Earnings Call Transcript - BW Q4 2022

Operator, Operator

Hello, everyone and welcome to the Babcock and Wilcox Q4 and Full-Year 2022 Earnings Conference Call. My name is Emily and I'll be coordinating your call today. I will now turn the call over to our host, Sharyn Brooks; Director of Communications. Please go ahead.

Sharyn Brooks, Director of Communications

Thank you, Emily and thanks to everyone for joining us on Babcock and Wilcox Enterprises' fourth quarter and full-year 2022 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 fourth quarter and full-year 2022 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 in our Annual Report on Form 10-K that will be filed with the SEC tomorrow, March 16, 2023 after the close of the market. 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 fourth quarter and full year earnings release published this morning, and in our company overview presentation filed on Form 8-K this morning and posted on the Investor Relations section of our website.

Kenny Young, CEO

Thanks, Sharyn. Thanks, operator and good morning, everyone, and thanks for joining our fourth quarter and full-year 2022 earnings call. We had a very strong quarter for Babcock & Wilcox and generated backlog and new opportunities to position us to reach our 2023 EBITDA targets. We increased our pipeline of opportunities, especially around our clean energy technologies, and renewable and environmental, as well as expanding opportunities with our BrightLoop hydrogen production technologies. Despite the near-term headwinds and ongoing supply chain disruptions, our seasonally strong fourth quarter results, which improved significantly on a sequential basis, enabled us to achieve our revised EBITDA, adjusted EBITDA target for the full year of 2022. Revenues in the fourth quarter increased 30% compared to 2021 and our quarterly bookings were $197 million, which were in-line with our strong fourth quarter bookings in the prior year. Our year-over-year results for 2022 were just as significant. Revenues for the year increased 23%, and our annual bookings of $908 million set new record highs since 2017. In addition, we booked seven renewable waste-to-energy new build projects in 2022 and announced several agreements with a number of leading companies to further augment our market applications of BrightLoop, SolveBright, and OxyBright technologies. Although, our performance for the year was impacted by global supply chain and market conditions, we continue to execute and progress against our long-term strategic growth strategy with an expanded pipeline of $8 billion and quality projects, and an ending backlog of $704 million, a 19% increase compared to the end of 2021. And remember, our backlog does not include our standard parts and service revenues. We look forward to 2023; we see strong customer demand across all of our business segments, coupled with significant backlog and booking momentum, which reinforces our conviction for improved full year performance and continued growth throughout the year. Given our current visibility for new booking opportunities, we reiterate our 2023 full year adjusted EBITDA target of $100 million to $120 million. While industry challenges and negative impacts of the global supply chain pressures still remain, we have implemented several strategic initiatives to mitigate these headwinds where possible. In recent quarters, we have worked to expand the qualification of alternative suppliers and modified our sourcing strategies to limit the impact that industry-wide bottlenecks have had with respect to availability of raw materials, fabrication capabilities, and labor shortages among a broad range of other factors. While we continue to evaluate where further improvements in our supply chain can be implemented, we are proud of our team's ability to react proactively to the present global and regional challenges while maintaining the highest level of operational performance. Our focus on providing customers with the technologies and services necessary to meet their growing demands for thermal base load generation and clean energy solutions remains our top priority. In the fourth quarter, we also announced two significant contract awards in our Environmental segment, which serves as a testament to our customer's confidence in our emission control and ash handling technologies. The first contract valued at over $24 million included the supply of two industrial package boilers, auxiliary equipment, and advanced emission control technologies for a petroleum refinery in North America. Under that same contract, B&W Environmental will supply two selective catalytic reduction systems to control nitrogen oxide emissions. The second contract is valued at over $20 million, including the design and supply of ash handling and conveying technologies for a power plant in North America, leveraging our equipment to assist the plant, operator and reducing the environmental impact of the plant and ensuring compliance with emission requirements. B&W Environmental will design, manufacture, and supply four state-of-the-art Allen-Sherman-Hoff submerged grind conveyors, that are designed to meet Effluent Limitation Guidelines and other coal combustion residuals requirements and also supply two tube conveyors for the project. These contract awards follow two very instrumental announcements we made last quarter, including a $43 million contract to provide construction and installation services for an environmental upgrade project here in the U.S. In addition to a contract award to study the application of B&W SolveBright solvent-based carbon dioxide capture solution for console energy. Overall, we are pleased with the progress our environmental business segment has achieved and the validation it brings to our growth pipeline and ultimate goal of revenues being two-thirds environmental and renewable, and one-third thermal. In addition, we just recently announced this year a $65 million contract to provide renewable waste-to-energy and environmental technologies to a low stock sustainable energy plant in the United Kingdom. This is one of the largest waste-to-energy plants in the UK and reflects strongly on our relationships with Copenhagen Infrastructure Partners and FCC Environmental Services. With respect to the supportive industry legislation that has been passed, we are excited to announce that we are collaborating with customers and partners to pursue a number of advanced clean energy projects and opportunities that will be made possible through the funding provided by the historic $1.7 trillion spending package recently signed by President Biden. The appropriations packages contained historic funding for clean energy projects, including opportunities for hydrogen generation, carbon capture, renewable energy, and methane mitigation demonstrations that would potentially benefit from B&W's advanced clean energy solutions. The spending package includes specific appropriations language that directs the Department of Energy to support commercial demonstration of hydrogen production using chemical looping, utilizing coal, biomass, or natural gas. This is a significant accomplishment and development, and we look forward to advancing our discussions with customers, partners, and representatives from the U.S. Department of Energy to explore ways in which we can accelerate the clean energy transition and provide essential innovative technologies for those projects. B&W has a diverse suite of renewable energy environmental and decarbonization technologies that are proven and ready to deploy including hydrogen, CO2 capture, decarbonization, methane abatement, renewable energy, and emission controls. Our commitment to further driving sustainability is reinforced by our recently announced collaboration with Chart Industries to evaluate innovative applications, utilizing our BrightLoop technology and the Global Alliance with Fidelis to produce clean zero carbon intensity hydrogen. Through the collaboration with Chart Industries, B&W will further deploy its BrightLoop hydrogen technology utilizing Chart's hydrogen liquefaction and carbon capture equipment. The partnership aims to provide low carbon hydrogen generation and cost-effective transportable forms of liquid hydrogen and carbon dioxide, while developing sales and marketing strategies for potential commercial customers. We are excited to partner with Chart industry and look forward to advancing the scalability and innovative applications our BrightLoop technology has to offer. The Global Alliance with Fidelis focuses on the production of clean hydrogen, using B&W's bubbling fluidized bed boiler technology and Fidelis's proprietary Fidelis H2 technologies. The partnership aims to produce zero carbon intensity hydrogen from natural gas that meets the required threshold under the Inflation Reduction Act to qualify for the full $3 per kilogram, 45B hydrogen production tax credit. We look forward to deploying these technologies at scale and further developing our suite of carbon capture solutions ultimately leveraging our ClimateBright Decarbonization platform and supportive industry legislation to further diversify our environmental and renewable business. I'll now turn the call over to Lou to discuss the financial details of the fourth quarter and the full year 2022.

Lou Salamone, CFO

Thanks, Kenny. First, I'll review our full year 2022 results and then I'll discuss our fourth quarter 2022 results. Please note that we will file our 10-K with the SEC tomorrow, March 16, after the market closes, and you can refer to it for more details beyond what we discuss here today. Our consolidated revenues for 2022 were $889.8 million, which reflects a 23% improvement compared to 2021. This increase was mainly driven by higher activity in our Renewable and Environmental segments, our expanded geographic presence, improved strategies to manage the ongoing effects of COVID-19, and acquisitions we made in the second half of 2021. The net loss for 2022 was $26.6 million, in contrast to a net income of $31.5 million in 2021, which included non-cash items of about $31.1 million mainly related to income tax benefits and mark-to-market pension benefits. The GAAP operating loss for 2022 was $4.2 million compared to an operating income of $20.8 million in 2021. We successfully met our revised 2022 adjusted EBITDA target of over $70 million, reporting an adjusted EBITDA of $72.4 million compared to $70.6 million in 2021. Total bookings in 2022 reached $908 million, marking a 17% increase from the previous year and the highest annual bookings since 2017. The backlog at the end of December 2022 was $704 million, which represents a 19% increase from the previous year. Now, I will discuss our fourth quarter results. For the fourth quarter, our consolidated revenues were $249.9 million, a 30% increase from the fourth quarter of 2021. This improvement was largely due to higher overall volumes and previous acquisitions, though it was somewhat offset by lower construction activity in our thermal segment. Net income for the fourth quarter was $5.7 million compared to $30.2 million in the same quarter of 2021; the difference was mainly due to non-cash items, including a $15.2 million tax benefit and a $17.8 million positive adjustment in our benefit plans. Our GAAP operating income for the fourth quarter was $9.3 million, down from $9.7 million in the same quarter of 2021. Adjusted EBITDA for the quarter was $26.7 million, compared to $27.8 million in 2021. Bookings for the fourth quarter of 2022 totaled $197 million, consistent with the strong bookings in the fourth quarter of 2021. Moving to cash flow, our cash flow from operations in the fourth quarter of 2022 generated $36.8 million. We finished the year with total debt of $353 million and combined cash, cash equivalents, and restricted cash of over $113.5 million, resulting in net debt of approximately $239.5 million. Our net leverage at December 31, 2022 was 3.31 times the adjusted EBITDA from the last 12 months. As Kenny mentioned, our strong results for the fourth quarter were driven by the successful execution of our growth strategy, allowing us to meet our adjusted EBITDA target of over $70 million for the full year 2022. In 2022, we secured seven significant renewable waste-to-energy projects, contributing to our highest level of annual bookings since 2017. We anticipate that the quarterly profile for 2024 will reflect our typical cyclical performance, with increasing profitability from the first to the fourth quarter. Additionally, as Kenny highlighted, we are reaffirming our 2023 target of $100 million to $120 million in adjusted EBITDA. This goal is backed by a strong pipeline of over $8 billion in opportunities through 2024 and a backlog of $704 million at the end of 2022. This backlog represents a 19% improvement from the previous year, showcasing the accelerating momentum of our strategic initiatives. I'll now turn the call back over to Kenny.

Kenny Young, CEO

Lou, thanks. Well in closing, capacity has been one of tremendous growth and progress for B&W despite all of the macro headwinds and ongoing supply chain disruptions. Notably, we have seen continued success across multiple key fronts, including achieving a record level of annual bookings since 2017. Topline annual revenue improvement year-over-year, an improved outlook for adjusted EBITDA growth in 2023, demonstrating the effectiveness of our strategic initiatives and the strength of our world-class team of operators. Looking ahead, we remain excited about the prospects stemming from a robust pipeline of more than $8 billion of global identified projects and upgrade opportunities, driving profitable multi-year growth and enhancing shareholder value. Our deep industry expertise with clean energy and carbon capture technologies coupled with our experience in traditional energy sources gives us a unique advantage in delivering sustainable solutions to our customers and stakeholders. As we continue to evaluate the ever-evolving landscape of the energy transition, Babcock & Wilcox looks forward to developing its ClimateBright Platform and deploying its technology at scale. I want to express my sincere gratitude to all of our employees and customers and shareholders and partners for their continued support and confidence in our company. We remain steadfast in our commitment to becoming a front-runner in the global energy transition and look forward to building on our successes in the years ahead. Together, we continue to drive strong profitable growth and create a more sustainable future for generations to come. That wraps up our comments. I will turn it back over to the operator to answer any questions.

Operator, Operator

Thank you. The first question today comes from Aaron Spychalla with Craig-Hallum. Aaron, please go ahead.

Aaron Spychalla, Analyst

Good morning, Kenny and Lou. Thanks for taking the questions. Maybe first on waste-to-energy. Good to see the low stock award to start 2023. Can you just maybe talk about the pipeline there, how it's trending and then supply chain and timelines on the current project. Just how that compares to your expectations back in October?

Kenny Young, CEO

We were thrilled about the low stock announcement. We aimed to finalize that before the end of 2022, but it took a few extra days. The exciting aspect of this project is the potential for expansion based on various developments in the future. We are very enthusiastic about this, which also positively reflects our relationship with SIP and FCC. FCC has a significant presence in the U.S. and Northern Europe, and it’s great to strengthen our ties with both SIP and FCC. Regarding our pipeline, we have several opportunities in the works, with some announcements expected this year and others next year, all focused on waste-to-energy. We are also expanding our royalty capabilities, particularly in Asia, with growth in our waste-to-energy technology licensing in China and India. We expect more developments in 2023 and 2024. Overall, our pipeline looks robust, and we see advancements not only in waste-to-energy but also in biomass-to-energy, especially due to the positive effects associated with CO2 sequestration through OxyBright. We're seeing an increase in opportunities tied to these technologies, partly due to the advancements from the Inflation Reduction Act in the U.S. On the supply chain front, there hasn’t been substantial improvement. We’ve adapted our approach based on last year’s insights and our current projections. We’re currently experiencing delays that extend timelines for acquiring materials like steel. As we negotiate contracts and plan revenue forecasts, we’ve integrated these supply chain concerns into our normal business expectations. We’ve adjusted our cost structures and forecasts accordingly. Unless conditions worsen significantly, we believe our forecasts and business planning already account for most of these issues. Should conditions improve, that would positively influence our results, but we aren’t counting on that for our 2023 projections.

Aaron Spychalla, Analyst

Understood. Thanks for the color. And then you mentioned language on commercial demonstration for chemical looping in the legislation. Can you just talk a little bit about what funding might look like there, anything on timing for deployments? And then any update to just the broad kind of 30 plus pipeline of kind of ClimateBright as those things are progressing?

Kenny Young, CEO

We're pleased about the appropriations language we've been involved in developing with both state and federal legislators in Ohio, gaining bipartisan support for inclusion in the Department of Energy's initiatives. We're currently navigating the usual appropriations process within the DOE, and while we anticipate it will take some time before we see financial support for the commercial demonstration project, we believe it will ultimately come together. The DOE is enthusiastic about our program and others, but as with any government-related project, progress may be slower than desired. On the commercial front, we're making steady advancements, particularly with potential projects in Louisiana and Wyoming, the latter using waste coal. We are also exploring a third project utilizing pet coke, which is a byproduct of oil and gas, to produce hydrogen while capturing CO2. We've also produced nitrogen during this process and are in talks with several companies about its potential uses alongside hydrogen and CO2. We're optimistic about the wider applications of our technology and are actively developing commercial opportunities, likely leading to a pipeline of larger prospects for BrightLoop. We see promising developments ahead, as we expand our outreach with partners like Chart and Fidelis to reach more customers. We're excited about our potential in markets across Europe and Asia, and we will continue to work diligently to make progress. We hope to share some concrete announcements soon regarding these projects as we move forward.

Aaron Spychalla, Analyst

That's good to hear. We'll stay tuned. Thanks for taking the questions.

Kenny Young, CEO

Yeah. Thank you.

Operator, Operator

The next question comes from the line of Rob Brown with Lake Street Capital. Rob, please go ahead. Your line is open.

Rob Brown, Analyst

Hi. Good morning.

Kenny Young, CEO

Hey, Rob.

Rob Brown, Analyst

Can you provide more details on the growth of the new booking pipeline? You mentioned the waste-to-energy market. Was that the main driver of the growth, and what specific areas are you identifying as new booking opportunities?

Kenny Young, CEO

We're experiencing growth primarily from renewable energy. Our new investor deck is available on our website, which outlines the updated pipeline we just released. The significant growth is coming from the renewables segment, including solar, where we're seeing substantial opportunities. Some of these opportunities are in community solar and smaller utility projects, rather than large-scale 500 megawatt projects. The solar sector is growing in the U.S., supported by last year's preparations and incentives. Additionally, there's considerable international development entering the U.S., focusing on combinations of projects. In some pipeline opportunities, we're looking at waste-to-energy or biomass, paired with solar capabilities. Our initial intent to enter the solar market focused on leveraging solar technology and creating combinations of clean power solutions, including solar with biomass and waste. This could involve integrating solar around waste-to-energy operations, and we're in discussions regarding those possibilities. Moving into green steam is also crucial for us, and we are starting to see this in our pipeline overall, which is focused on renewables whether in oxy combustion biomass, solar, or waste energy capabilities. Our BrightLoop capabilities are seeing a growing pipeline, and while our thermal business remains steady with many construction and enhancement projects, this part of the business is separate from the pipeline we discuss. The expansion we're witnessing is entirely driven by Renewable and Environmental segments, and we're excited about the opportunities ahead.

Rob Brown, Analyst

Okay. Great. Thank you. And then the thermal parts and services business. I think at one point, there was some deferment of activity. How do you sort of see that market, is there pent-up demand there? How does that look at this point?

Kenny Young, CEO

We had a strong fourth quarter in bookings, and I would say that the first quarter is returning to a more traditional pattern. Regarding our expectations for revenue and EBITDA margins in that sector, we have adjusted our forecast to account for the shift from 30-day book-and-bill cycles to 65 to 90 days. This change has been factored into our planning and cash flow management. The demand in that area has returned to pre-COVID levels, which we are quite pleased about. It's important to note that if we ignore the anomalies caused by the COVID year and last year's supply chain issues, we see that at the end of 2022 and into 2023, our business continues to operate and perform at solid margins. We are actively exploring opportunities for international expansion and looking to enhance our capabilities through reverse engineering competitive technologies. Overall, the business is in a solid state, and we believe we're back on track regarding demand and orders beginning to come in.

Lou Salamone, CFO

No, that's consistent with what we're experiencing at this point in time. So we expect the thermal business to continue to perform as well as it has. It just hasn't been hit by any decreases as much as people sometimes predicted the thermal business will be hit.

Rob Brown, Analyst

Great. Thank you. I will turn it over.

Kenny Young, CEO

Thanks, Rob.

Lou Salamone, CFO

Thanks, Rob.

Operator, Operator

The next question comes from Brent Thielman with D.A. Davidson. Brent, please go ahead.

Brent Thielman, Analyst

Hey, thanks. Good morning. Ken, I think you guys have taken a lot of internally to address some of these supply chain issues, which should be out this year. But can you help us sort of better understand this kind of $30 million plus bridge on guidance from 2022-23? Is that sort of assume no further degradation in margins or delays related to supply chain. And then the remainder is essentially a ramp up on new work booked and kind of normalization your short-cycle business, just kind of wanted to parse that bridge out?

Kenny Young, CEO

It's a great question. We assessed the current state of the supply chain, which significantly impacted our objectives in 2022, and have normalized it in our forecast. When analyzing the business, we assume that the supply chain issues we faced are now part of our normal operations. As I previously mentioned, some parts take 30 to 45 days to procure, and others take longer. We have integrated these factors into our planning processes. While examining the parts and services business and recognizing when revenues will be realized from a margin standpoint, we've accounted for some additional time in our projections. Essentially, we've normalized the impact of supply chain issues and incorporated that into our future forecasts. If there are improvements and conditions return to previous levels, it would enhance our financial performance, but presently, we've adjusted our expectations accordingly. We've established a management strategy that allows us to forecast business on a quarterly basis, and all of this has been factored into our calculations.

Brent Thielman, Analyst

Okay. It appears that there should be good top-line growth from all the new work you booked. Are you expecting to see some margin expansion this year at this point, or is it too early to determine that, considering all the supply chain factors?

Kenny Young, CEO

I would say this way; I think there's potential out there across the board for margin expansion and it's too early to say that to give any guidance as we say, we see specific ways that could happen. Clearly, there is potential for that and we'll see how it shakes out as we go forward, but those opportunities are there. So we'll keep an eye on it, but I wouldn't say anything right now that we can give any concrete guidance to.

Lou Salamone, CFO

And that I would say right now, when we look at going forward. We do our modeling based on where prices are, we're not looking at any great decreased inflation and et cetera. While we've done a little better than inflation, our supply chain guys have done a good job. As we model out and see where we can still be in the 100 to 120 range, that's based on, as Kenny said, really current pricing conditions etc. So there could be upside, but I think we just have to wait and see what happens in the economy.

Brent Thielman, Analyst

Understood. And then just a quick follow-on question about cash flow through the fourth quarter. Maybe just your expectations for cash flow for the year in comparability with the kind of business right now?

Lou Salamone, CFO

Brent, I really apologize, but we're getting maybe every third word of your question.

Brent Thielman, Analyst

Okay. I apologize. Thanks guys.

Operator, Operator

Apologies for that, Brent. We'll now move on to our final question, which comes from the line of Alex Rygiel with B Riley. Alex, please go ahead.

Alex Rygiel, Analyst

Thank you. Good morning, gentlemen and very nice quarter. In totality, can you talk about the opportunity with Fidelis, the multiple project opportunities of project cycles? And how that might flow through backlog over time?

Kenny Young, CEO

None of the Fidelis projects are currently material in our backlog, although they are in our pipeline. We have seen some minor engineering revenues from them, but the larger projects aren't included yet. Fidelis is currently finalizing their funding for the larger projects, and we are nearing the completion of that process. As mentioned, we expect potential bookings towards the end of this year, and everything seems to be on track. We anticipate making further announcements over the summer regarding timing and updates related to Fidelis. Looking ahead, we expect that by the end of the year, there's potential for work to commence on a three-year project, which they aim to have operational by early 2026. We're also collaborating with them on other opportunities, particularly in hydrogen and carbon capture projects, which we are eager to explore further. Although there's nothing significant yet, they have several global projects we're excited to be involved with, and we may be engaging in some engineering studies related to these over the next few months. I hope this clarifies our perspective.

Alex Rygiel, Analyst

No, that does. And then regarding the supply chain challenges and recognizing that each project contract is unique, are you able to convey some, if not all, of the unanticipated costs? Please explain that a bit.

Kenny Young, CEO

Yes, we can manage that. There are many variables since we sell thousands of different parts. However, we have the capacity to pass on most of the price increases or cost hikes that we experience from our vendors and suppliers. In some situations, we can do this immediately, but depending on the circumstances, we might absorb a portion of the costs initially and then implement the increases later, based on the contract and other factors. There are also large, long-term projects where we can adjust pricing on certain components while possibly not being able to do so on others. Therefore, it varies from project to project, part to part, and customer to customer. On average, we can effectively implement price increases, sometimes up to 100% right away, though in other cases there may be a slight delay. Overall, we are able to adjust pricing over time to ensure that our customers cover these costs.

Alex Rygiel, Analyst

And then lastly, Lou, can you comment on sort of the outlook for cash flow in 2023, understanding that there is every year kind of a few dynamics that might stand out as special situations?

Lou Salamone, CFO

Yes, as you've observed previously, our cash flow typically increases each quarter. The first quarter generally shows lower cash flow, which builds in the second quarter, increases further in the third quarter, and culminates in a strong fourth quarter, as demonstrated by our recent performance. We anticipate this trend will persist. We have also implemented internal measures to work more closely with our units to enhance cash and collection processes, which has been beneficial. I expect the cash flow pattern to be consistent with what you've seen in the past. Additionally, with the EBITDA growth we are targeting, we should be able to generate solid cash flows that align with that growth.

Kenny Young, CEO

Thanks, Alex.

Sharyn Brooks, Director of Communications

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

Thank you, everyone for joining us today. This concludes our call and you may now disconnect your lines.