Earnings Call Transcript - BW Q3 2025

Operator, Operator

Good afternoon. Thank you for joining the Babcock & Wilcox Enterprises Third Quarter 2025 Conference Call. I will now hand it over to our host, Sharyn Brooks, B&W's Director of Communications. Thank you. You may proceed, Ms. Brooks.

Sharyn Brooks, Director of Communications

Thank you, Victoria, and thanks to everyone for joining us on Babcock & Wilcox Enterprises Third Quarter 2025 Earnings Conference Call. Joining the call today are Kenny Young, B&W's Chairman and Chief Executive Officer; and Cameron Frymyer, 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 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 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 last week 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.

Kenneth Young, CEO

Thanks, Sharyn. Well, good afternoon, everyone, and thanks for joining us today on our call. We continue to execute on our strategy to expand our Global Parts & Services business while also focusing on large opportunities within North America and reducing the majority of our debt obligations. The increasing demand for power in North America drives our growth and aligns well with our strategy to divest certain non-core assets to significantly reduce our debt while positioning B&W to play a pivotal role in supporting AI data center expansion and increased baseload generation needs. We are pleased to report a number of positive developments this quarter at Babcock & Wilcox, both in relation to our quarterly financials as well as our recent projects and partnerships that we have completed. Adjusted EBITDA and operating income significantly outperformed company and consensus expectations this quarter. Adjusted EBITDA was 58% higher compared to the third quarter of 2024, while operating income was up 315% when compared to the same period of 2024. Our improved margins directly reflect the record quarter results for our Parts & Services business. During the third quarter, our Global Parts & Services achieved the highest quarterly and year-to-date bookings, revenue, and gross profit in recent company history. Our growing backlog continues to benefit from increasing demand across projects, upgrades, and construction as power generation needs for industrials and utilities in North America continue to accelerate. In total, we saw our backlog rise 56% quarter-over-quarter to a total of over $393 million. Through a combination of disposition of non-core assets and equity raises, we have paid or will pay down the February 2026 notes by the end of the year 2025. We also have the liquidity to pay down the December 2026 bonds, a process that we plan to begin by the end of the year. Over the course of the past several months and with key equity raises last week, our balance sheet has significantly improved. With this improvement, along with the tailwinds from baseload generation demand in the market, we have positioned B&W for substantial growth in 2026. We are currently projecting a range of $70 million to $85 million in EBITDA from our core business in 2026, which is 80% growth year-over-year from 2025. And this does not include any revenues or margin from our recently announced AI data center projects. We have been in discussions on several opportunities within the AI data center space, and we are seeing Agentic AI as a new catalyst for higher power demand in the U.S. and around the world. We are pleased to announce that we have signed a limited notice to proceed with Applied Digital to begin work for the delivery and installation of natural gas technology that will provide 1 gigawatt of efficient energy for an AI factory and data center project. The total project valued at full notice to proceed will be over $1.5 billion in total once finalized, and we anticipate that full notice to proceed to be released in the next few months. As a part of this deal, B&W plans to design and install 4 300-megawatt natural gas-fired power plants consisting of proven boilers and associated steam turbines to support Applied Digital's AI factory. The plant is targeted to begin operation in 2028. This technology carries equal efficiency as simple cycle turbines and can be operational much faster than combined or simple cycle power plant options. The impact from this deal on B&W is profound, adding $3 billion to $5 billion in AI data center opportunities in our pipeline. We are also pursuing other projects and opportunities, which brings our total global pipeline to $10 billion to $12 billion in totality, including ClimateBright and BrightLoop. Taking a look at our BrightLoop technologies, our efforts to progress BrightLoop are moving forward as we further the commercial development of our existing projects and continue working to improve the overall operational effectiveness of these technologies to produce low-cost hydrogen or steam. We're seeing increasing activity for BrightLoop technology, both for steam generation and hydrogen production that can produce energy with lower costs and expenditures. In fact, we're in discussions with a number of oil and gas companies and large utilities about using BrightLoop for specific steam or hydrogen generation projects. From a ClimateBright perspective, we are seeing an increased demand to leverage carbon credits, both in waste to energy and coal to energy as optional offtake revenues for our customers. We also are in discussions on several opportunities and believe we can announce a significant carbon capture project utilizing our SolveBright technology very soon. I'll now turn the call over to Cameron to discuss the financial details for the third quarter of 2025. Cameron?

Cameron Frymyer, CFO

Yes. Thanks, Kenny. I am pleased to review our third quarter results, further details of which can be found in the 10-Q that is on file with the SEC. Our third quarter consolidated revenues were $149 million, which was roughly in line with the third quarter of 2024. Global Parts & Service remained strong in the third quarter of 2025 with revenues of $68.4 million compared to revenues of $61.7 million in the third quarter of 2024. The improvement is primarily due to the increasing need for electricity from fossil fuels, driven by the demand from artificial intelligence, data centers, and expanding economies. Our net operating income in the third quarter of 2025 was $6.5 million compared to operating income of $1.6 million in the third quarter of 2024. The loss from continuing operations in the third quarter of 2025 was $2.3 million compared to a loss of $7.9 million in the third quarter of 2024, and our adjusted EBITDA was $12.6 million compared to $8 million in the third quarter of 2024, beating market expectations. As Kenny stated earlier, we have announced our 2026 full year adjusted EBITDA target range of $70 million to $85 million stemming from our core business, which does not take into account any growth related to data centers. I'll now turn to our balance sheet, cash flow, and liquidity. Total debt at September 30, 2025, was $309.3 million consisting of $98.4 million of February 2026 bonds, $90.9 million of December 2026 bonds, and $121 million of bonds due in 2030, with the remaining debt being related to our letters of credits. As of September 30, we had $0 drawn on our asset-based loan. The company had cash, cash equivalents, and restricted cash balance of $201.1 million, giving us a net debt as of September 30, 2025, of $178.2 million. On October 2, B&W paid down $70 million of bonds that were due in February of 2026, and we recently announced the remaining outstanding February 2026 bonds will be paid down fully in December of 2025. Another notable development took place last week when the company was able to raise an additional $65 million of equity, which has further strengthened our balance sheet and shows the ability to pay down the remaining of the 2026 bonds that are due in December of 2026. When factoring in our recent equity raise, this will leave us with a pro forma net debt of $113.2 million, which will be between 0.8 to 1.6x targeted 2026 EBITDA. Lastly, although we said on Friday that we would be pausing sales under the ATM program, we've decided to resume ATM sales and intend to sell shares under the ATM program opportunistically based on market conditions and our share price. I'll now turn the call back over to Kenny.

Kenneth Young, CEO

Cameron, thank you. In closing, I want to acknowledge the hard work and dedication of our talented employees worldwide who strive every day to meet challenges and support our customers while addressing today's energy needs. I will now hand the call back to Victoria, and I believe we have time for about three questions. Victoria, I’ll pass it back to you. Thank you.

Operator, Operator

Our first question comes from Aaron Spychalla with Craig-Hallum.

Aaron Spychalla, Analyst

Maybe first on the $1.5 billion project. Can you just talk a little bit about next steps that are needed and how you see potential contribution from a timing and margin perspective moving forward? And then just thoughts on the supply chain and kind of working capital needs as that ramps?

Kenneth Young, CEO

Sure, I appreciate that, Aaron. Thanks for joining the call today. Currently, we are collaborating with Applied to finalize the exact location for the project, allowing us to complete the official notice to proceed, which we expect to wrap up in the coming months. As part of this, we are also working behind the scenes on a few steam turbine generators and have received verbal commitments indicating we can meet the necessary timelines. We will finalize those details along with our manufacturing plans for the specific boilers. The good news is that we are utilizing off-the-shelf designs for these 300-megawatt boilers, which we have previously installed in various locations. This is a proven technology, and minimal engineering is required to bring them to the manufacturing stage. We already possess the construction drawings, fabrication diagrams, and layout information necessary to meet the specifications and standards in the U.S. This simplifies our transition into the manufacturing process, making it an exciting opportunity for us to use a design we are already familiar with. We are comfortable with the performance and standards of these boilers, and we have direct access to steam turbines, enabling us to bring the project to market more quickly compared to using a combined cycle or simple cycle turbine plant. We're advancing these steps simultaneously with Applied, aiming to have the full notice to proceed signed in the next couple of months. Regarding working capital, we will coordinate with Applied on the timing of that, which will be part of the full notice to proceed process in the coming months. Typically, we maintain a neutral to positive working capital for projects like this, and we expect to collect down payment requirements from manufacturers or subcontractors upfront, as we usually do. Therefore, we see no reason this process will differ, and Applied is aware of this as well. This approach should help minimize any overall impacts on working capital, and we anticipate remaining cash flow positive, consistent with our usual performance on such projects. For revenue and margin recognition, since we operate on a percentage-of-completion basis, it will depend on when we can apply the project's costs, affected by the final notice to proceed. It might be somewhat unclear, but I estimate that perhaps 10% to 15% of the value would be recognized in 2026, with the majority realized in 2027 and 2028. As we are still finalizing the notice to proceed, we have not included this project or other data center projects in our $70 million to $85 million guidance for next year. Thus, this represents potential significant upside compared to the numbers we are currently sharing. Cameron, if you have anything to add, feel free; otherwise, I'll turn it back to you.

Cameron Frymyer, CFO

No, no. I think you hit all the points, Kenny.

Aaron Spychalla, Analyst

That's very helpful. And then maybe just second on the additional pipeline, it sounds like last week, it was $1.5 billion. Today, it sounds like maybe $3 billion to $5 billion. So maybe some growth there. Can you just talk about how mature some of those opportunities are and potential timing of when you could see some of those move forward as well?

Kenneth Young, CEO

We are currently engaged in discussions with several parties about this particular solution, which varies in size. Some projects are around 0.5 gigawatts, while others range from 1.5 to 2 gigawatts. There are several opportunities where this solution is advantageous in terms of cost, delivery, and timeframe. Availability in manufacturing and steam turbine production will influence some of these prospects. Initial indications suggest we have sufficient capacity to meet the demand. We are working to advance a few of these opportunities, ideally aiming for commitments within the next year. Additionally, we are actively collaborating with Denham Capital on projects to convert coal plants to natural gas, which is also progressing. All these opportunities, including the natural gas and steam turbine projects proposed for Applied, are part of our growing pipeline, prompting us to expand it even further from last week.

Operator, Operator

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

Robert Brown, Analyst

On the ability or your capacity for that pipeline, what is your capacity sort of in this power gen segment? And how do you sort of think about capacity limits there?

Kenneth Young, CEO

There are two main components to the capacity aspect. One is the manufacturing and fabrication of the boiler, which is part of our core operations. We have been evaluating our internal capacities as well as those of our external partners around the world who help us manufacture these systems. All of these companies are prepared for this endeavor, and many are accustomed to handling projects of this size. We're currently assessing how much we can allocate to each location. Based on our current pipeline and the timing of our projects, we are confident in our ability to complete the manufacturing of the boiler. Regarding the steam turbine aspect, there are significantly more steam turbine companies than there are combined cycle and simple cycle manufacturers. While I can't disclose names at this moment, we are in discussions with several companies and are working quickly to secure these relationships. Based on early conversations, we believe the necessary capacity is available, potentially across multiple manufacturers. These companies are enthusiastic about entering a high-growth area. Overall, we are seeing positive momentum in both manufacturing and steam turbine sectors.

Robert Brown, Analyst

Okay. Switching to the ClimateBright projects, could you provide more details on the developing CO2 capture opportunity, including when it might occur and its potential size?

Kenneth Young, CEO

We are currently engaged in discussions on several projects, particularly Front-End Engineering Design studies. We expect to finalize an opportunity fairly soon, possibly within weeks, on a project valued between $70 million and $100 million. This range could expand as the initial project progresses, and we see potential for additional opportunities. In the U.S., some operators and hyperscalers are interested in carbon capture and storage, seeing it as a way to generate extra revenue for power plant owners while developing infrastructure to support these hyperscalers. We've been in contact with a few developers and are hopeful to announce a project soon, potentially within days or weeks.

Robert Brown, Analyst

Congratulations on the progress.

Operator, Operator

Our next question comes from the line of Brent Thielman with D.A. Davidson.

Brent Thielman, Analyst

Kenny, I want to ask just back on the Applied Digital contract, the $1.5 billion, is that all within B&W's scope? I know this is all getting worked out. But obviously, it's a massive potential uptick to the backlog that you have today. So I just wanted to kind of understand what's all in there.

Kenneth Young, CEO

Yes, that $1.5 billion would represent B&W's involvement in this project. B&W will handle all aspects related to the boiler and steam capabilities, along with the construction element. We have our own construction company in the U.S. Thus, it will combine construction with the steam turbines and the boiler elements. We will also address other components to ensure the plant is completed on time. We will collaborate with Applied on this. Therefore, we estimate it as over $1.5 billion for that site. The overall value might increase based on the final scope, and we will need to navigate through that. I wanted to provide some insight from B&W's perspective on what our scope looks like. The project's scope might be larger in this case, and we will work with them to finalize that once we have the Notice to Proceed.

Brent Thielman, Analyst

Okay. Yes, I appreciate that, Kenny. And then I guess, just as a follow-up, anything you can say in terms of just risk sharing associated with it? Is this all fixed price in terms of execution? And I noticed there's an equity component that Applied Digital gets in B&W. Maybe just talk about that and whether that's going to be something that's ongoing as you look to maybe some of these other opportunities out there.

Kenneth Young, CEO

It's difficult to determine if a similar model would be applicable elsewhere at this point. While I’m not ruling it out, it’s too early to say confidently. We see this as a very positive development. The presence of warrants creates incentives for Applied to expedite the NTP and complete the project. Additionally, it fosters support for B&W, not just as a potential customer but also as a shareholder. This is very encouraging, and we have observed similar sentiments in some aspects of the data center as well. Regarding risk sharing, we are currently assessing how that will be structured, including the involvement of external manufacturers and steam turbine companies in sharing some of that risk. As always, we aim for a balanced approach. A key factor reducing our overall risk is that these projects utilize technologies we have successfully implemented multiple times before. There is no new technology here; it’s well-established technology that has been used in numerous locations where B&W has executed construction. We benefit from our U.S. construction company and the skilled boiler makers we have on-site. All these boilers have been built before, so we are confident in their performance and complexity, as well as the timelines involved. We have a solid understanding of the manufacturing processes and how to effectively manage them. We’ve gathered best practices from previous projects, making this situation distinct from other large projects B&W has undertaken in the past. This project is particularly advantageous because it’s based on proven methods, with no new technology being introduced, which significantly lowers the risk. The terms and conditions will be outlined in the final notice to proceed.

Operator, Operator

Thank you for your questions. That will conclude our question-and-answer session today. I would now like to pass the call back to Sharyn for any final remarks.

Sharyn Brooks, Director of Communications

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

Operator, Operator

That concludes today's call. Thank you for your participation, and enjoy the rest of your day.