Babcock & Wilcox Enterprises, Inc. (NYSE:BW) Q2 2018 Outcomes Earnings Convention Name August 9, 2018 5:00 PM ET
Chase Jacobson – VP, IR
Leslie Kass – President and CEO
Joel Mostrom – Interim CFO
Pete Lukas – CJS Securities
My title is Tim, and I can be your convention operator at present. At the moment, I want to welcome everybody to the Babcock & Wilcox Q2 2018 Earnings Convention Name. All traces have been positioned on mute to forestall any background noise. After the audio system’ remarks, there can be a question-and-answer session. [Operator Instructions] Thanks.
Chase Jacobson, Vice President of Investor Relations, it’s possible you’ll start your convention.
Thanks, Tim, and good afternoon, everybody. Welcome to Babcock & Wilcox Enterprises second quarter 2018 earnings convention name. I am Chase Jacobson, Vice President of Investor Relations at B&W. Becoming a member of me this afternoon are Leslie Kass, B&W’s President and Chief Govt Officer; and Joel Mostrom, Interim Chief Monetary Officer, to debate our second quarter outcomes.
Throughout this name, sure statements we make can be forward-looking. These statements are topic to dangers and uncertainties, together with these set forth in our secure harbor provision for forward-looking statements that may be discovered on the finish of our earnings press launch and likewise in our annual report on Kind 10-Okay and our Kind 10-Q which might be on file with the SEC and supply additional element concerning the dangers associated to our enterprise. Moreover, besides as required by regulation, we undertake no obligation to replace any forward-looking assertion.
We additionally present non-GAAP data concerning sure of our historic outcomes in addition to our ahead outlook to complement the outcomes supplied in accordance with GAAP. This data shouldn’t be thought-about superior to, or as an alternative choice to, the comparable GAAP measures. A reconciliation of historic non-GAAP measures will be present in our first quarter earnings launch, revealed this afternoon, and in our Firm overview presentation on the Investor Relations part of our web site at babcock.com.
With that, I am going to flip the decision over to Leslie.
Thanks, Chase. Good afternoon, everybody.
Through the second quarter, we have taken a variety of actions to enhance B&W’s monetary flexibility, which helps us stay within the sturdy place to proceed to serve our clients. These actions together with the financing association we introduced this afternoon, ought to present us with sufficient liquidity to finish our renewable tasks and proceed to deal with enhancing our product and repair choices for purchasers and our core energy and industrial finish markets. I am going to focus on a couple of of those actions with you at present.
First, in early June, we signed an settlement to promote our MEGTEC and Common companies for $130 million. This transaction is predicted to shut within the subsequent few weeks. And at present, we introduced an settlement to promote our operations and upkeep enterprise on the Palm Seaside Useful resource Restoration heart in Florida to Covanta for $45 million.
Additionally in June, we started implementing extra value financial savings actions which might be anticipated to generate $34 million of annual financial savings. Prices to attain these financial savings can be roughly $5.5 million. We anticipate to acknowledge $15 million of the financial savings this 12 months with the rest being acknowledged in 2019. As a part of our strategic timing course of that we are going to full within the coming months, we’re persevering with to judge our value construction and are concentrating on extra financial savings of not less than $20 million that we anticipate to implement within the fourth quarter for a complete focused financial savings of $54 million.
Lastly, at present, we introduced a brand new financing association that demonstrates assist for the energy of our underlying enterprise by offering us with the financing dedication that provides us flexibility we have to end the renewable tasks. The mixture of these things ought to present us with enough liquidity and place us for improved profitability and money flows, as soon as the renewable tasks are absolutely full.
Turning to our enterprise efficiency. We have acknowledged that the renewable tasks proceed to be a disappointment and have vital will increase in estimated value to finish within the quarter, however the tasks are persevering with to progress in direction of completion with 4 of the six models anticipated to be turned over to clients within the subsequent three months. Probably the most vital prices got here from the crops that required structural beam repairs. When the beam repairs had been full and work was launched contained in the [indiscernible] estimates had been up to date to incorporate gear harm associated to publicity to the weather throughout the 9 months delay and to make sure pricing for the remaining development work was primarily based on up to date vendor bids.
Within the UK, three of the 4 tasks are in startup and trial operations. One unit has already generated energy to the grid and can be quickly be transferring to the ultimate trial operations interval. The opposite two models are anticipated to generate energy to the grid this month and observe an identical course of to attain turnover to the purchasers.
The mission with the metal beam situation is absolutely staffed, development is underway and turnover to the client is deliberate for the third quarter of 2019. The 2 challenged crops in Denmark are absolutely operational and ought to be turned over to clients within the coming months. One, ending with [ph] steering throughout the scheduled plant outage that ought to be full within the subsequent few weeks, and the others finishing its contractual trial operations interval. Either side have demonstrated profitable operations. In keeping with our earlier disclosure we’re working with clients, suppliers, insurers and others to hunt recoveries on these tasks.
In energy, we usually carried out properly, although our gross margin was decrease than anticipated within the quarter, on account of fewer favorable contract close-outs in comparison with final 12 months and better guarantee expense in choose tasks.
We had stable bookings within the first half of 2018 with a number of massive tasks in Q1 and good aftermarket bookings in each Q1 and Q2, which retains up largely on observe for our beforehand said targets for the 12 months.
Whereas our B&W SPIG enterprise had a difficult quarter, it is persevering with its restoration this 12 months, as we now have labored to refocus this enterprise on corvette know-how within the EMEA area, and aftermarket development. With this alteration in technique and a extra selective strategy to the tasks we pursue, SPIG has a backlog of stable tasks. Mixture of latest tasks with improved charms and economics and the numerous restructuring actions which might be at the moment underway are anticipated to drive improved efficiency in 2019.
With that, I am going to now flip the decision over to Joel to supply extra element on our monetary outcomes.
Our second quarter consolidated revenues had been $291 million, down $14.9 million or 5% in comparison with the prior 12 months, primarily on account of decrease income within the energy section, which was usually consistent with our expectations. For the quarter, we reported a GAAP working loss from persevering with operations of $137.four million, primarily because of the improve in estimated prices to finish the renewable power contracts in Europe and goodwill impairment prices associated to our SPIG enterprise.
Adjusted EBITDA for the second quarter which excludes the goodwill impairment of our SPIG enterprise, the loss on extinguishment of our second-lien mortgage was a $96.2 million loss, primarily because of the lack of a renewable section and or unfavorable forex influence on the Firm’s intercompany loans, primarily associated to renewable section.
Curiosity expense within the quarter was $11.eight million in comparison with $6.2 million final 12 months, reflecting the next degree of borrowings on our revolving credit score amenities and the curiosity related to the second lien mortgage into early Might of this 12 months.
I might additionally wish to level on the market are a number of main noncash gadgets which might be affecting the GAAP outcomes throughout the quarter together with the aforementioned $37.5 million goodwill impairment for SPIG, a $49.2 million loss on the extinguishment of debt, a $20.2 million international forex loss associated to the intercompany loans, and a $72.three million impairment cost associated to the MEGTEC and Common sale that’s included within the discontinued operations.
Turning to our section outcomes. Within the energy section, income was $197.eight million, down $16 million or 7% in comparison with the prior 12 months. This was due primarily to the anticipated decrease income on retrofit service contracts consequently with fewer tasks related to the chilly combustion residual rules within the U.S. which profit our enterprise in 2017, in addition to decrease gross sales in industrial steam technology methods. Moreover, year-over-year comparisons in energy are adversely impacted by our sale of emissions monitoring enterprise, KVB-Enertec.
Energy’s gross margin was 15.2%, down from 20.5% final 12 months on account of a rise in estimated guarantee prices on sure tasks within the present interval, favorable contract close-outs and discount of worker profit bills, which benefited final 12 months’s margin efficiency. Nonetheless, we proceed to anticipate energy gross margin of roughly 20% in 2018. Energy EBITDA was eight.6%, in comparison with 12.6% final 12 months because the gadgets beforehand talked about had been mitigated by ongoing value administration actions in that enterprise.
Within the renewable section, income was $55 million within the second quarter. Adjusted EBITDA within the section was a lack of $78.6 million, primarily on account of $57 million of extra estimated prices to the renewable power contracts in Europe. The most important portion of the prices associated to higher than anticipated prices to restart work on the website with the beforehand introduced metal beam failure and the rest of the elevated prices relate to will increase anticipated guarantee expense and different commissioning prices with the opposite tasks.
Additionally booked throughout the quarter, we established a reserve for a $15 million insurance coverage receivable e book within the third quarter of 2016. The insurance coverage supplier has dispute the protection on the declare. So, we imagine the dispute is with out advantage and intend to aggressively pursue full restoration underneath the coverage and have filed for arbitration. As Leslie talked about, we’re additionally working with our clients to hunt reduction from losses and are pursuing potential claims the place accessible from different events.
Income in our industrial section, which now consists primarily of our SPIG enterprise, was $46 million, basically flat in comparison with final 12 months as a rise in new construct methods was offset by decline in aftermarket providers. Adjusted EBITDA for this section was a $6.2 million loss on account of will increase in estimated prices to finish new construct cooling system tasks and authorized bills associated to a legacy litigation matter. Due to the continuing losses within the SPIG enterprise and the influence on its forecast, we impaired the remaining goodwill associated to the enterprise, leading to a $37.5 million cost within the quarter.
We’ve beforehand introduced that we signed an settlement with Dürr AG to promote our MEGTEC and Common companies for $130 million topic to changes. The transaction is at the moment present process regulatory opinions, and we anticipate will shut within the coming weeks. Moreover, as indicated our first quarter outcomes, we bought our funding in TBWES, our Indian JV for $15.5 million, which adopted the sale of our Chinese language three way partnership earlier within the 12 months. Promoting our curiosity within the Asian joint ventures is in keeping with our technique to shift B&W extra in direction of aftermarket and retrofit alternatives within the coal fired energy market and away from massive worldwide new construct alternatives in addition to monetize non-core belongings.
Turning to our money circulate, stability sheet and liquidity. Free money circulate within the quarter was a use of $67 million, primarily on account of spending associated to exercise working towards the completion of the renewable new construct tasks. We ended the quarter with $28.5 million money and equivalents associated to our persevering with operations internet of restricted money.
Whole balances underneath our U.S. and worldwide revolving credit score amenities at June 30 had been $200 million. We anticipate to make use of the online proceeds from the gross sales of MEGTEC and Common and the West Palm enterprise to cut back these balances.
As Leslie talked about — additionally talked about, at present, we amended our first-lien revolving credit score facility to supply incremental liquidity to the Firm and reset our monetary covenants. Just a few key parts of the modification embody a dedication for a brand new Final Out mortgage that can outcome within the Firm receiving $30 million of internet money proceeds, a discount within the minimal liquidity covenant that successfully gives the corporate with entry of as much as $35 million of incremental liquidity relative to the prior phrases of our credit score facility and a requirement that the Firm should obtain sure concessions from our renewable misplaced contract clients by September 30th that can generate not less than $25 million of incremental advantages to the Firm. it additionally consists of the availability that enables the Firm to retain $25 million from the West Palm Seaside sale proceeds. The supplier of the dedication is Classic Capital they usually knowledgeable the Firm that topic to the consent of the agent financial institution, they intend to syndicate all or a portion of the dedication, which can proceed to be backstopped B. Riley FBR, Inc.
Lastly, primarily based on a variety of lately introduced asset divestitures, strategic actions and the general strategic evaluate of the enterprise, the Firm’s earlier steering is not related and the Firm’s withdrawing its beforehand said 2018 monetary steering.
I’ll now flip the decision again to Leslie.
We have taken a number of actions in the previous few months to place B&W for the longer term. We have recognized asset gross sales of roughly $190 million, value slicing actions with the goal of $54 million, and are working with our Chief Implementation Officer to finish the strategic evaluate of our whole Firm that when absolutely applied is predicted to streamline our enterprise and enhance our profitability and money circulate for the long run.
Within the close to time period, we’re targeted on executing are work in our backlog, persevering with to serve our clients and core energy and industrial markets with top quality engineered gear and providers, and driving the renewable mission to completion. Whereas it was a difficult quarter, we made progress on the renewable tasks, remained targeted on delivering for our clients and continued to drive value management efforts to enhance our backside line. We anticipate to see enhancements subsequent 12 months, led by our core energy enterprise that is concentrating on EBITDA technology within the vary of $100 million in 2019. And we’ll proceed to work to strengthen our enterprise throughout the board.
As I shut out our ready remarks at present, I additionally should notice that that is Chase Jacobson’s final name with us. On behalf of the management crew, I might wish to thank Chase for his glorious work to assist enhance our communications and assist of our traders throughout his time with B&W. We admire and admire his professionalism and dedication.
With that, I am going to flip the decision again over to Tim, who will help us in taking your questions.
Thanks. [Operator Instructions] Your first query comes from the road of Bob Labick with CJS Securities. Your line is open.
Hello. Good afternoon. It is Pete Lukas for Bob. In your ready remarks, you talked about 2019 aim for energy of $100 million adjusted EBITDA. Simply questioning how a lot of that will be associated to pension contribution.
Roughly $24 million.
Nice. Thanks. After which, sticking with energy, is it nonetheless the expectation to fold SPIG into energy, and are their financial savings that may come from that?
So, that’s actually one of many choices that we’re taking a look at as a part of our general strategic evaluate that we’ll full right here within the subsequent couple of months. However energy is unquestionably a great match for SPIG with the nice overlap in clients and the know-how blends in properly.
After which, sticking with SPIG. Any replace on operations so far as timing to get that again to mid-teens gross margins?
Sure. So, we’re nonetheless working down the backlog, it’s bother tasks that had been in that. And we actually anticipate to see improved outcomes latter half of this 12 months, trending into subsequent 12 months, having a a lot stronger efficiency.
Nice. Thanks. And only a couple fast ones on renewables, so far as — you’ve laid out the timing of ending up the tasks there. However any anticipate — sorry, expectations on money burn on the remaining tasks?
Bob, as we mentioned earlier we’re actually able now the place we’re not going to be offering that sort of steering on a forward-looking foundation.
Thanks. [Operator Instructions] And there are not any additional questions presently. I’d now like to show the decision over to Chase Jacobson for closing remarks.
Thanks, Tim. And thanks, all people, for becoming a member of the decision at present. That concludes the convention name. A replay can be accessible for a restricted time on our web site later at present, and I look ahead to following up with lots of you within the coming weeks. Thanks.
This concludes at present’s convention name. You might now disconnect.