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Edited Transcript of BW earnings conference call or presentation 7-Nov-19 10:00pm GMT

Q3 2019 Babcock & Wilcox Enterprises Inc Earnings Call

CHARLOTTE Nov 27, 2019 (Thomson StreetEvents) -- Edited Transcript of Babcock & Wilcox Enterprises Inc earnings conference call or presentation Thursday, November 7, 2019 at 10:00:00pm 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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Ladies and gentlemen, thank you for standing by, and welcome to the Babcock & Wilcox Q3 2019 Earnings Conference Call. (Operator Instructions) I will now turn the conference over to Megan Wilson. You may begin.

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

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Thank you, Sunidra, and good afternoon, everyone. Welcome to Babcock & Wilcox Enterprises' Third 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 third quarter results.

During this call, certain statements we make will be forward-looking. These statements are subject to risks and uncertainties, including those set forth in our safe harbor provision for forward-looking statements that can be found at the end of our earnings press release and also in our annual report on Form 10-K and our Form 10-Q that are on file with the SEC and 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 third 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 joining our call. For the third quarter and throughout the year, we continue executing against our strategy and continue recognizing our operational and cost-saving initiatives, significantly improving our consolidated operating margins and achieving profitability for the second consecutive quarter on a consolidated adjusted EBITDA basis. We are now increasing our global market presence and delivering our core technologies across the Babcock & Wilcox Vølund and SPIG segments, while in parallel, driving down costs across the entire company.

With the finalization of the EPC loss projects, we are driving forward with increasing operating margins, improving our balance sheet, exceeding our customers' expectations and growing profitable revenues and refinancing our debt. Although we still face challenges, we are on a clear path to improved cash flows and pursuing a growing pipeline of new opportunities worldwide, with significant potential for growth in the U.S., Asia and the Middle East as well as diversification across multiple fuel types and industries for both steam generation and environmental controls. We appreciate our strong relationships with our customers and continue to see real potential to increase market share globally. Today, our management team and our employees around the world are executing our strategy to leverage our best-in-class core technologies, engineering services to reach our targeted run rate, adjusted EBITDA of $100 million in 2020.

Now as we discuss our third quarter 2019 results, you will see we have improved performance in every business segment. Our consolidated results reflect the strength of Babcock & Wilcox segment, which saw significantly improved margins and solid bookings this quarter, while the Vølund and SPIG segments have been strategically shrinking to bid and win the work within our core scope that we can complete profitably.

This quarter, revenues were lower year-over-year as planned. And as we finalize the historical loss EPC projects, exiting low margin, high-risk products and services and divested certain noncore businesses. We are executing strategies in each business to expand market share and grow intelligently. We're also making steady progress on our cost-saving initiatives, and we're aggressively investigating further opportunities to cut unnecessary costs. Today, we are right where we expect to be as we emerge from our transformation and progress down the path of sustained long-term profitability and growth.

I will now turn the call over to Lou to discuss the third quarter of 2019 in more detail. Lou?

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

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Thanks, Kenny. As Kenny explained, and as expected, due to the finalization of the EPC loss contracts and our strategic focus on our core technologies and profitability, the third quarter consolidated revenues were $198.6 million, a decrease of 33% compared to the third quarter of 2018. Our GAAP operating loss was $3.2 million in the third quarter of 2019. That's an improvement of $41.9 million compared to an operating loss in the third quarter of 2018 of $45.1 million. The improved operating loss was primarily driven by improved gross margins on our construction projects in the Babcock & Wilcox segment, a lower level of losses on the 6 European EPC loss contracts and a change in our strategy in the SPIG segment to improve profitability by focusing on more selective bidding in core geographies and products.

This quarter's $3.2 million loss included $7 million of restructuring and settlement costs and advisory fees. Our consolidated adjusted EBITDA also improved by $36.8 million as we generated a positive consolidated adjusted EBITDA of $10.1 million as compared with a negative consolidated adjusted EBITDA of $26.7 million in the third quarter of 2018.

Turning to our improved results in our segments. The Babcock & Wilcox segment continued to show improvement in key operating metrics. While revenues decreased 15.3% to $161.8 million in the third quarter of 2019 compared to $191.1 million in the prior year period, primarily attributable to lower volume related to completion of large construction newbuild projects, our adjusted EBITDA in the third quarter of 2019 increased by 23% to $19.3 million as compared with -- to $15.6 million in last year's quarter. This increase was primarily due to improved gross margins on the construction projects, which was partially offset by the effects of lower volume and increases in overhead being absorbed by the segment that was previously absorbed by other segments.

The adjusted EBITDA margin was 11.9% compared to 8.2% in the same period last year. Third quarter adjusted gross profit in the segment increased 19% to $41 million as compared to $34.3 million in the prior year period. And the gross profit margin was 25.3% as compared to 18% in the same period last year.

Moving on to our SPIG segment. As expected, due to our change in strategy, revenues decreased by 70.4% to $10.3 million in the third quarter of 2019 compared to $34.8 million in the third quarter of 2018. This anticipated decrease was mainly due to the lower volume of newbuild cooling system projects following our shift to a more selectively bid and focused on core geographies and products to improve profitability.

In that regard, adjusted EBITDA improved by $8.8 million to a negative $2.4 million as compared to a negative $11.2 million in the same period last year, and this is driven by our new strategy in addition to the benefits of restructuring, SG&A cost savings and operating cost reductions. Adjusted gross profit improved to a negative $1 million in the third quarter as compared to a negative $5.5 million in the prior year period, again, primarily due to the effects of our new strategy.

As expected, revenues in the Vølund and Other Renewable segment were $32.4 million for the quarter -- for the third quarter of 2019 as compared to $76.5 million in the third quarter of 2018. Third quarter revenues were lower compared to the prior year quarter due to the finalization of the EPC loss contracts, sales of the PBRRC and Loibl businesses, which had previously generated annual revenues of approximately $60 million and $30 million, and a shift to a core technology business model. This decrease was partially offset by the start-up of 2 operations and maintenance contracts in the United Kingdom.

Adjusted EBITDA in the quarter improved by $22.8 million to a negative $2.9 million as compared to $25.7 million in the third quarter of last year. This is primarily due to lower level of losses on the EPC loss contracts as well as attention to cost-cutting. In the third quarter of 2019, the segment recorded a $700,000 net loss as compared to a $19.1 million of equivalent losses recorded in the third quarter of 2018, and this was inclusive of warranty expense. Beyond the effect of the EPC loss contracts, the third quarter 2019 adjusted EBITDA included lower levels of direct overhead support, warranty expense and lower SG&A, which were partially offset by the absence of any gross profit from the PBRRC and Loibl operations due to them being sold during the year. The segment adjusted gross profit improved to $18.4 million to a positive $1.3 million in the third quarter of 2019 as compared to a negative $17.1 million reported in the third quarter 2018.

I'll turn now to our cash flow, balance sheet and liquidity. Cash flow from operations in the quarter was a use of cash of $8.1 million. We ended the quarter with unrestricted cash and cash equivalents of $32.1 million. Total revolving debt at September 30 was $191.7 million.

Interest expense in the quarter was $29.4 million as compared to $10.2 million in the prior quarter, and this increase was primarily driven by increases in the amortization or accretion of deferred or contingent fees related to our revolving credit facility and our last out term loans. We're continuing to pursue cost recoveries under various insurance policies and from subcontractors for the European EPC loss contracts.

As previously disclosed in June of 2019, we agreed to a full settlement related to a portion of the losses on our first EPC 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 one insurance recovery -- one insurance policy to recover $3.5 million of certain losses on the fifth project. That payment was received in September 2019. We are continuing to actively pursue other potential insurance recoveries and claims where appropriate and available.

As discussed in detail on our second quarter earnings call, we completed a series of equitization transactions and a 1-for-10 reverse stock split on July -- on the 23rd and 24th of July, respectively. Further information on these transactions which significantly delevered our balance sheet can be found in our 10-Q and our earnings release issued today.

Our credit agreement requires us to refinance on or prior to March 15, 2020, and we intend to refinance the revolving credit facility as required and such effort is fully underway. As Kenny mentioned, we continue to make progress on our cost-savings initiatives, targeting $119 million in annualized savings. As of the end of the third quarter, we have implemented $106 million of those savings or roughly 90% of them, with the remainder to be implemented in the fourth quarter and into the early part of 2020. The cost savings have been identified across all segments and at the corporate level, and the implementation plan and savings are progressing as expected. We continue to look for additional opportunities for efficiency, and we are also continuing to evaluate potential dispositions as appropriate.

Finally, as previously stated, based on the number of ongoing strategic actions and cost-savings initiatives, the company is continuing its practice of not providing guidance at this time.

I'll now turn the call back over to Kenny.

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

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Thanks, Lou. Our performance in the third quarter greatly shows acceleration following our recent strategic action and cost-saving efforts. And as we said before, there are 3 parts to our strategy: cost-saving initiatives, improved cash flow and leveraging our core technologies with improved project execution. Lou already spoke to our cost-saving initiatives, and we are determined, confident, and more importantly, our employees are committed to continue to drive unnecessary costs out of the business at every level. We achieved this through reduction of necessary expenses but also through improvements in quality, delivery and streamlining our operations. From a cash flow perspective, as we continue to establish a stronger operational and financial foundation, we positioned the company for refinancing, which is in progress. Once completed, we expect to avoid substantial settlement, amendment, restructuring and advisory fees.

Finally, we're concentrating on our strengths in execution. With the finalization of the EPC loss projects, we are focusing on our core products and services for power and the industrial markets, with an increased emphasis on retrofit and aftermarket services. As I said earlier, we are pursuing lower-risk, higher-margin projects rather than focusing on just revenues. We've identified opportunities in each segment to capture more business as we continue to improve our project execution.

In the Babcock & Wilcox segment, this means supporting our vast installed base around the world with retrofits, aftermarket services and environmental equipment and tapping into our competitors' underserved installed base. It also means pursuing growth in international boilers and environmental equipment, aftermarket services for our large pulp and paper installed base and our industrial package boiler business as well.

In the SPIG segment, we continue to improve its project execution and leverage its world-class cooling expertise. This means targeting opportunities based on our core products and geographies, and selectively bidding on higher-value projects with better terms.

And in the Vølund segment where we've taken -- where we've been leaders in renewable technology for grates, boilers and environmental control systems for decades, this means focusing on our core technologies there as well as we return to our prior business model as a designer and supplier of these components as a plant operator, which served us well and profitably for many years and where we see a solid pipeline improving around the world.

We appreciate the continued support of our customers, our vendors, our employees and our shareholders. We are committed to our strategy, we are confident in our employees and technologies, and we are very optimistic about our future.

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

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Operator [6]

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(Operator Instructions) And at this time, there are no questions.

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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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Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.