Babcock & Wilcox Enterprises Q2 2024 Earnings Call Transcript

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Provided by Quartr
August 8, 2024

There are 6 speakers on the call.

Operator

Good evening. My name is Makai and I will be your conference operator today. At this time, I would like to welcome everyone to the conference call. All lines will be muted during the presentation portion of the call with opportunity for questions and answers at the end. Sharon, you may begin your conference call at this time.

Speaker 1

Thank you, Michaiah, and thanks to everyone for joining us on Babcock and Wilcox Enterprises Second Quarter 2024 Earnings Conference Call. I'm Sharon Brooks, Director of Communications. Joining the call today are Kenny Young, B&W's Chairman and Chief Executive Officer and Lou Salamone, Chief Financial Officer, to discuss our Q2 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 could 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 ks that is on file with the SEC and provide further detail about the risks related to our business.

Speaker 1

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 Q2 earnings release published this afternoon and in our company overview presentation filed on Form 8 ks afternoon and posted on the Investor Relations section of our website at babcox.com. I will now turn the call over to Kenny.

Speaker 2

Thanks, Sharon, and thanks, Michaiah, and good afternoon, everyone, and thanks for joining us on our Q2 2024 earnings call. We continue to build on our strong start to 2024 with a robust second quarter results across all of our businesses. Our results in the Q2 reflect the increased demand for our portfolio of technologies that support the generation of efficient and sustainable energy regardless of fuel source and B and W is well positioned to capitalize on the continued growth in natural gas conversions, environmental solutions, carbon capture and clean energy opportunities globally with utility and industrial customers. We are excited about the progress we're making to advance our revolutionary ClimateBright decarbonization technologies, including our innovative BrightLoop system that creates hydrogen without incineration or gasification to support the world's energy transition. We continue to see opportunities for new bookings this year for these types of hydrogen generation and carbon capture projects and we'll discuss some exciting new developments later during this call.

Speaker 2

Additionally, our teams have worked hard to reduce our overall costs, improve our margins as we are seeing the benefits of our more selective market approach and target of higher value projects and opportunities. We've also seen an increase in paid front end engineering design or FEED studies regarding various biomass, carbon capture and hydrogen opportunities. We expect that a few of these FEED studies will lead to booking opportunities over the coming years and we are looking at expanding our engineering teams due to the increased demand for these studies. As mentioned, we generated another quarter of strong operating results during Q2 highlighted by adjusted EBITDA that exceeded our expectation and keeps us on track to achieve our full year adjusted EBITDA targets based on the combination of strong thermal parts bookings and new customer activities and better than expected adjusted EBITDA through the Q2 of 20 24, we are reiterating our full year adjusted EBITDA target of $105,000,000 to $115,000,000 despite the sale of our Danish Renewable Services subsidiary, which was completed during the Q2. The proceeds from this sale improved our balance sheet and demonstrates the execution of our stated intent to sell certain non strategic businesses.

Speaker 2

Importantly, we remain in negotiations related to the sale of other non strategic assets with proceeds expected to significantly reduce our debt obligations, improve liquidity and support growth working capital. We also continued to make progress on our cost reduction efforts during the Q2, achieving $25,000,000 to date as we work toward our target of over $30,000,000 of annualized cost savings. We have significantly improved the cash in our solar operations, which produced $6,000,000 of cash in the 2nd quarter and is now generating positive EBITDA results despite its classification. In parallel, we continue utilizing cash to ramp up our investment in BrightLoop and Climate Bright as we continue developing the pipeline of opportunities and anticipate bookings later this year. These actions and our improved margins are creating a pathway that will allow us to improve our liquidity as we focus on reducing our long term debt.

Speaker 2

The expected growth and anticipated higher margins of our BrightLoop low carbon hydrogen technology and our ClimateBright decarbonization technologies should also lead to continued higher margins in the future. I would like now to discuss our strong 2nd quarter operating performance in which our adjusted EBITDA exceeded the company's expectations. These results combined with strong bookings and year to date set the stage for us to reiterate our full year adjusted EBITDA target range. We are already seeing the benefits of our strategic plan as adjusted EBITDA margins expanded during the Q2 of 2024, representing 100 basis points of improvement compared to the Q2 of 2023. Our margins are benefiting from the shift to reduced reliance on high interest low margin newbuild projects.

Speaker 2

Our margins have been further supported by strength across our aftermarket parts and services businesses. From a segment perspective, our environmental business was a standout performer during the Q2 with revenue increasing 15% compared to the Q2 of 2023 and margins that continue to expand which drove a 97% increase in total adjusted EBITDA compared to the Q2 of 2023. These results were primarily driven by higher margin product mix along with a favorable closeout of the flue gas treatment project. While revenue declined year over year in the Renewables segment as a result of our strategic shift to be more selective and reduce the number of low margin newbuild projects that we pursue, adjusted EBITDA increased 40% compared to the Q2 of last year benefiting from our cost reduction efforts related to the restructuring of our renewable business. Thermal revenues declined compared to the Q2 of 2023 as a result of a completion of a large construction project in 2023.

Speaker 2

However, customer demand for our Thermal segment products and services remains strong as demonstrated by bookings in the first half of twenty twenty four that exceeded bookings in the same period of 2023 and we anticipate a strong Q4 based on previously announced gas conversion projects and recent parts and service bookings. We continue to see strong underlying industry trends with expanding global demand for clean power production and energy security and a global pipeline of identified project opportunities of over $9,000,000,000 which includes over $1,500,000,000 of BrightLoop and Climate Bright opportunities alone. These trends are foundational drivers for our business outlook for 2024 and beyond as we continue to make considerable progress in converting this pipeline into bookings. Moving through the second half of twenty twenty four, we anticipate prospects for continued new bookings and strong financial performance. Our backlog and applied backlog at the end of the second quarter was $472,000,000 $757,000,000 respectively, representing a slight decrease in bookings, but an increase of 39% compared to the backlog and implied backlog at the end of Q2 of 2023.

Speaker 2

As we introduced last quarter, the implied backlog figure includes awarded projects as well as those under contract and have not been fully released for performance and provides a better representation of our customer demand. Looking ahead, given the new EPA requirements, we are seeing increasing opportunities for coal to natural gas and coal to biomass projects within the United States, which is very exciting for us as we look to the remainder of 2024 and into 2025. Many of these projects are either under development in the proposal stage or in final design and have with revenue ranges of $50,000,000 to $400,000,000 in value for B and W. With our increasing visibility of customer demand and our near term booking success, we are reiterating our full year 2024 adjusted EBITDA target range of $105,000,000 to $115,000,000 which excludes BrightLoop and Climate Bright. Importantly, we continue to invest in our BrightLoop opportunities and anticipate spending in the range of $10,000,000 to $15,000,000 in 20.24 on our Bright Loop projects and technology advancement including CapEx.

Speaker 2

Our efforts to progress BrightLoop are moving forward as we further the commercial development of our 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 Bright Loop projects in Gillette, Wyoming Baton Rouge, Louisiana and Massillon, Ohio. In fact, today we are excited to announce a few key developments regarding our Massillon, Ohio project. As we have previously stated, it's important to prove the commercial demonstration of BrightLoop both for hydrogen production as well as syngas production, which can be used as sustainable aviation fuel or SAF or other synthetic fuels. We have signed a 10 year take it tendered offtake agreement with CGI International for up to 5 tons of hydrogen per day while sequestering the CO2.

Speaker 2

We have reached indicative financing terms for the construction and leaseback of the site for up to 10 years as well. And we do anticipate signing the SPV financing letters of intent and begin construction immediately with the goal of reaching hydrogen production by the end of 2025 or early 2026. This is a significant development for our BrightLoop technologies as we now will have a commercial demonstration facility near our headquarters in Ohio. This will raise our technology readiness level into bankable projects as we continue our efforts towards the Wyoming, Louisiana and potentially West Virginia projects as well as other BrightLoop opportunities where we are in discussions or have engaged in feed studies around the world. We remain excited about the prospects and outlook for the BrightLoop projects that are in our current identified pipeline.

Speaker 2

As I mentioned earlier, this pipeline includes approximately $1,500,000,000 of Bright Loop and Climate Bright opportunities alone. We continue to believe this level of activity has the potential to lead to $1,000,000,000 in revenues by 2,030, which would still only represent roughly 1% of the market share for total global hydrogen spend by 2,030. 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. We also continue to see opportunities for new projects related to waste energy in the United States, which should enable us to leverage our Climate Rights decarbonization platform and presents additional higher margin prospects. I'll now turn the call over to Lou to discuss the financial details of the Q2 for 2024.

Speaker 2

Lou?

Speaker 3

Thanks, Kenny. I'm really pleased to read our 2nd quarter results, further details on which can be found in the 10 Q that's on file with the SEC. Our 2nd quarter consolidated revenues were $233,600,000 which is a decrease compared to the 2nd quarter. This decrease is primarily attributable, as Kenny mentioned, to our strategic approach of reducing reliance on lower margin projects and completion of a very large construction project in the Q2 of 2023. Our operating income in the Q2 of 2024 was $42,200,000 compared to an operating income of $12,400,000 in the Q2 of 2023.

Speaker 3

Operating income well exceeded expectations and is primarily attributable to a gain on the sale of our Denmark based subsidiary and a decrease in selling, general and administrative expenses. Our adjusted EBITDA excluding BrightLoop and Climate Bright expenses was $24,600,000 which was ahead of expectations for the quarter. Implied bookings in the Q2 of 2024 were $193,000,000 and ending implied book backlog was 757,800,000 dollars Our earnings per share in the 2nd quarter were a positive $0.24 as compared to a loss per share of $0.10 in the Q2 of 2023. I'll now turn to our segment quarterly reporting results. Within our Badcock and Wilcox segment revenues were $61,000,000 for the Q2 of 2024.

Speaker 3

This was a decrease compared to the Q2 of 2023 and the revenue decrease is primarily due to our strategic shift to be more selective and reduce the number of lower margin new build projects that we will pursue. Adjusted EBITDA in the Q2 of 2024 was $7,700,000 an increase of 63% compared to the $4,700,000 in the Q2 of 2023. This is primarily due to the reduction of our reliance on low margin newbuild projects and a decrease in selling and in general administrative expenses and cost saving initiatives related to the restructuring of our renewable business. Within the Babcock and Wilcox Environmental segment, revenues were $56,200,000 for the 2nd quarter. This is an increase of 15% compared to the 48 point $7,000,000 in the Q2 of 2023.

Speaker 3

This increase is primarily driven by higher overall volumes of cooling technology projects, partially offset by lower volumes of flue gas treatment projects and adjusted EBITDA was $6,700,000 for the quarter compared to $3,400,000 in the same quarter of last year. So our adjusted EBITDA in that segment nearly doubled. And this is primarily driven by improved product mix and favorable flue gas treatment projects. Turning to the Babcock and Wilcox Thermal segment, revenues were $120,000,000 compared to the in the Q2 of 2024, which is in line with company expectations despite the decrease compared to the 2023 quarter. The revenue decrease is primarily attributable to the completion of a large construction project in 2023 that was not fully replaced in the Q2 of 2024.

Speaker 3

Adjusted EBITDA in the Q2 of 2024 was $13,000,000 which is in line with our expectations and a slight decrease compared to the Q2 of 2023, primarily due to the completion of that previously mentioned large project. I'll now turn to our balance sheet, cash flow and liquidity. Total debt at June 30, 2024 was $476,800,000 and the Company had cash, cash equivalents and restricted cash of 202,100,000 dollars As Kenny previously mentioned, we've significantly closed out the legacy solar projects and anticipate cash use being neutral to positive going forward. As previously noted, we completed the sale of a Denmark based subsidiary during the quarter, which improved our balance sheet and demonstrated our ability to execute against our stated strategy to sell certain non strategic businesses. Additionally, as previously announced, we are initiating processes to sell certain other non strategic business assets and assets.

Speaker 3

The proceeds of these sales will be used primarily to pay down existing debt and for working capital. As a result of these actions, we are confident that we have overcome the previous liquidity concerns and continue to invest over $10,000,000 a year annually in the BrightLoop and Climate Bright suite of projects to accelerate our future growth. I'll now turn it back to Ken.

Speaker 2

Thanks, Lew. Well, in closing, we remain intently focused on executing our strategic plan and driving further improvements in our balance sheet. More specifically, we anticipate additional sales of non strategic businesses to drive further improvements in our cash liquidity position and leverage ratio. As we look ahead to the second half of twenty twenty four, we expect 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 $9,000,000,000 and identified project opportunities remain healthy across all our business segments and we anticipate prospects for new bookings and stronger financial performance throughout the second half of twenty twenty four.

Speaker 2

We continue to believe our deep industry expertise with clean energy and carbon capture technologies coupled with our long history of in traditional energy sources positions us well to deliver environmentally conscious technology driven solutions to our global customers. And lastly, as always, I would like to recognize the efforts of our dedicated and talented employees around the world. We have a great team at B and W that's focused on working hard and safely to deliver consistent profitable growth for our shareholders and help meet the world's need for clean, reliable energy now and in the future. I would also like to thank our global customer base and suppliers for their continued support at Babcock and Wilcox. And looking forward, we are excited about leveraging our leading power and environmental solutions to capitalize on the strong growth prospects ahead for the remainder of 2024 and beyond.

Speaker 2

And we remain focused on being a leader, an innovator and an advocate for clean energy future. I will now turn the call back over to Makiya, who will assist us with your questions. Makiya?

Operator

Thank you. We will now begin the question and answer session. The first question comes from the line of Rob Brown with Lake Street Capital Markets. You may proceed, Rob.

Speaker 4

First question is on the Bright Loop project in Ohio. You've got an offtake agreement there and then some financing. Can you give us a sense on how that ramps and how the economic model works for you?

Speaker 2

Yes. So basically there'll be a construction period to build projects over the next 12 to 18 months on the project. So the primary part of the financing will be used to offset a significant amount of cash being borne by the company for the construction period. And then there will be a leaseback of the site during the offtake period when revenues are being produced off the offtake agreement. So over the 10 year period that cash and revenue offset each other on that standpoint.

Speaker 2

So it is a great way for us to build a first commercial project without using a significant amount of our own capital to build a commercial demonstration plant. So pretty excited both on the financing opportunity and also the offtake agreement to buy the hydrogen during that period.

Speaker 4

Okay, great. And then some of the larger projects that you have under development, I know you talked about the engineering work. Could you give us a sense of how those progress? And I think you talked about expectations by this year getting some of those to move forward as well, but just an update on how the Wyoming and the Baton Rouge projects are coming along?

Speaker 2

Yes. We're in full engineering mode and working with on the Wyoming project right now have been doing a lot of the on-site engineering works, civil engineering, those type of activities in conjunction with that. We're as previously stated, we're working closely with Black Hills Energy on that particular project who would be the user of the hydrogen as they're working through their rate base considerations inside Wyoming in parallel. So we continue supporting them on those particular efforts and anticipate more developments and other activities around that hopefully later this year that we can put out. On the Baton Rouge project, primarily we are although I can't name them public at this point, but we since we are under NDA, but we are in full discussions with the developer and investor in the initial 15 ton per day project that we contemplate there with the follow on up to 200 tons per day in that particular site.

Speaker 2

And so we're in full discussions with them on moving that project forward. So too early to announce any certainty on the developments of that investment coming in. But other than that, we're in full discussions and considerations right now for both the 15 and the 200 ton per day projects in Baton Rouge. And that again, that would be using biomass in that particular case.

Speaker 4

Okay, great. Thank you. Congratulations on the progress. I'll turn it over.

Speaker 2

Yes, thanks.

Operator

Thank you. The next question is from the line of Alex Rygiel with B. Riley. You may proceed.

Speaker 5

Thanks. Good evening, guys. A lot of great things here.

Speaker 2

Hey, Alex.

Speaker 5

A couple of questions first. Kenny, as it relates to your guidance, it's great to hear that you're reiterating your guidance, your EBITDA guidance. I guess my question is sort of kind of what's at risk there or maybe what portion of that guidance if any at all is not yet in backlog and or what are some of the variables that can help you to be near the low end or the high end of that range?

Speaker 2

Yes, it's mainly timing on primarily I would say a couple of the larger projects, gas conversion projects that we announced previously. And it's just it's really the timing of the exact starting point of some of those activities. And like anything on our projects, especially larger projects, our revenue and margin is all based on cost recognition. So it's just the timeliness of how we get orders through and on some of those projects and just the timing of that that could get the higher end of the range or the lower end of the range on that. So that's always our challenge, but that's those are the main considerations there.

Speaker 5

Excellent. And then, great to see your net debt down here. Any update on the timing of additional non core asset sales?

Speaker 2

We're other than we're just in discussions and those continue on and anticipate hopefully 1 or 2 yet this year. And I would leave it at that for now, obviously since we're in discussions and negotiations on those. But, you do anticipate 1 or 2 yet this year on that and that's probably it's probably as much as I want to get into it on the call.

Speaker 5

Excellent. And then coming back to the Ohio Bright Loop project. Can you help me to understand that leaseback again? How much capital is BW going to have to put up on the front end there for construction? And exactly what's the timeframe or when does that sort of get paid back and so on?

Speaker 2

Yes. And Lou can go into it more, but go ahead, Lou.

Speaker 3

No, go ahead, Kenny, and then I'll follow-up.

Speaker 2

Okay. So what we're anticipating, I mean, the total project to build the project will be in the roughly $50,000,000 $60,000,000 range. I should say that, let's just call it $60,000,000 to $65,000,000 range to build out that particular project is what we're anticipating. Initially, we'll probably have, I don't know, roughly 5 to 10 as we mentioned, we're spending about 10 a year investing in BrightLoop. Some of that investment goes towards that project.

Speaker 2

So, it's not duplicative or incremental on top of that. I just want to add that. So about 5 to 10 would come from B and W in that and the rest would be financed out to do the construction portion of that particular project. And then the revenues for the hydrogen would start with the 1st day that we're producing hydrogen, which again we do anticipate at the end of 2025, really 2026 as we start to play some of the long lead time orders for equipment and other aspects associated with that particular project overall. So that's, Lou, I don't know if you want to add to that, but that's rough order of magnitude how we think about it in terms of the B and W's portion of it.

Speaker 2

So I think we're excited about it because we need to have that commercial demonstration out and this is actually a much more affordable way for us to do that to get that first commercial project off the ground so that we can increase our TRL level. And what we're excited about, normally we would have to invest in that project ourselves and build it ourselves almost like an R and D facility. In this particular case, we're doing that in a commercial environment where we're receiving revenues to cover the costs associated with that based on the revenues of the hydrogen that we'll be selling to the offtake or through the offtake agreement itself. So we think it's a great way for us to get this off the ground, a great way to do it with a low amount of cash requirements by B and W and we get to offset the financing costs of that over the long term period versus the taker if tender off take agreement that's for up to 5 tons a day. So that part seems like a win win for us.

Speaker 2

But Lou, if you want to add some color.

Speaker 3

Just to amplify a little bit, Alex, it's really a 2 phase with 1 entity financing. 1 will be the construction phase, where we'll have your basic construction loan for the construction period. And then there will be an off what we call an off take period to go with the off take once the construction is completed, where we'll have what would be a quick can do a long term lease for the remainder of the to amortize out those construction costs that we incur. So as Kenny said, for us, it's a really good cash flow project because we're able to keep cash on our balance sheet, use the construction financing and then use the lease financing when the offtake agreement starts producing revenue.

Speaker 5

That's great. Thank you.

Operator

Thank you. There are currently no questions registered. So at this time, I would like to pass the conference back over to the management team for any further remarks.

Speaker 1

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

Operator

Once again, thank you all for attending today's call. This will now conclude today's conference call. We appreciate your participation. We hope you have a wonderful day and you may now disconnect.

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Key Takeaways

  • B&W delivered Q2 adjusted EBITDA of $24.6 million that exceeded expectations and reiterated its full-year target of $105 million–$115 million despite the sale of its Danish Renewable Services unit.
  • The company’s global pipeline of identified project opportunities stands at over $9 billion, including about $1.5 billion of BrightLoop and ClimateBright decarbonization prospects, driven by strong demand for natural gas conversions, carbon capture and clean energy technologies.
  • B&W progressed its BrightLoop hydrogen system with a 10-year offtake agreement for up to 5 tons/day in Massillon, Ohio, secured indicative financing and plans to start production by end of 2025 or early 2026 as a commercial demonstration facility.
  • Cost reduction initiatives have delivered about $25 million in savings toward a $30 million annual target, while a shift to higher-margin projects drove a 100 basis-point expansion in adjusted EBITDA margins year-over-year.
  • The company remains focused on selling non-core assets to reduce debt and improve liquidity, and continues to reinvest in growth areas such as BrightLoop and ClimateBright technologies with planned 2024 spending of $10 million–$15 million.
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Earnings Conference Call
Babcock & Wilcox Enterprises Q2 2024
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