Babcock & Wilcox Enterprises, Inc. (NYSE:BW) Q3 2023 Earnings Call Transcript

Babcock & Wilcox Enterprises, Inc. (NYSE:BW) Q3 2023 Earnings Call Transcript November 9, 2023

Babcock & Wilcox Enterprises, Inc. misses on earnings expectations. Reported EPS is $-1.35 EPS, expectations were $0.09.

Operator: Good evening. My name is Hannah and I will be your conference operator today. At this time, I would like to welcome everyone to the Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions]. Thank you. Sharyn, you may begin your conference call.

Sharyn Brooks : Thank you, Hannah. And thanks to everyone for joining us on Babcock & Wilcox Enterprises’ Third Quarter 2023 Earnings Conference Call. I’m Sharyn Brooks, Director of Communications. Joining the call today are Kenny Young B&W Chairman and Chief Executive Officer and Lou Salamone, Chief Financial Officer to discuss our third quarter results. During this call, certain statements we make will be forward-looking. These statements are subject to risks and uncertainties, including those set forth in our Safe Harbor provision for forward-looking statements that can be found at the end of our earnings press release, and also in our Form 10-Q that 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 statement. We also provide non-GAAP information regarding certain of our historical and targeted results to supplement the results provided in accordance with GAAP. This information should not be considered superior to or as a substitute for the comparable GAAP measures. A reconciliation of historical non-GAAP measures can be found in our third quarter earnings release published this afternoon and in our company overview presentation that will 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.

Kenny Young : Thanks, Sharyn. And thanks to everyone for joining us today. Well as you can tell by our earnings release, it’s been a busy third quarter for Babcock & Wilcox. I’d like to start the call today by first reviewing our third quarter performance on a continued operations basis accounting for the announced reclassification of our solar business, as well as the latest advancements across our Bright Lube and Climate bright initiatives. I’ll also discuss our announced strategic business realignment and the rationale behind that decision as well as details related to our 2023 and 2024 financial targets, which are based primarily on the strong performance of our aftermarket parts and services businesses, before turning the call over to Lou.

Let me start by highlighting the broad-based activities that drove revenue growth across all business segments during the quarter. Revenue for the third quarter was $239 million, which is 13% improvement compared to the prior year and our third consecutive quarter of revenue expansion on a year-over-year basis. Our top-line improvement was led by thermal revenues then increased approximately 17% when compared to the third quarter of 2022 followed by renewable more specifically our renewable services as well as environmental revenues increasing 11% and 4% respectively. Our aftermarket parts and services business and thermal and renewable typically our higher margin businesses continue to perform above our internal expectations. Consolidated adjusted EBITDA from continuing operations for the quarter was also impressive at $20 million, an improvement of $7 million or 54% when compared to the same period last year.

This is inclusive of roughly $2 million in expenses for Bright Lube and Climate Bright in Q3 2023. While product mix was a large factor in the adjusted EBITDA performance for the quarter attributable to the higher margin nature of our aftermarket businesses, we also demonstrated strong execution on increased volumes of projects within our environmental segment. While continued operation bookings and backlog were mostly flat year-over-year. This is largely attributable to timing of new bookings, as negotiations on a few larger opportunities are taking slightly longer than anticipated. Some of these delays are positive due to increased scope for B&W aftermarket services, as many utilities and large energy companies are reevaluating the timing of newbuild projects and deferring to upgrades due to higher interest rates and other geopolitical factors.

Our outlook for near term booking opportunities remains robust positioning as well to achieve updated backlog growth in a range of $550 million to $650 million by year-end 2023 based on continued operations, not including our reclassified assets. In addition, based on our improved performance of thermal parts and services and our global reach and providing clean energy technologies, we remain confident in achieving our revised full year adjusted EBITDA target from continuing operations of $85 million to $90 million in 2023 when excluding Bright Lube and Climate Bright expenses. Transitioning to Bright Lube and Climate Bright commercial activities, we are pleased to provide several updates related to our hydrogen generation technology and project portfolio.

As previously mentioned, we are developing a small Bright Lube hydrogen production plant in Massillon, Ohio, very near our headquarters here in Akron, we are close to signing a definitive agreement for hydrogen uptake at this location for up to 3 tonnes per day of hydrogen production for the next 10 years. We are also excited to announce we have a Letter of Intent for project level financing, and we have signed a lease agreement and are moving forward with construction to produce hydrogen by the end of 2024, or very shortly or early end of 2025. With regard to our medium and larger platforms, we are also excited to announce a collaboration with Air Products, which represents a key step forward in our development of net negative carbon intensity hydrogen production facility in Louisiana utilizing Bright Lube technology.

More specifically, we have signed a memorandum of understanding with their products to enter into a definitive offtake agreement for up to 200 tonnes of carbon negative hydrogen per day, as well as the CO2 produced at the facility, with the initial production facility expected to be operational and late 2026. This comes on the heels of our previously announced offtake agreement with General Hydrogen to acquire both hydrogen and CO2 from our medium sized biomass Bright Lube platforms. Both of these agreements come with 10-year length terms. Based on the trend — the traction we have received to date is become clear that commercial solutions that address carbon neutral targets have become imperative. Importantly in parallel, we continue progressing in Wyoming and within recently announced hydrogen hubs, especially in West Virginia.

This includes permitting fuel commitments and collaboration offtake land allocations as well as project funding. While our recent developments across Bright Lube projects continued to progress we’re also pleased to announce a meaningful update to our board of directors. Effective today, Dr. Naomi Boness will join our board of directors bringing an extensive expertise within the energy sector, particularly in hydrogen generation and carbon capture. We welcome Naomi to the board and are confident her deep industry experience will prove valuable as we continue to accelerate our hydrogen strategy going forward. To reiterate our updated pipeline when excluding the reclassified operations is over $8.5 billion across all three segments, with approximately $1 billion and Bright Lube opportunities.

We believe this puts us on a pathway to reach $1 billion in bookings by 2028, with a combination of small, medium and large projects. We feel confident that could lead to $1 billion in revenues from Bright Lube by 2030 and beyond, and would still only represent 1% of the market share of total hydrogen spin by 2030. I now like to focus on the announced strategic business realignment, including what it means for the company going forward, and its immediate impact to our current operations. In response to today’s market conditions, which include higher interest rate costs, and reduce their delayed growth capital expenditures by our customers, we see growth a growing global trend and extending the operational lifespan of existing power and industrial generation facilities.

This presents us with an opportunity to shift our focus to the more predictable revenue streams generated from our aftermarket businesses. We plan to utilize these cash flows to strengthen our balance sheet and reduce our overall debt. While we are also evaluating strategic aftermarket alternatives related to non-strategic assets. Further, we expect to realize up to $30 million in annualized cost savings primarily through reduction of the high overhead associated with seeking multiple newbuild projects. Our heightened focus on producing more predictable cash flow generation is consistent with our approach to provide long term profitable growth for the company and its shareholders, ultimately driving our decision to streamline our efforts to concentrate on aftermarket businesses and capitalize on higher margin parts and service opportunities.

In order to ensure a successful realignment of our updated strategy, our focus is on the following. One a greater emphasis on higher margin aftermarket parts and services across all three segments, while further reducing overhead costs associated with certain large newbuild project opportunities. Reducing our seniors secure letters of credit facility by up to $20 million by the end of fiscal year 2024. Refinancing our existing senior secured credit facility to reduce our interest expense by up to $5 million. And just today announcing a commitment for $150 million and refinancing. Bolstering cash flow generation and strengthening the balance sheet and utilizing federal, state and project level financing to accelerate the deployment of our Bright Lube and Climate Bright technologies.

While we recognize the long term growth potential for solar from both the community and utility standpoint, there were several key factors that our management team and board considered when evaluating what steps the company would take regarding the pathway and for continued growth. As part of this evaluation process, we have decided to reclassify our solar business out of continuing operations. This is primarily due to the historical projects, the higher risks and the margin profiles. Looking ahead to next year, our focus on promoting future growth aligns with the sustained demand, we observe across all segments, paving the way for improved performance in 2024 with our announced adjusted EBITDA target range of $100 million to $110 million when excluding Bright Lube and Climate Bright.

Importantly, given our strategic business realignment, we now have increased visibility and confidence in our outlook as a significant portion of our targeted adjusted EBITDA will be generated from existing backlog with less reliance on large projects. I’ll now turn the call over to Lou to discuss the financial details of the third quarter, Lou?

Lou Salamone : Thanks, Kenny. I’m pleased to review our third quarter results and our recent commitment for the refinancing of our senior credit facility. Further details of which can be found on our 10-Q that is on file with the SEC. I’d also like to call your attention to the fact that I will be referring to amounts of our continuing operations. Our third quarter consolidated revenues were $239.4 million, which is a 13% improvement compared to the third quarter of 2022. This is primarily attributable to higher volumes in our renewable segment due to the B&W Renewable Services operations, as well as the thermal segment volume, which increased due to higher levels of construction and parts activity. Our net operating income for the third quarter of 2023 was $5.5 million, compared to an operating loss of $2.7 million in the third quarter of 2022.

Our adjusted EBITDA was $20 million, as compared to $13 million in the third quarter of 2022. Bookings in the third quarter of 2023 were $198 million, and the ending backlog at the end of the quarter, third quarter of 2023 was $507 million. Our net loss per share in the third quarter was $0.18 as compared to a loss per share of $0.15 in the third quarter of 2022. As Kenny mentioned, we’ve reclassified the solar business out of continuing operations. As a result will have taken an impairment charge of about $56.6 million and recognize contract losses of $47.9 million, which include future estimated losses, both of which are reported in discontinued operations. We’re pursuing potential recoveries of certain of these amounts, up to $40 million.

And there is no assurance that these amounts will be recovered. Accordingly, such recoveries have not been recognized in the financial statements. I’ll now turn to our third quarter segment results. Within our Babcock & Wilcox Renewable segment, revenues were at $7.1 million for the third quarter of 2023, which is an 11% increase compared to $78.5 million in the third quarter of 2022. The increase in revenue is due primarily to higher volume associated with renewable services. And our adjusted EBITDA in the third quarter was $10.1 million as compared to $4.5 million in the third quarter of 2022, primarily due to the higher revenue volumes as described above. Within the Babcock & Wilcox Environmental segment, revenues were $46.4 million in the third quarter of 2023, which is an increase of 4% compared to the $44.6 million in the third quarter of 2022.

The increase is primarily driven by a lower volume related to Bluegrass treatment projects offset by a higher overall volume of cooling technology projects. Adjusted EBITDA was $5 million for the quarter as compared to $3.1 million for the same period last year. And again, this is primarily driven by higher product mix, higher margin product mix as described above, along with favorable close out of a blue glass — Bluegrass treatment plants, sorry about that hard for me to say Bluegrass. Turning our Babcock & Wilcox Thermal — to our Thermal segment. Revenues were $107 million in the third quarter of 2023, which is an increase of 17% compared to the $91.3 million in the third quarter of 2022. And this was primarily attributable to the higher level of volume in our construction progress projects, as well as parts and service and our package boiler businesses.

This was partially offset by a decline in certain service projects. Adjusted EBITDA in the third quarter of 2023 was $11.3 million, compared to $10.8 million in the third quarter of 2022. This was primarily driven by the higher revenue volume and product mix described above. I’ll now turn to our balance sheet cash flow and liquidity. Total debt at September 30, 2023, was $377.6 million, and the company had cash cash equivalents and restricted cash balance of $65.1 million. Additionally, subsequent to September 30, 2023, we obtained a commitment to refinance our senior credit facility and amend our existing reimbursement agreement, including updating certain financial covenants there under. The refinance commitment is expected to reduce our interest cost by up to $5 million per year based on current interest rates.

The financing, financing and strategic alignment should significantly improve our liquidity this quarter and onward. I’m also pleased to announce that we have — as Kenny had mentioned, we’ve signed a letter of intent for the financing of our first Bright Lube hydrogen project being developed in Massillon, Ohio. Now I’ll turn the call back over to Kenny.

Kenny Young : Thanks, Lou. While I closing, while Q3 wasn’t without challenges, man included several strategic decisions to improve the fundamentals of our business. We are extremely excited about the growth opportunities ahead of us. With increasing commercial interest in our core and new technologies and global demand for our baseload power generation our market outlook remains robust, and we see the momentum and booking activity accelerating into 2024 and beyond. Finally, as always, I’d like to recognize the efforts of our employees as they continue to drive our success as an organization worldwide. With the outstanding support of our extremely talented and experienced employees and the continued confidence of our customers, we’re driving innovation and supporting the global transition to sustainable solutions.

And we’re focused on delivering strong profitable growth for our shareholders. We are entering a new phase and as we execute our strategic business realignment, and we look forward to the transformation that will enhance overall margins and improve cash flows generation for the company. I’ll now turn the call back over to Hannah, who will assist with any questions, Hannah?

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question is from the line of Aaron Spychalla with Craig-Hallum. You may proceed.

Aaron Spychalla : Yeah, good afternoon, Kenny and Lou, thanks for taking the questions

Kenny Young : Hey, Aaron. No problem.

Aaron Spychalla : Thanks, first for me on the guidance. Appreciate some of the color there. Can you can you just talk a little bit more about the exclusion of kind of Bright Lube and Climate Bright there. What those investments might look like as we think about 2024 and then maybe just elaborate a little bit you talked about some kind of project level financing and other things that you’re pursuing there.

Kenny Young : Sure, now be happy to. So I would think about Bright Lube and Climate Bright from a broader company expense standpoint to be, I don’t know, under $10 million, but 5 to 7, perhaps somewhere in that neighborhood and just to give some transparency there. From a B&W standpoint, obviously, the project financing that we’re referring to will going at the project level, versus an impact necessarily to B&W. So there’ll be a timing and depending on how that project financing is set up, and the exact structure of ownership of those particular projects, how the revenue will flow back and forth to B&W, as we’ve mentioned in the past. But from an expense perspective, rough order of magnitude, that’s how we’re thinking about Bright Loop and Climate Bright.

Aaron Spychalla : All right, thanks for that. And then second, just on the backlog. Can you talk a little bit, can you just give a little more color on some of those projects, sounds like maybe just slipping into 2024 of any of those been lost? Or is it just kind of more of a project timing, and then you kind of talked about accelerating momentum? Just maybe some of the areas that you’re looking for as we head into ’24?

Kenny Young : Yeah, well, actually, I would — even though we’re in November here, we’re talking about Q3 on this call. I would say some of those are slipping more into Q4, maybe into 2024. It just depends as we work through this negotiations on a few projects that we’re trying to complete on that. As referenced in my comments, some of those delays are referred to, is increasing some scope and activity potentially for B&W as few of the projects, we’re looking to larger upgrades and enhancements. And some of our customers are now trying to ascertain how they can extend out the life of these plants longer than maybe they had anticipated. So it’s caused us to or caused them to relook at some of the scope in a positive way as it relates to B&W and so we’re excited about that.

But — so those negotiations continued. But hopefully, and we have full intent to get those books still in Q4. But one or two of those may slip out into 2024, as well. But it’s more of a timing, I think, just from a negotiations aspect. And as the customers read, look at their approach to some of these technologies and the lifespan of the plants, which in the long run bodes well for us as an aftermarket provider. So that’s how we look at it. I think worldwide, obviously, some newbuild opportunities, in particular, I would say in renewable energy, waste energy. Some of those are delayed a little bit because of the interest rate increases and timing of capital expenditures. But not for any other reason. So there’s a few that will probably extend into next year, overall.

But for us as we talked about on the business, as reducing the overhead associated with large newbuild, which this is an opportunity for us to do that, we also see potentially increasing opportunities around licensing and licensing and some of our waste to energy technologies and with — in support of some of the new direction that we want to take in the company. So we’ll balance that as we transition more towards licensing and less on specific large new build opportunities.