Broadwind, Inc. (BWEN) Q2 2016 Earnings Report, Transcript and Summary

Good morning, afternoon, evening and welcome to the Broadwind Energy Q2 2016 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Joni Konstantelos, Director of Investor Relations. Please, go ahead.

Thank you. Good morning and welcome to Broadwind Energy’s second quarter 2016 earnings conference call. With me today are Broadway’s President and CEO, Stephanie Kushner and Broadwind’s Vice President and Corporate Controller, Bob Rogowski. This morning’s earnings news release is available on our website at bwen.com. Second slide, please. 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 Stephanie Kushner.

Thanks, Joni and good morning. We made notable progress in the second quarter. We booked $176 million of new orders and we now have an important baseload in place for tower sales into 2019. We reported revenue of $43 million, which was on plan and consistent with our guidance. Our cost reduction efforts are on track. Through June 30, we have reduced fixed overhead and SG&A by $4 million and we expected to meet or exceed our $8 million commitment by year end. In the quarter, we generated $180,000 of operating income and $42,000 of net income from continuing operation. Our cash position remains strong and we repaid $2.4 million of long-term debt ahead of schedule, leaving only the $2.6 million subsidized loan outstanding. We also funded capital spending and some growth in working capital and ended the quarter with $11 million in cash assets. Six months ago, I laid out three near-term priorities. First, to double order intake, to-date, we have booked $215 million of new orders, more than double $94 million for the full year of 2015. And we are certainly not stopping. We announced – we have not announced an additional $25 million in new tower orders since June 30. Our second priority was to maintain consistent tower production. We have made tremendous progress here. Our Abilene plant, where we had significant production challenges last year, is currently producing above its design rate of 150 towers a year. After 6 months, we had produced 81 towers, equal to 83% of our full year production in Abilene last year. This strong performance has allowed us to get ahead of our current contract and will provide some planned cushion later in the year as we deploy new capital to permanently expand capacity to the plant. In Manitowoc, we had our first major model changeover during the quarter, which boosted our APQP, or advanced product quality planning – process. It proceeded as expected and our production was on target. We are also ahead of our contractual requirements in this plant, which is good in a year of strong demand. The final priority was cost management. As I said, our year-over-year savings totaled $4 million at the half year point. Our reductions include $2.5 million in lower cost or indirect labor and SG&A, lower depreciation of $1 million and a number of other reductions ranging from renegotiated property taxes to lower production professional fees. The U.S. wind energy market remained strong. As we discussed last quarter, the extension and phase down of the PTC provides visibility through 2019. More recently, the IRS modified and eased the requirements for earning the PTC by extending the build-out qualification period from 2 years to 4 years. This means that projects started before the end of this year have until 2020 to be brought into production and earn a 100% PTC. With this change, wind energy development should be strong in the U.S. at least through the early 2020s. Also shown on this slide is the consulting firm made estimate of current U.S. tower production capacity versus demand. As you can see, supply and demand are in pretty good balance when you consider that, particularly in coastal areas. Some towers are imported. We believe that particularly strong demand in the Texas region is supported of an expansion of our Abilene facility, which should come online in mid 2017 and take this plant up to 200 or more towers annually. Our board approved this $4.2 million expansion earlier this week and we are moving forward aggressively to bring this capacity online by the middle of next year. The expansion should support incremental annual revenues of approximately $15 million to $20 million, while adding some important operating flexibility as well. The U.S. market for gearing remains weak, although the AGMA, the industry association, expect 2016 to represent the low point, where we have experienced severe reductions in gearing demand for oil and gas and mining market. We are watching the oil and gas sector carefully, but our orders remain extremely low in this industry. Mining remains depressed although there has been speculation that 2018 to ‘19 will see an upturn. We continue to hunker down in these challenging markets and are also focused on improving our operational execution. I mentioned already the strong orders figure for towers. For gearing, we have booked $5.6 million of orders, a book-to-bill ratio of slightly above 1. Demand for replacement wind gearing, which is linked to the growing installed base of wind turbine, is growing and is accounting for about half of our gearing sale. The other area where we have seen some recovery is steel. Steel production has been boosted recently due to tariff protection supporting the U.S. industry. So, steel producers are making some investments in their production line, which in turn boost gearbox orders. As you can see on the right hand side, the $219 million total order backlog represents a nice uptick for Broadwind. Turning to the income statement, our reported revenue of $43 million was sharply lower than last year, which we expected. Most of the difference was in towers and I can talk about that better on the next slide. Our gross margin was 9.5% bringing the year-to-date figure to 9%. As you may recall, we started off very strong last year and then hit a major speed bump in the second half of the year. This year’s results will be much more consistent and our gross margin should stay in the 9% to 10% range. SG&A is down both for the quarter and year-to-date and should continue down significantly. Our income from operation was $180,000, our first profit in four quarters and we believe the start of a favorable trend. We generated $2.1 million of adjusted EBITDA and breakeven EPS. Turning to our Tower and Weldment segment, I will provide some more details on revenue. As you can see, our $38 million of revenue was down $17 million from the prior year, but in line with guidance. The biggest piece of the year-over-year reduction was $6 million in lower material prices, mainly steel. As I have mentioned before, we don’t take steel price risk, so we generally lock in steel prices at the same time that we bid a tower or we provide for a pass-through adjustment should prices change. So, this reduction basically reflects the lower steel prices negotiated late last year. We are seeing higher prices today, so the comparison next year will probably be the reverse. The second big factor, $5 million, is because last year’s second quarter included a catch-up sale of 12 towers that were held in inventory at the end of the first quarter. As you may recall, this was because of the West Coast port labor slowdown, which blocked some of the materials we needed for our scheduled build in the first quarter of 2015. So, we built an alternative tower for which we had materials on hand, so we wouldn’t lose production slots. We were unable to invoice those re-sequenced towers until the second quarter of 2015. So, that $5 million year-over-year is really just timing. The balance of the difference is both lower production, because of the production changeover in Manitowoc and timing on steel deliveries and a lower margin mix. I should also note that we have been building some four-section towers recently, which is distorting our reported tower count or at least it was distorting the comparison. As shown in the bottom left hand table, we are expecting to finish the year with about 450 towers sold, but our production activity measured by section count will actually be 7% higher year-over-year. Our operating income was just over 7% of sales and EBITDA was just over 10%, where it is averaging for the year-to-date period. With the progress we have made to ensure consistent production at both plants and the tower plants booked up, our second half should see revenue in the same range with slightly higher overall profit margin in the range of 8% and EBITDA margin of about 11%. On to gearing, gearing revenue was $5.4 million in the quarter, on target with our plan. As you can see in the chart below, oil and gas orders are running close to no, which is the main driver of our low revenue base. Our operating loss in gearing narrowed to $1.2 million, as we were able to remove costs in response to the weak revenues. The loss includes $300,000 of severance costs, which were not reflected in our forecast, which resulted in us missing our production for near breakeven EBITDA for the quarter. We expect about $1 million operating loss in Q3 on about the same revenue run rate. Given the weak market, we are focused in this business on improving labor productivity, managing costs and expanding our sales activity. Our tower inventory rose slightly in the second quarter, mainly because of the timing of raw material receipts. Consequently, our operating working capital rose to $10.8 million or 6% of annualized sales. We expect working capital to hold at this level or decline slightly as the year progresses. So we are unlikely to utilize our credit line. As a result, we decided to repay our outstanding term loan early using $2.4 million of cash. At this point, our total debt balance is $2.6 million. This is a government subsidized loan, which will be largely forgiven in 2018. At June 30, our cash and short-term investments totaled $11 million and our credit line was un-drawn. We spent $2 million on capital in the first half of the year and expect that figure to rise about $5 million to $6 million for the second half of the year. We expect to fund that capital requirement using a combination of operating cash flow and perhaps some capital lease financing to preserve flexibility. So then in summary, our tower plants are operating well and our tower production is consistent and slightly ahead of schedule. The wind energy market is strong and we have good visibility going out several years. This has given us the confidence to invest in an expansion of our Abilene tower facility, which should provide $15 million to $20 million of revenue growth beginning in the middle of 2017. Our gearing business is slogging through a tough market environment, but managing costs well and improving operational consistency. We are on target with our cost reduction efforts and should save $8 million or more this year from fixed overhead and SG&A. Our second half results should be consistent for the first half in terms of revenue, $86 million to $90 million for the two quarters and slightly stronger in terms of profitability. We should generate positive EBITDA of $8 million to $10 million for the full year. So with that, I thank you for your attention. I will turn this over to questions.

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Mark Spiegel with Stanphyl Capital.

Hi, hey Stephanie, congratulations on the turnaround there. Glad to see it developing.

Thanks Mark.

The last thing you said was you expect $8 million to $10 million of full year EBITDA, what’s your assumption in that figure on gearing, are you assuming a $2 million EBITDA loss for gearing, because that’s the run rate from this quarter?

No, it should be less than that because of the mix of some of the shipments they have in the back half of the year. So it should be kind of maybe $1 million plus.

Okay. And how much upside is there in towers from like the current kind of EBITDA run rate, I mean because I think in the last call or when I once spoke to you, I think like this quarter we just had, you were kind of running pretty flat out, right, so – or is that wrong and where does it go from here or is that like the run rate for the next 4 years or whatever, until the PTC is gone?

Let me try and unpack the question a little bit. I think the $8 million to $10 million estimate encompasses some potential improvement or upside from towers in this back half of the year. We are working hard to improve our efficiencies, reduce our overhead, reduce our use of consumables improve the consistency of our welding and painting. And all those things are giving us – we are seeing results from all those. It’s always hard to gauge at what rates those results will continue. We also have – in 2017 we expect that we have some revenue growth from this expansion, that should give us an extra $15 million to $20 million kind of run rate for revenue.

Okay. Because you are sort of on a – even with this quarter, you are on an $8 million EBITDA run rate, right, so what you are really sort of talking about is $10 million, if you hit some of this upside, I guess is kind of what you are saying, right?

Right.

Okay. And then last question about CapEx, it was $1 million I think this quarter, so obviously annualizes to $4 million, I thought you had said something on last call about CapEx being more like $6 million this year because of the paint shop, so if you could what’s – a little color on that and what would you call sort of normalized CapEx once the paint shop is finished?

Well, I think our paint project, which – I think our capital investments in towers. It’s really a three-part program. The paint investment was to improve the efficiency of paint. I think most of that capital will be dispersed this year. We are also – we have also just committed to a $4 million expansion down in Abilene. One of the things that it does is that’s going to give them a second paint facility and also expand some of the room for their assembly work. And then really the third phase and we haven’t committed to that yet, would actually be bringing in robotics. So long story short, we think that with the initial completing of the paint investment and the initial parts of the expansion, that our second half CapEx is going to be in the $5 million to $6 million range. And then we will wrap that up next year and then we will see how we are feeling about the robotics investment.

So what would you – ex-robotics, if you don’t do the robotics investment, what’s like sort of normalized CapEx annually?

Yes. Generally, it should be in the kind of sustaining capital, if you will. It should be in the 2% to 2.5% range for the business.

2% to 2.5%, but that varies so much depending on the price of steel, I mean can you put an annual number on it, ballpark, is it $4 million, is it $3 million, I mean what’s the number?

It’s probably $4 million to $5 million.

Okay, terrific. Thank you very much. I appreciate it.

Sure.

Our next question is from James Ward with Macquarie. Mr. Ward.

Hi, James.

Hi, good morning. How are you?

Good morning.

Good, so couple of questions here, one on your target final tower production capacity, you have got a great backdrop for growth right now, obviously with the PTC visibility, the expansion in Abilene is fantastic, what would be your final, whether it’s robotics or otherwise, your final target tower production capacity if everything went your way?

Well – I think its 550 towers is probably the right number to use. It’s always difficult to determine what capacity – or what efficiency and productivity can provide. But at the end of the day, it takes a certain amount of time to dry paint. And as the guy who runs the business says, unless we can figure out how to dry paint faster, our throughput is probably going to be in that 500 to 550 tower range.

Fair enough. Okay. So, no, expansion in terms of other facilities or anything of that nature are being thought about?

No not at the moment.

Okay. And second question was on gearing, we have been hearing quite a bit of talk of repowerings, some developers looking to take advantage of PTC’s existing wind farms that are getting up there in age, have you been factoring in that pickup in repowerings and do you anticipate that, that might make a material change to gearing over the next couple of years and if so how should we think about it?

We are watching the impact of that repowering opportunity pretty closely. And I can’t say I fully understand, I think my assumption thus far has been when the repowering takes place, that it would likely involve a new gearbox as opposed to replacement. And most of the new gearboxes for wind are being manufactured either in Asia or in Europe.

Okay, perfect. That’s all I have. Thank you.

Alright. Thanks James.

[Operator Instructions] This concludes our question-and-answer session. I would like to turn the conference back over to Stephanie Kushner for any closing remarks. Ms. Kushner?

Thank you very much. Thank you for your attention. As you can tell, we feel very positive about where we are and the future and the industry just in general. So we appreciate your attention and look forward to speaking with you again next quarter. Thanks. Bye-bye.

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.