Babcock & Wilcox Enterprises, Inc. (BW) Earnings Call Transcript & Summary

Good afternoon, and welcome to the 8th Annual Credit Suisse Industrials Conference. My name is Jamie Cook, and I'm the machinery and engineering and construction analyst at Crédit Suisse. In terms of today's format, I will be moderating the Q&A with management. However, if you do have a question, please feel free to e-mail me at [email protected]. And I can make sure I get that question asked for you. With us today, we have Babcock & Wilcox. We are very happy to have them here this year. We have a full management team, including Kenny Young, who's Chairman and Chief Executive Officer; Lou Salamone, who's Chief Financial Officer; as well as Megan Wilson, Vice President of Corporate Development and Investor Relations. We are going to kick it off with an overview from the management team. They'll also be sharing a slide slow -- sorry, a slide show, and then we will open it back up to Q&A. So Kenny, I will pass the mic to you. Thanks for your attendance.

Thanks, Jamie, and thanks, everyone, for joining us today for this call. Just a quick reminder to everyone to please review our safe harbor statement and risk factors. And just for also a reminder, this presentation will be available on our website later today as well. With that, we'll dive in. So if we go to Slide 3, just to get this started, I wanted to talk a little bit about Babcock & Wilcox, and our long history going back more than 150 years in the development of innovative power generation and industrial technologies, despite various changes and recent financial challenges, the global brand equity of B&W is actually now stronger than ever. While we got our start with steam boilers, today, we offer a broad range of environmental, renewable and thermal technologies, which we'll discuss further in just a few moments. Today, we're going to focus on our growth strategies, and our growth after recovering from significant losses associated with 6 projects in Europe, where our Vølund subsidiary had expanded its scope and to include broad procurement and construction scope, or EPC scope. When Lou and I joined the company in November of 2018, we took a number of strategy or strategic actions to turn the company around and recover from those pre-existing loss projects. Since then, we've completed or settled those projects, returned the business to a proven core technology scope and go-to-market model and implemented more than $120 million in cost savings and growing. We've extended our credit facility to mid-2022, we've launched a global rebranding effort, we've reestablished and expanded our international presence, and we returned the company to profitability on an operating income and adjusted EBITDA basis. While COVID has caused delays and deferrals on some of our projects in 2020, we remain focused on our strategic growth initiatives. We're gaining momentum with our new branding, expanding our sales and service presence internationally and pursuing more than $5 billion of identified project opportunities over the next 3 years, while continuing to focus on our cost reductions, our project execution and profitability. Notably, we have booked $177 million of new work during the third quarter of 2020, which was an increase of 106% year-over-year and 111% sequentially increase compared to the second quarter of 2020. Looking forward, we're targeting $70 million to $80 million of adjusted EBITDA in 2021, and $95 million to $100 million in 2022 based upon our current visibility. So what's next? So what does the next-generation of B&W look like? Well, we're building on our globally recognized brand equity and foundation of advanced technologies in the renewable, environmental and thermal markets. We're targeting high-growth markets and applications like waste-to-energy and biomass in Europe, the Middle East and Asia, and ash handling equipment to meet regulatory requirements in the United States. We're continuing our tradition of research and innovation, including the development of carbon capture technologies as well as advanced waste-to-energy and biomass, including working closely with various universities and the Department of Energy. We're leveraging the broad power generation industrial steam fleet worldwide, including, but not limited to, our vast installed base with utility and industrial customers for higher-margin and strong aftermarket parts and service sales. And we're committed to quality and safety, which have been one of the key drivers for -- to grow the brand equity for B&W worldwide over the past 150 years. We're now focused on leveraging our 3 new brands, B&W Renewable, B&W Environmental and B&W Thermal around the world. Across these 3 brands, we are a technology innovator, providing a comprehensive suite of emission controls, ash-handling systems, waste-to-energy and biomass systems, steam generation technologies, cooling systems and auxiliary equipment as well as aftermarket parts and services to optimize and upgrade existing equipment and operate and maintain plants. Our technologies are suitable for biofuel production and other circular and green economy applications, which we are pursuing broadly. We also offer field construction and construction management and maintenance services to complete our profile of technology and service offerings. Our offerings are industry-leading technologies that we have developed and that set the standards for a wide range of applications in the power, renewable and industrial markets. So let's go to the next slide. Next generation, where do we go from here? This is what the business looks like today, with about $600 million of revenue in the last 12 months as of September 30. Nearly half of our sales are derived from our Renewable and Environmental segments. About 2/3 of our sales are in North America, and more than 80% of our sales are in aftermarket upgrades, parts and services. I'll now turn the call over to Lou, who can discuss our financials.

Thanks, Kenny. As Kenny mentioned, we've taken a number of strategic actions since late 2018, including implementing more than $119 million of cost savings initiatives and focusing on project execution and profitability. As these actions have started to take effect, the company has returned to profitability on both an operating income and an adjusted EBITDA basis. And we've seen a significant improvement in both adjusted gross profit margin and adjusted EBITDA, as shown on this slide. Despite the adverse effects of COVID-19 on all of our segments in 2020, we've been able to achieve these improvements. Note that in the third quarter of 2020, we recognized a $26 million insurance loss recovery related to the historical loss projects, and we continue to pursue additional recoveries from various subcontractors. If we adjust for the impacts of our legacy business models that we since ended, such as expanded EPC scope and annualize the impact of our cost savings initiative, we have a pro forma adjusted EBITDA of about $69 million even with the impact of COVID-19. Looking forward, we're targeting adjusted EBITDA of $70 million to $80 million in 2021, and based on our current assumptions about the impacts of COVID-19 and bolstered by significantly improved bookings in the third quarter of 2020. Kenny, back to you.

Thanks, Lou. So how do we get to those targets from here? Well, our technologies and our branding are aligned with the major trends driving our industry. The demand for power and critical infrastructure continues to grow globally, and hand-in-hand with this growth is a drive towards more renewable energy sources like waste-to-energy and biomass. There are increasing environmental regulations globally, including restrictions on landfilling, more stringent emission standards and water use regulations. The fossil fuel installed base is aging, driving the need for aftermarket services and upgrades. And the potential for carbon legislation and regulation is growing. Our technologies help customers meet these needs and requirements and more. So as we think about our growth strategy, we are focused on; one, meeting the following -- meeting the global need for renewable solutions and environmental technologies; reducing methane from waste, which carries significant environmental impacts; supporting our large installed base and leveraging opportunities on our competitors' equipment as well; focusing on cash flow and profitability across the board; and expanding our sales, service and business development presence around the world to serve high-growth markets. As part of this, we recently announced new regional managers for Europe, the Middle East and Africa and the Asia Pacific region. We're opening new regional headquarters in Dubai and Perth, Australia. We are hiring sales and service team members around the world, more than doubling our presence outside the Americas. This expansion aligned with the roughly $27 billion in addressable market we see globally over the next 3 years. Within that $27 billion, 3-year addressable market, we have a 3-year pipeline worth more than $5 billion in identified project opportunities. Keep in mind, our pipeline does not include shorter lead time aftermarket parts and services and sales. If you remember the pie chart I showed you earlier, our goal is to shift our segment sales split from 52% in Thermal today to about 60% Renewable and Environmental by 2023. As shown here, with more than $1 billion in annual sales, our pipeline is aligned with that goal, with about 60% of our pipeline in Renewable and Environmental. In the near term, while we can't predict how COVID-19 will affect the timing of bookings and project progress, we are seeing renewed opportunities emerging as many of our customers restart paused projects or undertake new projects and upgrades, leveraging our technology. Combined with our recent strategic actions, this momentum is now driving significantly improved bookings and a confident outlook. Based on the current visibility on COVID-19 impacts on our customer plans, we expect strong bookings through the end of 2020 into the next year with significant earnings growth in 2021. Today, our focus is on winning and executing quality projects as well as aftermarket services to serve our customer needs for renewable energy, environmental solutions and efficient operations. We believe we have the technologies, expertise and the opportunities to expand our renewable and environmental platforms significantly over the next few years. With that, I'll turn the call back over to Jamie, and we can take or answer a few of your questions.

Can you guys hear me okay? I guess I'll kick off with, the Board has gone -- the Board level has gone through quite a transformation plan that was announced in September. Can you talk about the benefits that you're seeing to the portfolio at this point -- or to the organization at this point?

Sure. Yes. Obviously, we gave great thanks and appreciation to the previous board and the company. They came in to B&W to really help drive a lot of the financial transformation and project transformation that Lou and I went through when we first joined the company as part of our turnaround strategy. Clearly, from there, we wanted to bring in new Board members that actually brought a broader presence in the industry, both in the renewable energy sector and the worldwide manufacturing sector as well as in thermal and other technologies as well just to strengthen our overall, if you will, Board presence as it relates to our overall industry position. So it was a planned transition that we had wanted to do with both the previous Board, and we welcome the new Board and a lot of the help and activities and other strategies that they're working with management to execute on going forward.

Great. And then I guess if we look across your 3 different targeted segments, can you -- is there any way you can help us understand your market share in those key segments, key technologies that you think differentiate yourself? And who you're competing against?

Sure. Really across all 3 of those. So if you think about Thermal, Renewable and Environmental, there, actually, are different competitors across each of those 3 platforms. So if you look at the Thermal segment, obviously, in the supercritical and subcritical technologies, which are mainly focused on more of the fossil fuel or the baseload generation type technologies, you have competitors ranging from GE to a lot of the Mitsubishi systems or Japanese competitors in the marketplace there. If you look at -- in waste-to-energy, biomass-to-energy, they typically come down or a little bit smaller competitors in that space, a little bit more European competitors that sit and [ migrate ] there. It's a different channel. It's a different type of technology across that platform. In the environmental side, it does range and has a wide degree, but it depends on the use technologies there as well, too. It can be -- some of our competitors could be larger, some of them can be smaller on that front overall. But when you look at where the company has been, particularly, just take renewable energy because we talk a lot about that, worldwide today, on average, there's some probably 200-or-so plants that are either in consideration being built and planned. Now some of those are in China and India. And there, we would typically play more of a license type model, not a kind of build model. But outside of those markets, for example, there are roughly 100 of those in a planning stage so on and so forth, and we're involved in less than 10, so to speak, on those. So if you thought about it in that terms, we -- our position right now, and we do have world-leading technologies in waste-to-energy, we see that as a growth opportunity for us to really reemerge and play a stronger role in a lot of those new builds and new plants that are being considered or invoke today. But -- and that would range in biomass and waste-to-energy kind of technologies. But just to give you some idea of where we see ourselves. So we can be more dominant in expanding our footprint in geographies, especially in Asia and Middle East and other markets will help drive a lot of that growth, and it's reflective in the pipeline numbers that we have in the presentation. And you can see those by those different segments and regions. And that's why we're actually increasing our presence in those areas specifically so that we can gain a broader market share as it relates to that addressable market.

Great. And then just on the technology front, can you remind us where -- what Babcock & Wilcox's key technologies are, how they differ from their peers? And then, I guess as you look to grow over the next couple of years, can you talk about whether we were investing at the levels that we should or whether going forward to -- and what's implied in some of your longer-term targets? Does that mean we need to invest at a greater level? I'm just trying to understand if we've underinvested, and we're back to normalized levels as the company turns itself around.

Yes. Well, if you talk about investment, meaning more of a CapEx kind of approach, is that -- Jamie, just to make sure is that what you're asking?

CapEx and R&D.

Okay. CapEx is actually pretty stable for us. Other than a little upgrades here in the that we have in some of the manufacturing technologies, welding technologies that are more normal course for us. But it's not -- we don't see a big shift or change in our CapEx planning or strategy over the next 3 years as we look at the long-term plan and growth. So we're pretty constant there. From a technology aspect, today, if we look at the core aspects, let's just say, waste-to-energy around that, the supercritical, subcritical and the packaged boilers, the technologies that we have today are really sound, and we're actually doing upgrades and enhancements so we don't have to do a lot of R&D as it relates to those technologies. On waste-to-energy, we have actually some of the great technology, DynaGrate, for us, which is world-class and patented today, but has unique movements on those great technologies to be able to shift the ash or the waste down through the burn cycle. And it does it in such a very efficient way. We get more efficiency, and therefore, a higher output, more steam generation to drive a higher turbine value. So we can actually, in the plants that we're involved in, we have a better throughput, if you will, over our competition. And so the DynaGrate technology is world-class, and we're seeing that unfold. Even in some of the customers where we had some of the difficulties in the EPC projects, they're now some of our best customers because the technology is world-class leading, and we're seeing opportunities there around that. Having said all that, we are -- it's not -- it's very minute, relatively speaking, overall, but we are picking up a little bit in R&D and working with universities and the DOE especially on some biomass projects that we're working on with the DOE. And looking at -- and we have been involved in some carbon-capture, chemical looping research with universities historically as well, too. And we want to actually increase some of that. Not significant to the overall profitability of the company, but we do want to increase some of those areas where we can play a key role and leverage some of the new legislation and other areas, especially in biomass and other aspects that we think are coming in particular, in North America or the United States.

Yes. Okay. Go ahead, Lou.

So we've almost doubled our R&D since last year. For the 12 months ended '19, we had about $2.9 million R&D expense. For the LTM period ended September, we were at about $4.5 million. So we've really taken a really focused approach on increasing R&D where it will do us the most good. And then we've been able to limit that by partnering with various universities and so forth and leveraging their expertise with our R&D.

Okay. And then, Lou, I do have a couple of questions for you on the financial side. But before we go there, I wanted to dig a little deeper on the aftermarket side because I know that's something that always -- a strong aftermarket always interests investors. So can you remind us what your percent of sales are? Any color if you want to? I'm assuming it's more stable and more lucrative, if you could confirm that? And just where you see that business going? And sort of what's implied in the longer-term targets that you guys have laid out?

Yes. So it's actually broken apart in our presentation on the aftermarket into each segments and business units overall on the percentages. But it's -- for us, the aftermarket parts and service is a key part of our strategy. It is a higher-margin part of our portfolio in the long run. As we mentioned in our brief remarks here, where we've increased our focus, not only on our installed base, that actually now is extending past the typical thermal parts and service business that the company is strong had, but we're also focused on the waste-to-energy and the biomass parts and services as well and expanding our revenues from that segment in the Renewable side from that. But we're also focused on our competitors' systems and technologies as well in providing parts and services and upgrades and enhancements on that particular piece. So we do see growth in and around that. And as we mentioned, as we're expanding our worldwide presence, we're not only adding sales presence, but we're adding service presence in each of those areas as well. And we've already started to see some of the early paybacks from that strategy and picking up some new maintenance contracts and parts and services and other aftermarket pieces for us overall. But we think that's going to be a strong part of our strategy going forward in each of those particular areas. So what would be -- I'm sorry, the overall percent?

Including upgrades in retrofit. Yes.

Here we go. So it's -- the aftermarket piece for us is really important that we have. And we've -- as part of our also consolidation in the company to save money, we've also consolidated -- our aftermarket parts and services grew into a single segment globally, so that we're able to more effectively manufacture those parts, be responsive to our customers, have the right inventory levels and be able to address their issues and needs on a worldwide basis.

Okay. And then I guess, shifting to financials, maybe, Lou, this is more for you. Just what's implied to achieve your EBITDA targets that you've laid out for 2021 and I guess, through 2022 or 2023? And if you achieve those targets, is there any way you're helping investors think about like just free cash flow conversion for the company? I'm wondering if that changes at all. And then as we think about that, I guess, if also you could just address plans to delever target leverage ratios and just sort of a time line for that?

Okay. So with respect to free cash flow, our interest is around $36 million a year. The CapEx, as Kenny talked about, is in the $6 million range. And then our pension obligations are around $12 million to $15 million a year. So on a $75 million projected for 2021, you've got about $20 million free cash flow. Going -- looking ahead to 2022, we're looking at net debt of about $308 million. It was $316 million at the end of Q3 of this year. We had an $8 million paydown on the use -- from the funds we received on the insurance settlement. So that brings us down to about $308 million. If you think forward to 2022, and you sort of take the midpoint of our targeted EBITDA for 2022, you get to about $100 million, and that will give us a little over 3x leverage ratio. So we're clearly looking to delever the company as we hit these EBITDA targets that we've talked about earlier.

Okay. And then I guess, can you talk to any changes that you've made in sort of being incentive compensation structure, and how you're better aligned under your management team with sort of the longer-term shareholders? And then, I guess, from an investors' point of view, it'd be interesting to hear who you guys benchmark yourself against when you're thinking about benchmarking BW and sort of longer-term targets, who should investors be thinking about because that has obvious implications for valuation and multiples over time?

Yes. So on the management compensation aspect, we actually -- I think we publicly announced all of this, but we set up all of the senior management and actually mid-level management over a 3-year plan. And it's basically tied to the EBITDA targets that we talked about, the $70 million to $80 million and the $95 million to $105 million of our adjusted EBITDA in '21 and '22. And so we set up the compensation plans for senior management as well as, I guess, mid-senior management inside the company to align to those objectives in and around that, both on cash compensation as well as reflective into performance targets on stock as well, too. And that was to strictly align management with shareholders with what we wanted to accomplish in the marketplace and what we needed to get done, obviously, for refinancing purposes and other aspects. So we've aligned all of that. We think it's unique a little bit and refreshing from a public company standpoint to have management aligned with those specific targets. So we're pretty pleased to get those out and accomplished from that aspect on it. On the comps, I don't know if you want to take, Megan, shot at that, happy to as well, but...

so I think it's interesting, Jamie. I think we certainly class ourselves as part of the broad E&C industry. But as we think about our segments, we have variation of peers. Kenny touched on them a bit as we talked about our competitors.

No, that's fine. If you cross the board, some of these are public, obviously, not necessarily in the U.S. markets, but on international markets. But if you look at waste-to-energy, you have [indiscernible] and Steinmuller, [ Hitachi's Ocean ] and others that are companies out there that we often compare ourselves and look to compare ourselves with and against, and that's more of a technology aspect on those companies. Some of those companies have different characteristics in their go-to-market model than we do on that front as well. If you come back to the U.S., there's different pieces that cross over. You have, obviously, BWXT is a company we keep close tabs on, BPI, a few others in the U.S., in and around those that we look at and compare. We also have other services that cross over into companies like Jacobs and Parsons, and from a construction aspect in the U.S., it's a little bit unique overall in our overall services blend, which I know every company is always different and has their pros and cons on who they compare a comp to, but from that standpoint, that's on the core business. On the technology side, as we move more and more into the biomass and waste-to-energy, and we're seeing early opportunities right now around some of the biodiesel and renewable diesel, renewable energy, renewable fuel sector, where our technologies can be used in that particular area, kind of elevates us into a new class and looking at different comps and driving it more and more in the renewable sector, we think, is a much better comp for us long term. And we think there's a lot of growth in that aspect, especially as we continue our research and our product aspect on the environmental side to have more reduction of the carbon footprint, reduction of methane in landfills and some of the fracking aspects where some of our technology could play a key role in reducing that methane output, which is -- actually has a big impact on greenhouse gases. So the more we move and shift into that, then we see our comps actually shifting more into that emerging technology aspect, and we're pretty excited about that.

Okay. And then I guess, Kenny or Lou, to finish up, I think we only have 2 -- this half hour went quick. I think we only have 2 minutes left. But you've both been with the company a long time. I know you've invested your time and efforts in restructuring, in turning around this company. If you were to say, what are the 2 or 3 things you think investors underappreciate about where B&W could be over sort of the next 3 to 5 years, if you guys get 70% of this right, like what would you say to investors is underappreciated about the story?

Well, so there's 2 aspects to that. And let me describe that. I know we don't have a lot of time. But on a historical basis, the only reason the company really got into trouble financially was because it tried to move into a new contractual obligation as an EPC provider. If they hadn't done that, honestly, the performance of the company, the core businesses were very profitable prior to that period, and it was only that decision that led to the financial implications that occurred. So taking that aside, that's very much a positive because I think it reflects on the fact that the technologies worldwide worked very well, and it puts us in a really good position to grow against our pipeline that we've outlined out there. So -- but secondarily, if you look to the future, I think that we're seeing the evolution move much more towards the -- globally on this reduction of carbon output as it relates to power generation. And that's going to have a change. And obviously, there's going to be a lot of companies that are going to move into looking at, whether it be in solar aspects and wind, but also in -- around waste-to-energy. And one of the areas that we're anxious to see what happens is, from a U.S. standpoint, which is a little bit behind overall in its regulatory standpoint on landfills and other aspects, we think that waste-to-energy is going to be a higher growth area in North America, which we really don't have reflected in our pipeline out there. But we see those opportunities starting to emerge in the U.S., and we see a lot of local, state governments and other aspects that are looking how -- looking to determine how they can reduce the methane that's coming out of these landfills, and a lot of that could be done by waste-to-energy. Now some of that could also be done with -- again I'm jumping ahead, but some of that can be done with gasification and use the methane to create hydrogen, and hydrogen is something that a lot of companies are looking at, where it sits in the overall cycle to create baseload fuel opportunities, obviously, with reduced carbon footprint. And those are all areas that we can play a role in. So as -- even as some of these plants convert from, perhaps, coal into gas, we actually provide the transformation and the conversion of those plants. As they may look to move into hydrogen, then we can play a broader role in, perhaps, looking at the gasification of the waste order to help create some of the hydrogen that could feed into these plants. So we look at all of those. There's a lot of growth opportunities, not only in the U.S. clearly, some of that demand is also starting to occur in Europe and -- as well as Asia and other parts. So we're seeing that growth potential unfold. So we think B&W is in a really good spot to leverage that. And clearly, we're exploring a lot of those opportunities. We're also looking at battery storage and other things that we recently announced and, obviously, excited about some of the potential of those technologies will have for us as well.

Yes. And if I could just take a...

Yes, go ahead, Lou.

I think the snapshot an investor once should be looking at with us is where we are with the Renewable and the Environmental business in terms of relation to its growth and the Thermal business, which will level out and shrink a little bit. And what we're positioning the company to do is really grow the Environmental, the Renewable, as Kenny talked about, and looking at new technologies. We made a small investment in a company that has battery storage that has been doing very well, and we're looking for other investors who take us into these new technologies to better grow that Renewable and Environmental area.

Okay. Well, great. We are a couple of minutes over, and I have another presentation after this. So I wanted to thank the entire management team of Babcock & Wilcox for joining us today. Investors, if you have any questions, please follow up. And I wish you and your families a very healthy and happy holiday. So thank you very much, and we'll talk soon. Take care.

Jamie, Thanks. Take care, everyone.

Thanks.