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Edited Transcript of BW earnings conference call or presentation 15-May-20 12:00pm GMT

Q1 2020 Babcock & Wilcox Enterprises Inc Earnings Call

CHARLOTTE May 15, 2020 (Thomson StreetEvents) -- Edited Transcript of Babcock & Wilcox Enterprises Inc earnings conference call or presentation Friday, May 15, 2020 at 12:00:00pm 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. - Executive VP, CFO & CAO

* Megan Wilson

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

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Conference Call Participants

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* Hale Hoak

* Nelson Jay Obus

Wynnefield Capital, Inc. - President, CIO & Portfolio Manager

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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 First Quarter 2020 Earnings Conference Call. (Operator Instructions)

I would now like to hand the conference over to one of your speakers for today, Megan Wilson, Vice President of Investor Relations. Please go ahead, ma'am.

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

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Thank you, Carol, and good morning, everyone. Welcome to Babcock & Wilcox Enterprises First Quarter 2020 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; and Lou Salamone, Chief Financial Officer, to discuss our first 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 will be filed today 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 issues can be found in our first quarter earnings release published yesterday afternoon.

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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Thank you, Megan. Good morning, everyone, and thanks for joining. Our first quarter 2020 results and our completed 2-year refinancing agreement demonstrate the effectiveness of our turnaround strategy and the confidence of our lenders, shareholders, our customers, vendors and our employees in our operational plans and growth opportunities. Despite an operating loss on a GAAP basis, we closed the first quarter of 2020 with positive adjusted EBITDA despite the combined efforts of COVID-19 and our industry's typical historical lower first quarter patterns. This is due to the determination and experience of the entire team that engineered the turnaround of our business and their efforts to implement changes to route our operations in response to the unprecedented impacts of COVID-19. Our employees and technology are unsurpassed within our industry. And despite the impacts of COVID-19, our bookings in the first quarter were about the same as the first quarter last year. And we continue to see a robust pipeline of new opportunities worldwide. Our focus is, and continues to be, bottom line results and strong cash management. Our 2-year refinancing and credit extension is a critical milestone and a significant accomplishment for our company. Our ability to complete this long-term refinancing in financial markets distressed by the effects of COVID-19 is a major success. This refinancing gives us financial stability and strength to focus on our long-term growth strategy, and we sincerely appreciate the support of our lenders and stakeholders to reach this milestone.

Like many companies around the world, we have been affected by the actions taken by various local and national governments worldwide to control the spread of the global COVID-19 pandemic. Several of our major offices and many of our projects are located in areas with restrictions that necessitate a work from home arrangement and that forced delays and deferrals in many of our projects. Like every company challenged by the pandemic, it's impossible for us to fully predict the extent or timing of the impacts of COVID-19. However, as I've said before, 2 key points encourage and drive us forward at Babcock & Wilcox. We provide critical and essential infrastructure products and services, and our entire management and employee team is experienced and dedicated and stronger than ever. So to our employees who are working, whether on sites around the world, in our manufacturing centers, in our offices or at home, to each of you, we thank you.

First as an essential business, we provide products and services needed to ensure power and energy infrastructure in the U.S. and around the world. We are -- it is available and ready -- we are available and ready to support our communities. We are able to continue operating and supporting our customers as needed and are working closely with our customers, suppliers, lenders and government officials to address the challenges the pandemic presents.

In addition, because of the critical nature of our business, we expect that a majority of revenues that are deferred due to COVID-19 will return in late 2020 and 2021, depending on certain customer and project-specific factors.

Second, over the past 4 years, our management employees have continually demonstrated their strong commitment to excellence and their dedication to supporting our customers and the communities they serve. This team managed through very difficult losses to complete the EPC loss projects and significantly reduce and limit the risk. Now as we deal with the effects of the pandemic, the strength and professionalism of our employees combined with our industry-leading technologies serve as the foundation of our business.

Our critical refinancing is now behind us. We are an essential industry provider. We have a strong base of experienced, dedicated employees. And I'm confident that B&W is positioned to continue leveraging our best-in-class technologies and services to support our customers around the globe and accelerate our growth as the impacts of COVID-19 are managed and restrictions safely eased or modified when appropriate. We will be able to drive forward with projects delayed or deferred when conditions allow as we continue to pursue our strong pipeline around the world.

I'll now turn the call over to Lou to discuss the first quarter 2020 in detail.

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

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Thank you, Kenny. Our first quarter consolidated revenues were $148.6 million, down 36% compared to the first quarter of 2019. This was expected due to our focus on our core technologies and profitability. The decline was also driven by lower volume of periodic large construction, newbuild projects in the B&W segment, the ongoing wind down of the SPIG U.S. operations and the effect of COVID-19 restrictions on services volume in the SPIG segment and the 2019 sale of Loibl in the Vølund & Other Renewable segment.

Our GAAP operating loss in the first quarter of 2020 was a loss of $10.3 million, inclusive of restructuring and settlement costs and advisory fees of $6.2 million compared to an operating loss of $32 million in the first quarter of 2019. The improvement in operating income was primarily due to improved gross margins in the Babcock & Wilcox segment, the absence of losses on the 6 European EPC loss contracts and lower levels of direct overhead support, warranty expense and SG&A in the Vølund & Other Renewable segment. This was partially offset by the decline in overall volume and changes in product mix in the SPIG segment.

Our consolidated adjusted EBITDA improved to a positive $700,000 compared to a negative $4.4 million in the first quarter of 2019.

Turning to our first quarter segment results. Revenues in the Babcock & Wilcox segment were $122 million in the first quarter of 2020 as compared to $188.6 million in the prior period. This decline was primarily attributable to lower volume of large construction newbuild projects as was expected. Adjusted EBITDA in the first quarter was $10.7 million, an increase of 17.2% compared to $9.1 million in last year's quarter. This was primarily due to higher parts margin and the results of cost savings and restructuring initiatives partially offset by the decrease in revenue volume.

The segment adjusted EBITDA margin was 8.7% in the quarter as compared to 4.8% in the same period last year. The first quarter adjusted gross profit in the segment was $32.9 million, a 5.7% increase compared to the prior year period, and this was primarily due to the benefits of cost reductions, partially offset by the decreased volume. And the gross margin profit improved to 27% compared to 16.5% in the same period last year, primarily due to higher parts margins, the benefits of cost savings and restructuring initiatives and partially offset by the decrease in revenue as previously described above.

Moving on to the SPIG segment. Revenues were $11.3 million in the first quarter of 2020 as compared to $28.9 million in the first quarter of 2019. This anticipated decrease was mainly due to the ongoing wind down of the SPIG U.S. operation, the impact of worksite COVID-19 restrictions on services volume and more selective bidding and focus on core geographies and products to improve profitability.

Adjusted EBITDA was a negative $1.2 million, a decrease of $1.9 million compared to the positive $700,000 in the same period last year. This was driven by a decrease in revenue and lower margins due to changes in product mix described above as well as a $700,000 settlement on a legacy dry cooling project expected to facilitate the collection of outstanding receivables. This was partially offset by lower overhead fixed costs. The adjusted gross profit declined to $900,000 in the first quarter of 2020 as compared to $3.7 million in the prior year period, mainly due to the decrease in revenue, changes in product mix and the legacy dry cooling project settlement as well as the impact of COVID-19 on the SPIG segment.

Revenues in the volume and the -- pardon me, sorry. Revenues in the Vølund & Other Renewable segment were $15.3 million for the first quarter of 2020 as compared to $29.5 million in the first quarter of 2019. This decline was mainly due to the divestiture of the Loibl Materials Handling business, which contributed $7.2 million of revenue in the first quarter of 2019, as well as a lower level of EPC project revenue activity due to the completion of the European EPC loss contracts. This was partially offset by the start-up of 2 operations and maintenance contracts in the U.K.

Adjusted EBITDA in the quarter improved to a negative $3.3 million as compared to a negative $8.8 million in the first quarter last year. This was primarily due to the absence of losses on the European EPC loss contracts in the first quarter of 2020. This segment recorded a small gain on the European EPC loss contracts as compared to $4.1 million of losses recorded in the first quarter of 2019. This is inclusive of warranty expense. Beyond the absence of losses on the EPC loss contracts, the improvement also reflected the benefits of restructuring, including lower levels of direct overhead support, warranty expense and SG&A. The segment's adjusted gross profit was a positive $1.5 million in the first quarter of 2020, an improvement of $4.3 million compared to the negative $2.9 million in the prior year quarter. This was, again, primarily driven by the absence of losses on the European EPC loss contracts, the lower levels of direct overhead support and warranty expenses discussed above, partially offset by the absence of adjusted gross profit from Loibl due to its sale.

I'll turn now to our cash flow, balance sheet and liquidity. Cash flow from operations in the fourth quarter of 2019 was a use of cash of $35.5 million. We ended the quarter with unrestricted cash and cash equivalents of $35.4 million. Total debt at March 31 was $321.1 million, with $185 million related to the revolver and $136.1 million for last-out term loans. All of our senior debt is now reclassified as noncurrent in our March 31, 2020, financial statements, which I'll talk about later.

Interest expense in the quarter was $22.1 million compared to $11.1 million in the prior year quarter. The increase was primarily driven by increases in amortization or accretion of deferred or contingent fees, which were related to our revolving credit facility and our last-out term loans.

We are continuing to pursue cost recoveries under various insurance policies and from subcontractors on the European EPC loss contracts.

Additionally, we've completed the implementation of our cost savings initiatives, targeting $119 million of annualized savings. However, we'll continue to look for additional opportunities for efficiency, and we are continuing to evaluate potential dispositions as appropriate.

As Kenny mentioned, we announced on May 14, 2020, that we amended our credit agreement to extend our current revolving credit facility and availability for letters of credit for 2 years with the maturity date of June 30, 2022. We are extremely pleased to have reached this agreement despite the impacts of the global COVID-19 pandemic and its effect on the financial markets. Under the terms of the agreement, B. Riley Financial has provided $30 million of new last-out term loans and is committed to provide $35 million of additional incremental last-out term loans through the maturity date. These incremental last-out term loans will amortize revolving credit facility through reductions in the revolving credit facility commitments over time. We expect to use the proceeds from the last-out term loans to pay transaction fees and expenses, to repay outstanding revolving credit facility borrowings and for working capital and general corporate purposes.

In addition to the $65 million of last-out term loans, B. Riley has also committed to make an additional $5 million in last-out term loans available at the company's request for working capital needs.

In conjunction with our amended credit agreement, B. Riley has also provided a limited guarantee for our obligations under our revolving credit facility, other than with respect to the letters of credit and contingent obligations.

As the amended -- under the amended agreement, the current supplement on borrowings is maintained. Our revolving credit facility continues to be available for letters of credit, subject to certain sub limits, and certain fees and interest payments due to the senior lender syndicate will be deferred to 2021.

In support of the refinancing, we entered into an agreement with B. Riley to equitize approximately $16.2 million of fees and interest payments through the end of 2020 on the unpaid principal amount of the last-out term loans, including the new term loans. All stock issued in payment of these fees and interest will be valued at a price equal to the average volume weighted average price of the common stock over 15 consecutive trading days beginning today, subject to customary adjustments and stockholder approval. Further details on our refinancing can be found in the related Form 10-K we filed with the SEC yesterday.

With our financing agreement in place, we continue to focus on managing our costs and our cash flow as the global COVID-19 pandemic continues, while evaluating its effects on our business and working to support our customers in the long term. As we evaluate the impact of COVID-19 on our business, while it's fully impossible to predict, we expect deferrals and delays of certain projects to affect our performance in the second quarter of 2020 and anticipate the majority of deferred projects to remobilize late in 2020 and through 2021.

As noted in our 10-Q to be filed today, based upon the terms of the refinancing and the cash management and cost reduction measures taken to date, we expect to maintain sufficient liquidity to fund our future operations and meet our obligations to the extent we believe that there is no longer substantial doubt about our company's ability to continue as a going concern.

I'll now turn it back to Kenny.

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

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Thanks, Lou. We continue to demonstrate significant progress in our turnaround. Our successful long-term refinancing agreement is the latest critical milestone in our strategy and gives us financial stability to focus on our long-term growth. Our employees and technologies underpin our core strengths. We have a demonstrated track record in working through significant challenges while continuing to execute. We continue to book critical work, and we see strong pipeline of new opportunities worldwide despite the impacts of COVID-19. This includes strong growth opportunities across each of our segments, including renewable energy, parts and services and advanced technologies to support efficient long-term operations of our core energy customers. We continue to focus on supporting our customers and our energy infrastructure, taking care of our employees and managing our cash flow through the pandemic to protect our fundamentally strong core business for the long term.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question this morning comes from Hale Hoak from Hoak & Co.

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Hale Hoak, [2]

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Congratulations on the refi. It's nice to have that behind you. You've been operating in refinancing limbo for quite a while. With that behind you, is there any more thought, and Lou mentioned, a continued focus on cost savings. But you did a fabulous job on margins in the core BW segment. Is there more to do there? And kind of how do you think about in a normal environment, what the earnings power should be there? We used to talk about $80 million or $100 million of EBITDA, I think. Is that still a goal that if and when we're back to post COVID-19, that's a rate you'd like to be able to hit?

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

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Hale, thanks for jumping on the call this morning. From an overall perspective, and I appreciate the congratulations of refinancing, you're right, it has been a long time coming, and we're grateful to get it behind us, and we feel very strong in a successful way. As we look at our company, as we've talked about previously on a few other calls, we continue to look at how we can improve the overall operating margins of the business, whether that be in the core BW segment or our other segments, Vølund and SPIG as well. Obviously, we're looking at how we can maximize the operations and the efficiencies. It's what we do. And we have a lot of people working very hard to accomplish that. Those are not necessarily relating to employee reductions per se, but also in areas where we can improve the manufacturing process and capabilities, improve the timeliness of the manufacturing processes and capabilities and so on and so forth. That has not only an impact on overall margins in the business but also helps impact the timing of cash flows as it relates to the various projects. And we've made a lot of strides and we'll continue to do so.

As far as the target concern that we've talked about in the past, clearly, our target is still there that we want to achieve. There's going to be impacts this year of COVID-19 on the overall business. And sitting here now, like everyone, it's hard to predict what will happen overall. We're working through it, obviously, day by day, week-by-week and month by month. But our goals that we've discussed in the past are still there. And we believe the company can eventually reach those levels, given time. Obviously, COVID is an impact, but we're still determined, and we still have a vision to get to those levels and we see the capabilities that -- in the future to get there.

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Hale Hoak, [4]

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Well, great. And congratulations again, and thanks to the B. Riley for their support.

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Operator [5]

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Our next question comes from Nelson Obus from Wynnefield Capital.

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Nelson Jay Obus, Wynnefield Capital, Inc. - President, CIO & Portfolio Manager [6]

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Yes. I had a couple of questions. Is there any effort to pursue the former parent in regard to possible fraudulent conveyance concerns?

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Kenneth M. Young, Babcock & Wilcox Enterprises, Inc. - CEO [7]

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Nelson, thanks for joining this morning on that. We wouldn't comment on if we were or could at this point, obviously, from that standpoint, but we've had people looking into possibilities on recoveries across the board, whether they be there or they -- in former insurance standpoints, as we talked about, perspectives, on projects, things like that in the past. But we wouldn't give a direct comment on anything that we're truly -- would be involved in if we were involved in at this point in time.

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Nelson Jay Obus, Wynnefield Capital, Inc. - President, CIO & Portfolio Manager [8]

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Well, I assume that at some point, it would become public if you filed against them. I mean, it's true you've looked into this, haven't you? You should, I mean, to represent the shareholders, it's kind of an interesting timing on the spin-off.

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

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Yes. We -- I don't think, to our knowledge, Nelson, we've left any stone unturned as it relates to helping improve the cash flow position of this company overall, without a doubt.

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Nelson Jay Obus, Wynnefield Capital, Inc. - President, CIO & Portfolio Manager [10]

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Well, that's a big one, come on. The rest is, I suspect. What's the blended coupon on the debt now?

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Louis Salamone, Babcock & Wilcox Enterprises, Inc. - Executive VP, CFO & CAO [11]

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It's in the -- on the loan, the lap out is 12%. And then the revolver is around 7%.

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Nelson Jay Obus, Wynnefield Capital, Inc. - President, CIO & Portfolio Manager [12]

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So obviously...

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Louis Salamone, Babcock & Wilcox Enterprises, Inc. - Executive VP, CFO & CAO [13]

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That floats with LIBOR and other benchmarks.

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Nelson Jay Obus, Wynnefield Capital, Inc. - President, CIO & Portfolio Manager [14]

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I assume, with the new refinancing, is it -- do you have the ability to replace that high yield -- that pretty onerous yield, as you realize. Is there any prepayment penalty, if somehow you can get a better coupon?

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Louis Salamone, Babcock & Wilcox Enterprises, Inc. - Executive VP, CFO & CAO [15]

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There's -- as described in the 8-K and in the documents filed -- that will be filed with it, there were no prepayment penalties, per se.

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Nelson Jay Obus, Wynnefield Capital, Inc. - President, CIO & Portfolio Manager [16]

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Well, that's good. I just wanted to follow up with Hale's question. I mean, maybe asking it in a less -- in a more skeptical manner. I mean, you've had this metric about cost savings. It goes back a long way. You've had a goal in terms of EBITDA. I think a big component of that was pension. It wasn't really cash. But a $119 million shows up again is something you're proud about. But can you take us through what exactly you've done? I mean, I realize we have COVID, but I have to be honest with you, all the savings that you keep reporting on has never been evident to the shareholders even before COVID. So maybe a little deeper dive in terms of exactly where that savings came from. I can tell you, most companies I've seen that have saved $120 million, even with COVID or even taking COVID out, have had more vibrant P&L. So that would be kind of helpful.

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Kenneth M. Young, Babcock & Wilcox Enterprises, Inc. - CEO [17]

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Well, Nelson, quite honestly, I disagree with your statement on that. So I think this company that has gone through loss EPC contracts that have totaled several hundreds million dollars that have impacted the losses over the years and to pull $120 million out of this business to get it back to a profitable state at this point in time is quite an achievement. And I think those results have definitely impacted the business. The numbers we filed last year and the positive $33 million of EBITDA wouldn't have been achievable without reducing obviously that significant amount of cost. So I'm not sure where you're missing that, but we disagree with that...

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Nelson Jay Obus, Wynnefield Capital, Inc. - President, CIO & Portfolio Manager [18]

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What I'm trying to do is get -- figure out how you calculated it. I mean, if you have bad contracts that ran off, that's not how I would look at it. In other words, have you really taken costs out? Or have you simply shed things that unfortunately, your predecessors got you into?

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Kenneth M. Young, Babcock & Wilcox Enterprises, Inc. - CEO [19]

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Nelson, we've taken out true costs. There's been true costs that have put a positive impact on the margin of the business and the EBITDA of the business and gets down into net income. So when we talk about $120 million in savings, we're not talking about $120 million of contract deferrals, we talk about $120 million in savings. So you can have your opinion about it, but I'll disagree. So I think it's been a tremendous success for the shareholders of this company, and I think -- those who will continue. And I think our employees have done an amazing job of turning this around to create the value.

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Nelson Jay Obus, Wynnefield Capital, Inc. - President, CIO & Portfolio Manager [20]

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Well, I guess my opinion is, if you took that much money out on the cost basis, you're on a bad business, but -- okay. I mean, I was kind of interested in the breakdown.

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Kenneth M. Young, Babcock & Wilcox Enterprises, Inc. - CEO [21]

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That's great. Nelson, is there any other questions you have? Or is there any other comments you'd like...

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Nelson Jay Obus, Wynnefield Capital, Inc. - President, CIO & Portfolio Manager [22]

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I mean, can you break -- I just answer my question. $119 million, can you break it down a little bit?

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Kenneth M. Young, Babcock & Wilcox Enterprises, Inc. - CEO [23]

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We've broken it down before. If you go back and look at the filings, I think we put as much detail as we can out there. It's all (inaudible)

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Nelson Jay Obus, Wynnefield Capital, Inc. - President, CIO & Portfolio Manager [24]

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(inaudible) you would have that. I think it's a stupid metric.

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Kenneth M. Young, Babcock & Wilcox Enterprises, Inc. - CEO [25]

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All right. Nelson, is there any other questions you have right now? Otherwise we're moving on. Operator, can you move to the next investor, please? We're done.

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Operator [26]

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And we have no one else in the queue at this time. I'll turn the call back for any closing remarks.

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Megan Wilson, Babcock & Wilcox Enterprises, Inc. - VP of Corporate Development & IR [27]

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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 [28]

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