Chase Jacobson – Vice President-Investor Relations Jim Ferland – Chairman and Chief Executive Officer Jenny Apker – Senior Vice President and Chief Financial Officer

Lee Jagoda – CJS Securities Jamie Anderson – Credit Suisse Sean Eastman – KeyBanc Capital Markets

Thank you, Mike, and good afternoon, everyone. Welcome to Babcock & Wilcox Enterprises second quarter 2017 earnings conference call.

I'm Chase Jacobson, Vice President of Investor Relations at B&W. Joining me this afternoon are Jim Ferland, B&W's Chairman and Chief Executive Officer; and Jenny Apker, Senior Vice President and Chief Financial Officer to discuss our second quarter results and outlook.

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 press release and also in our annual report on Form 10-K and our Form 10-Q for the second quarter on file with the SEC, which provide further details about the risks related to our business.

Additionally, except as required by law, we undertake no obligation to update any forward-looking statement. 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. A reconciliation of historical non-GAAP measures can be found in our second quarter earnings release issued this afternoon and in our Company overview presentation posted on the Investor Relations section of our website at babcock.com.

I would ask that you limit yourself to one question and perhaps one follow-up. And you are of course welcome to get back in the queue.

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

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

During the second quarter, we achieved a number of successes in our company that speak to the merits of our long-term strategy and the hard work and dedication of employees throughout the organization, which I will cover shortly. But first, I'll discuss the $115 million charge arising from unexpected cost and schedule issues in our Renewable segment.

I will also discuss actions we have taken in response to this development. Late in the second quarter, as we continue to advance the new-build projects, we then scrubbed our cost and schedule estimates.

As a result, we concluded we were not on target with our previous forecast. This was disappointing given the extensive analysis we conducted and actions we took earlier this year in an effort to remediate cost increases and reduce risk on these projects.

In the quarter, we recorded $115 million charge for increases in estimated cost to complete projects in our backlog, the large majority of which related to four construction projects in the UK. The main items behind the estimated cost increases are higher quantities and lower overall productivity levels, which led to lengthened schedules, higher costs and increased reserves for liquidated damages.

We've also recognized a need to include additional float related to potential variations in the project schedules and other identified project risks in our revised forecasts. Specific to the four ongoing projects in the UK, these estimates represent 20% of estimated remaining spend, compared to 14% at the end of the first quarter.

The majority of construction and spending on these projects is estimated to be complete in the first half of 2018. Importantly, the two projects in Denmark have essentially completed construction.

One is in operational testing currently, and operational testing will continue on the other once cooler weather arrives. As these projects come to completion, our risk profile decreases and additional resources will be available for our projects in the UK.

During the second quarter, we completed our review of potential new business models, and also we review of the broader renewable waste energy and biomass markets. We concluded that there is demand for our proprietary and reliable boiler, grate and environmental equipment technologies.

Going forward, however, our business model will change. We will focus primarily on our core technologies with the balance of plant and civil construction scope being executed by a partner.

Although this execution model reduces our addressable market opportunity from a revenue per project standpoint, it carries lower execution risk and better profitability potential and is more consistent with our company-wide strategy of being an industrial equipment technology and solutions provider. We have completed extensive analysis of potential partners, and we plan to return to bidding renewable projects in Europe under our new execution model in the second half of 2017.

Profitability and risk management will be key moving forward. Moving on to our other businesses.

In Industrial, we had our second consecutive quarter of robust bookings growth driven by greater than 60% year-over-year organic bookings growth for MEGTEC and contributions from the SPIG and Universal acquisitions. While we are pleased with the bookings growth, we were not happy with the gross margin performance in the quarter, which was mainly due to overruns on several SPIG projects.

We have new leadership at SPIG, and with increased engineering and project management support from our Barberton, Ohio office, we believe the issues will be largely contained in the quarter and we expect improved profitability going forward. Additionally, as part of our Industrial growth strategy during the quarter, we announced the realignment of the Industrial Steam Generation business line into the Industrial segment and that we were aligning our multiple Industrial platforms under a single business unit leader in an effort to drive better cross-selling and a more consistent focus on execution.

We're seeing early signs of success from these actions, particularly as we work to drive cross-selling opportunities throughout the organization and improve our position in end markets that have not historically been core to B&W. One recent example is an opportunity to provide equipment to a chemical project in Southeast Asia where we leverage our history with a large well established global EPC company, the package equipment from our industrial steam group and MEGTEC to provide an attractive solution to the customer's procurement team.

Further, as this project moves to its later stages, there are opportunities for SPIG to provide cooling solutions to the project. As I mentioned last quarter, we continue to see new opportunities for MEGTEC's double-sided drying and coating technology in the lithium ion battery production space.

The pipeline of these opportunities is growing and has potential to be a growth market for B&W with opportunity for multiple bookings per year over the next several years as the lithium ion battery production facilities are built out globally. Turning to our Power segment.

We continue to execute well, and the proactive restructuring plan we introduced in mid-2016 is delivering results as margin performance remains strong. In the quarter, we reported segment gross margins of 23%, which are solidly within the low 20% range we have targeted.

Bookings and revenue are being impacted by timing on new-build, environmental and retrofit projects. And our aftermarket business, which represents nearly three quarters of the segment's revenue, is performing well and is finding ways to mitigate lower market demand with share gains in certain product areas.

I will now turn the call over to Jenny, who will discuss our financial results and new financing arrangements. After which, I'll provide an update on our outlook and priorities.

Thanks, Jim. Turning to second quarter financial results.

Consolidated revenues were $350 million compared to $383 million in the prior year second quarter. Higher revenue in Industrial, driven by revenue from our SPIG and Universal acquisitions, was offset by lower revenue in Power and lower revenue recognition on Renewable new-build projects.

For the quarter, we had an adjusted operating loss of $119 million, mainly due to the increase in estimated costs to complete Renewable projects. As a result, we reported an adjusted loss per share of $2.56.

Compared to our previous forecast, the main variables were the charges in the Renewable segment, lower than expected profits in the Industrial segment and higher interest expense. Bookings in the quarter were strong.

Consolidated bookings were $310 million, essentially in line with our bookings from Q1, with Industrial reporting its second consecutive quarter of book to bill above 1.0. As Jim mentioned earlier, Industrial bookings were driven by the expected improvement at MEGTEC as well as continued strength at SPIG.

Consolidated backlog as of June 30, 2017, was approximately $2.0 billion, which was modestly lower compared to last year – I'm sorry, to last quarter. Looking at results in our individual segments.

Revenues in the Power segment were $214 million, down 18% compared to the prior year quarter. The decline was due mainly to the lower construction activities associated with new-build utility and environmental equipment and retrofit projects.

Despite the revenue decline, gross margin was 23.0% in the quarter, down modestly from 23.9% in the prior year quarter but well within our forecasted low 20% range and driven by strong execution and the proactive restructuring we announced in mid-2016. Renewable segment revenues were $48 million.

While the level of activity was comparable to last year, revenue was impacted by changes in estimated cost to complete new-build projects. The segment reported a gross loss of $111 million, and solid O&M performance was more than offset by the estimated changes in costs to complete new-build projects.

In the Industrial segment, revenues were $90 million compared to $38 million in the prior year quarter, driven by contributions from B&W SPIG and B&W Universal. Despite higher revenue, gross profit was $9.5 million compared to $11 million in the prior year quarter, mainly as a result of product mix and several small issues on cooling system projects that in the aggregate, impacted profitability by about $8 million.

Supported by strong first half 2017 bookings and the timing of projects, we expect revenue growth across each of our Industrial business lines in the second half of 2017 to be a more normal gross profit margin around 20%. Consolidated SG&A was $69 million in the quarter compared to $63 million in the prior year quarter as lower SG&A from savings in Power were offset by the addition of B&W SPIG and B&W Universal as well as incremental cost to support the Renewable segment.

Our 2Q – our Q2 GAAP and adjusted effective tax rate were both impacted by losses and other discreet items in the quarter, which will affect the rate for the full year as well. Based on the jurisdictional location of our losses, we expect to record a tax expense for the year.

Turning to our balance sheet. At the end of the quarter, we had cash and cash equivalents of $68 million and total debt of $131 million.

As a result of the additional charges in the Renewable segment, we have completed a new financing arrangement and amended our existing revolving credit facility. This financing structure provides us the financial flexibility to execute on our existing business and to pursue organic growth in our core markets.

The new financing arrangement provides us with a $176 million second-lien term loan. Proceeds from the term loan will be used to reduce balances under our existing revolving credit facility, and as a condition of the term loan, we will use roughly $50 million to repurchase the lender's existing equity in the company, thereby reducing our share count by 4.8 million shares.

We will also have access to a $20 million delayed draw term loan conditions on certain terms in the agreement. Based on the new financing arrangements, we now expect interest expense to be approximately $17 million in 2017, excluding the interest related to the ARPA litigation.

We are not providing updated adjusted EPS guidance for 2017. However, I will note that because of timing of revenue in our backlog, the impact of lower revenue and little gross margin in our Renewable segment and incrementally higher interest expense, we expect to report a small adjusted loss per share in the third quarter with a much stronger fourth quarter that could be modestly above the current analyst consensus estimate.

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

Thanks, Jenny. Looking to the remainder of 2017 and into 2018, we remain committed to our strategic priorities and believe we have the operational and financial resources in place to deliver on our updated goals.

Our focus is on execution, leveraging our technologies and relationships with existing and new customers and positioning the company for the future. In Renewable, our full attention is on completing the projects in backlog and positioning the company for profitable growth in the future.

We believe we now have the right execution model in place. We have opportunities to bid in the UK and Europe in the second half of 2017 and a growing pipeline of prospects in other regions as well.

By making sure we have the appropriate risk and profitability profile on the projects we pursue is of utmost importance. Based on our current backlog, we continue to expect revenue in the segment to be roughly $350 million in 2017 with a small positive gross margin in the second half.

Driven by strong bookings in the first half 2017 and a solid pipeline, our Industrial segment is poised for strong revenue performance in the second half 2017. We expect the segment's revenue to be $400 million to $450 million in 2017 with gross margin returning to a more normal level of around 20% in the second half.

We're excited about the cross-selling opportunities and entering the new markets. As I mentioned earlier, as this market moves forward, lithium ion battery production is shaping up to be a strong opportunity for B&W as we believe our double-sided drying and coating technology provides a competitive advantage.

Based on a healthier end market, recent bookings and a solid pipeline, we see good organic growth potential across our Industrial business units as we approach 2018. In Power, our aftermarket and retrofit business is performing well.

However, as expected, the number of international new-build prospects in our pipeline is declining. We continue to have a prospective large international project, which could come in the next few quarters, but timing is proving difficult to predict.

Given the delay in this booking and fewer U.S. environmental prospects as a result of a changing regulatory environment, we're lowering our forecasted Power segment revenue to $825 million to $875 million for 2017.

Based on current market expectations, we believe we can hold this level steady in 2018. Despite lower revenue, as a result of our proactive restructuring, we expect to sustain gross margins in the low 20% range.

To sum it up, we had a challenging quarter in Renewable and we need to get these projects done. We're pleased with the performance in Power and excited about the growth in Industrial.

Improving profitability, managing our balance sheet and driving growth in key markets are all focuses for the remainder of the year. With that, I'll turn the call back over to Mike, who will assist us in taking your questions.

Hi, this is actually Lee Jagoda for Bob Labick. Good afternoon.

Good afternoon.

So first, some questions around the financing. So this new piece of financing, this $176 million, what's the interest rate on that?

And is it all cash? Or how does – what do the terms look like?

That $176 million term loan will carry interest at a 10% per annum fixed rate of interest.

And it's all cash interest?

It's cash interest.

So then the entire existing term loan should be paid down by that and cash on hand? Is that how you're getting the $17 million?

Or is it – or how are you thinking about that?

We also amended our credit facility. And in the terms of the amended credit facility, our interest rate is up a little bit.

That credit facility will be filed with our 10-Q, but you'll be able to see the full terms in that when it gets filed.

Well I mean, given we're in a regulatory environment, can you just give us the rate on the credit facility?

The LIBOR spread on the credit facility is now 4%, okay.

Okay. And as I look at – it looks like you're using the – as you said, $50 million to repurchase roughly 4.8 million shares.

That would imply roughly a $10.40 share price on that stock. How did you kind of agree on that versus where the stock is currently trading and may trade tomorrow?

Sure, this is Jim. So we looked at the – a variety of different financing opportunities in the last several – the last few weeks.

And when we looked at the opportunity that AIP presented us, we look at in its totality, which included the overall interest rate, other terms and conditions as well as the buyback. And when we put all of those together, and that's how it was negotiated, right, the AIP opportunity was the best by far.

So the actual price paid for the stock was part of the broader deal.

Okay. And as we look out, it sounds like these projects, these problem projects, are going to run through the first half of 2018.

Assuming you'll be doing work on these projects to finish them and you estimated the cost to complete, how much cash do you expect to burn between now and the second half of 2018 to get these things done?

We had originally said we thought we would have negative cash flow for the year in the neighborhood of about $120 million. We are now looking at a negative cash flow for the full year 2017 of about $200 million.

So I would say most of the incremental costs associated with these projects will be coming through the cash – coming through cash in the back half of the year.

Hi, this is Jamie Anderson on for Jamie Cook. So I just wanted to get a little more color on the four UK projects.

When we're thinking about these – and I appreciate the comments on the amount of contingency, how these are 20% versus 14% of the remaining cost to complete. But what kind of gives you guys the certainty that this is enough cushion?

So this is kind of like the ultimate last round of charges? And then when I'm thinking about normalized margin, I know that you guys have kind of historically talked about 20%, somewhere in there.

So when we're thinking about these projects, are they in a loss position? Are they in the drag on margins?

So as we get into 2018, how do we kind of think about the margin impact there? And then I have a follow-up.

Thanks.

Okay. So let me talk about the projects themselves to start to your first question.

So in the past few quarters, we've made substantial changes both in the management of the projects and the processes we've used to oversee the projects. And as everyone knows, we can't be absolutely sure that the revised cost estimates are going to be accurate, right, as it depends on multiple future events.

I will tell you, we scrub these projects hard. We added room in the estimates for schedule fluctuations and other potential risks that we see on the individual projects, and we're working as hard as possible to ensure we stay on course.

So it's our belief that the provisions we've made through Q2 are adequate, but there can't be any assurance that we won't have future losses on the projects.

And as for normalized margins, Jamie, you're right. I think we have said before that the margin in this business ought to be in the high teens.

And certainly, when you have a significant portion of the revenue in a segment coming through with zero margin, that's going to impact the margin that, that business produces. We're not – we're stopping short of giving 2018 guidance at this point.

There will be some revenue that – from these projects that persists through 2018. So the full year 2018 margin is going to be affected.

But clearly, the biggest impact is on 2017.

But we do feel good. As we move through 2018, Jenny is correct, there will be certainly some margin drag in the business as we complete these UK projects.

But when we take a look at the new business model that we're rolling out and our focus moving forward on the technology, which is really what the customers are looking for in the global marketplace, we feel good about our ability to recover margins and perhaps even improve them somewhat as we move out of 2018 into 2019.

Great. And then in terms of top line, I know that you guys have talked about reengaging in bid and proposal activity potentially in the second half of this year.

I'm assuming that that's now going to be pushed out. So when you're thinking about getting back into B&P on the Renewable side in Europe, what is the new time line for that?

And then assuming that it's a little bit later dated, I mean, does that mean that top line is going to be adversely impacted again next year or potentially into 2019?

Right. So I think there actually may be a project or two that we have a shot at later in 2017.

Certainly, we'll get back to a normal pace as we move through 2018. And I would expect the Renewable business to be back on normal track by 2019 for sure.

As far specific guidance for 2018 right, we'll put that out in the coming months.

Okay, got it. And sorry, I just want to squeak one more in, if I could.

So on the SPIG margin, I appreciate the comments that you guys made. When I was thinking about that business, I didn't realize it was as, I guess, project focused as your comments kind of suggested.

So when we're thinking about that issue that occurred in the quarter, were these the results of like a onetime delivery? Or was this from like an ongoing kind of project base work?

And if so, if it's project, what's the time line to complete? And similar to the Renewable side, like are we concerned that this then becomes like an issue in future quarters?

And then I'll hop back in queue. Thanks.

Sure. So we do have projects on the SPIG side of the business.

They're much smaller than the larger projects we see in either Renewable or some of the larger projects in Power. So $5 million to $10 million to $20 million would be normal-sized projects for SPIG.

And they also run on a much shorter time frame. They don't extend out over a couple of years like our larger Renewable or Power projects.

They tend to move through in a quarter or two for the most part. So in regard to the specific projects in Q2, we had a handful of projects that just didn't meet our as good expectations.

And the end result is, as Jenny indicated, we think those projects are largely in hand at this point. I can tell you that the new leadership team in SPIG is absolutely focused on project execution.

And our goal going forward is to put in place a world-class project management group and set of processes. And we're going to roll that out with SPIG and Renewable in front, and we'd expect much more consistent execution as we move forward.

Okay, great. Thanks.

Hi, Jim. This is Sean on for Tahira today.

I just want to start maybe with the Industrial segment. You talked through the sort of project issues in the quarter, but I'm wondering if you can speak to the mix aspect that you mentioned in the materials released this evening.

And also, maybe talk to the margin profile on these new bookings we've seen in the first half just to get a sense of kind of go-forward margin for the segment here.

Sure. The mix issue here is that some of the larger cooling systems that were part of SPIG's revenue profile this quarter have, on average, slightly lower margins than some of the business out of MEGTEC, for instance.

That's where project mix comes to play.

Okay. And then for the new bookings, obviously, we've seen a lot of new work coming in the door for Industrial.

How would you sort of characterize the margin profile and the new work you guys are targeting more recently?

So I'd say the margins are on track with what we normally expect. MEGTEC margins tend to be a little bit higher than the average margins in Industrial.

And SPIG margins tend to be a little bit lower, and on average, it's going to puts out in the upper teens going forward. So I think that the new bookings are right in line with what we would normally expect.

Okay, great. And then the other thing I just wanted to get a bit more color on is kind of how that addressable market changes under this new focus on technology for the Renewable segment.

Maybe you could give an estimate, kind of what portion of a typical project CapEx would be, the technology aspect and something B&W can actually target.

Sure. So the revenue per project is pretty straightforward.

We expect – in the past, we've told folks that the average Renewable projects, we would expect roughly $100 million in revenue for B&W. Under the new business model, we'd expect it to be about half of that per project.

So we'll be focusing going forward only on our core technology, boiler, grate, perhaps environmental controls and ash. And we'll be leaving the balance of plant portion to our partners in the future.

So on a per project basis, about half, in terms of the broader addressable market, we did see a significant change just because of our new approach with the business model, right. We think that in the end, our technology is what provides competitive advantage.

So long as we bring along a highly capable partner that can execute on the civil work and the balance of plant work, and we believe we found a number of partners like that, that want to work with us going forward, we think that addressable market is about the same as it would have been in the past. Now with that said, in any individual quarter, different projects come and go out of our pipeline but the broader market shouldn't change with this new approach.

We'll just need to explain it properly to customers.

Okay. Thanks.

That’s all from me.

Thank you, Mike. A replay of the call will be available on our website for a limited time later today.

Thank you.