Earnings Call Transcript - BW Q3 2024

Operator, Operator

Good afternoon. Thank you for joining the Babcock & Wilcox Enterprises Third Quarter 2024 Conference Call. I would like to hand over the call to your host, Sharyn Brooks, B&W's Director of Communications. Thank you. You may begin, Ms. Brooks.

Sharyn Brooks, Director of Communications

Thank you, Victoria, and thanks to everyone for joining us on Babcock & Wilcox Enterprises Third Quarter 2024 Earnings Conference Call. Joining the call today are Kenny Young, B&W's Chairman and Chief Executive Officer; and Lou Salamone, Chief Financial 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 Form 10-Q that was filed this afternoon 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 and targeted 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 afternoon and in our company overview presentation filed on Form 8-K this afternoon and posted on the Investor Relations section of our website at babcock.com. I will now turn the call over to Kenny.

Kenny Young, Chairman and CEO

Thanks, Sharyn. Well, good afternoon, everyone, and thanks for joining us on our third quarter 2024 earnings call. We generated significant operating margin improvement on a year-over-year basis during the third quarter of 2024, reflecting our recent strategic actions of avoiding lower-margin projects and improving project performance as well as reducing costs. This was highlighted by our strong increases in our adjusted EBITDA, operating income, and net income compared to the same period in 2023 when excluding revenue from BWRS, which was an asset we sold in the second quarter of this year. During the third quarter of 2024, we recorded two significant onetime items. The first was a noncash $5.8 million impairment related to the sale of our SPIG asset, which we just closed recently in the fourth quarter of this year. And the second was a $4.9 million settlement to exit the last O&M multiyear maintenance contract for a biomass plant in the U.K. This historical contract associated with one of the biomass plants from 2018 has had over $15 million of losses over the last three years, and we anticipated potential higher losses over the remaining 10 years. This was a remarkable settlement for us. Excluding these onetime provisions, we would have improved our operating income and net income by $10.3 million, both of which would have been on track with expectations. This really demonstrates the company's improved overall margin performance. We believe we are in a unique position to leverage the significant increase in baseload generation demand in North America and around the world. The demand for energy from consumers, data centers, and large businesses, either from the grid or behind the meter, along with increased energy needs from utility and large industrial clients, are providing even greater opportunities for us to design and install our broad range of technology and contribute our considerable expertise to the areas of fossil fuels, natural gas, synthetic fuels, and renewable energy to help meet that demand. We believe the increasing need for power and electricity fueled by demand from artificial intelligence, electric cars, and expanding economies will be key drivers for growth across our broad range of technologies. We are seeing our utility and industrial clients, including in the oil and gas sector, continuing to increase capacity, utilizing our core technologies while evaluating further power generation augmentation through biomass, hydrogen, and natural gas. We expect these tailwinds to increase in the coming years as the amount of front-end engineering design opportunities or FEED studies has grown. Today, we have roughly 12 to 15 active FEED studies that represent potential projects of over $1 billion in revenues in our pipeline. We believe that these expected industry tailwinds provide a strong foundation for B&W to grow in 2025 and beyond as we continue to reshape and rebuild this company and drive for higher margins and improved cash flows. Overall, our results in the third quarter reflect the strong demand for our diverse portfolio of technologies that support the generation of efficient and sustainable energy regardless of fuel source. B&W has developed a strong foundation to capitalize on the continued growth in natural gas conversions, environmental solutions, carbon capture, and clean energy opportunities globally with utility and industrial customers. Our investments across our ClimateBright suite of decarbonization technologies to support the world's energy transition are progressing well. Notably, we are continuing to move forward on our BrightLoop project in Massillon, Ohio, with a target of producing hydrogen by early 2026. We are also working on several carbon capture opportunities that utilize our SolveBright post-combustion CO2 capture and our oxy combustion as well. In addition, we recently announced a FEED study in Sweden that will utilize post-combustion technology with a waste-to-energy facility. We are further developing BrightLoop projects in Ohio, Wyoming, Louisiana, and are engaged in FEED studies for BrightLoop with various customers in Canada and around the globe. We continue to see strong customer demand for our technologies that help drive our implied backlog 48% higher at the end of the third quarter, excluding divestitures, compared to the same period last year and increased our implied bookings to over $800 million at the end of the third quarter. We are pleased to announce that just recently, our $246 million natural gas conversion project in Indiana has received PUC approval, and we have obtained the full notice to proceed. This will be included in our backlog numbers in the fourth quarter of this year. We have a broad range of technology and expertise across all fuel sources, and we believe the positive trends and momentum in the industries we serve will continue in the year ahead as the amount of FEED opportunities grow, and we continue to see a solid pipeline of more than $9 billion of opportunities over the next three years, including $2.4 billion in BrightLoop and ClimateBright opportunities alone. With respect to our third quarter results, we made further progress on our stated strategy to continue to divest nonstrategic assets to improve our balance sheet. Specifically, we completed the sale of our SPIG and GMAB businesses for net proceeds of $33.7 million. To date, we have raised over $116 million from the divestiture of assets in 2024. Importantly, we remain in negotiations related to the sale of other nonstrategic assets and are evaluating further debt refinancing with proceeds expected to reduce or refinance our debt obligations, strengthen our balance sheet, and support growth working capital or growth opportunities. We continued to make progress on our cost reduction efforts during the third quarter, achieving $26.5 million in cost savings to date as we work toward the target of over $30 million in annualized cost savings. We have significantly improved the income of our solar operations, which produced $5.7 million of income in the third quarter and is now generating positive EBITDA results despite its current classification. In parallel, we continue to ramp our investment in BrightLoop and ClimateBright as we continue developing the pipeline of future opportunities. The expected growth and anticipated higher margins of our BrightLoop low-carbon hydrogen technology and our ClimateBright decarbonization technologies should lead to continued higher margins in the future. I'd like to now discuss our strong third quarter operating performance. We saw a meaningful increase in our adjusted EBITDA, which came in at $22.3 million this quarter compared to $20 million in the third quarter of 2023. This year-over-year improvement was even more significant after excluding the impact of our recently divested BWRS business from last year's results. Excluding BWRS, adjusted EBITDA last year was $12.6 million in the third quarter of 2023 and increased 78% year-over-year in the third quarter of 2024. Our margins are benefiting from a strategic shift to reduce reliance on high-interest, low-margin new build projects. Looking ahead, we continue to expect strong operating momentum driven by our Thermal and Environmental segments, as the fourth quarter is historically a strong period for B&W businesses. This strong operating performance has been achieved alongside the sale of our recent SPIG and GMAB businesses. After taking into account the recent divestitures, we have revised our full year 2024 EBITDA target to a range of $91 million to $95 million, excluding BrightLoop and ClimateBright expenses. Importantly, we continue to invest in our BrightLoop opportunities and continue to anticipate spending in the range of $10 million to $15 million in 2024 on our BrightLoop projects and technology advancement, including CapEx. Our efforts to progress BrightLoop forward as we further the commercial development of existing projects and continue working to improve the overall operational effectiveness of these technologies to produce low-cost, low-carbon intensity hydrogen. We continue to progress with engineering work for our previously announced BrightLoop projects in Gillette, Wyoming, Baton Rouge, Louisiana, and Massillon, Ohio. In regards to our Massillon project, we have begun releasing purchase orders for long lead time items, and we continue to finalize our negotiation for financing and potential government grants related to this project. We will be submitting our minor source air permits, and we plan to convert existing wells to support local CO2 sequestration. We're excited to officially launch this project and look forward to the implementation of our first commercial demonstration BrightLoop plant. Also, we would like to announce today that we have reached a tentative agreement that we expect will be signed in the coming days with the state of West Virginia that will provide a $10 million forgivable loan to develop and construct a BrightLoop project in West Virginia utilizing local biomass and coal. This is an exciting development for us, and we greatly appreciate the support of Governor Justice and his staff as well as the support of the state of West Virginia. We remain excited about the prospects and outlook for the BrightLoop platform with visibility to reach $1 billion in bookings by 2028, driven by a combination of small, medium, and large BrightLoop projects that are in our current identified pipeline. As I mentioned earlier, this pipeline includes approximately $2.4 billion in BrightLoop and ClimateBright opportunities alone. We continue to believe this level of activity has the potential to lead to $1 billion in revenues by 2030, which would still only represent roughly 1% of the market share for total global hydrogen spending by 2030. Within BrightLoop, it's been extremely exciting to watch our team advance the engineering process and the business towards deploying these technologies at scale and further expanding our suite of carbon capture solutions. I'll now turn the call over to Lou, who will discuss the financial details of the third quarter of 2024.

Lou Salamone, CFO

Thanks, Kenny. I'm pleased to review our third quarter results, further details on which can be found in the 10-Q that is on file with the SEC. Our third quarter consolidated revenues were $209.9 million, which is a decrease compared to the third quarter of 2023. This decrease is primarily attributable to the inclusion in 2023 of $7.4 million of revenues from the BWRS asset that was divested in the second quarter of 2024. When BWRS is excluded from the 2023 revenues, they increased by $4.7 million in 2024, which is driven by growth in our domestic and European Environmental businesses as well as benefits related to a large natural gas project and increased volume in parts during the year. We saw an operating loss in the third quarter of 2024 of $1.4 million compared to operating income of $5.5 million in the third quarter of 2023. This loss is primarily attributable to the previously mentioned divestiture of BWRS as well as two onetime charges of a $5.8 million noncash impairment related to the sale of our SPIG subsidiary and a $4.9 million settlement to exit the loss-generating long-term maintenance contract, which Kenny mentioned earlier. Our adjusted EBITDA, excluding BrightLoop and ClimateBright expenses, was $23.3 million, which is ahead of expectations for the quarter. Implied bookings in the third quarter of 2024 were $810.5 million, and ending implied backlog was $628.2 million. In the third quarter of 2024, we had a loss per share of $0.10 as compared to a loss per share of $1.35 in the third quarter of 2023. I'll now turn to our third quarter segment results. Within our Babcock & Wilcox Renewable segment, revenues were $38.2 million for the third quarter of 2024, which is a decrease compared to the third quarter of 2023. This decrease in revenue was primarily due to the divestiture of BWRS, which we previously mentioned. Adjusted EBITDA in the third quarter of 2024 was $5 million, a decrease of 51% compared to the $10.1 million in the third quarter of 2023. Again, the third quarter of 2023 included $7.4 million from BWRS, and this was partially offset by favorable project closeouts in the current quarter. Bookings during the third quarter of 2024 exceeded bookings in the same period of 2023, with total bookings increasing to $40.8 million in the third quarter of 2024 from $32.7 million in the third quarter of 2023. Within the Babcock & Wilcox Environmental segment, revenues were $56.6 million in the third quarter of 2024, which is an increase of 22% compared to the $46.4 million in the third quarter of 2023. This increase is primarily driven by growth of our domestic industrial and electrostatic precipitator business in addition to growth in our European Environmental business. Adjusted EBITDA was $4.7 million for the quarter, which is favorable to our forecast despite being a slight decrease compared to the $5 million in the same period last year. Turning to our Babcock & Wilcox Thermal segment, revenues were $119.9 million in the third quarter of 2024, which is an increase of 12% compared to the third quarter of 2023. The revenue increase is primarily the result of a large natural gas project, which accounted for $4.2 million, and an increased volume of parts, which accounted for $4.8 million of the increase. Adjusted EBITDA in the third quarter of 2024 was $18.4 million, an increase of $11.3 million in the third quarter of 2023. This is primarily driven by revenue drivers previously mentioned and by favorable project margins in our construction business. I'll now turn to our balance sheet, cash flow, and liquidity. Total debt at September 30, 2024, was $475.4 million, and the company had cash, cash equivalents, and restricted cash balances of $127.9 million. As noted previously, we completed the sale of our SPIG and GMAB businesses for net proceeds of $33.7 million during the quarter, which improved our balance sheet and demonstrated our ability to continue to execute against our stated strategy to sell certain nonstrategic businesses. Additionally, as previously announced, we are initiating processes to sell certain other nonstrategic businesses and assets. The proceeds of these sales will be used primarily to pay down existing debt and for working capital.

Kenny Young, Chairman and CEO

Thanks, Lou. Well, in closing, we continue to execute against our strategic plan and remain intently focused on driving further improvements in our balance sheet. As we look ahead to the fourth quarter, we expect strong seasonal results and operating momentum driven by our Thermal and Environmental segments to continue with increased services and project schedules from our customers. Our global pipeline of over $9 billion of identified project opportunities remains healthy across all our business segments despite our divestitures, and we anticipate prospects for new bookings and stronger financial performance through the fourth quarter and heading into 2025. We continue to believe our deep industry expertise with clean energy and carbon capture technologies, coupled with our long history and traditional energy sources, positions us well to deliver environmentally conscious technology-driven solutions to our global customers. I would like to wrap up today by recognizing and thanking our customers as well as our employees, who work hard every day in a safe way to meet the challenges of energy demand around the world. Looking forward, we remain excited about the unique position we hold to provide our diverse portfolio of technologies to meet the increasing baseload generation demand in North America and across the globe and support the world's need for proven clean energy solutions both now and in the future. With that, I'll turn the call back over to Victoria, who can help with our questions.

Operator, Operator

Our first question today comes from Alex Rygiel with B. Riley.

Alex Rygiel, Analyst

Nice quarter. A couple of quick questions, Kenny. First, as it relates to your EBITDA guidance, $91 million to $95 million, recognizing that's adjusted to exclude some of these divestitures, can you talk to that new guidance range relative to maybe past guidance and where your sort of base business was adjusted, if at all?

Kenny Young, Chairman and CEO

Yes. If you look past the guidance, I think we're at $105 million to $115 million. If we bridge the SPIG, GMAB results for the quarter and some various expenses associated with that particular piece, it takes you down to that $94 million, $95 million scenario. So we actually just reset based on the SPIG, primarily based on the SPIG and GMAB divestitures that were just completed for the quarter in that area. And that's the primary aspect around it. So the rest of it would be just noise, but it bridges the gap between the new target and the old target.

Alex Rygiel, Analyst

Very helpful. And then of the 12 to 15 active FEED studies worth over $1 billion, what's your traditional conversion rate on these? And what portion of this is kind of already in backlog or implied backlog?

Kenny Young, Chairman and CEO

Most FEED studies are relatively small, with typical revenues ranging from $0.5 million to $3 million, depending on the study's size. Therefore, they don't significantly impact revenue or backlog. However, once we start a FEED study, the likelihood of conversion to active projects is often quite high. Clients typically engage us for comprehensive studies with the expectation of follow-up work. Generally, we estimate a conversion rate of about 40% to 50% for active FEED studies at any time. The timing for conversion can vary, occurring within a year or taking 2 to 3 years. We're excited about the increased number of FEED studies we've secured, particularly because they allow us to utilize our strong engineering capabilities for clients interested in carbon capture and other technologies like BrightLoop. Currently, we have several active BrightLoop FEED studies with clients in Canada and beyond, which signifies a positive trend as large industrial clients explore alternative energy production methods.

Operator, Operator

Our next question comes from the line of Aaron Spychalla with Craig-Hallum.

Aaron Spychalla, Analyst

First, good to see the coal to gas order, full notice to proceed. Can you just maybe give a little bit of detail on timing and just kind of the cadence of that revenue over the next couple of years? And then just talk about the pipeline there. I mean are there FEED studies for that? Or is there a good amount of work kind of behind that with other conversions?

Kenny Young, Chairman and CEO

Let me address the second part of your question first. Yes, we have several prospects in the pipeline for natural gas conversions. They are not all large, but there are more than a dozen opportunities we are considering. These projects differ in size, and many utilities are looking at long-term solutions regarding natural gas or the continued use of coal for baseload generation in the U.S. This trend is ongoing. As for the revenue from the natural gas conversion project, we recently received the full notice to proceed, which is why we're sharing this news today. We expect revenues to start coming in around 2025, continuing into 2026 and extending slightly into 2027. This income will be distributed over that period. We are excited to have received the full notice to proceed, which took a bit longer than anticipated, but we now have it. This will become part of our full backlog by November, and we will begin full work on this project in this quarter.

Aaron Spychalla, Analyst

All right. I appreciate the color there. And then just maybe on the balance sheet, can you talk about where kind of letters of credit stand today and kind of the timeline for those rolling off and freeing up some liquidity? And then just on free cash flow, the outlook there as we head into 2025.

Kenny Young, Chairman and CEO

Yes, go ahead, Lou.

Lou Salamone, CFO

Yes. Letters of credit right now are in the $80 million range. They will roll off over the next 1.5 years. What will happen, not to the same extent, but new letters of credit will come in as we win new business. But we've been able to decrease the percentage of letters of credits that are required. And then on the second part of the question, Aaron, was...

Aaron Spychalla, Analyst

Yes. I would like to share my thoughts on free cash flow conversion as we consider what 2025 might look like.

Lou Salamone, CFO

Yes. I think the free cash flow conversion, as we've discussed regarding EBITDA, the interest expense is around $50 million, which includes the dividends on the preferred stock. So you're probably looking at a conversion rate of 40% after accounting for the interest and the capitalized BrightLoop cost of about $10 million.

Kenny Young, Chairman and CEO

And we should add that the SPIG and GMAB, obviously, that's a fourth quarter impact to the company, but there’s probably roughly $10 million of letters of credit that will go away over time. It will take a few months to wind those off or convert, but the new owner will take over those letters of credit. So we'll reduce the letters of credit by that amount over the next month or two.

Lou Salamone, CFO

So the $80 million that I quoted is really when you take into account the sales, and those $10 million will roll off is really $70 million. And as I said, that will decrease, and some will come back as we win new business.

Operator, Operator

Our next question comes from the line of Rob Brown with Lake Street Capital Markets.

Rob Brown, Analyst

First question is on the Massillon project. I think you talked about some long lead items. When does that sort of start to ramp in full? And could you remind us again when you start to generate kind of or operate that facility?

Kenny Young, Chairman and CEO

So those items are now fully ordered. Some of these involve long lead time orders like air compressors and other components. Additionally, some work is being done with external engineering firms on the civil construction drawings and diagrams that we need to submit along with the permits. The significant ramp-up in construction costs is expected to begin in early Q2 of next year, followed by a busy period in Q3 and Q4. After that, we will gradually wind down. Our goal is to start hydrogen production in early 2026, with full commercial operations anticipated by Q2 of 2026. We will begin selling hydrogen as soon as it is commercially viable. The hydrogen production plan, which is crucial, is aimed for the early part of 2026. That's our current target.

Rob Brown, Analyst

I was going to talk a little bit about the West Virginia kind of loan guarantee or loan, I guess, forgivable loan. What sort of project that would be for and maybe the sort of other dependencies there to get that launched?

Kenny Young, Chairman and CEO

Yes. We should have that signed here in the next couple of days or so. We've reached full agreement with the state economic group, and they've been wonderful to work with and very supportive of that project. The plan is we will target a small to midsize BrightLoop facility that would ramp up by 2030, which is when that has to be in operation. The key caveat associated with that forgivable loan is the limited number of on-site jobs that will be created, which will obviously be part of the construction aspect of the project and the ongoing operations of that particular site for that project. The target is to have that plant up and running by 2030.

Operator, Operator

There are no additional questions at this time. That is the conclusion of today's call. Thank you for your participation, and enjoy the rest of your day.