Earnings Call Transcript - BW Q1 2020

Operator, Operator

Thank you for joining us for the Babcock & Wilcox First Quarter 2020 Earnings Conference Call. I will now turn the call over to Megan Wilson, Vice President of Investor Relations. Please proceed.

Megan Wilson, Vice President of Investor Relations

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.

Kenneth Young, CEO

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 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.

Lou Salamone, CFO

Thank you, Kenny. Our first quarter consolidated revenues were $148.6 million, down 36% compared to the first quarter of 2019. This was expected as we concentrated on our core technologies and profitability. The drop was also caused by a reduction in large construction and newbuild projects in the B&W segment, the ongoing winding down of SPIG U.S. operations, and the impact of COVID-19 restrictions on service volumes in the SPIG segment, along with the 2019 sale of Loibl in the Vølund & Other Renewable segment. Our GAAP operating loss for the first quarter of 2020 was $10.3 million, which includes restructuring and settlement costs and advisory fees of $6.2 million, compared to an operating loss of $32 million in the same period in 2019. The improvement in operating income was mainly due to enhanced gross margins in the Babcock & Wilcox segment, the absence of losses on the six European EPC contracts, and reduced direct overhead support, warranty expenses, and SG&A in the Vølund & Other Renewable segment. However, this was partially offset by the decrease in overall volume and changes in product mix within the SPIG segment. Our consolidated adjusted EBITDA improved to a positive $700,000 from a negative $4.4 million in the first quarter of 2019. Looking at our segment results for the first quarter, revenues in the Babcock & Wilcox segment were $122 million compared to $188.6 million in the previous year, primarily due to a decrease in large construction and newbuild project volumes as expected. Adjusted EBITDA for the quarter was $10.7 million, which is an increase of 17.2% from $9.1 million in the same quarter last year, driven by higher parts margins and cost-saving initiatives, partially offset by lower revenue volume. The segment's adjusted EBITDA margin rose to 8.7% from 4.8% a year earlier. The first quarter adjusted gross profit for the segment was $32.9 million, a 5.7% increase from the prior year, mainly due to cost reductions, although this was offset by decreased volumes. The gross margin improved to 27% from 16.5% in the same period last year, primarily due to increased parts margins and the benefits of cost-saving initiatives, countered by reduced revenue as previously mentioned. In the SPIG segment, revenues totaled $11.3 million for the first quarter of 2020, compared to $28.9 million in the first quarter of 2019. This expected decline was largely attributed to the ongoing winding down of SPIG U.S. operations, worksite COVID-19 restrictions affecting service volumes, and a more selective bidding process focusing on core products and geographies to enhance profitability. Adjusted EBITDA was a negative $1.2 million, down $1.9 million from the positive $700,000 in the same period last year, due to revenue declines and lower margins from product mix changes, as well as a $700,000 settlement related to a legacy dry cooling project. This was partially mitigated by lower overhead fixed costs. The adjusted gross profit fell to $900,000 in the first quarter of 2020 compared to $3.7 million in the previous year, mainly due to reduced revenue, product mix changes, and the legacy dry cooling project settlement, along with COVID-19's impact. Revenues in the Vølund & Other Renewable segment were $15.3 million for the first quarter of 2020, compared to $29.5 million in the first quarter of 2019. This decline was primarily due to the sale of the Loibl Materials Handling business, which contributed $7.2 million of revenue in the first quarter of 2019, and a decrease in EPC project revenue activity after the completion of the European EPC loss contracts, partially countered by the initiation of two operations and maintenance contracts in the U.K. Adjusted EBITDA for the quarter was a negative $3.3 million, an improvement from a negative $8.8 million in the first quarter last year, mainly because there were no losses on the European EPC contracts in 2020. This segment had a small gain on those contracts compared to $4.1 million in losses from the previous year. This included warranty expenses. In addition to the absence of losses on the EPC contracts, the improvement also stemmed from restructuring benefits, including reduced direct overhead support, warranty expenses, and SG&A. The segment's adjusted gross profit for the first quarter of 2020 was $1.5 million, an improvement of $4.3 million compared to a negative $2.9 million in the prior year, primarily driven by the absence of losses on the European EPC contracts, lower overhead support, and warranty expenses, though offset by the lack of adjusted gross profit from Loibl due to its sale. Now, regarding our cash flow, balance sheet, and liquidity. Cash flow from operations in the fourth quarter of 2019 showed a cash use of $35.5 million. By the end of the quarter, we had unrestricted cash and cash equivalents of $35.4 million. Total debt as of March 31 amounted to $321.1 million, which includes $185 million for the revolver and $136.1 million for last-out term loans. All our senior debt is now reclassified as noncurrent in our March 31, 2020, financial statements. The interest expense for the quarter was $22.1 million, compared to $11.1 million in the same quarter of the previous year, primarily due to increased amortization or accretion of deferred or contingent fees related to our revolving credit facility and last-out term loans. We are actively pursuing cost recoveries through various insurance policies and from subcontractors regarding European EPC loss contracts. We've successfully implemented cost-saving initiatives aimed at achieving $119 million in annual savings, while also seeking further efficiency opportunities and evaluating potential dispositions. As Kenny mentioned, we announced on May 14, 2020, that we amended our credit agreement to extend our revolving credit facility and letter of credit availability by two years, with a new maturity date of June 30, 2022. We are very pleased to have reached this agreement despite the challenges posed by the global COVID-19 pandemic on financial markets. Under the agreement, B. Riley Financial has provided $30 million in new last-out term loans and is committed to offering an additional $35 million in incremental last-out term loans before the maturity date. These incremental loans will be used to amortize the revolving credit facility through future reductions in commitments. We plan to use the proceeds from the last-out term loans to cover transaction fees, repay existing revolving credit facility borrowings, and fund working capital and corporate needs. B. Riley has also pledged an additional $5 million in last-out term loans upon our request for working capital. As part of the amended credit agreement, B. Riley has provided a limited guarantee for our obligations under the revolving credit facility, excluding letters of credit and contingent obligations. The current borrowing supplement remains under the amended agreement. Our revolving credit facility continues to permit letters of credit, subject to specific sub-limits, and certain fees and interest payments to the senior lender syndicate will be deferred until 2021. To support the refinancing, we reached an agreement with B. Riley to equitize approximately $16.2 million in fees and interest payments due on the unpaid principal amount of the last-out term loans, including new loans, through the end of 2020. All stock issued for these fees and interest will be valued based on the average volume-weighted price of our common stock over 15 consecutive trading days starting today, subject to standard adjustments and stockholder approval. More details regarding our refinancing can be found in the Form 10-K we filed with the SEC yesterday. With our financing in place, we are focusing on managing costs and cash flow amid the ongoing global COVID-19 pandemic, while assessing its impacts on our business and supporting our customers long-term. While it's challenging to predict the full effects of COVID-19, we expect certain project deferrals and delays will influence our performance in the second quarter of 2020, anticipating that most of the deferred projects will resume late in 2020 and into 2021. As highlighted in our 10-Q being filed today, based on our refinancing terms and the cash management and cost reduction strategies we've implemented, we believe we can maintain sufficient liquidity to support our operations and meet obligations, minimizing concerns about the company's ability to continue as a going concern.

Kenneth Young, CEO

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 a 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?

Operator, Operator

Our first question this morning comes from Hale Hoak from Hoak & Co.

Hale Hoak, Analyst

Congratulations on the refinancing. 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?

Kenneth Young, CEO

Thank you for joining the call this morning. I appreciate the congratulations on our refinancing efforts. It has been a long journey, and we're relieved to have it behind us while feeling optimistic about our future. Regarding our company, as we've previously discussed, we're focused on enhancing the overall operating margins across all segments, including BW, Vølund, and SPIG. We are committed to maximizing operations and efficiencies, and many dedicated individuals are working hard toward these objectives. Our efforts are not solely about reducing staff but also about improving our manufacturing processes and capabilities, including their timeliness, which will positively affect our margins and cash flow timing for various projects. We have made significant progress and will continue on this path. As for our targets, they remain in place despite the challenges posed by COVID-19. Currently, it is difficult to forecast the overall impact, but we are navigating these issues day by day. Our previously discussed goals still stand, and we believe the company can reach those levels over time. While COVID presents challenges, we remain determined and confident in our ability to achieve these targets in the future.

Hale Hoak, Analyst

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

Operator, Operator

Our next question comes from Nelson Obus from Wynnefield Capital.

Nelson Obus, Analyst

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

Kenneth Young, CEO

Thank you for joining us this morning, Nelson. We cannot comment on whether we are pursuing anything at this moment, but we have been exploring recovery options in various areas, including potential insurance claims and past projects. However, we are not in a position to provide specific comments on any involvement we may have at this time.

Nelson Obus, Analyst

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.

Kenneth Young, CEO

Yes. 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.

Nelson Obus, Analyst

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

Lou Salamone, CFO

The last-out on the loan is 12%, and the revolver is around 7%.

Nelson Obus, Analyst

So obviously…

Lou Salamone, CFO

That floats with LIBOR and other benchmarks.

Nelson Obus, Analyst

I assume that with the new refinancing, do you have the ability to replace the high yield, which is quite burdensome? Is there any prepayment penalty if you can secure a better interest rate?

Lou Salamone, CFO

There were no prepayment penalties associated with the documents that will be filed.

Nelson Obus, Analyst

I just wanted to follow up on Hale's question and perhaps ask it in a more skeptical manner. You have been reporting on cost savings for a long time and set a goal regarding EBITDA. A significant part of that was related to pension, which wasn't really cash. You mention a $119 million figure that seems to be a point of pride, but could you explain what exactly you've done to achieve this? I understand COVID has had an impact, but to be honest, the savings you report have not been clear to shareholders, even before the pandemic. A more detailed explanation of where those savings originated would be helpful, especially since I've seen other companies that saved $120 million, impacted by COVID or not, show more robust profit and loss statements.

Kenneth Young, CEO

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 hundred 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…

Nelson Obus, Analyst

What I'm trying to do is understand how you calculated it. If you have bad contracts that expired, that's not how I would view it. In other words, have you actually eliminated costs? Or have you just let go of things that your predecessors got you into?

Kenneth Young, CEO

Nelson, we have removed true costs that have positively impacted the business's margin and EBITDA, ultimately affecting net income. When we mention $120 million in savings, we are referring specifically to savings, not contract deferrals. You may have your own perspective, but I respectfully disagree. I believe this has been a significant achievement for the company’s shareholders, and those who will remain will see its benefits. Furthermore, I commend our employees for their exceptional efforts in driving this turnaround and creating value.

Nelson Obus, Analyst

Well, I believe that if you took that much money out based on the cost basis, you're not in a good business. However, I was interested in the breakdown.

Kenneth Young, CEO

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

Nelson Obus, Analyst

Can you break down the $119 million a little bit?

Kenneth Young, CEO

We've provided a detailed breakdown in our filings. If you refer back to those, you'll see the information we can share. It's all affected by various factors.

Nelson Obus, Analyst

I would think that you would have that. Look, I think it's a stupid metric.

Kenneth Young, CEO

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.

Operator, Operator

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

Megan Wilson, Vice President of Investor Relations

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, Operator

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