Earnings Call Transcript - BW Q4 2020

Operator, Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Babcock & Wilcox Enterprises Q4 and Full Year 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. I would now like to hand the conference over to your speaker today, Megan Wilson, Vice President of Investor Relations at Babcock & Wilcox. Thank you. You may begin.

Megan Wilson, Vice President of Investor Relations

Thank you, April, and good morning, everyone. Welcome to Babcock & Wilcox Enterprises Fourth Quarter and Full Year 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 Chairman and Chief Executive Officer; and Lou Salamone, Chief Financial Officer, to discuss our fourth quarter and full year results.

Kenneth Young, Chairman and Chief Executive Officer

Thanks, Megan. Good morning, everyone, and thanks for joining our call. Our results for the fourth quarter and full year 2020 really reflect the ongoing positive impact of our strategic plan despite the adverse effects of COVID across all of our segments. Our strategic actions in 2020, including the rebranding of our segments, ongoing international expansion, and continued cost-saving initiatives, provide a strong foundation for growth as we pursue our robust global pipeline. As Lou will discuss in more detail, with the recent closing of our common stock and senior note offerings, we have dramatically improved our capital structure. As a result of the offerings, we have reduced our secured debt by $274 million in our future cash interest payments by approximately $16 million annually. Combined with the reduction in our required pension contributions, we expect to save more than $40 million annually in cash expenses on a pro forma basis. Based on 2020 adjusted EBITDA and net debt as of December 31, 2020, the offerings resulted in a net leverage ratio reduction from 6.4% to 3.6x pro forma for the effects of our offerings and related debt paydowns and certain fees. The proceeds from our offerings not only significantly reduce our cash expenses but also provide capital to support the expansion of our clean energy technology portfolio as we continue to execute our growth strategy.

Lou Salamone, Chief Financial Officer

Thanks, Kenny. I'll first review our full year 2020 results, and then I'll turn to our fourth quarter 2020 results in detail. Further detail on our full year results can be found in our 10-K that's on file with the SEC. Consolidated revenues in 2020 were $566.3 million, a decrease as expected of 34% compared to 2019. Revenues in all segments were adversely impacted by COVID-19, including the postponement and delay of several projects. The GAAP operating loss in 2020 was $1.7 million, including the impact of the nonrecurring loss recovery of $26 million, which was offset by restructuring and settlement costs and advisory fees of $24.7 million compared to an operating loss of $29.4 million in 2019. The improvement in operating income was primarily due to the insurance loss recovery, the positive impact of cost-saving initiatives, and a lower level of losses on the EPC contracts, which was partially offset by the divestiture of Loibl and the impacts of COVID-19 on revenue in all three of our segments. Adjusted EBITDA improved to $45.1 million compared to $45 million in 2019. We continue to see strong momentum within our bookings and backlog, with total bookings in 2020 of $645 million and a backlog at the end of the year of $535 million, a 21.3% increase compared to the prior year. I'll now turn to our fourth quarter results. Fourth quarter consolidated revenues were $149.9 million, down 17% compared to the fourth quarter of 2019. As we said before, revenues in all segments were adversely impacted by COVID-19 as customers delayed projects and travel restrictions limited the ability of our company's workforce to be on-site. The completion of large projects in all three of our segments in the prior year quarter also contributed to this decline. Our GAAP consolidated operating income was $2.2 million, inclusive of restructuring and settlement costs and advisory fees of $7.9 million compared to an operating income of $10 million in the fourth quarter of 2019. The decline in operating income was primarily due to lower volume as a result of the impacts of COVID-19. This was partially offset by the effects of improved gross margin in the BMW Thermal segment. Adjusted EBITDA was $16.1 million compared to $22.8 million in the fourth quarter of 2019.

Kenneth Young, Chairman and Chief Executive Officer

Lou, thanks. Well, in closing and in the near term, while we can't fully predict how COVID-19 will affect the timing of bookings and project progress, we are seeing renewed opportunities emerging as many of our customers have restarted paused projects or are undertaking new projects and upgrades, leveraging our technology and capabilities. Combined with our recent strategic actions, this momentum is now driving significantly improved bookings and a confident outlook. Today, our focus is on winning and executing quality opportunities as well as aftermarket services to serve our customers' needs for renewable energy, environmental solutions, and efficient operations. Based on current visibility in our customer plans, we expect continued strong bookings of significant earnings growth in 2021, with a return to quarterly trends more typical of our industry, including the seasonal impacts of cold weather and customers reducing maintenance outages on first quarter performance, which is typical in our historical performance. With our recent public offerings, we significantly reduced our leverage at future cash interest payments, derisked our balance sheet, and provided a strong foundation to support our portfolio expansion around clean energy technologies and pursue our more than $5 billion three-year pipeline of identified opportunities on top of our strong high-margin parts and services business. Looking forward, we remain focused on growing our Renewable and Environmental segments, including deploying our waste energy and carbon capture technologies to help meet critical climate goals as the next-generation B&W powers the global energy and environmental transformation. That concludes our remarks, and I'll turn the call back over to our operator to assist with taking your questions.

Operator, Operator

And your first question comes from Alex Rygiel with B. Riley.

Alex Rygiel, Analyst

A couple of quick questions here. First, it sounds like new order activity has continued to be very strong in January and February. Maybe you could comment on that comment on where you're seeing that strength either geographically around the world or in which division? And then maybe you could address the carbon capture technologies to speak to sort of the timeline of demonstration and then commercialization?

Kenneth Young, Chairman and Chief Executive Officer

Sure, I'd be happy to provide some insights. Lou can add more as well. Regarding bookings for the quarter, we are observing positive trends, especially in the thermal segment, driven by various upgrades and some package borders. Businesses are starting to issue new purchase orders for enhancements, which is encouraging. Some of these orders are tied to planned outages, such as those occurring in spring or fall. We are also identifying significant opportunities within environmental projects, particularly in waste energy and emission capture. The global evolution of these projects is starting to regain momentum. Several projects that we expected to secure earlier have faced delays due to COVID-19 restrictions in different countries. However, we are witnessing other opportunities emerging more swiftly than anticipated, which we aim to capitalize on. The environmental aspect remains strong, and the thermal sector is also robust, as companies focus more on upgrades and enhancements that were deferred last year. As global conditions stabilize, we are engaged in various other opportunities and are eager to make announcements soon. Activity levels are picking up, and planning efforts are accelerating. While COVID-19 presented challenges, we are starting to see prospects for new opportunities in places like Australia, where pandemic restrictions impacted our ability to deploy engineering teams. Globally, many companies, whether in industrial or utility sectors, are making their long-term plans and commencing updates, inquiries, and proposals. This is an encouraging development. Regarding carbon capture, we are actively involved in three technologies: chemical looping, oxy-combustion, and RSAT for CO2 absorption. The first requires one more proof-of-concept phase, which we aim to complete soon before moving to commercialization. The other two technologies are ready for commercial deployment, and we have begun discussions with various customers. In Canada, there is a strong public drive for carbon capture, fueled by a robust carbon tax, leading to emerging opportunities. In the U.S., the new administration is placing greater emphasis on carbon capture, and although formal policies are still pending, we are seeing interest from customers wanting to implement carbon capture in their facilities. In Europe, particularly in the waste-to-energy space, we are also in discussions with clients regarding carbon capture technologies. We expect commercial activities to progress over the summer. For chemical looping, we anticipate advancing to the final stage to ensure it's ready for commercial deployment later this year, though it may take a bit longer due to its unique nature and the collaborative development with a university. We are excited about this technology, which has gone through significant lab trials over the past several years and is poised for field deployment. We look forward to discussing it more thoroughly once we have further updates.

Alex Rygiel, Analyst

Very helpful. And now you have $72 million of cash on your balance sheet; I suspect some of that might be needed for working capital as your revenue position starts to outgrow very nicely over the next couple of quarters. But how are you thinking about using that cash for M&A? And what does your M&A pipeline look like?

Kenneth Young, Chairman and Chief Executive Officer

There are a lot of opportunities out there from an M&A perspective, Alex. A great question. We're looking at a variety of opportunities ranging from larger adjacent type companies or industries, especially in some of the cleanup work and environmental work that needs to be done inside these areas. We think there are some interesting opportunities to consider, particularly with older plants and fuel facilities where significant work is required. We are also looking at younger or, shall we say, emerging technologies that complement what we're doing. These could be related to biofuels and syngas technology, particularly around hydrogen, or other aspects which might include ethanol or other renewable fuels. Many of these are typically smaller technologies and rather unique. There are several companies out there with interesting technology that need a solid platform, like a global company, to actually grow. We believe these represent interesting opportunities as well and will continue to evaluate them. But our main focus is on environmental services, carbon capture services, and augmenting our existing technologies, including biomass, waste-to-energy, and again, returning to syngas capabilities. Those are the areas we are concentrating on. We will look at both sides and determine based on various factors, including technology effectiveness and our ability to bring it to market, assessing how quickly we can achieve accretion. Many emerging technologies are still in smaller revenue stages at this point, whereas some of the more mature areas we evaluate could achieve positive returns sooner. So, we’ll balance that across both sides, but those are the key focus areas. Lou, do you have any other comments on that?

Lou Salamone, Chief Financial Officer

No. I think the one thing to point out is just since the beginning of the quarter, we've announced seven large projects, usually in the $10 million to $15 million range. Over half of those projects were in the Renewable and Environmental segment. I think that continues to be a proof statement of where we're taking the company with Kenny's strategy of emphasizing Renewable and Environmental while still prioritizing Thermal for profitability. That's a good indication of where we're taking the company.

Alex Rygiel, Analyst

That's very helpful. And Lou, you mentioned in your prepared remarks the expectation that there is sort of a step-up from 1Q to 2Q to 3Q to 4Q in financial performance, most likely both in revenue and EBITDA. So we're all sort of aligned on short-term expectations. Can you help us to sort of maybe think about the first quarter and how it might compare to previous quarters? Or how it might contribute to sort of the full year for 2021?

Lou Salamone, Chief Financial Officer

Well, we don't really give guidance. We've set a target for 2021 of $75 million to $80 million of EBITDA. We'd expect as COVID lessons and vaccinations rise that the following quarters will follow the historical trends of the company, will increase, and we’ll hit the $75 million to $80 million target we discussed.

Operator, Operator

There are no further questions at this time. I will now turn it back over for 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 concludes today's conference call. Thank you for participating. You may now disconnect.