Babcock & Wilcox Enterprises Inc (BW) 2017 Q1 法說會逐字稿

Good morning, my name is Mariama, and I will be your conference operator today. At this time, I would like to welcome everyone to the Babcock & Wilcox Q1 2017 Earnings Conference Call. (Operator Instructions)

I would now like to turn the call over to Chase Jacobson, Vice President of Investor Relations. You may begin your conference.

Thank you, Mariama, and good morning, everyone. Welcome to Babcock & Wilcox Enterprises' First Quarter 2017 Earnings Conference Call. I'm Chase Jacobson, Vice President of Investor Relations at B&W. Joining me this morning are Jim Ferland, B&W's Chairman and Chief Executive Officer; and Jenny Apker, Senior Vice President and Chief Financial Officer to discuss our first quarter earnings. Many of you have already seen a copy of our press release issued late yesterday. For those of you who have not, it is available at our website at babcock.com.

During this call, certain statements we make will be forward-looking. I want to call your attention to our safe harbor provision for forward-looking statements that can be found at the end of our press release. The safe harbor provision identifies risk factors that may cause actual results to differ materially from the content of our forward-looking statements. Our most recent annual report on Form 10-K and on Form 10-Q for the first quarter are on file with the SEC provides further detail about the risk factors related to our business. Additionally, I want to remind you that except as required by law, B&W undertakes no obligation to update any forward-looking statements to reflect events or circumstances that may arise after the date of this call.

We also provide non-GAAP information regarding certain of our historical results as well as our 2017 outlook 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. We believe that the non-GAAP measures provide meaningful insight into the company's operational performance, and we provide these measures to investors to help facilitate comparisons of operating results with prior periods and to assist in understanding B&W's ongoing operations. A reconciliation of historical non-GAAP measures can be found in our first quarter earnings release issued late yesterday and in our company overview presentation on our website. (Operator Instructions)

With that, I will turn the call over to Jim.

Thanks, Chase. Good morning, everyone. On today's call, we'll provide information on our first quarter results and an update on our strategic priorities and outlook for the remainder of 2017.

Consolidated revenues for the quarter were $391 million, down from $404 million last year as revenue from recent acquisitions helped to offset lower revenue in Power. The timing of work, along with disciplined cost controls throughout the organization, allowed us to report adjusted EPS of $0.04, which was ahead of our original expectations. Importantly, revenue in our Power segment, while lower compared to last year, was in line with our forecast, and because of the proactive restructuring we announced in mid-2016, gross margins for the segment was modestly higher at 21.9%.

In the Renewable segment, we're working to position the business for the future and are making progress toward the completion of our projects currently in our portfolio. On a net basis, project costs across our renewable portfolio were in line with the updated estimated cost-to-complete we provided in the fourth quarter results. In the quarter, we continued to improve our project management leadership and internal review processes across our Renewable business. We are intently focused on execution. With respect to the segment's 2 large non-U. K. projects, construction on the first is essentially complete and the other project is well into commissioning. Both of these projects are expected to be turned over to the respective customers in the second half of 2017. As the projects reach completion, we will continue to transition our resources to the other projects in our portfolio.

Turning to Industrial. MEGTEC had a softer than expected start to the year in terms of both revenue and bookings. That said, we are seeing a much improved marketplace, and we are on track for significantly improved bookings in Q2. As such, we are holding our bottom line expectations for MEGTEC for the year.

Fully in the quarter, we continue to expand our industrial portfolio with acquisition of Universal Acoustic & Emission Technologies, consistent with our longer-term strategy to grow our Industrial segment through acquisitions. Universal provides custom-engineered acoustic emission and filtration solutions to the industrial marketplace. It's a good bolt-on for our B&W MEGTEC business, and we're already seeing revenue synergies with other product lines in our Industrial segment. Integration of Universal is going well, and we remain confident in our ability to recognize cost synergies of $2.5 million to $3 million annually by 2018.

On the same book revenue synergies, we're excited about B&W's SPIG's awards in the quarter and its prospects going forward. As highlighted in our recent press release, SPIG was awarded 3 major contracts in the United States worth over $60 million to design and supply dry cooling systems, which more than doubled its preacquisition U.S. business. Leveraging B&W's brand and strong customer relationships, it's providing the opportunity for SPIG to get its technology in front of key customers, which we believe was critical in these awards. In anticipation of the growth of its U.S. business, SPIG has established a new office in our Barberton, Ohio location to help facilitate seamless execution of the new contracts.

As with SPIG, we are already seeing opportunities for Universal that they would not have been exposed to preacquisition. We would expect to bring some of these new opportunities to closure in the coming quarters. Of note, adding Universal's noise abatement technology to SPIG's cooling equipment has allowed us to further reduce decibel levels. This improvement is proving to be valuable in the marketplace and played a role in SPIG's recent awards. Our ability to leverage the B&W name and scale in both recent and future acquisitions will be a key factor in our long-term growth.

I will now turn the call over to Jenny, who will discuss the segment results and other financial matters in more detail. After which, I'll provide an update on our outlook and strategic priorities.

Thanks, Jim. Turning to our first quarter financial results. Consolidated revenues were $391 million compared to $404 million in the prior year first quarter. The change was due to a decline in our Power segment, mostly offset by growth in Renewable and Industrial driven by the SPIG and Universal acquisitions.

For the quarter, adjusted operating income was $3 million, compared to $23 million in the prior year quarter. This was mainly due to lower volume in the Power segment and lower profitability in Renewable as a result of the previously disclosed changes in the profitability of Renewable segment contracts.

Compared to our prior expectation, the quarter benefited from the timing of work moving into Q1 mostly in Power and good cost control throughout the organization. As a result, adjusted EPS, which excludes intangible amortization and other onetime items, was $0.04 in the quarter, ahead of our original expectations.

Our consolidated bookings for the quarter were $317 million, our highest in the past 4 quarters, resulting in a total backlog of $2.0 billion at the end of Q1, essentially flat compared to year-end 2016. It is important to point out that as our Industrial segment and aftermarket parts and services businesses grow as a percentage of total company revenue, a greater share of our annual revenue will come from a larger number of smaller-sized and shorter-cycle contracts as well as from additional book-and-build type work. Consequently, we expect to see a change in the relationship between backlog and forward revenue as we continue to transform the company.

Turning to the Power segment. Revenues were $196 million compared to $289 million in the prior year quarter. The decrease was expected and is due to lower volume in new build utility and environmental equipment as well as in retrofit and emissions systems. As a result of the proactive restructuring plan we announced in the second quarter 2016 and good execution, gross margin in the Power segment was 21.9% in the quarter, up slightly compared to first quarter 2016 despite the revenue decline. We continue to anticipate the Power segment will be able to sustain gross margin in the low 20% range in 2017.

Renewable segment revenues were $106 million, up from $84 million in the prior year quarter. As expected, gross profit decreased due to the previously disclosed changes in estimated costs to complete on multiple contracts. As Jim discussed, contract performance was largely in line with our expectations during the quarter, and we continue to expect the segment to generate low double-digit gross margin for the full year 2017.

Industrial segment revenues were $92 million, up 184% year-over-year due to contributions from the SPIG and Universal acquisitions. Gross profit in the segment was $15 million, up from $8 million last year due to higher revenue. Industrial segment gross margin of 16.6% was down from the 23.9% last year, mainly due to the change in revenue mix. As we have said previously, we expect industrial segment gross margin to be roughly 20% in 2017.

Consolidated SG&A was $67 million, reflecting the addition of SPIG and Universal to our portfolio as well as lower SG&A in Power resulting from the proactive restructuring we announced in 2016. Our GAAP effective tax rate was 36.7% in the quarter. On an adjusted basis, we had a modest tax benefit in the quarter. We continue to expect the 2017 full year adjusted effective tax rate to be in the range of 32% to 34%.

Turning to our balance sheet. At the end of the quarter, we had cash and equivalents of $46 million and revolving debt outstanding of $103 million. This compares to $96 million and $24 million at December 31, respectively. As anticipated, during the quarter, we used our revolver to fund the Universal acquisition and together with our non-U. S. cash balance to support the cash needs of our Renewable business. We are maintaining our 2017 non-GAAP EPS guidance of $0.75 to $0.95, which excludes noncash intangible amortization and other onetime items.

Lastly, we want to point out that based on timing of work and backlog, earnings are expected to be weighted more towards the second half than we had originally anticipated, with second quarter earnings likely looking similar to the first quarter.

I'll now turn the call back over to Jim to provide more insight into our segment outlook for 2017 and an update on our strategic priorities.

Thanks, Jenny. As we look to the remainder of 2017, our focus is on execution, capturing targeted project opportunities across the various businesses and positioning B&W for the future. Our bid pipeline is solid at approximately $2.9 billion, essentially flat compared to last quarter, with good prospects in each of our segments.

In Power, we continue to see strength in U.S. service and retrofit opportunities related to coal ash projects, and our aftermarket parts and services business driven by book-and-bill type work has a solid pipeline of opportunities. A good example is a recent $15 million contract we were awarded to replace 4 of the component of a plant we designed and built many years ago. This type of work is relatively short cycle and provides a good base for the Power segment.

Last quarter, we referenced a $100 million international equipment-only contract for which we have begun preliminary engineering under a limited notice to proceed. We expected to book that contract in the first half of 2017, but due to complexities surrounding international government approvals, permitting, and financing, the full award, which we still expect, has now been pushed to the second half of 2017.

In Renewable, our focus in the near-term is on execution. In the medium to long term, we continue to see a strong market for our highly-reliable and flexible waste-to-energy technology. While we pause bidding on renewable contracts in Europe for the first half of the year, our business development team is actively pursuing projects in other regional markets, which we would deliver out of our U.S.-based Power business in Ohio.

In regards to the European renewable market, we're working to finalize new partnership models that will allow us to meet our customers’ expectations while better focusing B&W on our core technology and improving our project-specific risk profile. We continue to expect to reenter this market in the latter half of the year.

In Industrial, we're building on our early revenue synergies successes in the marketplace and looking to further leverage cross-selling and technology opportunities going forward. Externally, we're seeing improved industrial market conditions in line with broader market commentary, as well as continued strength in natural gas power and pipeline markets. We're also seeing the opportunities to enter in new markets. A good example is lithium ion battery production, associated with growth in electric vehicles and energy storage. As these new battery factories are constructed, B&W MEGTEC dual coating and drying solution is well positioned for growth. We expect to be talking more about this opportunity in the coming quarters.

Looking at 2017 and beyond, B&W is well positioned to deliver shareholder value. We've made significant progress in our strategy to diversify our revenue base, taking B&W-wide coal exposure from 55% in 2014 to just over 40% in 2017, while increasing our industrial exposure. The remainder of 2017, we're focused on project execution and on the integration of our recent acquisitions. In the coming months, we look forward to reentering the European renewable marketplace with a strengthened business model. In early 2018, we also expect to reengage our industrial acquisition strategy with our focus remaining on industrial companies with good technology, where we can leverage our strong B&W name and key customer relationships.

With that, I'll now turn the call back over to the operator, who will assist us in taking your questions.

(Operator Instructions) Your first question comes from Tahira Afzal with KeyBanc.

Jim, I guess, the first question I had was really in regards to Power. A bit light on the revenue side, given you're aiming for $1 billion over there. Do you expect the Power side to also be sort of back-end loaded so that we're not too off on the revenue target there?

Yes, so just working through the Power number very quickly. Just under $200 million of revenue in the first quarter. You can see in the Q, about $338 million in backlog we expect to burn off in 2017. So the rest of gap is made up by more traditional book and bill. I'd say $200 million to $225 million is a reasonable number to expect in the last 3 quarters. And then we have a number of projects that we've been selected on and new projects as well coming in the back half of 2017 that we expect to book and for the -- a large portion of that revenue to occur in 2017. Probably the best example of that is the large number of coal ash-related projects that we see in North America in addition to the international new coal project I mentioned that we expect to book in the latter half of the year.

Got it, okay. Jim, that is helpful. And then, just as a follow-up, it's great to see SPIG's getting leverage. You've talked about that in the past. But can you help me get a little comfortable around the lessons learned from how you -- fast you grew the Renewable business, maybe too fast? And as you look to really leverage a lot of these newer businesses, what the lessons learned are?

Absolutely. So that's -- it's clearly has been a point of focus for us. In regard to SPIG, in particular, in the U.S. marketplace, SPIG's center of excellence in the states is based in California. And one of the things we've done, given this new work flow that we see coming in and given the expertise we have in our Ohio Power operation, is we've actually created a second SPIG business unit in Ohio. And we've staffed it primarily with a talented group of project management procurement and engineering folks we've pulled out of Power. So we're trying to -- as you said, we've learned the lessons from the Renewable business, and we are getting ahead of the SPIG business. So we're staffing up, we're bringing some really good people to supplement the talent we already have in California and then we'll continue to leverage the Italian space. So I think we're well prepared to handle this new work inflow and perhaps even some more work we can get, but we're working hard to stay ahead of the opportunity.

Your next question comes from Bob Labick with CJS Securities.

Just, I was hoping you could elaborate a little bit on that Q2 guidance you just mentioned out there. Is there a pronounced change in seasonality that would translate over into 2018 as well? Are there charges in Q2? Are there onetime gains in the second half of this year that has that big growth? I'm trying to figure out how this all fits in and then how we should be modeling on a go-forward basis.

Well, Bob, there are a couple of factors. For starters, some of the improvement in Q1 actually came because the excellent project performance in the Power segment was project performance we expected to conclude in the first half, in the second quarter. But because of good weather, we were able to get to those projects more quickly, and it pulled into Q1. As we've already talked, the revenue is back-half loaded, and a good portion of the profits follow that, the revenue timing. I think more than any kind of seasonal disruption, that's the large reason for the shift from what would be a normal seasonal pattern to what we're seeing this year.

Okay. So just to finish that, 2018 should return to more normal seasonality?

I would expect so. At this point, yes.

Okay, great. And then just my follow-up. Just in terms of cash flow uses we talked about in the Q4 call, what are the, I guess, expectation for uses of cash, for, particularly, from working capital and for the completion of the Renewable projects? And were you able to end the year in terms of cash in that?

Well, our original forecast was to be net users of cash to the tune of about $120 million for the full year. And that forecast, I think, is still right on. You can kind of anticipate whether you hold the cash balance level, and you used all of that delta in the debt balance. Or if we're able to utilize some of our non-U. S. cash, as we have been able to thus far, you might see our debt balance a little lower than you would have forecasted at the beginning of the year, but the cash balance dropped a little bit from the beginning of the year.

(Operator Instructions) Your next question comes from the line of Jamie Cook from Crédit Suisse.

This is Jamie Anderson on for Jamie Cook. I just wanted to dig in a little bit more on the Power revenue question again. So doing that bridge again, it looks like based of, of what you had in Q1 and what you need to secure -- what you have in backlog and what you need to secure in terms of book-and-burn work for the rest of the year is about $466 million. Jim, I know you spoke to about $200 million to $225 million in underpinnings that you guys can count on. But from previous commentary, when you guys would talk about larger awards, it seemed like those needed to happen in Q1 or Q2 to kind of contribute within the year. It seems like now those are shifting out. So I guess, in that remaining delta of about $200 million to $250 million, call it a book-and-burn work that you guys need to secure, how confident do you guys feel in that? And then what do you think the cadence of that is through the year? And then I have a follow-up.

Your numbers make sense to us, I'd say just in the ballpark, $200 million to $225 million on work we've been selected, or we call it new projects flow, for medium-sized or larger projects. Yes, you expect to see that were come in Q2, Q3. These are tending to be shorter-cycle projects. So as they come in, I think we'll be able to bring a little bit more of that work into the current year that we may have been in the past when we were working on larger environmental retrofit-type projects. So your numbers are in line. And Q2 and Q3, we expect that work to show, and most of it to get done in the latter half of the year.

Great. And then as we kind of look into FY '18, given the great execution in Q1 on the Renewable side, how should we think about normalized earnings and free cash flow as these problem projects kind of roll off? Are you guys still thinking about those targets that you laid out for EPS between 120 and 145 plus? Or are we still looking at free cash flow between 75% to 100% of net income? Or has that kind of airgap in bid and proposal activity on the Renewable side and maybe some of the lingering impacts from the problem projects that kind of likely push those targets out maybe another year?

So what I'd say to that is we'd like to see how fast we can get back into the Renewable projects in the second half of the year. The priority for us on that is around creating a new business model that lets us leverage the great technology we have, but, obviously, we need to reduce the risk profile on these projects. We need to focus on what we're good at, and we need to find partners that can work with us, who have expertise that's different from us. And together, I think we can do a nice job of reentering the market. But timing matters on that. So we'll take a look at that, and we'll make sure we update folks over the next couple of quarters on how fast we think we're going to rebuild that renewable backlog. That said, we continue to feel good about both our technology, the feedback from the customers and the market. The market in Europe is surprisingly strong and whereas in the U.K., we thought the market or rates of energy would be slowing down by now, it's actually not. Now we're purposely missing a few months’ worth of that opportunity but it's still going to be there for the next 2 or 3 years, so we feel good about it. It's just a question of timing. In regards to cash flow, yes, I'd expect us to get back on normal track of 75% to 100% conversion. The upside opportunity that might exist in 2018 is how fast we could rebuild that renewable backlog and pick up some advanced bills and play catch up.

There are no further questions at this time. I will turn the call back over to the presenters.

Okay, thank you for joining us. This concludes our conference call. A replay will be available for a limited time on our website later today. I look forward to catching up with many of you in the coming days and weeks.

This concludes today's conference call. You may now disconnect.