.

We also completed a reverse stock split to comply with the New York Stock Exchange minimum share price listing criteria. Most importantly, our entire management team, our entire global employees are focused on executing our strategy to leverage our best-in-class core technologies, engineering and services to achieve our targeted run rate adjusted EBITDA of $100 million in 2020.

Now as we discuss our second quarter 2019 results, you'll see that we have improved performance in every business segment towards that end.

Our consolidated revenues of $248.1 million reflect the strength of the Babcock & Wilcox segment, which saw strong revenues with improving margins and solid bookings this quarter, while the Vølund and SPIG segments have been strategically shrinking to bid and win the work we can complete profitably. This quarter, revenues were lower year-over-year as planned as we significantly reduced revenues coming from the historical loss EPC projects, exited low margin, high-risk products and services and also divested our West Palm Beach assets in the said third quarter 2018. We are executing strategies in each business to expand market share and grow the top line in a smart way, and we see a number of opportunities to do so, which we're pursuing aggressively.

Right now, we are exactly where we expect to be as we complete our transformation. We are not chasing revenues for the sake of revenue. We are building a foundation for sustained, long-term profitability and growth.

I'll now turn the call over to Lou, who will discuss the second quarter 2019 in more detail. Lou?

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

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Thank you, Kenny. As Kenny mentioned and as we expected, due to recent dispositions of West Palm Beach and Loibl, reductions in the lost project revenues as we wind those down and changes in our strategy to focus on our core technologies and profitability, our second quarter consolidated revenues were $248.1 million, a decrease of $43.2 million compared to the second quarter of 2018.

Our GAAP operating loss was $4.3 million in the second quarter of 2019, an improvement of $133 million compared to an operating loss of $137.4 million in the comparable 2018 quarter. The improved operating loss was primarily driven by improvements in gross profit in all of our segments, led by lower level of losses on the European EPC loss contracts, the absence of goodwill impairment charges and the SG&A benefits of our restructuring and cost initiatives -- cost control initiatives. This quarter's $4.3 million loss also included a $5.7 million of charges for advisory fees and restructuring costs.

Our consolidated adjusted EBITDA also improved by $90.4 million as we generated a positive consolidated adjusted EBITDA of $8 million as compared to a negative $82.4 million consolidated adjusted EBITDA in the second quarter of 2018.

I'm now going to move on and discuss the improved second quarter results of our various segments.

Our Babcock & Wilcox segment showed improvement in all key operating metrics. Revenues increased by 1.6% to $201 million in the second quarter as compared to $197.8 million in the prior year period. This increase was mainly driven by increased construction volume, which was partly offset by lower retrofit activity. Our gross profit in the second quarter of 2019 was 26.3% higher than the previous year at $37.9 million as compared to $30 million in the 2018 period. This increase was primarily due to higher construction volume, better cost control at the operating margin and lower warranty costs. The gross profit margin improved to 18.8% as compared to 15.2% in the same period last year. Adjusted EBITDA for the second quarter of 2019 increased 92% to $19 million as compared to $9.9 million in last year's quarter. Again, this improvement was attributable mainly to the gross profit margins as well as continued reduction in our G&A costs.

Moving on to our SPIG segment. As expected, due to our change in strategy, revenues decreased at SPIG by 50.4% to $22.8 million in the second quarter of 2019 as compared to $46 million in the second quarter of 2018. Revenue declined primarily as we continue to wind down this big legacy loss contracts and an anticipated lower volume of new build cooling system services following our change in strategy to improve profitability by more selectively bidding on core products in key geographies as well as lower volume in our aftermarket services. As a result of our change in strategy, gross profit improved to $2.4 million in the second quarter of 2019 as compared to $100,000 in the prior year period. Adjusted EBITDA improved by $6.1 million to a negative $100,000 as compared to a negative $6.2 million in the same period last year. Again, this improvement was driven by the gross profit improvement and benefits of the cost savings initiatives taken by the SPIG segment.

Moving on to Vølund. As expected, revenues in the Vølund segment were $33.7 million for the second quarter in 2019 as compared to $55 million in the second quarter of 2018. Second quarter revenues were lower compared to the prior year quarter primarily due to the sale of West Palm Beach in the third quarter of 2018 and the continued winding up of the EPC loss and other legacy contracts, and again, a shift to delivering our core technology products and services rather than bidding on full scope EPC projects. This expected decline was partially offset by the start-up of 2 operations and maintenance contracts in the United Kingdom that followed the turnover of the related EPC contracts to our customers.

As a result of winding down and settlements of the EPC loss contracts, the segment gross profit improved by $74.4 million to a positive $5.1 million in the second quarter of 2019 as compared to a negative $69.3 million in the second quarter of 2018. Again, this was primarily due to the lower level of losses on the European EPC loss contracts.

In the second quarter of 2018, this segment recorded $57.3 million in net losses resulting from changes in estimated revenues and cost to complete the 6 European contracts as compared to a $3.2 million equivalent losses recorded in the second quarter of 2019. Beyond the effect of the EPC loss contracts, the second quarter 2019 gross profit also included savings from lower levels of direct overhead, support and warranty expense, which were also offset by the absence of gross profit from the West Palm Beach project due to its sale in the third quarter of 2018.

Adjusted EBITDA in the quarter was a negative $800,000 as compared to a negative adjusted EBITDA of $78.6 million in the second quarter last year. This improvement was mainly due to gross profit as well as lower SG&A costs, reflecting the benefits of restructuring and cost reductions.

Now I'd like to turn to talking about our cash flow, our balance sheet and liquidity.

Cash flow from operations in the quarter was a use of $193 million, mainly due to funding of the settlements related to the European EPC contracts, progress against accrued losses in the 6 European EPC loss contracts and a reduction of our accounts payable and accrued liabilities. This was offset by our new last-out term loan, which is also considered a current liability. We ended the quarter with unrestricted cash of $35.2 million.

Our total revolving debt was $184.4 million. Interest expense in the quarter was $26.8 million as compared to $11 million -- $11.9 million in the prior year quarter, and this increase is primarily driven by increases in amortization and interest expense related to both the revolving loan and our new last-out term loans.

We're continuing to pursue cost recoveries under various insurance policies from subcontractors for the European EPC loss contracts. In June 2019, we agreed to a full settlement related to a portion of losses on the first project under which the insurer paid $5.6 million in July of 2019. Also in June of 2019, we agreed in principle to a settlement agreement under another insurance policy to recover $3.5 million for certain losses on one of the projects. We're continuing to pursue other potential insurance recoveries and claims where appropriate and available.

In the second quarter, we sold B&W Loibl, a material handling business, in Germany. We received $7.4 million in cash proceeds at closing, which were primarily used to reduce outstanding balances under the credit facility. However, the sale also facilitated the release of performance letters of credit totaling $8.5 million, which include -- which improved our borrowing capacity and reduced the revolving credit facility by $7 million under the terms of our credit agreement. We are continuing to evaluate potential dispositions as appropriate in the future.

As we previously disclosed, on April 5, 2019, we amended our credit agreement to provide $150 million of Tranche A-3 last-out term loans from B. Riley as well as an uncommitted incremental facility of up to $15 million. We also entered into an agreement with B. Riley and Vintage Capital to effect a series of equitization transactions for a portion of the last-out term loans subject to, among other things, stockholder approval. These transactions included the following: a $50 million rights offering at $0.30 a share; an exchange of all of the principal of Tranche A-1 of the last-out term loan for common stock at $0.30 per share; and an issuance of approximately 1.7 million warrants after a 10-for-1 reverse stock split -- a 1-for-10 reverse stock split to purchase common stock at $0.01 per share. These equitization transactions were completed on July 23, 2019.

On July 24, we effected the 1-for-10 reverse stock split that took effect immediately after the completion of the equitization transactions. Gross proceeds from the rights offerings were $41.8 million, of which $10.3 million was used to fully repay the Tranche A-2 of the last-out term loans. The remaining $31.5 million was used to reduce outstanding borrowings under the Tranche A-3 of the last-out term loans.

In addition, and in conjunction with the rights offering, we issued common stock in exchange for $8.2 million of the Tranche A-3 last-out term loans through B. Riley's backstop commitment and for all of the $38.2 million of outstanding principal of Tranche 1-A of the last-out term loans.

After completion of these equitization transactions, Tranches A-1 and A-2 of the last-out term loans were fully extinguished, and the balance of the Tranche A-3 last-out term loans was reduced to $114 million, inclusive of accrued paid-in-kind interest. In aggregate, we reduced our debt by $88.2 million to equity through the equitization transactions, resulting in a significant deleveraging of our balance sheet.

After giving effect to the reverse stock split, the transactions resulted in the issuance of 29.4 million shares of additional common stock, including 13 million shares through the rights offering and 2.7 million shares for the backstop commitment and a 12.7 million shares in exchange for the Tranche A-1 outstanding principal. This resulted in total outstanding shares of 46.3 million.

The company's credit agreement requires that it terminate the credit facility on or prior to March 15, 2020, and the company intends to refinance the revolving credit facility as required.

As Kenny mentioned, we continue to make our businesses more efficient. This quarter, we identified an additional $19 million in cost savings and are now targeting $119 million in annualized savings. Roughly 3/4 of the $119 million savings measures have been implemented to date, with the majority of the balance to be implemented in 2019 and the remainder in 2020.

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. We will continue to look for additional opportunities for efficient as we manage our business.

Finally, as previously stated, based on the number of ongoing strategic actions and cost savings initiatives, the company does not intend to provide guidance at this time.

Thank you. I'll now turn it over to Kenny to discuss our strategy going forward.

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

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Thanks, Lou. Our performance in the second quarter of 2019 shows momentum following our recent strategic actions and cost-saving efforts. Our consolidated business improved operating margin significantly and returned to profitability on an adjusted EBITDA basis. Our Babcock & Wilcox segment continued its strong performance. And across the company, we are making steady progress on our strategy to deliver value for our customers and improve profitability by focusing on our core technologies and businesses.

With our equitization transactions complete, we are preparing to refinance as planned to support our ongoing financial recovery.

As 2019 continues, we look forward to demonstrating the underlying core strengths of our businesses to our customers and our shareholders.

As we said before, there are 3 parts to this strategy: cost-saving initiatives, improved cash flows and leveraging our strengths with improved project execution.

From a cost savings perspective, as Lou said, we're targeting and have identified about $119 million in annualized savings, the majority of which we've already implemented and we will see more impact to our bottom line over time. We are continuing to evaluate our cost and structure to identify additional savings. Our incentive programs align with these efforts and support the outcomes expected by our customers and our shareholders.

From a cash flow perspective, with our April financing, we've been working towards a significantly improved balance sheet and credibility with our lenders, customers and suppliers. Through our equitization transaction, we substantially delevered the company. Ultimately, as we continue establishing a stronger operation and financial environment over the next few quarters, we will position the company for refinancing as soon as possible. Once completed, we expect to void the substantial settlement, amendment, restructuring and advisory fees that we have -- have come with our recent financial challenges. We expect this improvement will also support improved terms with our customers and suppliers, and ultimately, improve our bookings, pipeline conversions going forward.

Finally, we're concentrating on our core strengths and execution. Across the company, we are focusing on our core products and services for power and industrial markets, with an increased emphasis on retrofit and aftermarket services.

As I said earlier, we are pursuing quality, higher-margin projects rather than simply chasing revenues. We've identified opportunity in each segment to capture more business as we continue to improve our project execution.

The Babcock & Wilcox segment nearly doubled its adjusted EBITDA over the same quarter last year. We saw solid bookings in the second quarter, slightly up compared to the same quarter last year, and continue to see a robust pipeline.

Our employees remain committed, as they have been throughout our financial challenges, to being a world-class, leading supplier of boiler and environmental controls technology to the utility, oil and gas and pulp and paper markets.

Our Babcock & Wilcox brand, with our vast installed base around the world, is one of our strengths, as we support the global coal power generation fleet with retrofits, aftermarket services and environmental equipment, and tap into our competitors' underserved installed base as well.

Internationally, we continue to see growth in international boilers and environmental new build equipment, along with services.

We're aggressively pursuing our pulp and paper installed base and its untapped potential for aftermarket services as well as the great growth potential of our industrial packaged boiler business.

We expect the strength of Babcock & Wilcox segment to become more and more evident as we return to a more stable financial footing.

Our SPIG business is stabilizing under new management. We are targeting opportunities based on our core products and geographies, selectively bidding on higher-value projects with better terms. Like I said, chasing quality, not revenues.

This quarter saw steady bookings compared to the same quarter last year, and the pipeline is strong. We continue driving project execution improvements and evaluating further cost reductions in this segment. We expect the SPIG segment to continue to improve over the next several quarters.

The Vølund segment, apart from the specific EPC loss projects that are largely behind us, have been leaders in renewable technology for grates, boilers, conveyors and environmental control systems for decades. The underlying core technology business has been relatively steady and maintained solid margins. The business is no longer bidding EPC scope projects and could now focus on its core technologies, returning to the business model as a designer, supplier and operator that served it well and profitably for many years, where we see a solid pipeline building around the world.

This quarter, the segment recorded a positive gross profit as we worked through reductions in overhead that were previously required to support the loss projects, and we expect Vølund continue to improve performance over the coming quarters.

Taken together, we believe our emphasis on core technologies, project execution and improved cash flow, refinancing our debt and continued cost-saving initiative positions us extremely well on our path to sustain profitability, with the benefits becoming more evident in the second half of the year.

We appreciate the continued support of our customers, vendors, employees and shareholders, and we look forward to working together to deliver our core power and industrial markets in what is already a better 2019 and should be an even better 2020.

We are committed to our ongoing transformation, we are confident in our dedicated employees and world-class technologies and optimistic about our strategic path going forward.

With that, I will now return the call back over to Chris, who will assist us in taking your questions.

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Operator [6]

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(Operator Instructions) And ladies and gentlemen, this does conclude the Q&A period.

And I'll now turn it back over to Megan Wilson for any closing remarks.

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Megan Wilson, Babcock & Wilcox Enterprises, Inc. - VP of Corporate Development & IR [7]

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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 [8]

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