Earnings Call Transcript - BW Q1 2024

Operator, Operator

Good evening. My name is Sierra, and I will be your conference operator today. At this time, I would like to welcome everyone to the conference call. Thank you. Sharyn, you may begin your conference call.

Sharyn Brooks, Director of Communications

Thank you, Sierra, and thanks to everyone for joining us on Babcock & Wilcox Enterprises First Quarter 2024 Earnings Conference Call. I'm Sharyn Brooks, Director of Communications. Joining the call today are Kenny Young, B&W's Chairman and 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 and targeted results to supplement the results provided in accordance with GAAP. This information should not be considered superior to or a substitute for the comparable GAAP measures. A reconciliation of historical non-GAAP measures can be found in our first quarter earnings release published this afternoon and in our company overview presentation to be 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.

Kenneth Young, CEO

Thanks, Sharyn. Well, good afternoon, everyone, and thanks for joining us for our first quarter 2024 earnings call. We are off to a very strong start in 2024 with first quarter results that came in ahead of our expectations as we continue to advance and execute against our strategic plan based on selective higher-margin new build projects, heavier focus on upgrades, parts and services and increased engineering engagements and FEED studies for Climate Bright and Brightloop. Demand from our global industrial and utility customers for solutions in power generation upgrades, environmental and renewable technologies as well as hydrogen and syngas projects continues to expand as evidenced by the approximately $500 million in new signed contracts and awards in the first quarter. This is nearly double the total value achieved during the same period in 2023. Customer activity remained robust across all segments through the first quarter of 2024 despite what is historically a weaker seasonal period for B&W, which supports our positive outlook for the full year 2024 and enabled us to recently increase our full year adjusted EBITDA target to a range of $105 million to $115 million. We also continue to make progress on our stated cost reduction efforts during the first quarter, which now total $20 million to date as we work toward our target of over $30 million in annualized cost savings. Cash used within our discontinued operations is now significantly reduced to almost neutral. Cash from continuing operations is improving. And going forward, we are taking specific steps to increase liquidity as we focus on paying down or reducing our long-term debt. Our strategic focus on higher-margin core business opportunities continues as do our dedicated efforts to expand our Brightloop, low-carbon hydrogen technology and our climate right decarbonization technologies. In particular, we are making significant strides within our research and development to advance both the engineering performance and particle manufacturing process for Brightloop to improve the attrition rate, which will lower the overall cost of green hydrogen production. As mentioned, our first quarter performance displayed consolidated revenues and adjusted EBITDA that exceeded the company's expectations. These results, combined with strong bookings year-to-date, set the stage for our recently increased full year adjusted EBITDA target range. Notably, we are already seeing the benefits from our strategic plan as adjusted EBITDA margins expanded during the first quarter of 2024 as compared to the first quarter of 2023. Our margins are benefiting from the shift to selective higher-margin new build projects, particularly in the renewables segment, along with notable strength across our aftermarket parts and services businesses. From a segment perspective, our environmental business was a standout performer during the first quarter, with revenue increasing 23% compared to the first quarter of 2023 and margins that continue to expand, which drove a 74% increase in total adjusted EBITDA compared to the first quarter of 2023. These results were primarily driven by higher volume and improved operating performance as we completed certain projects during the first quarter. As demonstrated by the new contracts and awards announced in April, we continue to see strong underlying industry trends with expanding global demand for clean power production and energy security and an over $9 billion global pipeline of identified project opportunities. These trends remain foundational drivers of our business outlook for 2024 and beyond, and we continue to make considerable progress in converting that strong global pipeline. I've identified project opportunities, which includes over $1.5 billion of Brightloop and climate right opportunities alone into bookings. Our backlog and implied backlog at the end of the first quarter was $826 million, representing an increase of 29% compared to the backlog and implied backlog at the end of the first quarter of 2023. Looking ahead, given the new EPA requirements, we are seeing increasing opportunities for coal to natural gas and coal to biomass projects within the United States, which is very exciting for us as we look to the remainder of 2024 and into 2025. Many of these projects are either under development in the proposal stage or in final design with various revenue ranges of $50 million to $400 million in value for B&W. With our increasing visibility of customer demand and our near-term booking success, we are reiterating our recently revised higher full year 2024 adjusted EBITDA target of $105 million to $115 million, which excludes Brightloop and Climate Bright. Importantly, we continue to invest in our Brightloop opportunities and anticipate spending in the range of $7 million to $10 million in 2024 on our Brightloop projects and technology advancement, which excludes any spending on CapEx. Our efforts to progress Brightloop and continue both our commercial development of existing projects as well as the continued focus on improving our overall operational effectiveness of our technologies to produce low-cost green hydrogen. With regards to recent developments across Brightloop and Climate Bright, we are continuing to progress with engineering work for our previously announced Brightloop projects in Gillette, Wyoming, Baton Rouge, Louisiana and Masland, Ohio. This includes the award we discussed previously for $16 million in matching funds from the Wyoming Energy Authority to fund the permitting, engineering and development activities for the Wyoming project, which is a clean hydrogen generation facility with CO2 capture and sequestration utilizing coal as a feedstock. B&W and our partners expect to perform all of the detailed engineering for that plant and will prepare for the civil and foundation work to be executed in the spring of 2025. These projects are definitely getting noticed and you may have seen Brightloop featured in a number of major news and trade media outlets recently, including articles in Forbes, Carbon Capture Magazine, Power Magazine and H2 view as our Brightloop technology continues to gain recognition as a potentially superior alternative to other hydrogen technologies. We remain excited about the prospects and outlook for the Brightloop platform with a visible pathway to reach $1 billion in bookings by 2028 with a combination of small, medium and large Brightloop projects that capitalize on our current identified pipeline, which I mentioned earlier includes approximately $1.5 billion in Brightloop and Climate Right opportunities alone. We continue to believe this level of activity has the potential to lead to the $1 billion in revenues by 2030, which would still only represent roughly 1% of the market share for a total global hydrogen spend 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. We also continue to see opportunities for new projects related to waste energy in the United States and Europe, which should enable us to leverage our Climate Bright decarbonization platform and present additional higher margin prospects. We also anticipate we will soon be able to announce a significant U.S. coal to biomass fuel switching project that will utilize B&W's sole Bright post-combustion carbon capture technology to produce energy with net negative CO2 emissions. Salbrighe, which is based on regenerable solvent absorption technology, is another component of our Climate Bright suite of solutions and one more area that we believe holds significant promise for the future. We also continue to progress and close out the legacy underperforming solar projects as planned and in line with previous targets. Our solar organization continues to improve performance with higher quality operations, improved margins and stronger and expanding pipeline of opportunities. By the end of the first quarter, we are seeing significant cash flow improvements related to our solar operations as we have completed or are nearing completion of certain legacy projects. I'll now turn the call over to Lou, who will discuss the financial details of the first quarter. Lou?

Lou Salamone, CFO

Thanks, Kenny. I'm pleased to review our first quarter results. Further details of which can be found in the 10-Q that is on file with the SEC. Our first quarter consolidated revenues were $207.6 million, which is a 14% decrease compared to the first quarter of 2023. This decrease is primarily driven by a decrease in the B&W Renewable segment revenue due to fewer waste-to-energy projects, which, as Kenny noted earlier, is consistent with our previously stated strategy to focus on higher-margin and lower-risk new-build projects, particularly in our renewable business and a decrease in the Thermal segment revenue as a large project in our U.S. construction business was completed in 2023 that was not fully replaced in the first quarter of 2024. Our net operating income for the first quarter of 2024 was $4.3 million compared to operating income of $1.3 million in the first quarter of 2023. Our adjusted EBITDA, excluding Brightloop and Climate Bright expenses, was $13.2 million compared to $14.7 million in the first quarter of 2023. Implied bookings in the first quarter of 2024 were $506 million and ending implied bookings was $826.4 million in the quarter. Our loss per share in the first quarter of 2024 was $0.22 compared to a loss per share of 18% in $0.18 in the first quarter of 2023. I'll now turn to our first quarter segment results. Within our Babcock Wilcox Renewables segment, revenues were $52.3 million for the first quarter of 2024, which is a decrease of 38% compared to the $84.1 million in the first quarter of 2023. This decrease in revenue is primarily due to our strategic shift to reduce reliance on lower-margin new build projects. Adjusted EBITDA in the first quarter of 2024 was $1.7 million compared to $4.3 million, primarily due to the reduced volume described earlier, which is partially offset by higher adjusted EBITDA attributable to the European renewable parts and service business. Within the Babcock and Wilcox Environmental segment, revenues were $48.4 million in the first quarter of 2024, which is an increase of 23% compared to the $39.4 million in the first quarter of 2023. This increase is primarily driven by a higher volume related to flue gas treatment projects and higher overall volume of cooling technology projects as well as a slightly increased volume in our parts business. Adjusted EBITDA was $3.3 million for the quarter as compared to $1.9 million in the same period last year. This is primarily attributable to the higher volume described earlier and improved operating performance as certain environmental projects were completed in the quarter. Turning to the Babcock & Wilcox Thermal segment. Revenues were $110.2 million in the first quarter of 2024. This is a decrease of 8% compared to the $119.2 million in the first quarter of 2023. The revenue decrease is attributable to a large construction project completed in 2023 that was not fully replaced in the first quarter of 2024. As mentioned earlier, adjusted EBITDA in the first quarter of 2024 was $13.7 million, consistent with the $13.7 million in the first quarter of 2023, with increased international sales being offset by decreased adjusted EBITDA in our U.S. Construction business. I'll now turn to our balance sheet, cash flow and liquidity. Total debt at March 31, 2024, was $441.6 million, and the company had cash, cash equivalents, and restricted cash balances of $102.5 million. As Kenny previously mentioned, we significantly closed out legacy solar projects and anticipate cash burn for those projects being neutral going forward. Based on improved financial performance and the quality and strength and turnover in our parts and services business, our lenders have increased our borrowing capacity under our current senior debt facility by increasing the advance rate on inventory. This increase provides the company with additional liquidity. We've also entered into advanced negotiations related to the sale of one of our nonstrategic businesses. Proceeds from this sale are expected to be approximately $40 million, subject to due diligence and continuing negotiations. Additionally, as previously announced, we are initiating a process to sell certain other non-core businesses and assets. The proceeds of these sales will be used to primarily pay down existing debt and some will be used for working capital. As a result of these actions, we are confident that we've overcome the previous liquidity concern. I will now turn the call back over to Kenny.

Kenneth Young, CEO

Thanks, Lou. Well, in closing, we remain intently focused on continuing to execute our strategic realignment plan, and we are already seeing the benefits with an expanded year-over-year adjusted EBITDA margins during the first quarter as we reduced our reliance on or focus more on selective higher-margin new build projects with broad-based customer demand and new awards year-to-date that are nearly double our 2023 levels. We have visibility and optimism for further growth as we progress through 2024 toward our recently revised higher adjusted EBITDA target range of $105 million to $115 million, excluding Brightloop and Climate Bright expenses. 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. And lastly, as always, I would like to recognize the efforts of our employees around the world, along with our global customer base and suppliers for their continued support of Babcock and Wilcox. As a company, we remain focused on becoming a leader in the global energy transition while delivering consistent profitable growth for our shareholders. We're both excited and inspired by the growth possibilities ahead of us for the remainder of 2024 and beyond as we work to capitalize on strong customer demand and continue to support the global transition to sustainable energy solutions. I'll now turn the call back over to Sierra, who can help us take a handful of questions.

Operator, Operator

Thank you. We will now begin the Q&A session. Our question today comes from Brent Thielman with D.A. Davidson.

Brent Thielman, Analyst

Kenny, just on the conversion timing of implied backlog in the backlog when you think that drops through? And maybe just any thoughts on when you think you'll start revenue in some of this new business you've picked up here recently.

Kenneth Young, CEO

Yes. So the timing on implied to backlog or implied backlog on that particular piece would be the conversion on that would be later this year. Some of those projects will go out 2 or 3 years in overall revenue recognition. So the burn rate or the burn-off rate would start Q3, Q4 this year and that's what we anticipate anyway. And the revenue would be over the next 2 to 3 years on several of those projects.

Brent Thielman, Analyst

The coal to gas opportunities seem quite promising, especially in relation to the potential pipeline you mentioned. Can you share your perspective on the significant implied projects you currently have? How are you positioned to pursue more opportunities like these, and what are the economic factors associated with such projects? I assume they are appealing to you? I would appreciate any additional insights on these specific opportunities.

Kenneth Young, CEO

Yes, there are several opportunities currently being explored by our customers in the U.S. Some are in the proposal stage, while a few are further along in early negotiations. The pipeline remains strong for these projects. Recently passed EPA requirements are expected to accelerate these initiatives and underscore the necessity for regulatory approval. Our acquisition of FPS has strengthened our capabilities in the early technology and engineering aspects of gas conversions. Additionally, we have a well-structured team and established relationships with boiler manufacturers, allowing us to offer a more comprehensive turnkey solution for our customers. This positions us favorably against our competition and should enhance the operational performance of these projects, benefiting both us and our clients. We are optimistic about the market and the opportunities present.

Brent Thielman, Analyst

Just my last one, just in terms of some of the strategic actions, some which sound like they're pretty far along. You mentioned some other things in their non-core sales, maybe some real estate sales. without committing, obviously, I know these things go, but opportunities to get some of that done this year, just to on timeline there?

Kenneth Young, CEO

I think we do anticipate that a few of those will happen this year. Hard to give a specific date, but we are focused on getting some of those done this year, whether it's Q3, Q4, obviously varies, depends on that type of thing. But we are anticipating some impact this year from those.

Operator, Operator

Next question comes from Rob Brown with Lake Street Capital Markets.

Robert Brown, Analyst

First question on the Brightloop technology. It's great to see it receiving more press and visibility. How is the pipeline of discussions with customers progressing, and how is that developing? Also, how should we approach the initiation of order activity for new projects?

Kenneth Young, CEO

Yes, the progress in the pipeline continues to grow. The interest in the technology and demand are better than we initially expected, which is exciting. We are under pressure to move these early projects forward towards commercialization, which is crucial for us to secure more projects in the future. Brightloop is a flexible yet complex technology that allows us to produce hydrogen by splitting the water molecule with a low power requirement—less than what electrolysis or SMR needs. Additionally, Brightloop's core technology can also create various syngas, and we are beginning to see opportunities in the oil and gas sectors and other industries for syngases useful in sustainable aviation projects and more. Our challenge is to keep our engineering team focused on meeting the milestones for our early projects in Wyoming and Louisiana, as well as in Mason, Ohio, while also responding to new pipeline requests in emerging areas. We need to balance our resources carefully. There is a growing demand for engineering talent in our decarbonization efforts, and we will continue to expand Brightloop, which is something we must monitor closely as we advance. While the revenue from these efforts may not be substantial initially, we do expect to see some revenue from Brightloop and other activities. We are confident that Climate Bright will generate some revenue and we are currently undertaking double the number of paid FEED studies on various decarbonization projects across the U.S., Canada, and Northern Europe. The level of activity is increasing, and we anticipate that one or two of these studies will evolve into full projects in the coming months. We are optimistic about these prospects, particularly regarding our Saltbright and other decarbonization technologies, and hope to announce one or two full projects shortly.

Robert Brown, Analyst

Regarding the growing need for power generation, how does that macro trend manifest in your business? Where do you expect to notice its effects first, and how could it impact you?

Kenneth Young, CEO

We are observing increased global demand for our parts and services business, which we expect to continue for a significant period. While we are not at a critical turning point, there is a growing demand in the U.S. for fossil fuel plants to enhance efficiency and address environmental concerns. We are providing more parts, services, upgrades, and enhancements for these plants. Additionally, we are discussing the conversion of some plants to natural gas and exploring potential biomass projects with carbon sequestration technologies. In the U.S., the demand for baseload generation is rising, putting pressure on the grid and infrastructure to maintain strong baseload generation. Our strong customer relationships, coupled with our acquisition of relevant technologies for gas conversion, position us advantageously in this landscape. We are witnessing both the need for improved baseload generation and enhanced efficiencies, which leads to stronger parts and services demand in the U.S. and globally. We also see an increase in opportunities for upgrade projects driven by the ongoing conversions in the U.S. This trend is likely to persist for the next four to six years, and we are currently in a unique position in this regard.

Operator, Operator

Our next question comes from Alex Rygiel with B. Riley.

Alexander Rygiel, Analyst

A quick question here. As it relates to that $9 billion of pipeline, can you talk a little bit about maybe some of the largest opportunities geographically where they're positioned or which technologies or whatnot that make up the largest component of that?

Kenneth Young, CEO

Sure. I can provide some insights. Our pipeline consists of opportunities we expect to book over the next three years, not just in terms of revenue recognition but also identified projects. As illustrated in the chart, North America shows significant activity across various projects. These projects can range from $300 million to $400 million, with several more in the $50 million to $150 million range, depending on their size. Some involve conversions, while others pertain to upgrades aimed at increasing power generation or implementing new carbon capture solutions. When considering a coal plant, adding a post-combustion element represents a considerable capital investment for the utility, which is typically seeking a return, such as the 45Q tax credit or others. We're also observing several projects in the $10 million to $15 million range. In our thermal segment, there are increasing opportunities in renewable projects, including biomass initiatives. We're currently discussing a potential conversion from coal to biomass. Additionally, we are seeing waste energy projects emerging in the U.S. due to new EPA regulations impacting various waste-to-energy plants. These projects will require upgrades related to emission control systems, which is favorable for us. There are also selective new builds aimed at replacing older waste-to-energy facilities. In Europe, we are being more selective, but there are numerous aged waste energy plants that will need upgrades or enhancements, which can range from $10 million to $100 million depending on their specific requirements. Overall, we are identifying promising projects at both the smaller and medium scale, and while we are being selective, we are also noticing high-value projects similar to those previously announced, which we believe will be operationally beneficial for us.

Alexander Rygiel, Analyst

And then can you also give us an update on each of the 3 Brightloop projects in Ohio, Wyoming and Louisiana?

Kenneth Young, CEO

In Ohio, we are currently finalizing engineering design and construction elements. We are also in the final stages of negotiating the offtake agreements related to hydrogen and CO2 for this location and discussing financing for the site. We are optimistic that these components will come together soon, as we are fully committed to advancing this project. In Wyoming, we have a dedicated team working on the project, especially considering the state grant and our partnership with Black Hills Energy. We are finalizing the overall project design, which includes all necessary steel structures and civil works, with a partner we are currently in talks with. The grant also encompasses the permitting process, which is moving forward. For Louisiana, our focus is primarily on securing financing, and we are in discussions with a couple of potential finance partners to advance the project. We are also exploring local opportunities related to biomass feedstock availability. These development efforts for all projects are ongoing and at different stages, and we are diligently working to finalize them as the timing allows. We aim to minimize cash usage from our balance sheet while still securing outside financing to support these projects.

Alexander Rygiel, Analyst

And then maybe one for Lou, can you talk to a little bit of the cadence of EBITDA from 2Q through 4Q?

Lou Salamone, CFO

Yes... Alex, the cadence will go along with what our cadence has traditionally been. Q1 is usually our lowest cadence. And then it varies, but you'll get close to doubling Q1 in Q2 and then about 30% to 35% increase in Q3 and another 25% increase in Q4. And depending on how those percentages work out, that should really get us to the targeted number that Kenny spoke of earlier of between $105 million and $115 million of adjusted EBITDA.

Operator, Operator

Next question comes from Aaron Spychalla with Craig Hallum.

Aaron Spychalla, Analyst

I wanted to explore further the EPA emissions rules you mentioned regarding waste to energy and Climate Bright. Can you discuss the expected impact of these rules and the timing for what we might anticipate moving forward?

Kenneth Young, CEO

Yes. The marketplace is not surprised by the recently passed rules that have been under consideration for a while. These rules compel utilities using coal facilities to either eliminate those plants by 2032 or implement carbon sequestration, or to increase the use of a green fuel that can be co-fired with coal. This shift encourages utility customers to convert to natural gas or incorporate carbon capture technology and integrate various forms of green energy to achieve carbon offsets. Each of these avenues presents potential opportunities for us. If they implement sequestration, we can support that; if they convert, we can assist with biomass offsets or other integrations for those plants. The impact of these projects, which often require state or local PUC approvals, will be reinforced by the mandates from EPA regulations. In terms of waste-to-energy, the focus will be on reducing emissions of sulfur oxide, nitric oxide, mercury, and other pollutants. While newer plants may meet the requirements, some older facilities will need upgrades, which creates more opportunities for us. Several of these sites are already in our pipeline, and we're engaged in discussions regarding various technologies and solutions. We believe these rules will reinforce the investment framework these plants must follow, supporting PUC and local EPA approvals needed for permits. That's our perspective on the situation.

Aaron Spychalla, Analyst

And then just on the targeted cost savings, so $20 million of the $30 million so far. Can you just talk about kind of the line of sight and for the rest of this year and just remind us where we should expect to see the rest going forward? Is that on the OpEx line and the COGS side or some combination?

Kenneth Young, CEO

No. There will be a small impact on the cost of goods sold, but the greater effect will be on our operating expenses in order to achieve the total reduction. This will happen throughout the year. As we continue to focus on selecting higher-margin projects, we expect to decrease some of the overhead in specific operations as well as in manufacturing. These factors will aid in the overall shift. Additionally, we are seeing improvements in IT productivity and operations, as well as financial productivity within the company, as we enhance these areas. We believe we are on track to achieve our target of 30% this year. If we can exceed that target, we will certainly aim to do so, but we wanted to provide a status update. Reaching $20 million towards our goal is a significant milestone at this time, and we will keep implementing this strategy throughout the year.

Aaron Spychalla, Analyst

If I could ask one more thing for Lou. In terms of free cash flow, do you expect it to align with EBITDA as the year progresses? Could you discuss some of the factors involved?

Lou Salamone, CFO

It should align with the EBITDA trajectory throughout the year, Aaron. We have increased free cash flow from the first quarter to the second, third, and fourth quarters. The fourth quarter is typically a strong period for cash flow, which should correspond with our targeted EBITDA.

Kenneth Young, CEO

Thanks, everyone. Sharyn, I'll turn it over to you or want to close out.

Sharyn Brooks, Director of Communications

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

Operator, Operator

That will conclude today's conference call. Thank you all for your participation. You may now disconnect your lines.