BWX Technologies Inc (BWXT) 2014 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Babcock & Wilcox Company first quarter 2014 earnings conference call.

(Operator Instructions)

I would now like to turn the call over to our host, Ms. Jenny Apker, B&W's Vice President, Treasurer, and Investor Relations. Please go ahead.

Thank you, Patrick and good morning everyone. Welcome to the Babcock & Wilcox Company's first quarter 2014 earnings conference call. I'm Jenny Apker, Vice President, Treasurer, and Investor Relations at B&W. Joining me this morning are Jim Ferland, B&W's President and Chief Executive Officer, and Tony Colatrella, Senior Vice President and Chief Financial Officer.

Many of you have already seen a copy of our press release issued last night, as well as our release this morning announcing a pending M&A transaction. For those of you who have not, both are available on First Call and on 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 annual report on form 10-K and quarterly reports on form 10-Q on file with the SEC, provide 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.

Also on today's call, the Company may provide non-GAAP information regarding certain of its historical results to supplement the results provided in accordance with GAAP and it should not be considered superior to or as a substitute for the comparable GAAP measures. B&W believes the non-GAAP measures provide meaningful insight into the Company's operational performance and provides these measures to investors to help facilitate comparisons of operating results with prior periods and to assist them in understanding B&W's ongoing operations.

A reconciliation of these non-GAAP measures can be found in our first-quarter earnings release issued last night and in our Company overview presentation posted on the investor relations website -- investor relations Section of our website at Babcock.com.

Due to the number of participants on today's call, I would ask that you limit yourself to one question and perhaps one follow-up. You are of course welcome to get back in the queue.

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

Thank you Jenny. Good morning everyone.

Before I review the financial results and share with you the updates in activities in our various business segments, I want to discuss our announcement this morning that we have signed a definitive agreement to acquire MEGTEC Holdings Inc. MEGTEC is a leader in environmental solutions for industrial air pollution control and engineered products for energy storage applications.

The acquisition of MEGTEC will complement B&W's utility focused air pollution control technology and service capabilities. And it provides access to a broad industrial customer base, including many Fortune 500 companies, creating a strong environmental services growth platform that will serve the broad scope of global utility and industrial end markets. At a purchase price of $155 million, this transaction should be immediately accretive to earnings.

In MEGTEC we found a strong strategic fit with B&W. It's a well-managed, technology-based Company with a capable and experienced management team. Like B&W, they lead with technology, by providing engineered solutions to a wide range of customers problems and processes in diverse and growing industrial end markets.

MEGTEC designs, manufactures, and installs highly engineered air pollution control equipment and provides advanced material processing technologies for industrial customers worldwide. Among its environmental products and solutions are oxidizers for the abatement of volatile organic compounds, heat recovery systems, solvent recovery systems, distillation and purification systems, and wet ESPs.

MEGTEC's portfolio also includes fully integrated coating lines for the production of batteries used in electric and hybrid vehicles as well as solar films. Like B&W, MEGTEC supports its large customer base with an attractive and recurring global aftermarket services platform. Global trends of ever more stringent environmental regulation targeting industry emissions, will drive demand in MEGTEC's environmental product division, while the coatings business sees growth opportunity in a number of growing renewable energy markets worldwide.

Potential synergies include leveraging B&W's broad portfolio of emissions control technologies into MEGTEC's industrial base. We also expect to leverage PGG's erection and project management capabilities to capture larger project scope than MEGTEC can accomplish on its own today.

We believe B&W's 145 year history, technology platform, industrial reputation, and size will benefit MEGTEC in capturing more work. We have built into our projections modest cost synergies with only minimal cost to achieve.

Based in De Pere Wisconsin, MEGTEC has a global footprint of operations in Europe, Asia, and Australia. And maintains a worldwide service and replacement parts support network. 2013 annual revenue was $176 million with an EBITDA margin over 10%. We expect to close the acquisition by June 30 of this year, pending regulatory approvals.

I'm very pleased to announce this acquisition. It comes about after more than a year of disciplined review of many targets. In MEGTEC we found a well-managed Company that shares a similar set of core competencies and approach to the market, while diversifying our technology portfolio and expanding our customer base to provide growth opportunities in the global market.

We recognize that as important as it is to find the right acquisition, it's essential that we integrate it well. All focus now is on the integration plan. I look forward to keeping you updated on the progress made over the next several months.

Turning back to B&W, for the first quarter, consolidated revenues were $662 million, a decrease of $143 million or 17% compared to the prior year first quarter, primarily due to lower revenue in our power generation segment.

Bookings in the first quarter totaled $1.08 billion, versus $543 million in the first quarter of 2013. This increase is primarily due to the timing of approximately $550 million of nuclear operations contracts, awarded in the first quarter of 2014 that typically are awarded in the fourth quarter, and which were delayed due to events associated with the government shutdown and budget approval.

Adjusted consolidated operating income for the first quarter of 2014, which excludes the impact of restructuring costs, was $56.3 million compared to $68.6 million in the first quarter of 2013. Operating income in our nuclear operations and technical services segment were up on a quarter over quarter basis, while we reported decreases in the power generation and nuclear energy segments.

Net losses related to our mPower development program were about flat compared to last year. Tony will discuss the results of each segment in more detail shortly.

In the first quarter, the Company generated $0.42 in adjusted earnings per share, excluding the impact of restructuring charges. This compares to adjusted earnings per share in the first quarter of 2013 of $0.46.

During the quarter, we repurchased approximately 468,000 shares of common stock at a cost of roughly $16 million. Leaving $481 million of capacity under our current $750 million repurchase authorizations. I'll speak more about this program toward the end of the call.

Beginning with the Nuclear Operations segment, this business posted record first quarter revenues and operating income. Bookings continue to be strong as well. More than $763 million was booked in Q1, making it the highest booking quarter since Q4 of 2011.

Exceptional execution of contracts continues to be the key to success for this segment. With strong performance coming both from the activities related to the manufacture of nuclear components for US government programs, and from the Naval nuclear fuel and down blending activities of its subsidiary, Nuclear Fuel Services.

Moving to PGG, for our first quarter revenue of $312 million produced an operating income of $10.5 million. This is a slow start to the year for PGG relative to 2013. We expect improving performance each quarter over the balance of the year.

For the full year, we continue to expected PGG revenue of approximately $1.5 billion and an approximately 9% operating income margin. But we recognize the challenges that exist in this market and we are actively working to overcome them. Positively, reflecting actions we've already taken to improve performance at PGG, contract gross margins were higher this quarter than in the first quarter last year and total SG& A costs were lower, due primarily to realization of a number of GCI initiatives PGG has completed over the past year. But an additional charge on the biomass project coupled with lower revenue impacted both operating income and operating margins.

Going forward, the implementation of various corporate initiatives and the market developments that will benefit PGG in the coming periods give us reason for modest optimism. Starting with the Supreme Court ruling a couple of weeks ago, the court reinstated CSAPR, overturning a DC circuit ruling in August 2012 that had vacated the environmental regulations intended to improve air quality in states downwind of power plants. While there is a reason for optimism for B&W's environmental business based upon the court's ruling, there is a lot yet to be determined regarding its impact, with respect to both timing and requirements.

For example, the timing is still to be set by the circuit court and the rules have yet to be determined by the EPA. Each client will make different decisions at each plant site based upon their particular strategy, energy portfolio, and investment approach. Our macro view is that any operating coal unit in the US will eventually have environmental control equipment as a part of its equipment train, whether it's a scrubber, an injection system, and SCR, a particulate control system, or some combination of all.

We believe this will occur by 2020. This ruling will help on a customer by customer basis as we move into 2015, but it's difficult to put a specific dollar value on it today. We're also keeping our eye on the coming greenhouse gas regulations for existing coal plants due to be released this summer, as it could impact customer decision-making.

Driving organic growth and expanding our international reach, particularly within the power generation segment, is a top priority. Important to that effort is strengthening our relationship selling capabilities particularly in the global market.

We recently hired Elias Gedeon in as our Chief Business Development Officer. Elias will lead executive level customer and relationship management efforts with our key customers and partners. He most recently served as the head of global sales and marketing for a global competitor to power generation. I know Elias will be an outstanding addition to the B&W team.

Although power generation bookings in the quarter were lower than last year, there are a couple of large international projects which we expect to be awarded and booked over the next 3 months to 4 months. The bid pipeline remained healthy with more than $2.6 billion in projects either already bid or in process, including several waste energy projects in Europe that could be awarded later in the year, and several new domestic environmental proposals that we expect to submit in the coming months.

We announced last quarter that we are undertaking new initiatives to improve the operating margin in PGG by 200 to 300 basis points by the end of 2015. These margin improvement opportunities have been divided into five categories. Global manufacturing consolidation, these efforts are in addition to the manufacturing consolidation included in the GCI program and include our domestic and international manufacturing footprint.

Supply chain optimization. Structurally changing the way we purchase products and services across the Company by consolidating purchasing for all of our businesses. It also includes product design improvements that focus on design simplification to drive purchasing efficiencies and simplify field assembly.

Third, engineering outsourcing. Today most of our engineering is performed in the US. We are implementing alternatives for outsourcing some of the engineering activities currently performed in our US operations to offshore Engineering Centers of Excellence, including our joint venture in India.

Fourth, international efficiency initiatives. Last year's GCI program primarily focused on US operations. A similar focus is being applied to our international operations where we believe there are opportunities to simplify and streamline operations, increase management spans of control, and utilize centralized service centers for administrative functions.

Lastly, additional organizational efficiencies. We continue to scale and variabilize our overhead structure. In total, we expect these initiatives at PGG will generate cost savings in the range of $35 million to $50 million annually by the end of 2015, with estimated cash cost to achieve in a similar range.

Some of these initiatives can be acted upon in the near-term, and should immediately begin to impact our operating margin. Others, particularly those that involve the consolidation of manufacturing facilities, will take into 2015 to complete.

Turning to the technical services group, we now have certainty in regard to Y-12 and Pantex. Following notification from the GAO that our protest of the Y-12/Pantex award process had been denied, we concluded that we would not continue to protest the award of this contract. The M&O transition is underway and should be complete by the end of June. Performance continued to be good at both sites and we continue to meet deliverables during the transition.

We are keenly focused on rebuilding and growing our technical services segment. B&W's core operating strengths in nuclear management, precision manufacturing, and complex project management, together with our position as the only operator of category one nuclear facilities in the United States, makes us a valuable partner for nuclear and other high consequence projects. These strengths provide us with a strong and unique platform from which to secure a new M&O contracts and other related work in the US and internationally.

To better execute this strategy, we recently announced the consolidation of the management of our Technical Services and Nuclear Operations segment under a single leader. Sandy Baker, who has been President and Chief Operating Officer of the Nuclear Operations segment, now has consolidated responsibility for B&W's government operations business.

Restructuring these operations under Sandy, helps us better leverage the synergies that exist between our naval nuclear business and our high consequence government M&O contracts. This reorganization will also provide for greater efficiencies that will result in cost savings to B&W and to our government customers. For financial reporting purposes we will continue to maintain nuclear operations and technical services as separate segments.

Regarding our Nuclear Energy segment. After a rough couple of quarters and in light of the tough market conditions, we were pleased with the performance of the NE group this quarter. Revenue performance was as expected, operating income was positive reflecting the cost reduction actions taken last year.

Positively for the future, bookings were higher than in any of the previous six quarters. That said, we don't expect the NE business to be a significant contributor to earnings in 2014.

Margin improvement programs in Nuclear Energy are targeting a $10 million to $15 million improvement in the bottom line by the end of 2015. We're actively engaged to reduce our manufacturing footprint in Canada and improve our overall efficiency in both the US and Canada. Cash cost to achieve these savings are not expected to exceed $10 million to $15 million.

Finally, an update on mPower. B&W continues to believe in the strength of the mPower technology and the significant role it can play in meeting our country's climate change goals and global energy needs, while supporting US jobs and manufacturing growth. But without additional investors or EPC contracts from customers to provide the financial support necessary to develop and deploy mPower reactors, we must slow our pace of development.

In April we announced that mPower spending will be reduced to an annual run rate not to exceed $15 million beginning July 1, 2014. And that we would be working with the Department of Energy and other stakeholders to confirm the best path forward.

At that time, we also said that we expect these negotiations will take about two months to complete and that the various actions required to restructure the program should be accomplished by the end of the second quarter. We continue to believe that both of these timeline's are appropriate.

I will now turn the call over to Tony to discuss the segment results and other financial matters.

Thanks Jim.

Revenues in the Power Generation segment for the first quarter of 2014 were $312.1 million compared to $461.5 million in the first quarter of 2013, a decrease of 32%. This decline in revenue was driven by a 61% decrease in our new build environmental systems business, reflecting fewer projects underway than a year ago, as the compliance period for MATS is drawing near and uncertainties remain regarding the outcome of other environmental regulations.

Revenues for new steam generation systems were down 20% year-over-year, primarily due to a lower level of activity on a biomass project that is nearing completion. First quarter revenues in the aftermarket services business were down 16% reflecting fewer service projects in the Canadian and US markets, largely we believe due to regulatory uncertainty.

Backlog in Power Generation was $2 billion at the end of the first quarter of 2014 compared to $2.3 billion a year ago, reflecting lower environmental and international boiler projects in the backlog than was the case in the past years quarter. Operating income in the Power Generation segment, including the equity income of our global joint ventures, was $10.5 million in the first quarter of 2014 compared to $33.3 million for the first quarter of 2014. This decline is primarily volume driven, as discussed above and due to charges recognized in the quarter for a biomass project partially offset by improving gross profit margin, which was up, when adjusted for charges on the biomass project, nearly 200 basis point versus Q1 2013.

We also benefited from reductions in SG&A expenses related to our ongoing cost reduction initiatives and lower R&D expenditures. Equity income contributions from the Company's joint ventures increased by $0.3 million to $2.4 million compared to the first quarter of 2014.

During the first quarter we recorded additional, as I mentioned, additional contract losses of $7.6 million related to the biomass project, boiler project in Berlin, New Hampshire. These charges are in addition to $52.5 million of contract losses, net of claims, recorded for this project in prior periods.

Thus far we have been unsuccessful at reaching a negotiated settlement of our claims with our customer and have filed suit to recover a sizable portion of the losses incurred on this project. We believe we have achieved substantial completion of this project and we intend to aggressively pursue recovery on these claims.

The nuclear operations segment recorded record revenues of $286.2 million in the quarter a 10% increase when compared with $261.1 million in the first quarter of 2013. Nuclear operations segment operating income increased by 9% to $59.5 million in the first current of 2014, also a record, compared to $54.7 million in the prior year period.

This near double-digit increase in revenue was primarily attributable to increased activity in the manufacturing of nuclear components for US government programs and to increased volume in our naval nuclear fuel and down blending contracts. The strong increase in operating income is primarily due to manufacturing execution which drove higher volume and strong margin performance.

Backlog in Nuclear Operations at the end of first quarter of 2014 was $2.8 billion, compared to $2.9 billion at the same time last year.

Nuclear Energy segment revenues were $47.8 million in the first quarter of 2014, a decline of about 25% compared to revenues of $63.5 million in the first quarter of 2013. This decrease reflects the completion of certain maintenance and service projects as well as the completion of a contract for two replacement steam generators that were ongoing in the prior year period. Operating income decreased by $1.8 million to $0.5 million in the first quarter of 2014, compared to $2.3 million we recorded in the corresponding period of 2013. Primarily attributable to lower volume, as I indicated, and margin mix largely offset by $2.6 million of reduced SG&A expenses associated with cost savings from our GCI initiatives.

Technical Services segment revenues in the first quarter of 2014 totaled $24.5 million essentially in line with the corresponding period of 2013. Operating income increased $0.6 million to $14.8 million in the first quarter of 2014 as compared to $14.2 million in the same period last year. This increase is primarily due to reduced overhead and general and administrative costs.

mPower segment operating income increased $0.2 million to a loss of $26.7 million in the three months ended March 31, 2014. Compared to a loss of $26.9 million in the first quarter of 2013.

Research and development expenditures related to the B&W mPower development program increased by $15.1 million offset by the recognition up $17.1 million of a cost sharing award from the Department of Energy under the cooperative agreement. There was no cost sharing award recognized in the corresponding period of 2013.

In the first quarter of 2014 the Company's effective tax rate was 24.5% as compared to 26.6% for last year's quarter. Our effective tax rate for this quarter was lower than the statutory rate primarily due to a favorable ruling from the IRS that allows us to exclude distributions from several unconsolidated foreign joint ventures from domestic taxable income.

The Company's cash and investment position, net of debt, was $234.4 million at the end of the first quarter of 2014, a decrease of $167.9 million compared to $402 million at the end of 2013. First quarter net cash flow, which is typically our weakest quarter due to seasonal timing, reflected a net use of cash in operating activities of $113.5 million compared to a net usage of $26.3 million for the same period last year.

The increase in cash used for operations in the quarter was primarily related to increased working capital and higher net contracts in process, due to timing of project milestones and fewer advanced billings for major contract awards, as compared to the same period in 2013. During the quarter $26.8 million of available cash was used to fund our share repurchase and dividend programs.

Now let me turn the call back over to Jim for a discussion of our outlook for the balance of the year.

Thanks Tony.

With regard to our revenue and EPS forecast, we're holding guidance for the year. We expected that any benefit to full-year EPS realized by the ramp down of mPower spending in the second half of 2014, will roughly offset the loss of the Y-12/Pantex equity income beginning in the third quarter.

Incrementally, MEGTEC could add $80 million to $90 million of revenue and $8 million to $9 million of EBITDA, net of the effects of purchase accounting, assuming the transaction closes in June. We continue to see opportunities to enhance shareholder value through acquisitions that are consistent with our core competencies and which provide cost and revenue synergies.

On the government side, we are evaluating opportunities that would leverage our complex project management and/or precision manufacturing expertise into businesses to provide revenue growth. On the commercial side, we are targeting opportunities that allow us to leverage our expertise in power generation and environmental technologies beyond coal. The quality and depth of acquisition targets we are evaluating has clearly improved, largely because of the work we've done to scope out high-quality companies with complementary products in attractive markets.

In regards to B&W share repurchase activity during the first quarter of 2014, keep in mind that in order to initiate or expand share repurchase programs, B&W must not be in possession of material non-public information. With the mid-April announcement on B&W's decision to restructure mPower, the filing and reporting of our first quarter results and today's announcement on the agreement to acquire MEGTEC, the constraints that existed in the first quarter have been removed.

We remain committed to returning capital to our shareholders more aggressively than has been accomplished year to date. We will announce the results of such programs as it's appropriate to do so.

That concludes our prepared remarks. I will now turn the call back over to Patrick who will assist us in taking your questions.

(Operator Instructions)

Jamie Cook, Credit Suisse.

Hi. Good morning.

Good morning Jaime.

I guess a couple of questions. It was nice to see a good little acquisition this quarter. Can you just talk about your pipeline for the remainder of the year? Are there any more opportunities like this that we could potentially close?

And then I guess my second question is -- on the power gen side, does your confidence level in the international opportunities, could you size them versus US -- versus certain of the US opportunities? And just talk to also, is this a situation where you're the only contractor bidding on this work or are you up against other people? Because I just want to see how competitive the environment is versus you just signing a contract with a customer. Thanks.

Okay. Thanks Jamie. Start with the acquisition question and then I'll move into the discussion around PGG.

On the acquisition front, I appreciate the feedback on MEGTEC. We do like both the opportunity in MEGTEC in particular, which again I'm happy to talk a little bit more about, and two the size does make some sense to us. $150 million acquisition is large enough to matter, but it's also not so large that it will significantly distract us from the operations of the business.

Our approach actually to integrate MEGTEC is to have a separate standalone team working on integration, both traditional integration as well as capturing the synergies. So that the core PGG management team doesn't lose focus on revenue generation and project execution.

In regard to additional opportunities moving forward. We've taken a lot of time -- I think we've found a good investment that adds to shareholder value. That said, we have a pretty high bar and this is the first acquisition we've announced and we've been looking for more than a year. So we continue to remain cautious as we move forward.

The majority of the opportunities that we're looking at are roughly in the range of the MEGTEC acquisition. It would be nice if we could find another opportunity to close by the end of the year and we may or may not be able to do that.

In regard to PGG. We mentioned specifically in the call that we have a couple of opportunities that we expect to close in the next few months. Those are opportunities that typically have either been verbally awarded to us or we believe it's down to perhaps just one other competitor. So we feel good about both of those given that we mentioned them.

And both of those we think will help us the balance of 2014 in PGG. That said, beyond those specific opportunities, competition remains high in the marketplace. Both in the US and internationally and both on the environmental front and for new build.

Okay. And then just one final clarification I understand the puts and takes of the guidance. You have the acquisition Y-12/Pantex -- but what is your assumption on mPower spend for the remaining -- just what are your assumptions on mPower spend for 2014 versus last quarter?

Fair enough. So we had said $60 million to $70 million for the are on mPower. Last quarter we spent about $27 million on mPower in Q1. I'd expect in Q2 we'll spend less than $27 million, but not by too much. We continue to ramp the program down in a very controlled fashion.

We want to make sure that we capture the technology and it does take time to make that happen. So if you put spending in the, say low 20s for Q2, once we get to July 1st, we expect to be at an annual run rate of $15 million or less going forward. So that puts spend for the back half of the year at roughly $8 million.

Okay.

In essence, give or take a little bit, the reduced spending on mPower in total for 2014 roughly offsets the Y-12/Paantex project closing out about three months earlier than we thought.

Okay. All right. Great. Thank you for the color.

Andrew Kaplowitz, Barclays.

Good morning Jim.

Good morning.

Jim, can you talk about MEGTEC's growth that you expect over the next couple of years and maybe what it's done over the last couple years?

And then maybe talk about the flexibility that you still have to buy back shares? You had a decent cash drain in 1Q and you are spending this money on MEGTEC, so where does that put you over the next 6 to 12 months in terms of your ability to tap your authority?

Okay. Sure. Let me talk a little bit about MEGTEC and growth opportunities. I'll talk just a little bit about share buyback, but I'll ask Tony to jump back in on the cash side of the question.

So MEGTEC is relatively -- has been a relatively stable entity. We think MEGTEC on its own can sustain mid-single-digit growth going forward. The question is, when you leverage in potential synergies with B&W both on the technology side, the construction and erection side, and then simply just by the fact that we're larger and we have a stronger balance sheet to back projects, the question is, can we do better than that?

And if we can, we think there's significant upside in this acquisition opportunity. And we'll know I think in the next few months how successful we'll be on that front, but I can tell you we're very focused on growing MEGTEC. And we believe we can do that.

In regard to the share buyback question, Q1 was basically slow. And we've been vocal about being more aggressive going forward into the year. We have just less than $500 million authorization left. And I do believe we're well-positioned from a cash availability standpoint, even including the MEGTEC acquisition, to be a more aggressive on share buyback as we move through the year.

Tony anything you want to add?

Just to remind everyone that seasonally Q1 is our weakest quarter. We do expect an improvement in cash flow particularly in the second half of the year. Q4 will clearly be our strongest quarter-- it always is because of the government retainage payments.

We have plenty of availability under our revolver, as Jim said, to fund this acquisition and we have plenty of access to capital, through our syndication if we need it. So we're not worried about our cash flow. Our credit rating is very strong. We are a very, very strong BB plus, with actually investment grade metrics virtually across the board. Size is about the only thing that hurts us.

And we haven't push the rating either all which we could do although I don't think it really buys us much. There's really no pricing advantage to speak of between BB plus and low investment grade. So we feel very good about where we are.

We are focused on growing the business. We have some acquisition opportunities that we're still pursuing. We'll see how those play out, but we have the flexibility to do those if need be. Another acquisition if the opportunity is there, as well as step up our share repurchase program.

Jim can you talk about the sustainability of your nuclear operations performance? Revenue continues to grow in that business despite -- I think you said in the past that it would be more of a stable business. So can you sustain some of that growth that you've seen recently in those 20% margins?

Sure. Talk a little bit about sustainability of the nuclear operations business. So let me talk first about revenues and I'll talk about margin.

About half of the increase in revenue we believe is timing related and the other half was real in NOG going forward. So it was a little bit of a jump on the margin side. We continue to guide to the high teens. And it does take some exceptional performance to drive operating margin slightly above 20, which is where we were in Q1.

So again, our goal is to put out extremely high products ahead of schedule and under budget for our government customer. When we're successful in doing that, both on the manufacturing component side of the business and on the fuel side of the business at NFS, we end up -- we generate a quarter like we did in Q1, which was exceptional. And we're going to strive to do that every quarter going forward.

That said, Q1 might be a little bit better than the average quarter.

Thanks. Appreciate it.

Brian Konigsberg, Vertical Research.

Yes. Hi. Good morning.

Hi Brian.

Hey Jim, I just want to touch more on the environmental opportunity. Just kind of taking a step back. We were I think talking about maybe a year or two ago, you thought the opportunity was $12 billion to $18 billion in size.

Obviously there is a good amount of orders that happened already per MATS and now that CSAPR -- it's kind of coming back into the mix and potentially even unlocking some pent-up demand. I'm just curious -- do you still think that the size of the market that you previously had estimated is still legitimate?

And then just secondly, do you think the GHG rules will potentially help or hurt the size of the pollution control market because maybe it drives more closures or maybe not. I just wanted to get your thoughts.

Sure. No, we've spent quite a bit of time analyzing the Supreme Court's ruling on CSAPR. And previously in the call we talk about some of the open items that remain, including finalizing the timing and finalizing the rules.

You're correct. In the past we had estimated market size at $12 billion to $18 billion. Our view is it's going to be somewhat smaller than that going forward for a couple of reasons. One, some of that work's already been done. Two, as you mentioned a lot of the MATS work has completed. And that covered some of the CSAPR work on some of the utilities built at the same time.

The other driver we're trying to factor in is an overall reduction in demand or in load growth across the utility industry in the United States. Which gives the utilities a little bit more flexibility as they look to make capital investments in their generating fleet. Simply because that consistent build expenditure that used to be there when load growth was 2% to 3%, is now gone.

You put that all together we still believe there's some upside opportunity in CSAPR. We believe we'll see maybe a little bit of it in 2014, but more of 2015, 2016. And on a customer by customer basis we're trying to analyze exactly how that's going to play out while we're watching the EPA and the DC Circuit deal with timing and the final rules.

So we see upside, I'm not sure it's going to be quite as large as we all thought it would've been two or three years ago. And now we're just watching timing and working with our customers individually.

In regard to the greenhouse gas ruling on existing coal plants that we expect the administration or the EPA to put out this summer, it's a little bit hard for me to read the overall impact of that. My opinion, I think it's likely that, that ruling will come out and then it will be contested for some period of time, moving forward. So I am not sure it changes anybody's decision-making in the short term.

In general, B&W would expect a relatively stringent ruling or and aggressive proposal by the administration to do something with greenhouse gases on existing coal. But how it plays out over the next three to five to eight years is tough for me to forecast.

Okay. Fair enough and if I could just secondly just touch on the guidance. So just given the Q1 topline results, you're maintaining the $2.9 billion to $3.1 billion revenue for the year. It actually -- it implies an unusually large amount of book and burn.

You only have about maybe about half of the revenue between Q2 and Q4, booked in your backlog even if it's at the low end of the range it means the book and burn needs to ramp up a lot. I guess maybe if you could touch on what is really giving you that confidence that, that type of work is coming your way? It would be help to give some clarity there.

Will do. And primarily, in that question we're looking at PGG revenue. That's the variable and that's a business segment that was down the most in Q1. So a couple things.

Number one, I will say that we are very much keeping our eye on it. I think you tried to specifically call out PGG revenue as the variable that we're working hard on. We do have a couple of projects that we hope to sign and announce in the next three to four months that will help.

And we do expect Q1 to be the abnormally low quarter for the year in PGG. That said, your question's a good one and we're working hard to drive revenue in PGG and we're keeping our eyes on it.

Okay. Fair enough. Thank you very much.

Bob Labick, CJS Securities.

Good morning.

Good morning, Bob.

You spoke earlier about your TSG and the commitment for the division and in growing that. Could you give us a little background on some of the pipeline that's out there? And maybe three-year roadmap for where you see that going in international, US, and all that kind of stuff?

Will do. We think we have an advantage in that particular business unit simply by nature of what our nuclear operations business does for a living. The question is -- how do we leverage that advantage into the marketplace?

So there's good news and bad news in the technical service business. Opportunities are slow to emerge but once you have them, they tend to be around for a while. For example, we announced last quarter an extension to our Idaho contract. Which is a good thing for us.

Going forward a couple opportunities in the pipeline. The first opportunity to keep our eyes on is outside the US actually Chalk River in Canada's being bid. We think we have a strong position on our own and we have strong teammates. That'll come out later this year to be awarded into 2015.

Sandia contract, which we have spoken about previously has pushed out a couple more years. The government exercised an extension on that front. We are evaluating and watching to see what the DOE is going to do with the Kansas City opportunity.

And then we're also working hard on positioning for Savannah River, which we believe will come up in the next year to two. And that's a big opportunity for us. We do not have a large presence at Savannah River today. And we think we can add a lot of value as a supplier on that front.

So that's what we're looking at. Our view would be integrating TSG into the nuclear operations business in addition to generating some straight up cost savings via consolidation. Will help us better leverage and move talent back and forth between the nuclear operations group and the technical services division that should enhance the quality of our bids moving forward

Okay. Great. Thanks and then just switching gears slightly back to the MEGTEC. Could you give us a little background on the process and how long you've been speaking to them? And then also was the allure the environmental side or the energy storage or both? I mean can you give us a little further breakdown on how their business works like that?

Sure. Happy to do that. So we've been very public about being in the marketplace looking for opportunities to grow. We think we have a lot to add from a technology standpoint in the power generation business in terms of environmental controls. But we don't have a desire to expand our coal exposure going forward.

So we've been looking for ways to take advantage of the technology and the expertise we have and break into an industrial type marketplace. One because it's non-coal and two because we think there's sustainable growth in that environment, both inside the United States and internationally.

And MEGTEC does that for us. So the variety of opportunities we've looked at in that segment -- MEGTEC is a nice fit for a variety of reasons. It's about the right size. It complements our business very well. It comes with a very strong management team, which we thought that we needed as we moved into a new segment like this.

Just to give you a rough breakdown of MEGTEC by geography, in 2013, about 57% in North America, and 43% international. And the primary value driver in MEGTEC today is really it's environmental solutions business which is environmental controls on the industrial side and its aftermarket business. So rough split going forward environmental solutions about 1/2 of the Company, aftermarket about a 1/3, and the remainder being what we call engineered products, which is really this coatings renewable business.

We really see the fundamental value in MEGTEC being in the environmental solutions for the industrial customers and the aftermarket. In a lot of ways we look at the engineered coatings division which is focused on coatings for batteries and solar films. It's a profitable business today, but we look at that as being an upside opportunity going forward.

Great. Thank you very much.

Will Gabrielski, Stephens.

Thanks. Good morning. I'm just curious on the decline year on year in aftermarket if you think in any way a polar vortex or anything like that had an impact on utilities; maybe burning more coal and not shutting down or giving you an opportunity to service your install base? Or if there were any other variables in Q1 that could explain that type of a sharp year on year decline despite higher coal burn?

Yes. The question for us is -- is it a one-off event perhaps driven as you said by extremely cold weather, high plant usage? And we'll see a little bit of a recovery as the utilities have an opportunity to shut the units down and do some maintenance on them going forward?

That could well be. We do expect -- we've seen an awful lot of stability in that aftermarket services business in power gen. And on balance over the course of the overall year we would expect that to continue. Q1 was a little bit lower than we expected.

Yes. I'd say -- if I might add a couple of points. The biggest driver of the year-over-year change was clearly the environmental systems area and new build environmental and that was down considerably. That -- obviously we need a catalyst for that part of the business to recover.

We did have some timing related issues that should be recoverable over the balance of the year that represent $35 million or $40 million a volume that we do expect to recapture. And I think the other big driver is the biomass project that we talked about. Although it's clearly not -- it's in a loss position and it was even as of last year.

There's some volume there that we booked last year, zero-calorie volume, but it was booked last year that isn't really repeating itself. Because we really are just about done with this project with one exception being tweaking the plant to deal with some fuel that we think it is out of spec -- clearly out of spec.

So you put it all together. I think the plus in the quarter is that the spare parts business has held up very well. And the service project business, which can be a little bit lumpy, was down. And that's the one piece that I can't tell you -- I'm just not certain whether it's driven off of weather or timing or a little bit of all of the above although that's the smaller of the items I just mentioned.

Okay. And then can you talk about MEGTEC whether or not that's now included guidance? And then also a competitive landscape and Ps and Qs and how comfortable you are with what you're getting into in that market?

Right. So in regard to guidance, we held guidance and we view MEGTEC -- assuming we close it in June as a small upside. We've mentioned roughly -- perhaps $80 million or $90 million in revenue and $8 million to $9 million in EBITDA for the balance of 2014.

Competitive landscape for MEGTEC on the industrial side of its business is different than what we're used to in PGG. For the most part in PGG we compete against other large players and occasionally some smaller shops. The competition on the industrial side of MEGTEC is different. It tends to be an awful lot of small players with unique niche technology solutions. So a little bit different landscape. That's one of the reasons we're happy we're bringing in an experienced management team to help us run it.

That said, we think MEGTEC's backed by B&W and adding some of the B&W technology solutions to its industrial, environmental portfolio should position MEGTEC as a little bit more of a comprehensive supplier and perhaps a preferred supplier in the market going forward.

And there 's growth in the market itself

Yes. And that's the other piece we like obviously. Thanks, Tony.

For the most part, PGG competes in the coal business in the US and worldwide. Which is -- although it has its ups and downs, it's not a naturally growing segment. And we really like the natural growth opportunity that exists in the MEGTEC market today.

If you look back at what's available publicly, historically, and before going private, it looked like they were doing about $200 million to $250 million a year in revenue.

And can you just walk through the history of what changed after it was sold previously that shrunk that revenue number, was that intentional? Was there a market dynamic there? Was it margin focused? Is there anything we should know?

Yes. I don't think it was on the industrial products side. Over time and the history of MEGTEC, it's built by a handful of various acquisitions over time. But they had a pretty significant dryer business, printer dryer business. And that's ramped down a little bit over time.

And they've actually managed to transition that technology away from just printer dryer's and they're now using similar technology and that's what's allowing them -- what we think is an upside opportunity in this coatings business on the renewable side.

Okay. And then lastly, Tony, just thinking about the last few years the first time we spoke you talked about how under leveraged Babcock's balance sheet is and the point you've hit on multiple times.

And I'm just wondering if there's anything right now that we should know that's keeping you from, as you noted in your Q4 press release, using leverage to accelerate capital returns? Has anything changed in that strategy, the M&A plan, anything that's different today than it was a few months ago?

No. Not really. The fact is over the last year we have, I think very successfully and very consciously, reduced our US cash position. Largely supporting the dividend and share repurchase programs. I think we've returned well over $300 million so far since we initiated those two programs.

And now we're in a position where I think we have clearly used up our excess US cash, but we have access through our revolver to support a monthly cash flow needs -- quarterly, weekly cash flow needs. And we will continue to look at opportunities where it makes sense to officially leverage the business to support growth.

That growth can come through in terms of earnings, can come through obviously acquisitions like MEGTEC. Again we have a very capable team that's got a lot of traction right now and we feel very good about that. And we've indicated that we will continue to be fairly aggressive on the share repurchase side certainly more so than we were in Q1.

So in short we're not opposed to putting some leverage --

Not at all.

-- on the balance sheet going forward. And I think we've smartly executed the share buyback and we continue to be aggressive on the front. And now we've obviously we found what we think to be a good acquisition opportunity.

So I think we're staying on plan and we're looking forward to find some ways to return some additional value to shareholders either via additional repurchases and/or some additional mid-sized acquisitions.

Yes.

Martin Malloy, Johnson Rice.

Good morning.

Hi, Marty.

Could you give us an update in terms of what you're seeing out there in the market outlook for your India JV and China?

Sure, Marty. Happy to do so. China remains pretty stable for us. Not a lot of growth opportunity, but it's not a declining business either. So the Chinese JV remains solid. We continue to look for opportunities to do work, not only in China, but to expand outward beyond China, for example Vietnam.

India JV remains slow. The factory is complete. We do have some small amount of work, mostly from our partner, flowing through the facility, to date. And we remain aggressive in the marketplace, both in India and in trying to find ways to leverage other bidding opportunities around the world. Into that what we believe will be highly efficient and low-cost Indian JV, on the manufacturing side.

And then we mentioned specifically, as we look at opportunities to reduce costs in power generation over the next few months and we look at the engineering opportunity. We think that there is some upside in shifting some more work to India and creating or enhancing the Engineering Center of Excellence that we have in that Indian JV.

So it remains a bit of a drag on PGG and it probably will through 2014. But we're looking at multiple ways to create value out of that investment.

Okay. And then on your last call you mentioned that a refurbishment up cycle for the Candu reactors was expected beginning next year. Is that still the case?

Yes. It is. We do expect the refurb work to begin on Darlington. As a matter fact we've seen some of that work bid out and that contributed a little bit to the good bookings quarter in NE in Q1.

That work is mostly I believe 2016 and 2017 work. But Darlington will begin to procure some of the long lead items in advance of that. So we do see some NE recovery as the refurb work picks up in Canada. How much it helps us in 2014 we'll see more of a 2015, 2016 upside.

Thank you.

Tahira Afzal, KeyBanc

Thank you very much. Hi. Congratulations on the acquisition it seems to meet all the data points you've set up.

Thank you.

The first question is and I apologize, I know a gazillion people have asked you about the PGG division. But if you look at the first quarter and how things are playing out it's -- versus your internal expectations when you set guidance, there is the depth in first quarter, kind of what you thought and things were going to pick up. And I guess are we to assume you will revisit guidance once MEGTEC closes?

Sorry. I lost a little bit of the last couple sentences to hear -- our connection's not that good here.

Sure. I guess first question is in regards to PGG. Was the acquisition and if you look at the performance in PGG in the first quarter was that kind of in line with what you assumed?

And hence you are keeping all your guidance for PGG intact for the full year? And really would you revisit it of course once MEGTEC sort of closes as well? Because it seems that's incremental based on what you're saying.

Right. So PGG performance in Q1 was a little bit under our expectations. A couple of reasons primarily. One, this ongoing biomass project we did not expect to take a $7 million or $8 million hit. Again, we expect to recover that money from the customer. That unit's done and we're turning it to burn fuel that we think is out of spec and they think is in spec. So again that was a hit we did not expect to take in Q1.

And then two, we did have some -- we were a little bit light on revenue relative to our expectations. Some of it didn't materialize. A lot of it was a timing issue and it pushed off to later in the year.

So PGG was below expectations in Q1 and we need to step up the game in Q2 -- in the last three quarters in order to make the numbers for the year. We believe we have a plan to do so, but we're paying a lot of attention to it.

In regard to MEGTEC, we see that as a little bit of an upside. And that's a good thing assuming the transaction closes in June. We're working very hard to keep the MEGTEC transition and integration separate from the management team inside PGG that's working every day to drive revenue and to drive the margin improvement program that we have in place.

We had Eileen Competti step up last time on GCI and independently run that program. And it was very successful. And Eileen has stepped up again and she's going to be the integration manager in charge of integrating MEGTEC, both from an operational standpoint and from a synergy standpoint. So we feel good about the management approach we're taking to integrating MEGTEC and allowing our PGG management team to focus on revenue and costs inside their traditional business.

Got it. Okay. That is helpful. And then Jim just in regards to MEGTEC. If I look at the secondary heat recovery technology on the industrial side, is there a competing technology over there that you're aware of that we should view as a competitor or is that a pretty differentiated recovery system?

There's really not as much of a technology competition inside of MEGTEC's industrial business as we're used to in the power generation utility business. It's more a matter of being able to understand the unique solution that each industrial customer requires and then being able to adapt and implement the various technology portfolio that MEGTEC has to bring that solution to bear.

And I think that's what distinguishes MEGTEC in the market place. We actually think that having a little bit more on the technology front and perhaps the engineering expertise front might give MEGTEC a little bit more of an advantage in the marketplace going forward.

Got it. Thanks a lot Jim and congratulations again.

Thanks, Tahira.

Chase Jacobson, William Blair.

Hi. Good morning. Thanks for taking my question.

Hey Chase.

Just one more question on MEGTEC on the revenue synergies. Jim, you gave some color about using B&W's size basically on the revenue synergies standpoint. Do you expect more of the synergies to come on their new equipment business or their aftermarket business? And does their footprint in China and India -- how does that help B&W's core business?

Okay. Sure. So MEGTEC opportunities for revenue synergies. We do see revenue synergies. We've been, as you would expect, it to be a little bit conservative on those in our evaluation. But we do see a lot of upside, primarily up front on the industrial equipment -- environmental equipment portion of the business.

For example, MEGTEC, owned by private equity looked like they were good owners, certainly it is a well-run company. But I think at times they were limited by their balance sheet and their ability to take on larger projects. We believe prudently we can help with that and perhaps allow them to increase revenue a little bit.

I think at times MEGTEC actually governed on purpose by taking only selective projects, their revenue, in order to manage risk and manage earnings. We might be in a position to allow them a little bit faster revenue growth moving forward. Again primarily on the industrial environmental equipment side of the business.

In regard to MEGTEC's footprint around the world, we haven't valued any synergy in today from that. Interestedly their operations in India are in Pune, which is the same place our new manufacturing JV on the PGG side of the business is. Whether there's opportunity there or not we'll have to see as time goes on.

We would like to take advantage of MEGTEC's footprint in Asia and their footprint in Europe to try to better leverage or take it vantage of some of those relationships on the PGG site. And enter some of the MEGTEC markets.

On the other hand, there are opportunities and relationships we have in Europe and Asia that MEGTEC is not currently exposed to. So we would expect to be able to open some doors for them going the other direction as well.

Got it. Okay. And Tony, on the buybacks. We definitely understood with all the announcements that you couldn't do too many buybacks in the quarter and that the activity should pick up going forward.

Did I hear correctly that we're going to get an update in the next couple months on the buyback plan? Or is the $100 million that you talked about last quarter still what we should be thinking for the year? Thanks.

Hey Chase. This is Jim and I will start with that and then Tony's welcome to jump in. So we did about $15 million or $16 million in Q1 buyback. And clearly that's below our run rate for the past year and we would like to be and we plan to be more aggressive than that going forward.

We don't plan a specific update in regard to the buyback. Probably until the next quarterly call. But we do plan to be significantly more aggressive than we've been in Q1.

That's all I would have said. Yes.

Okay. Thanks a lot.

John Rogers, Davidson.

Hi. Good morning. Just a couple of follow-up things. First of all, in terms of your tax rate with the favorable ruling, is that a one-time event or does that continue through the year?

There was a pickup -- part of the pickup was due to the ability to reverse some accrual from over the last couple of years. But it is also --also has a continuing benefit to the extent that we can distribute earnings from lower tier -- what we call lower tier joint ventures upwards in our chain as long as we use the cash efficiently outside of the US.

And then the benefit continues to accrue to us. So we do not have to book the extra taxes as a result -- any extra tax accruals as a results. So it's a little of both to answer your question.

Okay. So your assumption for this year is for a tax rate is what then?

We haven't changed our guidance for the year from what it was.

Okay. Low 30s? I think.

Low 30s.

Okay. And then just one more thing on MEGTEC, can you talk about how big the market opportunity is on the industrial side? And sort of their share of it -- you obviously are a dominant player on the power side, and I just want to understand their positioning.

Yes. Sure, John. I don't have all the numbers in front of me right here. But the reality is it's -- there's a very large industrial environmental market globally. And MEGTEC has a relatively small share, but I think in the regions that they choose to compete in, they do relatively well.

The question is can we expand that reach and pick up additional market share? And then perhaps by leveraging some additional B&W technology, can we expand the markets a little bit for them? Those would be the two upside opportunities.

Okay. But so is the market comparable to the power market in your mind? I assume it's smaller, but?

Yes. I think -- it's certainly a little bit smaller than the power market. Primarily because each individual project is smaller. That said, I do think there's additional growth opportunity going forward on that side. Simply because as time goes on, in every country around the world starting with the US, into Europe and then into Asia the environmental regulations get more and more stringent.

And they get applied deeper and deeper into the industrial segments. So we do see additional opportunities going forward and a growth market, which is a little bit different than the coal business than we have in PGG.

Sure. Okay. Thank you. Appreciate the help.

Brian Konigsberg, Vertical Research.

Thanks for taking my follow-up. Hey, Jim, can you just talk about the $50 million of additional or incremental savings you mention in the press release? Is that -- can that add to the $70 million to $80 million in cost savings you expected through 2015 or is that -- does that kind of drift out beyond 2015?

Our belief is that the great majority of that $35 million to $50 million of additional cost savings in PGG will accrue some time during 2015 and will hit full run rate as we move into 2016.

Given PGG's revenue performance in Q1 of this year, we're obviously -- in case we weren't focused enough on taking margin -- taking cost out of that business, we're extra focused on it now. And we're actually trying to drive as much of that value into 2014 as we can.

The reality is that some of the actions on overall efficiencies, some of the supply chain and design work, we think can help 2014 a little bit and will certainly help in 2015. Some of the manufacturing footprint consolidation, just by nature of the fact that we have to maintain the work in the product quality that's coming out of those existing facilities while we do the transition takes a little bit more time.

So the 200 to 300 basis points of improvement that's still the target but it includes this additional $35 million to $50 million?

The 200 to 300 basis points roughly equates to $35 million to $50 million of actual cost. And that's on top of that GCI costs we took out last year.

Okay. But when I think about the total savings benefit up from the GCI when you talked about $75 million in Q4, that's inclusive of this $35 million to $50 million or is not?

It's not. The $35 million to $50 million is on top of the GCI numbers that you just gave.

One point to add though is that the first $70 million or so of cost savings was predicated -- we assumed clearly assumed a bit more volume 18 months ago than what we're now seeing certainly in PGG. Right? That was a $1.7 billion, $1.8 billion business at that time.

So some -- and I think we've been consistent in saying that some of the cost savings that we have realized has gone to offset the volume shortfall. So what we're trying to do now is drive margins up by 200 to 300 basis points on -- in the case of PGG on roughly a $1.5 billion run rate business, with the actions we've identified and discussed as of today being the key catalysts for doing that.

Okay. But to the extent that you do start to see some better growth because of the orders you're talking about from international boilers and better environmental and even MEGTEC in the mix -- you should have more than $1.5 billion business. So should we be thinking that if all goes to plan there could be some upside to the 200 to 300?

--if we're seeing more upside in revenue, what you said should be true. But let's not get ahead of ourselves. Right now, our goal is to maintain at least $1.5 billion business and drive 200 to 300 basis points of margin improvement.

With MEGTEC on top of that.

With MEGTEC on top of that. Thank you.

Okay. Fair enough. Thank you.

Ladies and gentlemen this concludes our question and answer session. I would now like to turn the call back over to Ms. Jenny Apker for closing remarks.

Thank you for joining us this morning. This concludes our conference call. A replay of the call will be available for a limited time on our website later today.

We also will be posting to our website, additional information in the form of a Company overview that will be shared with investors and analysts during various meetings throughout the quarter.

Thanks very much. Good morning.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.