Babcock & Wilcox Enterprises, Inc.
Q4 2018 Earnings Call Transcript

Published: 9 Apr 2019

[Operator:]

Good afternoon. My name is Chris and I will 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.

[Megan Wilson:]

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; Louis 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 provides 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.

[Kenneth Young:]

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

[Louis Salamone:]

Thanks, Kenny. As Kenny mentioned, the company's three reportable segments, Babcock & Wilcox, Volund 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 Volund 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 Volund loss contracts. Operating losses were also due to the SPIG segment’s increased estimated cost 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 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 Volund 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 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 progress 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 Volund and Other Renewables segment, formally the Renewable segment, were affected by the March 2019 settlement regarding the fifth European Volund project, which reduced the estimated selling price for this project as of December 31, 2018 by $81.1 million. Revenues in the 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 costs to support these loss projects. Adjusted EBITDA in the quarter was a 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 segments 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 settlements of again $81.1 million. This was mainly due to differences in the actual and estimated cost and 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 Volund 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 a 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 Volund 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

[Kenneth Young:]

Thanks, Lou. Well, in summary, we've made significant strides towards positioning B&W for return to profitability in 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 Volund 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 in our core power and industrial markets, and 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.

[Operator:]

[Operator Instructions] We do have a question from Robert Cathey with SCW Capital. Your line is open.

[Robert Cathey:]

Hey, guys. I appreciate you guys [indiscernible]this call. I was wondering -- I know you’re not giving guidance as it relates to the run rate EBITDA for 2020, if you could kind of breakdown 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 cost look like? Thanks.

[Louis Salamone:]

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

[Robert Cathey:]

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

[Louis Salamone:]

Well, we can state what the corporate costs were, but not give guidance..

[Robert Cathey:]

Okay, what were they?

[Louis Salamone:]

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

[Robert Cathey:]

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

[Kenneth Young:]

Yes, just to talk a little bit about -- I mean, and again on high level, I think as we kind of alluded to in this -- in the conference call here, Robert is, SPIG had taken on I think an incredible amount trying to 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 in other parts after-the-fact or aftermarket.

[Robert Cathey:]

Got it. Okay. Okay. Well, thanks guys. I know you had a really difficult situation. We appreciate all the hard work getting to where you’re today.

[Kenneth Young:]

Thanks.

[Louis Salamone:]

Thank you.

[Kenneth Young:]

Appreciate the support.

[Operator:]

[Operator Instructions] Okay. And this conclude the Q&A portion of today’s call. I will now turn things back over to the presenters for any closing remarks.

[Megan Wilson:]

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

[Operator:]

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