Broadwind, Inc. (BWEN) Q1 2014 Earnings Report, Transcript and Summary

Hello, and welcome to the Q1 2014 Broadwind Energy, Inc. Earnings Conference Call. My name is Dan, and I will be your operator for today's call. [Operator Instructions] I will now turn the call over to Joni Konstantelos. Joni, you may begin.

Thank you. Good morning, and welcome to Broadwind Energy's First Quarter 2014 Earnings Conference Call. With me today are Broadwind's President and CEO, Peter Duprey; and Broadwind's Executive Vice President and CFO, Stephanie Kushner. This morning's earnings news release is available on our website at bwen.com. Before we begin today, I would like to caution you that this call will include some forward-looking statements regarding our plans and market outlook, and also will reference some non-GAAP financial measures. Actual results may differ materially from these forward-looking statements. Please refer to our SEC filings and consider the incorporated risks and uncertainties disclosed there, including our Form 8-K and the attached news release filed with the SEC this morning and our Form 10-Q, which will be filed later today. We assume no obligation to update any forward-looking statements or information. Having said that, I will turn the call over to our President and CEO, Pete Duprey.

Thanks, Joni, and thanks, everyone, for joining the call. This morning we reported our financial results for the first quarter of 2014. Overall, we reported another solid quarter showing 29% topline growth, and more than doubling EBITDA compared to Q1 2013. Looking at the 3-year trend of the business, we're generating strong revenue and EBITDA growth, and 2014 is shaping up to be one of our best years. Our Wind Tower business continues to deliver outstanding results that are driving Broadwind closer to positive EPS. Even with the extreme cold weather in the Midwest, we produced 108 towers in the quarter, a 50% increase over Q1 last year, and we remain on track to produce a record 500 towers this year. Our Gearing segment endured another tough quarter, facing both internal and external challenges. We have a healthy backlog, but production and execution challenges hampered our ability to ship and invoice customers. Weather delays and ongoing labor contract negotiations also impacted the quarterly results. Clearly, we are not where we need to be with our Gearing business. Local management remains very focused on improving on-time delivery and quality to ensure Gearing is competitive and profitable in the long-term. After a tough 2013, our Services segment saw a nice uptick in demand for blade repairs and other major corrective services in the quarter. However, with the absence of a large industrial drivetrain assembly contract that we had in our Adeline facility a year ago, this segment's results were down considerably compared to Q1 2013. I am pleased to report that our new Services leader is in place, and we are focused on leveraging our robust infield service capabilities in wind and industrial applications. Turning to orders, we booked $16 million in net new orders during the quarter. Our towers business booked $3.9 million in new orders, all of which came from our Industrial Weldments segment, mainly from one large customer. As I've indicated in the past, tower orders are lumpy, particularly given the volume of orders booked in the second half of 2013. We expect further orders in Q2 and Q3 to round out our 2015 order book for towers. Gearing orders totaled $8.3 million for the quarter, down from the prior year, which included a large order for replacement wind gearing. We are seeing improved momentum in gearing. Orders are up 61% from Q4 2013, a large long-term oil and gas customer is seeing their demand ramping up, and we recently won 2 sizable orders from a major steel manufacturer. Orders in Services were up nearly $4 million from Q1 2013, which included 1 order cancellation for industrial drivetrain assembly work. As I mentioned last quarter, quoting activity has increased substantially, and as a result, orders are up 50% from Q4 of 2013. Our backlog of $267 million is down from our year-end record high, and approximately 90% of our 2014 revenue is in backlog as of March 31, 2014. The wind industry is maturing. And as we stated before, wind is very close to grid parity with other sources of electricity generation. The outlook for 2016 is a bit more optimistic than we've reported in the past. Some of the catalysts for the demand are older coals finance being retired, and the levelized cost of wind energy is continuing to decline. A recent interesting data point was Google's long-term purchase of more than 400 megawatts of wind power from Mid-American Energy. This brings Google's total long-term purchase of wind energy to over 1.6 gigawatts. These PPAs allow Google to have a stable long-term cost of electricity with no risk of future costs associated with carbon emissions. With our position as a leading wind turbine tower manufacturer, we feel confident in our ability to maintain our market share. A longer-term forecast is shown in 3 scenarios, with the detailed assumptions shown at the bottom for the bull and the bear case. The bear case reflects no PTC renewal, natural gas prices in the $4 to $5 range, electricity demand growing less than 1% per year and so on. At this level, assuming a 25% share of the market, this would equate to approximately 300 towers annually, which would still allow the Towers business to remain profitable. Given our market position, location of facilities, strong relationships with our customers, we feel confident we can navigate through the bear case scenario, if it were to occur. The PTC was included in the tax extender bill that was passed by the Senate finance committee in early April. The bill now awaits approval by both the House and the Senate, which we think could happen after the November midterm elections. As I mentioned on our last call, one of our strategic priorities for 2014 and beyond is to take advantage of the massive amounts of investment going in on the U.S. Gulf coast. A $110 million of investment for close to 80 chemical, LNG and refining projects is going into the Gulf region right now. These large infrastructure projects have a high percentage of industrial fabrication work. This is our sweet spot. We have highly skilled welders, who specialized in welding large structures, and we are going after this market in a big way. We see packaging cylindrical vessels and large skids for upstream and midstream market segments as an excellent opportunity for growth. Finally, I would like to comment on our Gearing turnaround. Overall, it was a difficult quarter with a low level of shipments. We saw some operational improvements such as inventory levels declining and improvement in productivity and a 2-point improvement in first pass yield. The build out of our sales organization is going as planned, with a greater mix of manufacturers' reps. However, it will likely take several more months to see a meaningful impact in our order rate, particularly as we go through the qualification process with new customers that these reps will bring to the table. I'll now turn the call over to Stephanie, and then we'll talk about the financials in more detail.

Thanks, Pete. I'm referring to Slide 8. On $58.8 million of revenue our Q1 gross profit margin, excluding restructuring, rose to 9.1%, up sequentially from 7.8% in the fourth quarter of 2013, and up more than 50% from the first quarter of last year. Although sales came in a little lower than my $61 million to $63 million guidance, all of our profit measures exceeded guidance. Since Q1 and Q4 are seasonally the weakest for Broadwind, our progress in the first quarter positions us well for a full year gross margin above 10%. Q1 operating expense was $6.1 million, down $600,000 from the prior year, despite the additional expenses associated with the accounting investigation. More than offsetting these incremental expenses, were lower restructuring expenses and lower insurance expense. Insurance expense reduction reflects the fact that with our improved financial position we are now able to self-insure for worker's comp and health care, which has reduced the out-of-pocket cost to the company. Additionally, our intangible amortization expense has declined by $554,000 due to fully amortizing a portion of the customer intangibles associated with our acquired businesses. Excluding restructuring, operating expenses as a percent of sales was 10.2% in the quarter, down 3.1 percentage points from 2013. Our adjusted EBITDA was $2.8 million, ahead of guidance and more than double last year. And the EPS loss of $0.07 improved sharply from the prior year $0.32 loss. Despite some weather and supply chain challenges, Towers delivered a strong quarter, producing and invoicing 108 towers. Section count was 352, up 24% from last year's Q1 and up 6%, sequentially, from 332 sections in Q4 of 2013. Disappointingly, our Weldments revenue was down from a strong prior year comparison. Although we have built out our organization to support this business, we are still experiencing the adverse effects of a weaker mining environment, making our diversification efforts key to achieving stable and growing revenue for this product line. Due to the strong Tower results, operating income for this segment was $5.6 million or 11.6% of sales. This was slightly ahead of the 11% figure I guided to. As the quarter progressed, the weather and supply-chain disruptions we were seeing early in the year settled. And production of low-end profitability improved versus the outlook at the time we released year end's 2013 results. In the next 2 quarters, Tower production, all of which is already in our backlog, should rise to 400 or more sections [Audio Gap] quarterly revenue should be in the $55 million range. At this production level, we expect operating income to exceed 13% of sales. Next slide please. As Pete described, despite some progress with core manufacturing and quality metrics, Gearing had a down quarter, with $8.8 million of revenue and an operating loss of $3 million. Although we entered the year planning to produce and ship $12 million of product in the first quarter, we encountered a range of adverse operational issues. These included the impacts of the severe weather early in the quarter, higher machine downtime and difficulties arranging final shipments to customers. Versus 2013, EBITDA was down $800,000 on a $1.9 million reduction in sales. The operating loss of $3 million was unchanged because the restructuring expenses are trailing off as we approach completion of the project. We remain focused on improving the performance of this business unit, and despite the weak start to the year, we continue to believe it is achievable. We now have completed the move of the vast majority of our roughly 150 pieces of gearing equipment involved in the consolidation, with only 4 machines remaining to be moved. The disruption is nearly behind us, and we have 100% of our Q2 production in backlog. The second quarter should show improved revenue at the $12 million rate, a much smaller operating loss and EBITDA that is slightly positive for significant year-over-year improvement. Our April shipments were on track with this higher run rate. We are working hard to grow the order rate to support a newly reconfigured plant. During Q1, we received initial qualifying orders from 16 new customers totaling $450,000. As we continue to expand our cadre of direct sales professionals and manufacturing reps, now up more than 50% from a year ago, this growth and diversification should begin to successfully feed a newly rationalized plant, with an improved equipment layout and better production flow. Services Q1 results were in line with our guidance, with revenue of $2.4 million, and an EBITDA loss of $900,000. In 2013, by comparison, we enjoyed a large onetime industrial drivetrain assembly order and strong sales of replacement gearing for the installed base of turbine. So it was a tough comparison. For Q1 of 2014, the mix of business is shown in the bottom left. During the quarter about 40% of our revenue came from projects where we provided labor support. These activities do not use proprietary technology but contribute to cover fixed overhead. Drivetrain and gear box repair activities, both in the shop and at tower, comprised 32% of our revenue. This is generally more technical, higher value-add work. The third category, inspection work, is important because it can be a path to revenue growth; especially end of warranty inspections, when a turbine is coming off a manufacturer's warranty. This were relatively low, about 8% of revenue in the first quarter. Although we are seeing customers doing more blade inspection. The balance of the revenue encompassed activities like oil changes and part sales. Our focus is to increase the proprietary content over time, and of course, grow the revenue base to cover costs and help us transition to profitability. In Q2, our sales should approach $4 million. Our loss will be about the same, however, due to some onetime charges associated with personnel changes. As I indicated during the year-end call, operating working capital rebounded to 8% of sales during Q1, an increase of $14 million. This reflected growth in steel inventories, both to support the ramp up in our production and to allow customers to take advantage of an opportunity for better steel pricing. Additionally, our customer advances are beginning to be consumed as we produce towers in backlog. Our forecast is for working capital to remain in the 8% to 9% of sales range for the next few quarters. Turning to the next slide, liquidity remained strong at quarter end. Debt plus capital leases totaled $4.7 million at a composite average interest rate of just over 1%, thanks to the low- and 0-interest-rate grants. Net debt remained negative, $6.8 million at 3/31, and our credit line was undrawn as well. Turning to the financial outlook, we expect revenue in excess of $70 million in Q2, up more than 30% from last year, with a gross margin in the low double-digits. Adjusted EBITDA of $5 million to $6 million, and earnings per share in the range of $0.10 to $0.15. Netted with the $0.07 loss in the first quarter, this will put us cumulatively profitable for the first half of the year, a very important milestone in Broadwind's evolution. Our full year outlook is unchanged, we're projecting revenue of $260 million to $270 million, a full year average gross margin in the 10% to 12% range, and SG&A in the 9% to 10% range. Full year EBITDA should exceed $16 million, and our EPS should be positive. And with that I'll turn the call back to Pete for questions.

[Operator Instructions] I do have a question from Katja Jancic from Sidoti & Company. Katja Jancic - Sidoti & Company, LLC: Could you break the backlog of $267 million into specific segments? Is that possible?

It's -- I can give it you approximately. So our Service business is pretty much a book and sell. So probably would normally have just a couple of million dollars in backlog there. Our Gearing we run 4 to 6 months ahead, so something in the low $20 millions, and then, really the rest of it is Towers. So Towers tends to be a longer buy cycle and also we've been in a tighter tower market. Katja Jancic - Sidoti & Company, LLC: So it's mostly basically Towers. Now I know that there were no new orders for Towers. And I know, Pete mentioned that, we expect this to happen in the second and third quarter. Do you see any pullback, that it's slowing down? Is there any fear that because of the delay in the extension of the credits? What do you see out there?

No, as we talk to our customers, I think there is still pretty confident that 2015 -- actually, I think a lot of them are saying 2015 is expected to have more installs than '14. So I think they're still pretty confident, and we're pretty confident that we'll be able to fill up 2015. And as I said in the comments, I would expect Q2 and Q3 is when we'll make good strides towards filling that up. Katja Jancic - Sidoti & Company, LLC: I just wanted to double check something, you said in the bear case, you would still have around 300 towers orders, would be still possible?

Yes, I think so. I mean, in many respects, 2013 was somewhat of a proxy [ph], though we're -- only 1 gigawatt got installed. But we had a pretty robust year, I think we did 400 towers. So I think even in the bear case, going from 500 to 300 is pretty reasonable. Assuming the other assumptions line up with natural gas not falling any further and Congress behaving somewhat.

I think, I'm not sure where you're -- what you're thinking, Katja, but I don't think we would believe that a bear case would be likely as early as 2015.

Right.

That's really, that comment was kind of going further out. We think 2015 is still enjoying the benefits of a lot of projects that were started before the end of '13.

Yes, because you've got the 2-year from PTC renewal, and the treasury guidance that said they will not question whether a project would get the production tax credit as long as it completed by the end of 2015. So we think '14 and '15 are going to be very good years in the wind market. And what we're hearing is that some projects may in fact spill over into '16, where there might be little more PTC risk, but a lot of owners are still going forward with those. So that's why I think there was a bit of a change in the outlook for '16 being a little bit better than what we had reported previously. And then, the question is what's going to happen in '17. Katja Jancic - Sidoti & Company, LLC: Regarding the Gearing segment, I know that it's a turnaround story. What's your expectation to growth, once the restructuring is completed?

Yes. We talked a lot about this in the past. I think our 2 big initiatives are getting more growth on the sales side. So we've gone out, we've secured manufacturers reps who have years and years of experience in gearing. They're bringing new customers to the table. It takes a while to go through that qualification process. So we are working on the growth side. And we are working on making sure we're getting better throughput, lower waste through the factory. Consolidation is certainly helping in that. We're getting a lot more visual in the tools that we're using, so we know where our bottlenecks are. So between those 2 things, we believe those are the right steps to turn that business around. I think growth has been the biggest issue. For Q2, I would expect to see a good increase in orders compared to Q1 and show steady progress in that business. Katja Jancic - Sidoti & Company, LLC: Can you provide any comment on, percentage wise, how much growth you see in that segment? or you expect to see?

Well, I think on the last call I said, for 2014, we would expect to see modest top line growth of around 5%. I think what we're focused on is what's our order intake in Q2, Q3 and Q4, which should start to be a predictor of what 2015 is going to look like, and I would expect more than 5% growth in 2015.

[Operator Instructions] And I have a question from James Ward from Macquarie Capital.

Can you please clarify where you stand now from a labor perspective? And particularly, how you see the impact of labor on the first quarter? And how it will be different, going forward?

Are you speaking about Gearing?

Yes.

So we did do a reduction of force of about 25 people in January. And we are not anticipating any further adjustments to our labor force. And I think, as you may have seen in our disclosures, that the union contract did expire and we are continuing to negotiate with the union. I think that's progressing maybe a little more slowly than I would've thought. I think one of the sticking points is around health care costs and the sharing of that, which is, I don't think, anything unusual in union contracts these days; and trying to educate our workforce that they need to participate in better understanding and helping to save in our health care costs. So we want them to be more active in managing the costs.

[Operator Instructions]

All right, I guess if -- are there any more?

Yes -- no, sorry, go ahead Pete. No more questions on my end.

Okay. So to kind of wrap it up. I think Q1 was a great start to the year. For Q2, in Gearing, we're focused on work growth and achieving positive EBITDA. In Services, I think the key is going to be order growth and showing some progress in expanding into some of the industrial services around drivetrain repair. And then, in Towers, we need to execute on the order book that we have and start to fill up the order book for 2015, and then, start to show some progress in the oil and gas infrastructure space around our Weldments business, our Weldments product line. So again, I think it's great quarter, and I look forward to sharing the results of Q2 on our next call. Thanks.

Okay. Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.