BW - NYSE

Good afternoon. Thank you for attending the Babcock & Wilcox Enterprises Third Quarter 2024 Conference Call. [Operator Instructions] I would like to turn the conference over to your host, Sharyn Brooks, B&W's Director of Communications. Thank you. You may proceed, Ms. Brooks.

Thank you, Victoria, and thanks to everyone for joining us on Babcock & Wilcox Enterprises Third Quarter 2024 Earnings Conference Call. Joining the call today are Kenny Young, B&W's Chairman and Chief Executive Officer; and Lou Salamone, Chief Financial Officer, to discuss our third quarter results. During this call, certain statements we make will be forward-looking. These statements are subject to risks and uncertainties, including those set forth in our safe harbor provision for forward-looking statements that can be found at the end of our earnings press release and also in our Form 10-Q that was filed this afternoon and our Form 10-K that is on file with the SEC and provide further detail about the risks related to our business. Additionally, except as required by law, we undertake no obligation to update any forward-looking statements. We also provide non-GAAP information regarding certain of our historical and targeted results to supplement the results provided in accordance with GAAP. This information should not be considered superior to or as a substitute for the comparable GAAP measures. A reconciliation of historical non-GAAP measures can be found in our third quarter earnings release published this afternoon and in our company overview presentation filed on Form 8-K this afternoon and posted on the Investor Relations section of our website at babcock.com. I will now turn the call over to Kenny.

Thanks, Sharyn. Well, good afternoon, everyone, and thanks for joining us on our third quarter 2024 earnings call. We generated significant operating margin improvement on a year-over-year basis during the third quarter of 2024, reflecting our recent strategic actions of avoiding lower-margin projects and improving project performance as well as reducing costs. This was highlighted by our strong increases in our adjusted EBITDA, operating income and net income compared to the same period in 2023 when excluding revenue from BWRS, which was an asset we sold in the second quarter of this year. During the third quarter of 2024, we recorded 2 significant onetime items. The first was a noncash $5.8 million impairment related to the sale of our SPIG asset, which we just closed recently in the fourth quarter of this year. And the second was a $4.9 million settlement to exit the last O&M multiyear maintenance contract for a biomass plant in the U.K., this historical contract associated with one of the biomass plants from 2018 and has had over $15 million of losses over the last 3 years and we anticipated potential higher losses over the remaining 10 years. This was a remarkable settlement for us. Excluding these onetime provisions, we would have improved our operating income and net income by $10.3 million, both of which would have been on track with expectation. This really demonstrates the company's improved overall margin performance. We believe that we are in a unique position to leverage the significant increase in baseload generation demand in North America and around the world. The demand for energy from our -- from consumers, data centers and large businesses, either from the grid or behind the meter, along with increased energy needs from utility and large industrial clients, are providing even greater opportunities for us to design and install our broad range of technology and contribute our considerable expertise to the areas of fossil fuels, natural gas, synthetic fuels and renewable energy to help meet that demand. We believe the increasing need for power and electricity fueled by demand from artificial intelligence, electric cars and expanding economies will be key drivers for growth across our broad range of technologies. And we are seeing our utility and industrial clients, including in oil and gas sector, continuing to increase capacity, utilizing our core technologies while evaluating further power generation augmentation through biomass, hydrogen and natural gas. We expect these tailwinds to increase in the coming years as the amount of front-end engineering design opportunities or FEED studies has grown. Today, we have roughly 12% to 15% -- or 12 to 15 active FEED studies that represent potential projects of over $1 billion in revenues in our pipeline. We believe that these expected industry tailwinds provide a strong foundation for B&W to grow in 2025 and beyond as we continue to reshape and rebuild this company and drive for higher margins and improved cash flows. Overall, our results in the third quarter reflect the strong demand for our diverse portfolio of technologies that support the generation of efficient and sustainable energy regardless of fuel source. B&W has developed a strong foundation to capitalize on the continued growth in natural gas conversions, environmental solutions, carbon capture and clean energy opportunities globally with utility and industrial customers. Our investments across our ClimateBright suite of decarbonization technologies to support the world's energy transition are progressing well. And notably, we are continuing to move forward on our BrightLoop project in Massillon, Ohio with a target of producing hydrogen by early 2026. We also are working on several carbon capture opportunities that utilize our SolveBright post-combustion CO2 capture and our oxy combustion as well. In addition, we recently announced a FEED study in Sweden that will utilize post-combustion technology with a waste-to-energy facility. We are further developing BrightLoop projects in Ohio, Wyoming, Louisiana, and are engaged in FEED studies for BrightLoop with various customers in Canada and around the globe. We continue to see strong customer demand for our technologies that help drive our implied backlog 48% higher at the end of third quarter, excluding divestitures, compared to the same period last year and increased our implied bookings to over $800 million at the end of the third quarter. We are pleased to announce that just recently, our $246 million natural gas conversion project in Indiana has received PUC approval, and we have obtained the full notice to proceed. This will be now in our backlog numbers in the fourth quarter of this year. We have a broad range of technology and expertise across all fuel sources, and we believe the positive trends and momentum in the industries we serve will continue in the year ahead as the amount of FEED opportunities grow, and we continue to see a solid pipeline of more than $9 billion of opportunities over the next 3 years, including $2.4 billion in BrightLoop and ClimateBright opportunities alone. With respect to our third quarter results, we made further progress on our stated strategy to continue to divest nonstrategic assets to improve our balance sheet. Specifically, we completed the sale of our SPIG and GMAB businesses for net proceeds of $33.7 million. To date, we have raised over $116 million from the divestiture of assets in 2024. And importantly, we remain in negotiations related to the sale of other nonstrategic assets and are evaluating further debt refinancing with proceeds expected to reduce or refinance our debt obligations, strengthen our balance sheet and support growth working capital or growth opportunities. We continued to make progress on our cost reduction efforts during the third quarter, achieving $26.5 million in cost savings to date as we work toward the target of over $30 million in annualized cost savings. We have significantly improved the income of our solar operations, which produced $5.7 million of income in the third quarter and is now generating positive EBITDA results despite its current classification. In parallel, we continue to ramp our investment in BrightLoop and ClimateBright as we continue developing the pipeline of future opportunities. The expected growth and anticipated higher margins of our BrightLoop low-carbon hydrogen technology and our ClimateBright decarbonization technologies should lead to continued higher margins in the future. I'd like to now discuss our strong third quarter operating performance. And we saw a meaningful increase our adjusted EBITDA, which came in at $22.3 million this quarter compared to $20 million in the third quarter of 2023. This year-over-year improvement was even more significant after excluding the impact of our recently divested BWRS business from last year's results. Excluding BWRS, adjusted EBITDA last year was $12.6 million in third quarter of 2023 and increased 78% year-over-year in the third quarter of 2024. Our margins are benefiting from strategic shift to reduce reliance on high-interest, low-margin new build projects. And looking ahead, we continue to expect strong operating momentum driven by our Thermal and Environmental segments as fourth quarter is historically a strong period for B&W businesses. This strong operating performance has been achieved alongside the sale of our recent SPIG and GMAB businesses, and after taking into account the recent divestitures, we have revised our full year 2024 EBITDA target to a range of 21 -- I'm sorry, from $91 million to $95 million, excluding BrightLoop and ClimateBright expenses. Importantly, we continue to invest in our BrightLoop opportunities and continue to anticipate spending in the range of $10 million to $15 million in 2024 on our BrightLoop projects and technology advancement, including CapEx. Our efforts to progress BrightLoop moving forward as we further the commercial development of existing projects and continue working to improve the overall operational effectiveness of these technologies to produce low-cost, low-carbon intensity hydrogen. We are continuing to progress with engineering work for our previously announced BrightLoop projects in Gillette, Wyoming, Baton Rouge, Louisiana and Massillon, Ohio. In regards to our Massillon project, we have begun releasing purchase orders for long lead time items, and we continue to finalize our negotiation for financing and potential government grants related to this project. We will be submitting our minor source air permits, and we will convert -- and plan to convert existing wells to support local CO2 sequestration. We're excited to officially launch this project and look forward to the implementation of our first commercial demonstration BrightLoop plant. Also, we would like to announce today that we have reached a tentative agreement that we expect will be signed in the coming days with the state of West Virginia that will provide a $10 million forgivable loan to develop and construct a BrightLoop project in West Virginia utilizing local biomass and coal. This is an exciting development for us, and we greatly appreciate the support of Governor Justice and his staff as well as the support of the state of West Virginia. We remain excited about the prospects and outlook for the BrightLoop platform with visibility to reach $1 billion in bookings by 2028, driven by a combination of small, medium and large BrightLoop projects that are in our current identified pipeline. As I mentioned earlier, this pipeline includes approximately $2.4 billion in BrightLoop and ClimateBright opportunities alone. We continue to believe this level of activity has the potential to lead to $1 billion in revenues by 2030, which would only -- which would still only represent roughly 1% of the market share for total global hydrogen spend by 2030. Within BrightLoop, it's been extremely exciting to watch our team advance the engineering process and the business towards deploying these technologies at scale and further expanding our suite of carbon capture solutions. I'll now turn the call over to Lou, who will discuss the financial details of the third quarter of 2024. Lou?

Thanks, Kenny. I'm pleased to review our third quarter results, further details on which can be found in the 10-Q that was -- that is on file with the SEC. Our third quarter consolidated revenues were $209.9 million, which is a decrease compared to the third quarter of 2023. This decrease is primarily attributable to the inclusion in 2023 of $7.4 million of revenues of the BWRS asset that was divested in the second quarter of 2024. When BWRS is excluded from the 2023 revenues, they increased by -- our revenues increased in 2024 by $4.7 million, which is driven by growth in our domestic and European Environmental businesses as well as the Thermal segment benefits related to a large natural gas project and increased volume in parts during the year. We saw an operating loss in the third quarter of 2024 of $1.4 million compared to operating income of $5.5 million in the third quarter of 2023. This loss is primarily attributable to the previously mentioned divestiture of BWRS as well as 2 onetime charges of a $5.8 million noncash impairment related to the sale of our SPIG subsidiary and a $4.9 million settlement to exit the loss-generating long-term maintenance contract, which Kenny mentioned earlier. Our adjusted EBITDA, excluding BrightLoop and ClimateBright expenses, was $23.3 million, which is ahead of expectations for the quarter. Implied bookings in the third quarter of 2024 were $810.5 million, and ending implied backlog was $628.2 million. In the third quarter of 2024, we had a loss per share of $0.10 as compared to a loss per share of $1.35 in the third quarter of 2023. I'll now turn to our third quarter segment results. Within our Babcock & Wilcox Renewable segment, revenues were $38.2 million for the third quarter of 2024, which is a decrease compared to the third quarter of 2023. This decrease in revenue was primarily due to the divestiture of BWRS, which we previously mentioned. Adjusted EBITDA in the third quarter of 2024 was $5 million, a decrease of 51% compared to the $10.1 million in the third quarter of 2023. Again, the third quarter of 2023 included $7.4 million from BWRS, and this was partially offset by favorable project closeouts in the current quarter. Bookings during the third quarter of 2024 exceeded bookings in the same period of 2023 with total bookings increasing to $40.8 million in the third quarter of 2024 from $32.7 million in the third quarter of 2023. Within the Babcock & Wilcox Environmental segment, revenues were $56.6 million in the third quarter of 2024, which is an increase of 22% compared to the $46.4 million in the third quarter of 2023. This increase is primarily driven by growth of our domestic industrial and electrostatic precipitator business in addition to growth in our European Environmental business. Adjusted EBITDA was $4.7 million for the quarter, which is favorable to our forecast despite being a slight decrease compared to the $5 million in the same period last year. Turning to our Babcock & Wilcox Thermal segment. Revenues were $119.9 million in the third quarter of 2024, which is an increase of 12% compared to the third quarter of 2023. The revenue increase is primarily the result of a large natural gas project, which accounted for $4.2 million, and an increased volume of parts, which accounted for $4.8 million of the increase. Adjusted EBITDA in the third quarter of 2024 was $18.4 million, an increase of $11.3 million in the third quarter of 2023. This is primarily driven by revenue drivers previously mentioned and by favorable project margins in our construction business. I'll now turn to our balance sheet, cash flow and liquidity. Total debt at September 30, 2024, was $475.4 million, and the company had cash, cash equivalents and restricted cash balances of $127.9 million. As noted previously, we completed the sale of our SPIG and GMAB businesses for net proceeds of $33.7 million during the quarter, which improved our balance sheet and demonstrated our ability to continue to execute against our stated strategy to sell certain nonstrategic businesses. Additionally, as previously announced, we are initiating processes to sell certain other nonstrategic businesses and assets. The proceeds of these sales will be used primarily to pay down existing debt and for working capital. I'll now turn the call back over to Kenny.

Thanks, Lou. Well, in closing, we continue to execute against our strategic plan and remain intently focused on driving further improvements in our balance sheet. As we look ahead to the fourth quarter, we expect seasonal strong results and operating momentum driven by our Thermal and Environmental segments to continue with increased services and project schedules from our customers. Our global pipeline of over $9 billion of identified project opportunities remains healthy across all our business segments despite our divestitures, and we anticipate prospects for new bookings and stronger financial performance through the fourth quarter and heading into 2025. We continue to believe our deep industry expertise with clean energy and carbon capture technologies coupled with our long history and traditional energy sources positions us well to deliver environmentally conscious technology-driven solutions to our global customers. I would like to wrap up today by recognizing and thanking our customers as well as our employees, who work hard every day in a safe way to meet the challenges of energy demand around the world. And looking forward, we remain excited about the unique position we hold to provide our diverse portfolio of technologies to meet the increasing baseload generation demand in North America and across the globe and support the world's need for proven clean energy solutions both now and in the future. With that, I'll turn the call back over to Victoria, who can help with our questions. Victoria?

[Operator Instructions] Our first question today comes from the line of Alex Rygiel with B. Riley.

Nice quarter. A couple of quick questions, Kenny. First, as it relates to your EBITDA guidance, $91 million to $95 million, recognizing that's adjusted to exclude some of these divestitures, can you talk to that new guidance range relative to maybe past guidance and where your sort of base business was adjusted, if at all?

Yes. If you -- I mean, if you look past the guidance, I think we're at $105 million to $115 million. If we bridge the SPIG, GMAB results for the quarter and some various expenses associated with that particular piece, it takes you down to that $94 million, $95 million scenario. So we actually just reset based on the SPIG -- primarily based on the SPIG and GMAB divestitures that were just completed for the quarter in that area. And then I mean that's the primary aspect around it. So the rest of it would be just noise, but it bridges the gap between the new target and the old target.

Very helpful. And then of the 12 to 15 active FEED studies worth over $1 billion, what's your traditional conversion rate on these? And what portion of this is kind of already in backlog or implied backlog?

So most of the FEED studies would be -- those are smaller, right? So the typical revenue in FEED study can vary from $0.5 million to $2 million or $3 million depending on the size of the FEED study. So they're not material as it relates to revenue or in a backlog standpoint on it. But once we're engaged in a FEED study, the conversion rate usually is pretty high. As you can imagine, our customers are not necessarily hiring us to do a full range of FEED study and then with no follow-on. But roughly, you could say probably on a 40% or 50% conversion rate on an active FEED study at any given time would be converted. There could be a timing element. It could be inside a year. It could be 2 or 3 years before they're converted into active projects from there. But the exciting part for us, and this is something that we changed, a lot of our -- I mean, we've really driven to obtain more FEED study to leverage the strong engineering position we have for these clients to move into carbon capture and obviously BrightLoop and other areas around it. So the number of FEED studies are exciting for us. And I think it's also reflective that we're obtaining FEED studies on a lot of these newer technologies, including BrightLoop. And so we've got a couple of active BrightLoop FEED studies right now with clients up in Canada, as I mentioned, and elsewhere that are outside of the ones that we've been developing. And so we think that's a pretty exciting development for us as the concept of utilizing a BrightLoop technology is starting to really take hold, I would say, in some of these larger industrial clients as they're looking at alternative ways to produce energy going forward.

Our next question comes from the line of Aaron Spychalla with Craig-Hallum.

First, good to see the coal to gas order, full notice to proceed. Can you just maybe give a little bit of detail on timing and just kind of the cadence of that revenue over the next couple of years? And then just talk about the pipeline there. I mean are there FEED studies for that? Or is there a good amount of work kind of behind that with other conversions?

Let me answer the latter first. Yes, there is -- we have several actually prospects in the pipeline on natural gas conversions. They're not all that big, obviously, but -- out there, but we do have a number of those. I hate to give a number, but let's just say greater than a dozen that we're looking at. Again, those would vary in size on opportunities. But a lot of the utilities are looking long term around either natural gas or the continuity of using -- continuing to use coal as it relates to baseload generation here in the U.S. And we're seeing that continue on. As far as the revenue goes of the -- on the natural gas conversion project on that, we -- obviously, we just received the full notice to proceed. That's why we're announcing it today on the call and excited about that. But revenues would really start to kick in, in '25 but also '26 and a little into '27 as well on that. So it will be spread over that longer period of time on it. So -- but we're obviously excited to get the full notice -- to finally the full notice to proceed. Came in a little longer or late than we expected, but we have it now. So it's going to move into full backlog here, I guess, in November, and we'll start the full work on it here this quarter.

All right. I appreciate the color there. And then just maybe on the balance sheet, can you talk about where kind of letters of credit stand today and kind of the time line for those rolling off and freeing up some liquidity? And then just on free cash flow, the outlook there as we head into 2025.

Yes, go ahead, Lou.

Yes. Letters of credit right now are in the $80 million range. They will roll off over the next 1.5 years. What will happen, not to the same extent, but new letters of credit will come in as we win new business. But we've been able to decrease the percentage of letter of credits that are required. And then on the second part of the question, Aaron, was...

Yes. Just kind of thoughts on free cash flow conversion as we look towards -- thinking about what 2025 can look like.

Yes. I think the free cash flow conversion, as we've walked through the EBITDA, there is -- the interest expense is in the $50 million range, including the dividends on the preferred stock. So you're probably talking of the 95 plus -- $100 million to $95 million of EBITDA, you're probably talking about a 40% conversion rate on that after the interest and the BrightLoop cost of about -- capitalized BrightLoop cost of about $10 million.

And we should add that the -- so SPIG and GMAB, obviously, that's a fourth quarter impact to the company, but there's probably roughly $10 million of letters of credit that will go away over time. I mean it will take a few months to wind those off or convert those, but the new owner will take over those letter of credit. So we'll reduce the letters of credit by that amount over the next month or 2.

So the $80 million that I quoted is really when you take into account the sales, and those $10 million will roll off is really $70 million. And as I said, that will decrease and some will come back as we win new business.

Our next question comes from the line of Rob Brown with Lake Street Capital Markets.

First question is on the Massillon project. I think you talked about some long lead items. When does that sort of start to ramp in full? And could you remind us again when you start to generate kind of or operate that facility?

So those items are in full order now. Obviously, some of that is in material long lead time orders like air compressors and other aspects. Some of that is with outside engineering firms on some of the requirements for the civil construction drawings, diagrams that we've got to submit as well to -- along with the permits on that piece. The real ramp-up will start to occur probably early Q2 next year, I mean, on the ramp-up of the cost sides of the construction element. And then in Q3, we'll move into a heavy period, Q4. And then the following quarter, we'll kind of wind it down. We -- right now, we're targeting to be able to produce hydrogen by early '26, in the early, early part of '26. And then that would go into full commercial state somewhere in Q2 of '20 -- around Q2 of '26 with -- and then we'll begin obviously selling the hydrogen as soon as it's ready in full commercial state. But the production plan of hydrogen, which is the critical part of this, it should be in the early part of 2026. That's what we're targeting right now. I think the -- just add to that because -- go ahead, Rob. Sorry.

I was going to talk a little bit about the West Virginia kind of loan guarantee or loan, I guess, forgivable loan. What sort of project that, that would be for and maybe the sort of other dependencies there to get that launched?

Yes. So we should have that signed here in the next coming day or 2 or 3 on that. We've reached full agreement with the state economic group, and they've been wonderful to work with and very supportive of that project. So the plan is we will target a small to midsize BrightLoop facility that would ramp up by 2030 is when that has to be in operation. And there's -- tied to that forgivable loan is -- really the key caveat there is a limited number of on-site jobs that will create that will obviously be part of the construction aspect of the project and then the ongoing operations of that particular site for that project. So the target is to have that plant up and running by 2030 on that. So we -- that's what we've got contemplated in the agreement.