Chase Jacobsen - VP, IR Jim Ferland - Chairman and CEO Jenny Apker - SVP and CFO.

Tahira Afzal - KeyBanc Bob Labick - CJS Securities Jamie Anderson - Credit Suisse.

Good morning. My name is Mariama, and I will be your conference operator today. At this time I would like to welcome everyone to the Babcock & Wilcox Q1 2017 Earnings Conference Call. [Operator Instructions] Thank you. I would now like to turn the call over to Chase Jacobsen, Vice President of Investor Relations. You may begin your conference..

Thank you Mariama, and good morning everyone. Welcome to Babcock & Wilcox Enterprises' first quarter 2017 earnings conference call. I'm Chase Jacobsen, Vice President of Investor Relations at B&W.

Joining me this morning are Jim Ferland, B&W's Chairman and Chief Executive Officer and Jenny Apker, Senior Vice President and Chief Financial Officer, to discuss our first quarter earnings. Many of you have already seen a copy of our press release issued late yesterday. For those of you who have not, it's available 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 most recent annual report on Form 10-K and our Form 10-Q for the first quarter are on file with the SEC provides further detail about the risk factors related to our business.

Additionally, I want to remind you that except as required by law, B&W undertakes no obligation to update any forward-looking statements to reflect events or circumstances that may arise after the date of this call.

We also provide non-GAAP information regarding certain of our historical results, as well as our 2017 outlook, to supplement the results provided in accordance with GAAP. This information should not be considered superior to or as a substitute for the comparable GAAP measures.

We believe that the non-GAAP measures provide meaningful insight into the Company's operational performance and we provide these measures to investors to help facilitate comparisons of operating results with prior periods and to assist in understanding B&W's ongoing operations.

A reconciliation of historical non-GAAP measures can be found in our first quarter earnings release issued late yesterday and in our Company overview presentation on our website. 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 turn the call over to Jim..

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

Consolidated revenues for the quarter were $391 million down from $404 million last year, as revenue from recent acquisition helped to offset lower revenue in Power. The timing of work along with disciplined cost control throughout the organization allowed us to report adjusted EPS of $0.04 which is ahead of our original expectations.

Importantly, revenue in our Power segment while lower compared to last year was in line with our forecast and because of the proactive restructuring we announced in mid-2016, gross margin for the segment was modestly higher at 21.9%.

In the renewable segment, we're working to position the business for the future and are making progress toward the completion of our projects currently in our portfolio. On a net basis, project cost across our renewable portfolio were in line with the updated estimated cost to complete we provided in the fourth quarter results.

In the quarter, we continue to improve our project management leadership and internal review processes across our renewable business. We are intently focused on execution. With respect to the segments two large non-U.K. projects, construction on the first is essentially complete and the other project is well into commissioning.

Both of these projects are expected to be turned over to the respective customers in the second half of 2017. As the project reaches its completion, we will continue to transition our resources to the other projects in our portfolio. Turning to Industrial, MEGTEC had a softer than expected start to the year in terms of both revenue and bookings.

That said, we're seeing a much improved marketplace and we are on track for significantly improved bookings in Q2. As such, we're holding our bottom line expectations for MEGTEC for the year.

Earlier in the quarter, we continued to expand our industrial portfolio with the acquisition of Universal Acoustic & Emission Technologies consistent with our longer term strategy to grow our industrial segment through acquisitions. Universal provides custom engineered acoustic, emission and filtration solutions to the industrial marketplace.

It's a good bolt-on for our B&W MEGTEC business and we are already seeing revenue synergies with other product lines in our industrial segment. Integration of Universal is going well and we remain confident in our ability to recognize cost synergies of $2.5 million to $3 million annually by 2018.

On the theme of revenue synergies, we're excited about B&W SPIG awards in the quarter and its prospects going forward. As highlighted in our recent press release, SPIG was awarded three major contracts in the United States worth over $60 million to design and supply dry cooling systems which more than doubled its preacquisition U.S. business.

Leveraging B&W's brand and strong customer relationships is providing the opportunity for SPIG to gets its technology in front of key customers which we believe is critical of these awards. In anticipation of the growth of its U.S.

business, SPIG has established a new office in our Barberton, Ohio location to help facilitate seamless execution of the new contracts. As with SPIG, we are already seeing opportunities for Universal that they would not have been exposed to preacquisition. We would expect to bring some of these new opportunities to closure in the coming quarters.

Of note, adding Universal's noise abatement technology to SPIG's cooling equipment has allowed us to further reduce decibel levels. This improvement is proving to be valuable in the marketplace and played a role in SPIG's recent awards.

Our ability to leverage the B&W name and scale in both recent and future acquisitions will be a key factor in our long-term growth. I will now turn the call over to Jenny, who will discuss the segment results and other financial matters in more detail after which I will provide an update on our outlook and strategic priorities..

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

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

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

Our consolidated bookings for the quarter were $317 million, our highest in the past four quarters resulting in a total backlog of 2.0 billion at the end of Q1, essentially flat compared to year end 2016.

It is important to point out that our industrial segment and aftermarket parts and services businesses grow as a percentage of total company revenue a greater share of our annual revenue will come from a larger number of smaller sized and shorter cycle contracts, as well as from additional book-and-bill type work.

Consequently, we expect to see a change in the relationship between backlog and forward revenue as we continue to transform the company. Turning to the Power segment, revenues were $196 million compared to $289 million in the prior-year quarter.

The decrease was expected and is due to lower volume in new build utility and environmental equipment as well as in retrofit and emissions systems.

As a result of the proactive restructuring plan we announced in the second quarter 2016 and good execution, gross margin in the Power segment was 21.9% in the quarter, up slightly compared to first quarter 2016 despite the revenue decline. We continue to anticipate the Power segment will be able to sustain gross margin in the low 20% range in 2017.

Renewable segment revenues were $106 million up from $84 million in the prior-year quarter. As expected gross profit decreased due to the previously disclosed changes in estimated costs to complete on multiple contracts.

As Jim discussed, contract performance was largely in line with our expectations during the quarter and we continue to expect the segment to generate low double-digit gross margin for the full-year 2017. Industrial segment revenues were $92 million up 184% year-over-year due to contributions from the SPIG and Universal acquisitions.

Gross profit in the segment was $15 million up from $8 million last year due to higher revenue. Industrial segment gross margin of 16.6% was down from the 23.9% last year mainly due to the change in revenue mix. As we had said previously, we expect industrial segment gross margin to be roughly 20% in 2017.

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

We continue to expect the 2017 full-year adjusted effective tax rate to be in the range of 32% to 34%. Turning to our balance sheet, at the end of the quarter we had cash and equivalents of $46 million and revolving debt outstanding of $103 million. This compares to $96 million and $24 million at December 31 respectively.

As anticipated during the quarter we used our revolver to fund the Universal acquisition and together with our non-U.S. cash balance to support the cash needs of our renewable business. We are maintaining our 2017 non-GAAP EPS guidance of $0.75 to $0.95 which excludes non-cash intangible amortization and other one-time items.

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

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

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

In Power we continue to see strength in U.S. service and retrofit opportunities related to coal ash projects and our aftermarket parts and services business driven by book-and-bill type work has a solid pipeline of opportunities.

A good example was the recent $15 million contract we are awarded to replace oil component at a plant we designed and built many years ago. This type of work is relatively short cycle and provides a good base for the Power segment.

Last quarter we referenced the $100 million international equipment only contract for which we have begun preliminary engineering under a limited notice to proceed.

We expected to book that contract in the first half of 2017 but due to complexities surrounding international government approvals permitting and financing the full award which we still expect has now been pushed to the second half of 2017. In renewable, our focus in the near-term is on execution.

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

based Power business in Ohio. In regards to the European renewable market, we are working to finalize new partnership models that will allow us to meet our customer's expectations while better focusing B&W on our core technology and improving our project specific risk profile.

We continue to expect to reenter this market in the latter half of the year. In Industrial, we are building on our early revenue synergies accepted in the marketplace are looking to further leverage cross-selling and technology opportunities going forward.

Externally, we are seeing improved industrial market conditions in line with broader market commentary, as well as continued strength in natural gas power and pipeline markets. We're also seeing the opportunity to enter new markets. A good example is lithium-ion battery production associated with growth in electric vehicles and energy storage.

As these new battery factories are constructed, B&W MEGTEC dual coding and drying solution is well positioned for growth. We expect to be talking more about this opportunity in the coming quarters. Looking at 2017 and beyond, B&W is well positioned to deliver shareholder value.

We've made significant progress in our strategy to diversify our revenue base taking B&W-wide coal exposure from 55% in 2014 to just over 40% in 2017, while increasing our industrial exposure. For the remainder of 2017 we are focused on project execution and on the integration of our recent acquisitions.

In the coming months we look forward to reentering the European renewable marketplace with the strength in business models. In early 2018, we also expect to reengage our industrial acquisition strategy with our focus remaining on industrial companies with good technology where we can leverage our strong B&W name and key customer relationships.

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

[Operator Instructions] Your first question comes from Tahira Afzal with KeyBanc. Your line is open..

Thank you, and Jim congratulations to you and your team for getting everything back on track..

Thanks Tahira. Good morning..

Good morning. So Jim I guess the first question I had was really in regards to Power, a bit light on the revenue side given - you're aiming for 1 billion over there.

Do you expect the Power side to also be sort of backend loaded so that we are not too off on the revenue target there?.

Yes, so just working through the power numbers very quickly, just under $200 million of revenue in the first quarter, you can see in the Q about $338 million in backlog we expect to burn off in 2017.

So the rest of the GAAP is made up by more traditional book-and-bill I’d say $200 million to $225 million is a reasonable number to expect in the last three quarters.

And then we have a number of projects that we've been selected on, and new project flow coming in the back half of 2017 that we expect to book in for a large portion of that revenue to occur in 2017 probably the best example of that is the large number of coal ash related projects that we see in North America.

In addition to that international new coal project I mentioned that we expect to book in the latter half of the year..

Got it, okay, Jim that is helpful. And then just a follow-up it’s great to see SPIG getting leverage, you’ve talked about that in the past.

But can you help me get a little comfortable around lessons learnt from how fast you grew the renewable business, maybe too fast and as you look to really leverage a lot of these newer businesses what the lessons learnt are?.

Absolutely so it clearly has been a point focus for us in regard to SPIG in particular in the U.S. marketplace.

SPIG’s center of excellence [in the State’s] [ph] is based in California and while the things we've done given this new workflow that we see coming in and given the expertise we have in our Ohio power operation, as we've actually created a second SPIG business unit in Ohio.

And we’ve staffed it primarily with a talented group of project management procurement and engineering folks we’ve pulled out of Power. So we're trying to as you said we've learnt the lessons from the renewable business and we're getting ahead of this SPIG business.

So we're staffing up, we’re bringing some really good people to supplement the talent we already have in California and then we’ll continue to leverage the Italian base. So I think we’re well prepared to handle this new work inflow and perhaps even similar work we can it but we're working hard to stay ahead of the opportunity..

Got it. Jim thank you very much and I’ll hop back in the queue..

Your next question comes from Bob Labick with CJS Securities. Your line is open..

Good morning.

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

Well, Bob, there are a couple of factors, for starters some of the improvement in Q1 actually came because the excellent project performance in the Power segment was project performance we expected to conclude in the second quarter but because of good weather we were able to get to those projects more quickly and it pulled into Q1.

As we’ve already talked, the revenue is back half loaded and a good portion of the profits follow that the revenue timing. I think more than any seasonal disruption that's the large reason for the shift from what would be a normal seasonal pattern to what we're seeing this year..

Okay.

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

I would expect so at this point, yes..

Okay, great.

And then just my follow-up just in terms of cash flow usage, we talked about on the Q4 call, what are the, I guess expectation for uses of cash from working capital and for completion of the renewable projects and where you will end the year in terms of cash and debt?.

Well, our original forecast was to be net users of cash to the tune of about $120 million for the full year and that forecast I think it's still right on. You can kind of anticipate whether you hold the cash balance level and you use all of that delta in the debt balance or if we’re able to utilize some our non-U.S.

cash as we have been able to thus far we might see our debt balance little lower than you would forecasted at the beginning of the year, but the cash balance dropped a little bit from the beginning of the year..

Great. Thanks very much..

[Operator Instructions] Your next question comes from the line of Jamie Cook from Credit Suisse. Your line is open..

Hi, this is Jamie Anderson on for Jamie Cook. I just want to dig in a little bit more on the Power revenue question again so doing that bridge again it looks like based on what you had in Q1 and what you have in backlog what you need to secure in terms of book and burn work for the rest of years about $466 million.

Jim I know you spoke to about $200 million to $225 million in underpinning that you guys can count on but from previous commentary when you guys were talking about larger awards, it seems like those needed to happen in Q1 or Q2 to kind of contribute within the year.

It seems like now those are shifting out, so I guess in that remaining delta of about $200 million to $250 million, call it of book and burn work that you guys need to secure how confident do you guys feel in that and then what do think the cadence of that is for the year? Thanks and I have a follow-up..

So your numbers make sense to us I’d say just in the ballpark $200 million to $225 million on work we’ve been selected or we call it new project low, or medium size or larger projects. We expect to see that work coming in Q2, Q3 these are tending to be shorter cycle projects.

So, as they come in, I think we’ll be able to bring a little bit more of that work into the current year than we may have in the past when we are working on larger environmental retrofit type projects. So your numbers are in line and in Q2, Q3 we expect that work to show and most of it to get done in the latter half of the year..

Great, thanks. And then as we kind of look into FY 2018 given the great execution in Q1 on the renewable side, how should we think about normalized earnings and free cash flow as these problem projects kind of roll off.

Are you guys still thinking about those targets that you laid out for EPS between $1.20 million and $1.45 plus, are we still looking at free cash flow between 75% to 100% of net income or has that kind of air gap in bid and proposal activity on the renewable side and maybe some of the lingering impacts from the problem projects that kind of laid, you push those targets out maybe another year?.

So what I’d say to that is, we’d like to see how fast we can get back into the renewable projects in the second half of the year. The priority for us on that is around creating a new business model that lets us leverage a great technology we have but obviously we need to reduce the risk profile on these projects.

We need to focus on what we're good at and we need to find partners that can work with us, to have expertise that’s different than us and together I think we can do a nice job of reentering the market by timing matters on that.

So we’ll take a look back and we’ll make sure we update folks over the next couple of quarters on how fast we think we’re going to rebuild that renewable backlog. That said, we continue to feel good about both our technology the feedback from the customers and the market. The market in Europe is surprisingly strong and whereas in the U.K.

we thought the market we tend had to would be slowing down by now it's actually not. Now we’re purposely missing a few months worth of that opportunity, but it still going to be there for the next two or three years. So we feel good about it this question of timing.

In regard to cash flow yes, I’d expect this to get back on normal track of 75% to 100% conversion, the upside opportunity that might exist in 2018 is how fast we can rebuild that renewable backlog and pickup some advanced bills and play catch up..

Okay, great. Thanks so much, I’ll hop back in queue..

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

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

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