Babcock & Wilcox Enterprises Inc (BW) 2021 Q3 法說會逐字稿

Hello, and welcome to the Babcock & Wilcox Enterprises Third Quarter 2021 Earnings Conference Call. My name is Charlie, and I will be coordinating your call today. (Operator Instructions)

I will now hand you over to your host, Megan Wilson, Vice President of Investor Relations to begin. Megan, Please go ahead.

Thank you, Charlie, and good afternoon, everyone. Welcome to Babcock & Wilcox Enterprises Third Quarter 2021 Earnings Conference Call. I'm Megan Wilson, Vice President of Investor Relations at B&W. Joining me this afternoon are Kenny Young, B&W's 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 in our quarterly report on Form 10-Q filed this afternoon 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 statements.

We also provide non-GAAP information regarding certain of our historical and targeted results to supplement the results provided in accordance with GAAP. This information should not be considered superior to or as a substitute for the comparable GAAP measures. A reconciliation of historical non-GAAP measures can be found in our third quarter earnings release published this afternoon and in our company overview presentation filed on Form 8-K this afternoon and posted on the Investor Relations section of our website at babcock.com.

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

Thanks, Megan. Good afternoon, everyone, and thanks for joining our call. We had an extraordinary quarter at Babcock & Wilcox, and our results in the third quarter of 2021 exceeded our expectations, a and combined with our recent and anticipated bookings, reflect the strength and the momentum of our strategy. Despite the continued effects of COVID and global supply chain challenges, we are doing what we said we would do.

We're booking renewable waste-to-energy projects. We're growing our environmental business. We're investing in our ClimateBright decarbonization platform. And we're expanding our clean energy offerings through strategic acquisitions. We achieved another strong quarter of bookings with $194 million of new bookings in the third quarter of 2021, and we received awards for 2 renewable build projects during the third quarter, including a $35 million contract to supply waste energy technologies for a new build facility in Greenland and a $38 million technology award for a new build waste energy facility in East Asia. We're making progress toward booking another 2 or 3 renewable new build projects in the fourth quarter of this year, and we anticipate further announcements in the coming days.

We also expect that the growing concern about and the regulation of methane emissions globally will continue to expand our waste-to-energy pipeline. Our overall pipeline is now more than $6.5 billion of identified project opportunities through 2024, and this does not include parts and services. We also see potential growth in our parts and service business due to the higher demand and usage within our installed base as a direct result of higher natural gas prices.

We continue to be focused on our ongoing global environmental expansion, which helped drive the award of 2 power plant emission control contracts in the Asia Pacific region during the third quarter. And more than 60% of our pipeline is related to renewable and environmental opportunities, showing that we're on target with our long-term strategy.

Looking forward, and based on current expectations, we are targeting at least $70 million of adjusted EBITDA for full year 2021, which represents a significant operational improvement compared to 2020, and we expect to end the year with significantly higher backlog compared to the end of 2020, and know that we set these targets last year based on no further influence by COVID or other external factors beyond our control. But despite more global COVID impacts, including worldwide shipping, transportation and supply chain issues, we continue delivering very robust results.

I am very proud of the way our employees and our management teams have responded and rose to the occasion to drive these strong results despite external global challenges. We are now seeing accelerated bookings following the end of the third quarter with approximately $90 million of bookings in October alone. We anticipate total bookings of $250 million to $300 million in the fourth quarter of 2021, which would result in the highest level of annual bookings since 2017.

We believe our parts and services business will remain strong as many facilities in our global installed base are operating at significantly higher levels, again, due to the high price of natural gas. We are also raising our 2022 adjusted EBITDA target to between $110 million and $120 million as we anticipate the continued momentum of our ongoing growth strategies, our growing pipeline, our strong backlog and accelerated bookings and acquisition strategy.

The launch of our ClimateBright decarbonization platform in May is propelling the development of an exciting pipeline of carbon capture and hydrogen production opportunities as our customers seek solutions to address some of the world's most urgent climate objectives, including carbon dioxide and methane reductions.

B&W has unparalleled experience in Clean Energy Solutions backed by more than 90 active patents for carbon capture alone, and has the expertise and technology to lead the world's next industrial revolution towards a zero carbon future. Interest in our ClimateBright decarbonization technologies is expanding, particularly for our breakthrough BrightLoop technology to produce hydrogen, steam or syngas from a variety of fuels or feedstocks, while isolating CO2 for capture or other industrial purposes. This growing interest has been demonstrated by our recent agreement to jointly develop an innovative biomass to hydrogen green energy project with the Port authority -- or excuse me, Port Anthony Renewables Limited in Australia, utilizing BrightLoop. When completed, this plant is expected to be one of the largest green hydrogen hubs in Southeastern Australia.

To further enhance our BrightLoop offering, we recently signed an exclusive global licensing agreement with the Ohio State Innovation Foundation for a chemical looping process and particle used for decarbonization and the production of hydrogen, steam or syngas, which complements B&W's existing chemical looping technology portfolio. This technology was jointly researched and developed in collaboration with the Ohio State University and its use to produce hydrogen from syngas has successfully been demonstrated at the U.S. National Carbon Capture Center. The joint research by OSU and B&W has proven how fully scalable and adaptable this technology is for both large and small installations, and we are excited about its transformational potential.

We are continuing to actively work on and progress roughly 20 potential ClimateBright projects to determine the best carbon capture solution based on customer-specific needs and anticipate booking additional ClimateBright projects in the coming months. We further expanded our Clean and Renewable Energy business by announcing 2 acquisitions in the third quarter. We closed the acquisition of a controlling stake in a leading commercial solar installation firm now called Fosler Solar Services at the end of September, and we are thrilled to welcome the talented Fosler team to B&W and excited about the substantial opportunities to work together on solar installation and construction services in the U.S.

We are confident that B&W's strong presence in the Energy industry will provide the synergies and scale to further accelerate Fosler's growth, including access to B&W's existing customer relationships and resources to support larger projects. We are seeing early opportunities to combine solar with B&W's long-term energy storage solutions and look forward to continuing our efforts to drive these newer technologies.

We also signed an agreement to acquire VODA A/S in Denmark, a flexible, scalable aftermarket parts and services business serving renewable energy waste, energy and biomass customers. In conjunction with B&W's existing aftermarket service business, VODA will form B&W Renewable Services to create a platform for our expanding renewable service business in Europe. This transaction is targeted to close by the end of the year following the satisfaction of customary closing additions, including regulatory review in Denmark, which is currently ongoing.

We are continuing to explore additional acquisition opportunities in both emerging technologies and mature markets and aggressively pursue opportunities to further increase shareholder value through acquisitions.

I'll now turn the call over to Lou, who will discuss key points of our financial performance in the third quarter of 2021. Lou?

Thanks, Kenny. Our third quarter consolidated revenues were $160 million. This is a 21% improvement compared with the third quarter of 2020. This improvement is primarily due to a higher level of activity in our project business, within our Thermal segment, as well as increased volume and higher overall project activity in our Environmental segment. This was partially offset by the effects of project timing in our Renewables segment due to COVID. Revenues in all segments were adversely impacted by COVID-19 as customers delayed projects and travel restrictions limited the ability of our workforce to be at job sites.

Our GAAP operating income in the third quarter of 2021 was $14.8 million compared to operating income of $14.1 million in the third quarter of 2020. The third quarter of 2020, however, included $26 million from a settlement agreement with an insurer. This increase was primarily due to earlier referenced increases in revenue and an increase in our gross margins. Adjusted EBITDA was $18.7 million compared to $800,000 in the third quarter of 2020. Excluding the nonrecurring insurance loss recovery of $26 million in the third quarter of 2020, as just discussed.

New bookings in the third quarter of 2021 were $194 million. Our backlog at September 30 was $540 million and is inclusive of a $21 million de-booking related to a 2016 construction booking in the Thermal segment. Importantly, keep in mind that generally speaking, our backlog does not include shorter lead time parts and services.

I'll now turn to our cash flow, balance sheet and liquidity. Cash flow from operations in the third quarter of 2021 was a use of cash of $21.8 million. We ended the quarter with total gross debt of $193.1 million and cash, cash equivalents and restricted cash of $115.7 million, which is inclusive of net proceeds under our previously discussed at-the-market sales agreements through September 30, 2021, and after cash paid for the Fosler Construction acquisition. Net leverage at September 30, 2021, was 1.34x to last 12 months adjusted EBITDA.

Net interest expense for the quarter was $8.2 million. This is compared to $12 million in the prior year quarter. The decrease is primarily driven by the reduction of our total debt, the reduction in the interest rate on our last out term loans, and the interest rate secured on our senior notes issued during the public common stock and senior notes offerings in February of this year.

As Kenny stated, based on our current expectations, we're targeting at least $70 million of adjusted EBITDA for the full year 2021. This is despite the adverse effect of COVID-19 on all segments of our business, and we achieved a strong third quarter performance, including the booking of 2 sizable renewable new build projects. We're experiencing accelerated bookings entering the fourth quarter and for the full year 2021, and we're anticipating the highest level of annual bookings since 2017.

We expect to end the year with significantly higher backlog as compared to the end of 2020, and we're confident that our strong performance in the first 3 quarters of this year has positioned us for a robust fourth quarter to achieve our adjusted EBITDA target for the full year of 2021. As a result of our accelerating bookings and strong backlog, and in addition to the other elements of our ongoing growth and acquisition strategies, we're raising our 2022 adjusted EBITDA target from between $95 million and $105 million to between $110 million and $120 million.

I'll now turn this back over to Kenny.

Lou, thanks for that. Well, here's the bottom line. We have accomplished a tremendous amount this year so far. And even more so when considering the continued challenges due to COVID and global supply chain issues we all face. We are excited about how far we have come over the past couple of years. Our clean energy initiatives and our ClimateBright platform, our cost reduction actions, our international expansion and our acquisition strategy, all of these elements are coming together and positioning us for a strong end of 2021 and an even better 2022 and beyond.

Our more than $6.5 billion pipeline through 2024 is propelling our bookings with 2 renewable build opportunities awarded during the third quarter and significant progress on booking 2 or 3 additional renewable new build bookings by the end of the year.

We expect the global growing attention towards methane emissions from waste to continue to drive our waste-to-energy pipeline. And interest in our ClimateBright technologies is accelerating as shown by our recent announcements, in addition to the nearly 20 other potential ClimateBright projects we are actively pursuing. We further expanded our Clean and Renewable Energy business by announcing 2 acquisitions and continue to aggressively pursue additional opportunities in both emerging technologies and mature markets.

Looking forward, we are confident about the accelerated impact of our strategic actions on our financial performance and bookings and remain dedicated to our long-term plans to profitably grow our business around the world in support of clean, sustainable and dependable energy. So with that, I'll now turn the call back over to Charlie who can assist us with taking a few questions.

(Operator Instructions) Our first question comes from Rob Brown of Lake Street Capital Markets.

Good progress in the quarter. Could you give us some more detail on the waste energy projects that you won in terms of what the pipeline is?

Sure. Actually, we announced 2 in the quarter, obviously, the one in Greenland and the other in Southeast Asia. I think what's interesting and fascinating, let me briefly describe the Greenland project. Where it's interesting for us is, it is obviously our core technology for waste-to-energy. In this case, also creating steam production for district heating in that particular area. But the exciting part of that, and it's an area that we press on globally obviously, is it's not only utilizing household waste coming directly from households, but it's also utilizing waste coming from existing landfills in Greenland itself.

So it's further proof the technology is, can be used to reduce methane output from landfills and using waste from a landfill as a fuel source to create energy, obviously, for either electrical purposes or for district heating. So I think that's pretty exciting for us, and it's also core to our technology. Asia is, Southeast Asia is similar on that project.

Actually, it's complementing a couple of other sites that we've been involved in, in that technology, that's some of the largest waste-to-energy facilities in the world in there. And so it's great that we're continuing to participate and add and augment to a couple of other sites in that particular area. It proves I think further the value of our technology overall.

So we're tremendously thrilled about those. The pipeline that we have and the projects that we mentioned that we anticipate yet this year, are in combinations of locations. Our pipeline is global, so we are working on opportunities in North America, in Europe, Middle East, in Asia and other parts of the world. And we anticipate announcing 1 or 2 more yet this year, and those would be very key and important projects for us once they do get announced.

But we're in final throes of some of those negotiations, so I wouldn't go too much into further comments on this call, but we are excited about getting those finalized and obviously announced and moving forward. So positive for us.

That's a great overview. And then maybe on the ClimateBright activity, you mentioned 20 projects. Has that increased lately? And when do you see those projects sort of starting to be awarded?

Yes, I think we're advancing those projects quite a bit. There's even new ones that are coming in, Rob, on those opportunities. We announced obviously the Port Anthony project which will begin soon. And I think you'll see some other announcements, in conjunction possibly with a couple of waste energy or biomass opportunities that we're working on where carbon capture is going to be a part of those solutions.

In itself, I think there's -- we have several that we fully anticipate booking or announcing over the coming months. Whether that's in this year, the next 90 days or early next year, we're working through a lot of variabilities in and around those technologies from that standpoint. But the opportunities are increasing. And I think it's -- to kind of reiterate what we've talked about before, when you look at our BrightLoop technology, in particular today globally, the need utilizing different fuel sources.

And that fuel source could be coal, it could be natural gas, it could be pet coke, it could be waste, it could be food waste, it could be pellet ties, it could be biomass. It could be a number of different syngas and materials that can be utilized within our BrightLoop technology, and not only create energy to drive either electricity or for their industrial processes, but BrightLoop also avails itself to create, at the same time simultaneously, hydrogen and other syngas. So it has a dual-purpose output while simultaneously capturing the CO2 associated with that element.

It's a chemical reaction rather than another type, if you will. And so the combustion aspect technology in BrightLoop is unique in that we're creating that heat energy, capturing the CO2, producing syngas on a simultaneous basis. And there's not an increased overhead lift that the industrial customer or the utility customer would experience. So as a result of that, we're moving forward with that on small commercial projects and anticipate getting those booked and moved forward. And some time, we'll move into larger commercial projects as well, and we're excited about moving that forward.

We think that technology is revolutionary. When you look at the world right now, trying to capture CO2 and obviously fossil fuels is a key part of that. This is a technology that can utilize fossil fuels, but capture the CO2 associated with that. And so we think that is a true gamechanger in conjunction with its ability to use biomass and other renewable forms that are non-fossil fuel as well. So we think we sit in a very nice position from a technology standpoint, and we're actively and aggressively pursuing those opportunities to drive that going forward.

The next question comes from Brent Thielman of D.A. Davidson.

Congrats on all the progress here. Kenny, I guess I just want to come back to all this recent momentum in bookings that you all have been seeing beyond the kind of renewables new build opportunities that you're pursuing. Can you just talk a little bit more where this recent momentum is coming from? And I guess in particular, what's pushed it here in the last month or so?

Yes, great question. I think these projects have been projects that we've been working on for quite some time. I think we've talked over the past year around the fact that a lot of bookings and projects were delayed due to COVID for a variety of reasons over the past couple of years. So a lot of projects that we were involved in and new bookings that we were involved in had a lot of delays due globally to COVID.

I mean those varied from region to region and location to location. I mean, in some cases, it was as simple as delaying contract signing for 3 or 4 weeks because a couple of people involved in those final decisions actually came down with COVID and weren't able to attend required face-to-face sessions. The impacts of that still exist. I mean, they haven't gone away. Obviously, on a global basis, there are still countries that are difficult to get in and so on and so forth. But we always talked about the fact that we knew these projects were out there.

We were excited by the fact that we were obviously in Q2 starting to renew energy around the negotiations and engineering efforts and the design efforts around these projects across the board. So we felt as if they were out there and coming. And the good news I think now is that worldwide people are starting to, at least we are starting to learn how to work better in COVID, and I think things and projects and other aspects have to move forward, especially on Renewables, Environmental and even on Thermal.

All 3 of those sectors for us, these projects have been out there for a while, and we're excited to get them now finally signed and moved forward. We've also -- so I would say the reason it feels like there's renewed energy around these projects is nothing new to us. We knew they were there, it's just a matter of getting them across the goal line, getting them booked and getting them going.

At the same time, though, we have, and I think we've mentioned on a few occasions publicly, that our proposal activity has increased significantly across all 3 segments. So we anticipate that continuing and I think that's reflected in our increasing pipeline that we referred to. And clearly, there's renewed vigor, I think, on a global front to move forward on a number of these projects, both in the Thermal, Environmental and Renewable sectors.

So it's just combinations of things that we've been working on for a while that are starting to accelerate and now move into our backlog. They're a little bit later to get into our backlog than we had originally anticipated as it related to how we were looking and thinking about the year, but we're excited that they're happening now.

And again, as I mentioned in my comments, I think we'll have some further announcements in the coming days. So we're excited to move this forward and obviously we have a number of projects that we look forward to announcing next year as we keep the process growing from a growth strategy overall.

Yes, okay. Question I guess on the Thermal segment in particular. I mean, it still looks like pretty good growth year-on-year, maybe not as strong as you might have expected earlier in the year, but it looks like there's some product mix headwinds that impacted the margins, maybe the overall leverage. Should that unwind as we get into the fourth quarter or into 2022 in terms of that mix headwind?

Yes. The mix was primarily due, again, there's 2 major components in our -- actually, I guess 3. We have the technology and project aspect. We have the construction aspect in the U.S., and then we have the parts and services, which the parts and services, typically as we've always talked about, has higher margins on that business.

This year, what's been I wouldn't say unique, it's just I think it varies each quarter, but this year we had a little bit more wrapping up of some construction projects that drove a little bit more the revenues in the Thermal aspect. Typically, construction has a little bit lower margin on those projects, but that's usually followed later on by more parts and services as we do follow-on on some of the technologies that we did the installation and other aspects for.

I think the other component this year, which is a little bit unique, we had some, a couple of unique variances in the parts and services, especially from our installed base business. One was earlier in the year that we talked about and during Texas "freeze" or impact where a lot of our installed base was actually operating on a full-time basis to provide additional power to supplement the losses that were being incurred through that Texas issue.

What we're seeing this summer, and we think it will continue into the fall, is that those same installs worldwide, our installed base actually is operating way more than our customers had ever planned because of the high price of natural gas. And due to that, we do anticipate that the parts and other aspects would catch up significantly and actually grow. So this year I think our parts is in a strong position in its performance and will contribute what it normally does.

But based on the higher demand of these installed base plants that we provide parts and services for on a global basis, we think that there's good potential that we should see even higher parts and services, which would be higher margins going into next year. So we'll see if that unfolds, but we anticipate that. And the early indications are that it's a pretty good understanding on our part.

Okay. Yes, that's helpful. I guess the last one for me was just the upward revision in the 2022 outlook. Just wondering if there were meaningful sort of incremental contributions from the acquisitions you've done baked into that. Or is a lot of this just sort of related to the accelerated performance of the core business?

Is think it's always a mix. It's primarily from the accelerated aspect of the business, and we think the acquisitions will play a role in that as well too on that. But we're looking at that increase based on a mix of all of those. The parts and services will be better next year we think because of what I talked about. We have the acquisitions that will obviously help out, and we have obviously a lot of renewed optimism in the fact that we're getting these accelerated bookings.

And we see a pathway to get more into next year as well too. So there's always the impact of COVID on this, and we're trying to balance all of that out as we think about those targets. And COVID, more for delays. It just takes more time to get stuff done these days than normal, but it's quickly becoming the norm. But it's a combination of all those elements that drive our optimism to increase the target for next year.

The next question comes from Alex Rygiel of B. Riley.

Kenny and Lou, nice quarter. A couple of quick questions here. With the expectation of $250 million to $300 million of new bookings in the fourth quarter, it would appear that your backlog could end up the year around $650 million, so up maybe as much as 20% year-over-year. I know it's early and you don't forecast backlog growth sort of in the out year, but can you help us to think about the variables that could be notable catalysts to backlog expanding even further in 2022?

Sure. Lou, do you want to take this one? We'll divide and conquer here.

I think as Kenny said earlier, a great deal of it is going to be due to the fact that we did have projects that moved out of 2021 into 2022. So that will increase -- that increases our backlog. And also, a number of other factors, one of which we've greatly enhanced our global salesforce over the past 1.5 years, that's paying off with increased project sales as well as increased sales on parts and services.

The services would be in backlog, where the parts wouldn't. And then primarily, we -- as Kenny indicated, we've got a number of waste-to-energy projects. We're seeing a very large pickup in proposals on waste-to-energy and renewable projects. And then finally, we were expecting a good uptick from the Fosler acquisition.

That's great. And then as it relates to 2 new renewable projects announced in the quarter, can you talk about the cadence of revenue recognition for these?

Yes. I'll cover that, Kenny, if that's okay. The way it works obviously is, you've got the projects generally are between 18 and 24 months that we're doing. So you'll have some revenue recognition early on in those projects. Much of that revenue recognition comes from the materials and setting up the projects as that is a significant part of the cost of the projects.

But I would say it's almost not a bell curve, but in the early going, the first several months, your revenue and EBITDA is going to be lower because of percentage of completion. But as you get the materials in the location, as you get the workforce ramped up, then in the latter stages from about the first quarter of the project until you're almost winding down the project is where your heaviest revenue recognition is.

So order of magnitude, I'd say, fourth month of the project to the 12th to 16th month of the project is where you pick up a significant amount of the revenue.

There are no further questions at this time. So I'll hand the call back over to Megan.

Thank you for joining us. That concludes our conference call. A replay will be available for a limited time on our website later today.

That concludes today's call. Thank you for joining. You may now disconnect your lines.