Babcock & Wilcox Enterprises Inc (BW) 2021 Q1 法說會逐字稿

Good day, and thank you for standing by. Welcome to the Babcock & Wilcox Q1 2021 Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions)

I would now like to hand the conference over to your speaker today, Megan Wilson, Vice President of Investor Relations. Please go ahead.

Thank you, Cindy, and good morning, everyone. Welcome to Babcock & Wilcox Enterprises First Quarter 2021 Earnings Conference Call. I'm Megan Wilson, Vice President of Investor Relations at B&W. Joining me this morning are Kenny Young, B&W's Chairman and Chief Executive Officer; and Lou Salamone, Chief Financial Officer, to discuss our first 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 morning 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 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 first quarter earnings release published this morning and in our company overview presentation filed on Form 8-K and posted on our Investor Relations section of our website at babcock.com.

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

Thank you, Megan. Good morning, everyone, and thanks for joining our call. Our results for the first quarter of 2021 really reflect the ongoing drive, commitment and dedication by our employees, the strength of this management team and our turnaround efforts, including cost reductions and growth strategies. All segments generated positive adjusted EBITDA, and we ended the first quarter well despite continued adverse effects of COVID across each of the segments. With our strategic growth initiatives over the last year, which included launching new segments, expanding our sales and service presence internationally, implementing additional cost saving and overhead reduction initiatives, significantly reducing our secured debt and our continued focus on smaller projects, we have positioned this company to successfully leverage the global demands while preserving cost structure flexibility.

Notably, we booked $645 million of new work in 2020 and continue this momentum with $170 million in bookings in the first quarter of 2021. We ended the first quarter strong with $535 million in backlog. And importantly, keep in mind that generally speaking, our backlog does not include shorter lead time parts and services. As we've previously stated, we're reiterating our target of $70 million to $80 million of adjusted EBITDA in 2021 based on our current visibility. Our first quarter performance puts us in a strong position to achieve our EBITDA objectives with consolidated adjusted EBITDA of $8.5 million, which is ahead of our internal plan and still takes into account the seasonal impacts of cold weather and customers' reduced maintenance outages that generally impact first quarter performance.

Our normal cyclical performance typically shows increasing profitability from Q1 to Q4 each year. Our strategic actions over the last 2 years and improved performance has provided a solid foundation for our growth strategy. We are seeing attractive targets for investments or acquisition opportunities both in emerging technology and mature products and services, including small add-ons or larger transformative opportunities. We are focused on opportunities that generate strong cash flow, leverage the strength of our proven management team to improve margins and generate synergies or that expand or complement our clean energy technology portfolio, all of which drive shareholder value.

As we announced last year, we have aligned our market-facing segments and financial reporting under 3 new segments: B&W Renewable, B&W Environmental and B&W Thermal, which directly reflect our core markets, technology and strategic pursuits. For several years, B&W has anticipated the change in global energy infrastructure needs and requirements for clean energy, which we believe will include significant steps forward in the application of carbon capture technology.

We have been a leader in decarbonization research and development for decades and hold more than 90 active patents for carbon capture technologies. Our proven decarbonization solutions are either currently in use or ready for demonstration and commercialization to support utilities, waste treatment facilities and a range of other industries, including steel, cement, oil and gas, food manufacturing, pulp and paper as they work to decarbonize their environmental footprint.

We are developing a brand-new platform for our suite of cutting-edge decarbonization technologies and services. This suite puts us in a leading-edge technology position on a global basis and includes: our hydrogen-fired package boiler offering, which has been in operation for several years as well as coal-fired to hydrogen-fired boiler conversions; our regenerable solvent absorption technology, also known as RSAT, which is an advanced fully regenerable solvent to capture carbon dioxide emissions from post-combustion flue gas streams for utilization of storage backed by 20 years of research; our oxy combustion technology, which isolates a concentrated stream of carbon dioxide for utilization or storage. This technology was successfully demonstrated at a 30-megawatt thermal scale, one of the largest successful oxy combustion demonstrations completed worldwide and is ready for large-scale commercialization; and our chemical looping carbon capture and hydrogen production technology, a breakthrough technology with exceptionally versatile oxide in terms of application, cost and abundance, which has been successfully demonstrated to isolate carbon dioxide for utilization or storage while simultaneously producing hydrogen.

This technology, which is economically scalable for large and small installations can use a wide variety of feedstocks or fuels, was jointly developed by B&W and a major university in the U.S. and is ready for large-scale demonstration. In addition to this suite of technologies, we continue to see new opportunities being developed within the United States and internationally for organic and inorganic growth of our renewable and environmental technologies, including hydrogen production, carbon capture and waste-to-energy technologies with the potential for B&W to drive a worldwide industrial transformation to green and environmental -- to a green environmental future.

To further accelerate our growth strategy, we are forming an advisory council made up of experienced global leaders with a wealth of knowledge regarding the industries we serve, emerging technologies, regulatory policy and geopolitical drivers affecting them. The advisory board will work with the B&W leadership team to assess market trends, identify innovative opportunities and acquisition targets and develop strategies related to new markets and technologies.

In addition to opportunities within emerging technology markets, we are also seeing acquisition opportunities within the thermal services sector with the potential to achieve immediate synergies and higher margins, leveraging the strength of our experienced management team. Our recent deleveraging and capital-raising events, including our preferred stock offering that closed on May 7, 2021 have positioned us well to leverage these types of opportunities as they arise to support our growth strategies and drive shareholder value.

I'll turn the call over to Lou now to discuss some of the key points of our financial performance in the first quarter of 2021. Lou?

Thanks, Kenny. Our first quarter consolidated revenues were $168.2 million. That's a 13% improvement compared to the first quarter of 2020. This is primarily due to a higher level of construction activity in the 2021 quarter. Revenues in all segments were adversely impacted by COVID-19 as customers still delayed projects and travel restrictions, which limited the ability of our company's workforce to be at job sites.

Our GAAP operating loss in the first quarter of 2021 improved to an operating loss of $6.5 million, which is inclusive of restructuring and settlement costs and advisory fees of $4.3 million. This is compared to an operating loss of $10.3 million in the first quarter of 2020.

Adjusted EBITDA was a positive $8.5 million compared to $1 million in the first quarter of 2020. The improvement was primarily due to higher construction volume, improved product -- project execution and further positive impacts of the benefits of our overhead and G&A reductions as well as other cost savings and restructuring initiatives.

Turning to our cash flow, balance sheet and liquidity. Cash flow from operations in the first quarter of 2021 was a use of $54 million, primarily as a result of the full repayment of our revolver using the proceeds of the equity and debt offerings, which I'll discuss more fully.

As previously disclosed on February 12, we successfully closed the public common stock and senior notes offering. The offering included 29.5 million shares of common stock sold at a price of $5.85 per share for gross proceeds of approximately $173 million. We also closed the senior notes offering of $125 million at an interest rate of 8.125%, which is due in 2026.

In addition to the public offerings, B. Riley Financial exchanged $35 million of its existing last-out term loan for $35 million of the senior notes in a concurrent private offering. The interest rate on the remaining last-out term loan balance of $73 million was reduced to 6.625% as compared to its prior rate of 12%. The 2 offerings resulted in net proceeds of approximately $283 million after deducting underwriting discounts and commissions, but before expenses.

As previously mentioned on February 16, 2021, we used a portion of the proceeds from the offerings to repay $167.1 million toward our outstanding revolving credit facility, reducing the outstanding borrowing balance to $0. Additionally, on March 4, 2021, we amended our credit agreement to, among other things, reduce the revolving borrowing availability to $0 and the letter of credit availability to $130 million.

On March 4, 2021, we also paid $21.8 million of accrued and deferred bank fees and $75 million towards our existing Tranche A last-out term loan. We ended the first quarter of 2021 with total gross debt of $233.3 million and unrestricted cash and cash equivalents of $53.8 million. On March 31, 2021, we entered into an at-the-market sales agreement with B. Riley Securities, Inc. in which we may sell up to an aggregate principal amount of $150 million of 8.125% senior notes due 2026 to or through B. Riley Securities. As of May 10, 2021, we received $10.7 million of net cash proceeds after commissions and fees through this ATM arrangement.

Also as previously disclosed, on May 7, 2021, we closed out an underwritten public -- registered public offering of 4 million shares of 7.75% Series A Cumulative Perpetual Preferred Stock at an offering price of $25 per share. The offering resulted in net proceeds of approximately $95.7 million after deducting underwriting discounts and commissions, but before expenses. The underwriters also have a 30-day option to purchase up to an additional 600,000 shares of the preferred stock in connection with the offering.

Taking into account the effect of the ATM net proceeds as of May 10 and the net proceeds from the preferred stock offering closed on May 7, pro forma total gross debt and unrestricted cash at March 31, 2021, would be $243.9 million and $160.2 million, respectively, which reduces our net leverage to 1.6x LTM adjusted EBITDA on a pro forma basis. This is a marked improvement compared to our 6.4x net leverage as of December 31, 2020.

Combined with our strong cost-cutting initiatives, this creates a solid foundation for both organic and inorganic growth. Net interest expense in the quarter was $14.1 million compared to $22.1 million in the prior year quarter, with the decrease primarily driven by the reduction of our total debt, the reduction of the rate on the last-out term loans and the rates secured on our senior notes issued during the public common stock and senior notes offering in February of this year.

Looking forward, we expect our interest expense to be further reduced due to the benefit of the full quarter of reduced debt levels and rates as a result of the February offering. In addition, as previously disclosed, based on the performance of our domestic qualified pension plan and as a result of the passage of the U.S. American Rescue Plan Act, the minimum required funding contributions for the plan through 2026 have been reduced by $133 million compared to our previous expectations of $142 million of minimum required contributions for the period from 2021 to 2026. The current total minimum required funding contribution for this period is approximately $9 million, of which $5.5 million was paid in the first quarter of 2021, with the remainder expected to be paid in 2022.

It's important to note that these numbers are subject to change with the performance of the pension investments, but the effects of this improved pension performance mark a significant reduction in cash expenditures related to the pension, which has been a key focus of our strategic objectives.

Turning to our cost savings initiatives. In addition to the $120 million (sic) [$127 million] of cost savings initiatives previously disclosed, we have also implemented $6 million of additional cost savings in the first quarter of 2021 for a total of $133 million. We further identified an incremental $8.4 million of cost savings actions that we expect to implement during the remainder of 2021. These initiatives reflect the strength of our management team and our commitment to improving our EBITDA margins, which we are targeting to reach 10% to 12% over the next few years.

We continue to target adjusted EBITDA of the $70 million to $80 million range for 2021. This is based on our current assumptions about the impacts of COVID-19 and is bolstered by significantly improved bookings in the second half of 2020, combined with our cost reductions. Each of our segments generated positive adjusted EBITDA in the first quarter of 2021, with the consolidated adjusted EBITDA of $8.5 million in the quarter. We achieved these results despite the adverse effect of COVID-19 on all of our business segments. We're beginning to see some of the previously deferred projects resuming as is evidenced by the higher level of construction activity in the first quarter of 2021.

As Kenny noted, our normal cyclical performance typically displays increased profitability from Q1 through Q4 of each year. This is due to the seasonal impacts of cold weather and customers' reduced maintenance outages in the first quarter. Given this, we believe our first quarter results put us in a strong position to achieve our full year adjusted EBITDA targets. The bottom line is the entire Babcock Wilcox team is focused on winning profitable projects, projects execution and controlling costs to drive our financial performance and significantly improve cash flows, which will deliver shareholder returns.

I'll now turn the call back over to Kenny.

Lou, thanks. Well in closing, our ongoing turnaround efforts and strategic actions, including launching new segments, expanding internationally, implementing additional cost-saving initiatives and significantly reducing our secured debt have provided a strong foundation for the continued execution of our growth strategy. We ended the first quarter of 2021 well and ahead of our internal plan, giving us further confidence in our ability to achieve our adjusted EBITDA targets.

Our strengthened balance sheet puts us in a favorable position to compete globally on mature and emerging technologies through both organic and inorganic opportunities. We have leading-edge decarbonization technologies and are seeing stronger opportunities emerging across our Renewable and Environmental segments. And looking forward, our focus is creating stronger shareholder returns as we continue executing our long-term plans to profitably grow our Renewable, Environmental and Thermal segments.

With that, I'll turn the call back over to Cindy, who can assist for a few questions. Thanks.

(Operator Instructions) Your first question comes from Rob Brown with Lake Street Capital.

My first question is really on the pipeline of activity in, I guess, particularly Renewables/Environmental. How is that pipeline developing for the year? And have you seen that start to open up as the COVID restrictions lift? And I guess how do the projects sort of flow for the next sort of 12 months?

Yes. We are seeing -- so as we often talk about, two things: one, our activities on proposals and other presale activities have increased significantly over the past several months and continues to move in a very positive direction, which means those will follow on into proposals, those will follow on into bookings at a later date. But we are seeing now that COVID is becoming either a little bit more neutralized or is -- we're seeing a shift back towards normalization. We're clearly not there yet, but we do see a number of projects that we had been working on last year emerging again and starting to come back up to the levels of proposal and legal activities and negotiations and the like.

So we are seeing some positive movements globally on a lot of projects that we were working on previously that were delayed due to COVID that are now emerging. And those will be projects we look forward to booking later this year or into next year. As well as we are -- putting that aside, we are seeing, I would say, renewed efforts on in the U.S. now as well as internationally on interest in developing new waste-to-energy or renewable energy technologies. And those range from biodiesel-type facilities to waste-to-energy-type facilities for -- or to steam generation facilities, but we're seeing a level of increase in interest in developing further projects around the world.

And on top of that, maybe just to add, we are also seeing interest in the decarbonization aspect even of existing facilities and plants, both in the renewable and in thermal. But adding some sort of decarbonization technology that would capture the carbon from those facilities, we're starting to see interest there as well. And we're in engineering discussions with several of our customers around the processes and procedures and technologies required to be able to do that.

So we have seen an increased interest in -- globally in these areas, some of that because of COVID now lifting or some of the restrictions on COVID starting to lift. We're also, I think, seeing some of that demand come from just renewed interest in renewable energies and obviously, carbon capture technologies from an environmental standpoint.

Okay. And then you talked on the inorganic growth opportunities and you named some verticals, but could you give us a sense of sort of the verticals that you see with the most potential there and how that could impact the business?

Yes. The best way for me to describe that as we mentioned in the presentation here this morning is we're looking at opportunities that both have maybe on smaller-sized companies that have some very unique technologies to complement some of our core capabilities, whether that be in Renewable segment around the creation of different biofuels or syngases, which we think is interesting out there and seeing more and more of or technologies that, from a carbon capture perspective, that can complement technologies that we've created in that particular area that may be of interest that we provide some unique capabilities to help drive a pure stream of CO2 from a sequestration standpoint and so on and so forth.

So we were looking at a number of technology. Some of those are smaller scale that we believe we can scale up in the marketplace. At the same time, we are looking to further some of the services and obviously, companies that may be a little bit more mature and sizable but that can broaden either internationally or globally as well as in the U.S. parts and services, and they are higher-margin, cash flow-driven type capabilities and that can leverage our distribution and the management team that we put in place.

So we're excited about some of those that can bolster revenues and top line and create cash flows and have immediate synergies and accretive to the bottom line as well as some of the smaller ones that are unique technologies that are in the leading edge, but we see a long-term capability to scale those and bring those to the international markets as well as the U.S.

Your next question comes from Zane Karimi with D.A. Davidson.

So first off here, you kind of commented on it earlier, but regarding the growth you're seeing in backlog, that segments or markets in particular, are you seeing the most upside opportunities from here in? And I know you don't usually include services and parts that now you should typically capture in your backlog. But could you provide an update around those markets in particular as well?

Yes, sure. Well, let me start with the latter, if I can, and then we can go to the former. But our parts and services business, which we often talk about publicly is a high-margin business for us. It's usually a 30% to 35% gross margin platform for us during -- obviously, during COVID, because a lot of the plants, whether they were industrial utility, a lot of those limited the amount of enhancements, maintenance outages and so on and so forth during that particular period. But we have seen a return starting a little bit late in the fall last year.

But as we got into Q1, we've seen a return of the parts business start to come back to -- towards normal levels, if you will, which is very much a positive. There was a little bit of delay on some parts in the early part of Q1, with some of the heavy weather outages that occurred where a lot of the plants had to obviously provide electricity and backfill for some of the Texas outages. So a lot of the utility customers elected to hold off just a little bit longer because of the need to have those plants running on that, but we've seen the pickup since returning closer to our normal levels.

The good news for us, and we put this out in press releases as well, too, is we talked about expanding our presence internationally in the Asia Pacific region or the Mid East, furthering in Europe and other aspects is we're starting to see stronger and stronger parts revenues coming in from those international operations as well that augment overall our revenues in the parts and services business. So we have a very, very strong management team that runs that organization. And as we mentioned, from a potential M&A standpoint, we're always on the lookout for companies or products or solutions that we think can complement our distribution infrastructure and that we can leverage to broaden and further those revenues as they're typically very strong margins and strong cash flows. It's a 30-day process typically or less on purchase order cash on those. So it's a strong area for us to make sure that we keep a focus on.

On the -- as far as the backlog goes, again, as I mentioned, we're -- what you see really around the world is this trend towards wanting to move into more renewable-type fuels and renewable segments. And these -- as we talk about a lot, this is -- the whole premise of this is looking at how the world responds to the greenhouse gas aspects, and a lot of that is derived from the fact that methane from waste or methane from landfills is a huge issue not only in the U.S. but also internationally. Europe took a fairly strong position a few years back to set regulatory policy to basically eliminate most, if not all, landfill usage.

And so there's been a drive as a result of trying to curb the methane coming from landfills. And just to reiterate, and we talked about this, but I think it's a very important point that methane from landfills is 80x worse on the greenhouse gas effect than CO2 is. So if we're going to, as a world address greenhouse gases and not address methane from landfills, we've completely missed the mark. We're not even playing in the game. So there's been a big drive on that. We're starting to see in the U.S. more and more interest in looking at different ways to create different types of fuels, what are different types of outputs from waste, whether that be waste-to-energy or it could be waste to biofuels or waste of various gases as well.

Some of that could be in biomass, some of that could be elsewhere. But we're starting to see those opportunities, and developers are now looking more into the U.S. to be able to invest in this market as it relates to creating needs, different types of energy production. So we're seeing that lift here in the U.S. now on opportunities. And those are -- those developed -- they're in early development phases. So those are years out from actually being implemented, but we're seeing that as well starting to occur.

Internationally, as I said, Europe and the U.K. are very strong. We continue to see our backlog -- our pipeline grow in those particular markets as well as in Southeast Asia. If you look at Indonesia, Australia, even other parts of that region, China included, Japan, Korea, Vietnam are all looking more and more at waste-to-energy type technologies to fill the void on baseload generation from a reduction of CO2 aspect as well as reducing the methane coming from landfills, which has a much bigger impact on the environment.

So we're seeing a lot of activities in all of those areas. And again, it leverages the fact that we -- that built up a pretty solid expansion in those particular areas. And so we're seeing a lot of those opportunities come.

Mid East is the same. Mid East, we're seeing a large increase in opportunities there. There's -- this is all public out there, you can find it. But UAE obviously has eyes to build one of the largest waste-to-energy facilities in the world. Obviously, in South -- they're -- the largest one right now is in Southeast Asia on that front. But you're starting to see that kind of thought process on waste-to-energy. Biofuels doesn't scale that big, but we see an increase in winning biofuels from waste, which is a smaller scale application, but still equally as important. So we're looking at obviously all those areas, but we are starting to see a lot of opportunities grow worldwide as well as the U.S.

That's helpful for sure. And then a little bit talking about COVID now and the implications that it's been -- has for you guys. When you think of the COVID delays and disruptions, have you or do you quantify what you believe the impact had been so far? And are any of these segments more or less likely to see a rebound faster coming out of COVID?

We haven't calculated specific numbers on the impact of COVID, because it's so wide and so variable and some of it is tangible and some of it is not tangible in its description. And what I mean by that is, for example, some projects, as we talked about, new projects,were delayed. If you go back historically, they were delayed initially because the whole world shut down, right, during COVID, and it was -- people just were putting everything on hold. Everyone was trying to figure out the economy, trying to figure out what was happening. Borders were closed and the like.

So you had -- worldwide, you had projects and other aspects that just were put on hold. As the summer progressed last year and moving into the fall, you started to see some of those like reengage in some of those new projects and bookings. But just to give you an example, something that might take normally 2 weeks or 3 weeks to get a permit through, now it takes 3 months, something that where we or our client or the customer needed to send out various engineers into a country to do various drawings for mechanical drawings or mechanical engineering aspect around the plant or is there a civil partner construction company, whoever that may be needed to go out and do the drawings. It was impossible to get people in cross-borders, even on country to country. Locally, those took weeks to get accomplished.

So all of those processes just added time, and it also extended out, obviously, the timing of those bookings and new projects. We also -- we clearly saw projects that were deferred. So projects that we were currently working on where a customer wanted to delay or defer those, some of those went into a shrink mode where, basically, the customer was saying, "Hey, we're going to continue doing the work, but we're going to do it on smaller groups, smaller numbers of people, so to try to limit the impact of COVID on the site. But they can keep the project moving along."

Others deferred those out. Other customers delayed their maintenance outages from a utility perspective. So we had a myriad of tangible and intangible impacts on COVID. And as we've talked about publicly, coming out of it now or at least we're starting to feel like we're moving towards that direction globally, we're seeing those -- obviously, a lot of the projects return to normal levels. We still have several that are in COVID-type separation where we've got to keep people separated. We've got limited numbers of people that could be on elevators and so on and so forth. So those just add to more time and delays and revenues get delayed a little bit as well throughout those projects.

But you're starting to see things return. You're also seeing the customers plan outages by parts that they would normally do to prepare for those outages both this year and in the fall and then going into next year as well. And then you're starting to see a robust pipeline being built where a lot of our clients or customers now are developing -- are making plans to upgrade or enhance their technology. And with the construct that there is now a mounting environmental pressures worldwide on decarbonization, we're seeing more and more activities as it relates to our customers that are looking at ways to upgrade their technology, looking at that possible replacement of technology and leverage as much as it can some of the decarbonization.

So we're just seeing that now. And some of that is in a post-COVID world, some of that is in a new regulatory world that's happening as we speak as well. So just all those influences are out on our business. But as we said, we've got really good visibility now on the parts business. Obviously, what projects that we're working on and delivering this year from a revenue standpoint. And we -- this management team has done a great job of actually cutting costs and building up cost to -- or not building up but cutting costs to actually leverage and be closer to known revenue so that we can -- we're actually bringing more to the bottom line. So both through the abilities to know what business that we're highly confident that we're going to book and is out there, knowing that we've cut the cost and overhead of the company, all of those things give us confidence and visibility into our projections and where we're going to be.

(Operator Instructions) And your next question comes from Alex Rygiel with B. Riley.

Very good quarter. Congratulations.

Thanks, Alex.

Couple quick questions here. Revenue was ahead in the first quarter. Was any of this pull forward? Or is it all sort of mostly underlying demand and just kind of a return back to normal?

Not pull forward. It's just return back to normal, where we had several projects that I think Lou mentioned in his remarks on -- in construction in the U.S., a few that were performing stronger for us through better project management controls, which helps improve margins. But the revenues and other aspects here were -- none of them were pulled forward or from that standpoint. So better visibility as the parts business begin to pick back up a little bit. As we mentioned as well, too, right after the cold weather impacts of Texas, the parts business started to increase as well. So we just -- we had stronger revenue performance based on increased demand over where we thought we're going to be.

And as you look at your backlog, and you kind of answered this a little bit earlier on, but as you look at just your backlog today, how much confidence do you have in the time line of executing on this backlog and the profit forecast that's embedded in that backlog?

It's a great question, Alex. We have a lot of confidence now in looking at that visibility and the timing of it. There's always plus and minuses as we begin to perform the work related to that backlog that happened out there. We think we're getting better as a company internally, looking at our own forecasting elements and being able to look at each of those projects and how much cost we'll incur and how much of the revenues we'll recognize each month.

And the team does a really good job at outlining that and trying to anticipate any -- anything or activities that may delay us for 2 weeks here or a week there, that could be from -- not our fault, could be a customer's issue, could be a third-party company issue or whatever the case may be. But we try to factor those in into our revenues and forecast as well in our visibility, so that we're looking at it from a more disciplined standpoint and not just a complete -- well, we'll recognize all that revenue in the third quarter without any material facts behind it.

So there's a tremendous amount of scrutiny that goes into those numbers, and there's a lot of people that review each of those projects on a weekly and monthly basis to analyze the forecast and the costs associated with those projects to give us better visibility as well as even on the parts side, which is not in the backlog, but a lot of scrutiny goes into that as well, too, as we're looking at each of the forecast on a quarterly basis and how we're performing on a daily basis on our parts and services aspect.

So there's a lot of work that goes into that to make sure that we've got good visibility into those numbers. There's always going to be pluses and minuses and positive and negatives that occur on the projects. And obviously, the more that we can eliminate or stop the negative aspects and increase the positive, it's a win for everyone. But we manage that pretty tightly so that we've got all of that accounted for as it relates to our internal projections. And then obviously, that flows in how we're going to manage cash flows or our cost side as well. So...

Sure. And then turning over to M&A, you're looking at some really attractive markets here and many others are looking at these as well. Can you comment on seller expectations for valuation? And what your sort of value proposition is to execute on accretive deals here?

Well, I think there's a lot -- there is a lot of opportunities out there. And again, as we talked about, we look at a twofold on that in that we -- when you look at our overall underlying technology we have as a company on our Renewable and Environmental segment, and that goes across the board. So in our Renewable segment, there are obviously additives and other aspects we'd like to add to our overall technology portfolio that we think will make it more attractive for us to participate. We look at going into renewable. When we talk about waste-to-energy means a lot of things, right? It's an easy topic, but there are a lot of technologies below that around it.

We have some of the best DynaGrate technology in the world, and that DynaGrate technology is very efficient in burning and moving trash along the combustion process in order to maximize the steam or heat output from those facilities. There are little pockets of technology. For example, they might pop up that are able to control some of the emissions associated with the combustion of that waste a little more effectively than we have, for example. And we think when we look at technologies, we'll look at ways and areas that we can augment what we have today and make it more robust, lower our cost structure from that standpoint, but that we think could complement long term where we want to go.

As we talk about -- and I'll just focus on it for a second, as we talk about waste-to-energy in landfills, there's going to clearly be a need to consume and burn waste to create energy, no doubt. We've seen that worldwide. We're one of the leaders in that worldwide today and have a very large presence internationally. U.S. has been limited. It's been limited for a number of reasons on the use of waste-to-energy, but we do see that changing now, and we're anxious to help move that along.

But one of the other areas that waste will be used for, obviously, is going to be creating different kind of biofuels. And whether that's biodiesel or ethanol or, in some cases, actually even the creation of hydrogen or utilizing that fuel to -- or ways to create different types of pellet output to create different types of fuels that can be used in the production of hydrogen, all of those areas are of interest to us. Some of that technology we sit around, and some of that technology we're looking at developing internally from an R&D perspective, but there's other companies out there that have some of those unique capabilities that we think we can scale up fairly rapidly in the space.

And so -- and there's several of them out there that are looking to either for investments where we might take a minority position in those or where it might be -- and obviously, through that, we'll want to have some sort of license or market capabilities to bring the product into a revenue stream for us. Others may be something that we take a stronger ownership play in, where we can help further develop those technologies and actually own -- physically own the IP associated with that.

So we're looking at it from a renewable standpoint. We're seeing also in the production of hydrogen. We think hydrogen production longer term is going to be a very strong market as it relates to green and blue hydrogen energy, and we see those opportunities as well. Our -- as we mentioned in our presentation, our own chemical looping technology that we jointly created with Ohio State and Department of Energy is capable of actually producing hydrogen through the burning of say, natural gas, where you can on a small scale, it could be a very small facility or it could be a very large facility, but be able to burn that fuel source, create heat output at the same level as you were previously, at the same time producing hydrogen as a fuel source.

So that double aspect around that capability, we think, is very unique, and we're starting to see a lot of interest in that technology. There are other smaller technologies that can complement some of that. We might look at partnering up with companies that have some unique sequestration capabilities that would be use sources -- uses of the CO2 that we capture. So we think all of those are very strong opportunities.

The other industry that we see interest around is the fact if you look at pet coke on, from an oil and petroleum standpoint, pet coke can be used in the burning in the chemical looping process. And again, with the concept of creating that split stream out there, and that's -- those are going to be smaller scale type of facilities not on a super critical basis, but we think there's some interesting opportunities there as well worldwide as the oil and gas industry is looking to move into a green or blue energy direction, our technology fits very well within that industry.

And so there's always tuck-in aspects that we'd like to add to that technology around it and improve our agent capabilities as we talked about on our RSAT technology. So just giving you some wide variety of things that we will be looking at there. At the same time though, there are larger companies that have services that we think are attractive to us, where we can bring those companies into ours. And again, just reiterating the fact that this management team builds on the fact that we control the overhead and the cost structures of these companies. But by acquiring some of these other companies that may have too high an overhead, but have high margin on services where we can cut the overhead out of those companies and bring those cash flows from those services right to the bottom line, those are attractive as well. And some of those will be in our thermal sector that we're looking at. Some of those are in our renewable sector as well that actually can maintain and provide services long term to some of these plants. And typically, when you talk about the services and parts, those are typically more recurring revenue type of opportunities. And so those are exciting as well as we look at how we can manage those businesses, I think, more effectively and bring that to the bottom line. So I don't know, Alex, if that helps, but that's some of the areas that we're looking at.

This ends our Q&A session. I would now like to turn the conference back to Megan Wilson.

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

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.