Broadwind, Inc. (BWEN) Q4 2016 Earnings Report, Transcript and Summary

Good day and welcome to the Broadwind Energy Fourth Quarter and Full Year 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 and Corporate Communications. Please go ahead.

Thank you. Good morning and welcome to Broadwind Energy’s fourth quarter and full year 2016 earnings conference call. With me today are Broadwind’s President and CEO, Stephanie Kushner; and Broadwind’s Vice President and Corporate Controller, Jason Bonfigt. This morning’s earnings news release is available on our website at bwen.com. Before you 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 we 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-K, 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. Thanks and good morning. We achieved some significant milestones in 2016. First and foremost, through the hard work of all of our team, we delivered our first profitable year. I am very proud of the successful hard work that got us there, solid management practices at all levels of the organization. Good customer service, attention to detail and diligent cost management. We booked orders totaling $275 million, nearly triple 2015 including a wind tower backlog that provides a baseload into 2019. We raised our gross profit margin to 10%, our first full year double-digit gross margin. We reduced our manufacturing overhead and operating expenses by more than $9 million year-over-year and we generated $11 million of free cash flow, which allowed us to repay some debt and closed the year with $22 million in cash assets in the bank, much of which was used to fund the growth and diversification by the recent acquisition of Red Wolf Company. When we started the year, I set out three urgent business priorities and we delivered on all three. First, to double our order intake, we actually did better, including that multiyear tower order with one key customer. Second was to stabilize and maintain consistent tower production at both tower plants. A year ago, we were recovering from severe production challenges in our Abilene plant associated with our efforts to scale up the plant and introduce the new tower model at the same time. We learned from our mistakes. We have institutionalized a robust APQP discipline around new product launches. We have invested capital to improve our operating performance and flexibility and we have introduced a number of best practices to support improved training, quality management, production flow and supply chain management. By mid-2016, we were operating at our desired capacity level and we are currently completing an investment to expand the capacity of this same plant by one-third or about 50 towers a year. We have demonstrated the maturity of our production organization by making multiple product design changes successfully and on time. And we reduced our cost structure significantly taking $9.2 million out of our manufacturing overhead and operating expenses. We rationalized headcount, renegotiated or replaced many professional advisors, changed utility providers, reduced systems and communications cost and benefited from lower depreciation and environmental remediation costs. In 2016, more than 90% of Broadwind’s revenue was linked to U.S. wind market. The industry had a strong year, adding 8.2 gigawatts of wind power to the U.S. electricity supply as you can see in that chart on the left. 2016 installations were concentrated in the Heartland, in Texas, Oklahoma, Iowa, Kansas and North Dakota. There are now 52,000 wind turbines operating in 40 states across the U.S. And New York’s wind power is now the largest source of renewable energy and provides 5.5% of our electricity. Importantly, as shown in the right hand slide, the right hand picture, despite completing 8 gigawatts of new wind during the year, there were still more than 18 gigawatts in development at year end. That’s actually an increase from the end of 2015 when 14 gigawatts were in development. So, the development pipeline grew in 2016 despite the large number of wind farms that went into production. Because wind is now so cost competitive, the recent entry of commercial and industrial customers into the market has continued, with 39% of the wind power purchase agreements in 2016 signed by corporations such as GM, Amazon and Microsoft. Although the industry faces some added uncertainty due to the recent changes in Washington, at least for the medium term, we don’t see any change in industry fundamental. Our Q4 orders totaled $32.3 million, up sharply from the first quarter – from the final quarter of 2015 and gearing orders rose somewhat off a very low prior year level, but still trailed shipments. The full year picture was much more positive, with a book-to-bill ratio of 153%. I would also like to point out that one large gearing customer booked $8 million in orders in 2015 to be delivered over 2 years, had that order has been split between the two years, we would have seen a more modest year-over-year decline in gearing orders. The comparison would have been from $21 million to $18 million. We exited 2016 with $189 million in backlog, of which $120 million is shippable in 2017 and that of course does not include Red Wolf. Turning to consolidated financial results, Q4 sales totaled $48 million, slightly above the guidance we gave, because we were able to complete and deliver a few more towers than planned, an important contrast versus last year when our revenues were constrained by very low productions in our Abilene tower plant. We reported a gross profit margin of 9.8% for the quarter in line with the year end total and operating income of $600,000 just above our guidance. This translated into EPS of $0.03 and EBITDA of $2.5 million. Full year revenue was $181 million, with a 10% gross profit margin and operating income of $1.9 million. Full year EBITDA was $9.6 million, or 5.3% of sales. This represents a $10 million increase in EBITDA year-over-year. Turning to towers, we sold 119 towers in the quarter bringing the full year total to 458, about 92% of capacity. We had a much improved fourth quarter and the year. We have made significant changes in our business processes to remediate the erratic production results we have reported in the past. Both the amplitude and frequency of production variability have been reduced through adherence to best practices that encompass our supply chain and inventory management, continuous improvement in our production lines, improved training materials and practices, stringent APQP processes for introducing new tower designs and improved data collection and analytics. One side resulted these process improvements was satisfactory remediation of the material weakness we reported last year around inventory control, which is noted in the 10-K we will file later today. We have invested capital in our welding and paint lines to improve flexibility and productivity and we removed unnecessary costs to improve our competitiveness. While we still experience normal production hiccups, they are much less impactful because of our improved process management. Our tower segment reported $2.8 million of operating income in the quarter and $12.8 million for the year. Looking into 2017, we expect results in this segment to be flat to modestly higher for both revenue and operating income. Although, the increased capacity in Abilene will come online in the second half of the year, we are seeing some weaker demand in our Wisconsin plant in the back half of the year. So, we may be producing at less than full capacity in that plant. We have also seen some increasing price pressure from imports and are working to offset that impact through improved productivity and cost management. Gearing. Gearing reported Q4 revenue of $5.9 million, flat with last year, but with dramatically better financial results. The operating loss dropped to $200,000 and we generated positive EBITDA of $0.5 million. It was a tough year commercially with oil and gas and mining orders very low, but our leadership focused on what they could manage and made significant progress in a number of operational areas. In addition, to continuing stringent expense management, we improved our on-time delivery, lowered our scrap rate, achieved better productivity and improved safety results, which then translated into lower workers comp expenses. We are lean and well positioned to enjoy some recovery in our gearing markets this year. Our expectation is to see some top line growth, at least 10%, positive EBITDA for the year and a reduced loss. With our current cost structure, we believe the business can be profitable at a $7 million quarterly revenue run rate and we have invested in our sales organization to drive that top line growth. Liquidity improved during the year and we ended the year with $21.9 million in cash. We invested $6.6 million in capital, mainly in towers, to upgrade our coatings or paint lines and to start the expansion in Abilene. We expect to invest capital at the same relatively high level in 2017, before it moderates back to the 2% to 2.5% revenue sustaining rate we have had in the past. Our debt plus capital leases totaled $4.1 million at year end, which includes the $2.6 million new markets tax credit loan, which should be forgiven next year. The $1.5 million balance is capitalized leases. I am proud of the statistics on the right. We made improvements to all of our capital metrics in 2016. We have reduced days sales outstanding to 22 days, improved inventory turns to 8.2 and our days payable rose modestly. I believe the improvement in inventory turns partly reflects our better supply chain and inventory management. As a result of these improvements, plus our strong customer deposit balance, our cash conversion ratio was essentially, zero. We have a new credit line – new credit facility in place and at year end, had unused availability of $17 million under the line. Following the Red Wolf acquisition and due to normal variability in working capital, we expect Q1 cash to be near zero with perhaps some small amount drawn on the credit line. Turning to strategy, during the fourth quarter, our Board approved an updated strategy for the business. In short, we have modified our mission to focus on precision manufacturing of structures, equipment and components for clean tech and other specialized applications. With our operational issues successfully stabilized, we are setting our sights on growth while continue to improve profitability. On the growth side, our target is to double revenue with that growth coming from about 50-50 mix of acquisitions and organic growth. We finished 2016 with a 5% EBITDA margin. We are focused on improving both our commercial and operational execution in order to double that margin level to 10% of sales. We are making database decisions using continuous improvement techniques across our business and continuing to actively manage our expenses to improve our margin. The Red Wolf acquisition we announced earlier this month lines up with our strategy. Red Wolf is a $30 million company focused on light manufacturing assembly and kitting of components that predominantly go into gas turbines. This business represents a diversification for us. Over the past 5 years, wind and natural gas turbines have had more or less equal shares of the market for new electricity capacity. So, the Red Wolf acquisition immediately reduces our reliance on wind energy markets alone while still keeping us primarily in the clean tech space. Red Wolf also brings us geographic diversity. Their plant is located outside of Raleigh, North Carolina where there is a very strong manufacturing base and good available manufacturing talent. And they are close to the major plants for the power generation OEM. Importantly, two-thirds of Red Wolf sales currently go into the global aftermarket for maintaining and operating gas fired turbine within the global installed base, so another element of diversification for us. We see some opportunities to grow the business by leveraging some of our existing customer relationships and we will update you on these opportunities as the year progresses. Our plan is to combine this business with the CNG compression unit product line we introduced in 2015. There is a natural fit between these products. On the next Slide, beginning this quarter, we will report our results into three operating segments plus corporate. We will include or Abilene heavy industries facility, which increasingly does primarily CNG work with Red Wolf to form a new process systems segment. This will shift about $5 million of full year revenue and a small operating loss out of the towers and weldment segment and added to process systems. There won’t be any change to the gearing segment. Turning to 2017, in line with our strategy we plan to grow revenue and profitability. In the first quarter, revenue should be $54 million to $56 million, up 15% to 19% from 2016. We expect EBITDA of about $3 million. We are unable to project operating income at this time because we are waiting for the third-party appraisal of Red Wolf, which will tell us how the purchase price will be allocated and how much of that value will be amortized against income. We expect to have that answer before we report our Q1 results in April and will resume providing earnings guidance at that time. For the full year, we expected to report revenue of $210 million to $220 million. This reflects modest growth for our two existing businesses plus the addition of Red Wolf for 11 months and EBITDA up $14 million to $16 million, up about 50% from 2016. At the midpoint for projected revenue and EBITDA, we would have an EBITDA margin of about 7%. This would represent a meaningful step on our path to a targeted 10% margin. Our operational goals are summarized below, selling out the rest of 2017 for towers, continuing to reduce costs in towers, completion of the capital projects, good, strong integration of Red Wolf and expanding our commercial presence in gearing. So on the final slide, in summary, we are very pleased to deliver our first profitable year. We have invested time and money to implement best practices and supply chain management, labor productivity, data collection, training, new product development and we will adhere to this progress rigor. Our wind markets are fundamentally strong and we see encouraging indications of recovery in oil and gas and mining markets. We have redeployed our surplus cash to diversify into the gas turbine supply chain with the acquisition of Red Wolf. We have a conservative capital structure, which should support our growth objectives. And we are able to use a considerable $200 million NOL to shelter future earnings. So this completes my prepared remarks and I will turn it over for questions.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question will come from Chris [indiscernible] of Cowen and Company. Please go ahead.

Hey, guys. Thanks for taking the call. My first question is related to the gearing segment, would you be able to provide any color on the pace of recovery within the different end markets, just wanted to get a sense of what you guys were thinking about markets between oil and gas, mining and kind of refurbished wind gears?

Yes. So I will start with wind gearing. That was roughly half of our revenue in 2016 and that market looks like it’s staying about the same. I would say we see more – we do see more refurbishment of gears, so kind of regrinds and polishing than replacement gears and the revenue on those is lower, so that kind of keeping the growth from being very impressive right now. But yes, it will continue to be an important and solid part of our business there. The mining, I would say the coating activity is up materially on oil and gas. I think it’s too soon for us to count on that being a big addition in 2017, although each day, we are getting a little bit more encouraged. At its peak, oil and gas, well, I think in 2014, oil and gas accounted for $20 million of orders for us and last year I think it was under $1 million. So you can see, we can have a pretty dramatic impressive percentage increase without necessarily moving the dial, but there is certainly a lot of room for that to grow and come back. I think some of that’s probably moved overseas just because of where oil prices are in time, but I still think there is some good opportunity for us out there. Mining was – it continues to be down, but we are seeing again a little more mining activity. I would say, it’s maybe the coating increase is maybe not as significant right now as it is in oil and gas, but I think that’s definitely on an upward trajectory.

Got it. That’s helpful. And then my next question was related to the Red Wolf acquisition. Would you be able to discuss the OpEx run-rate and any cash or CapEx needs that the new team there requires or what kind of sale synergies we could expect?

We are still mapping their income statement to our income statement. So, it’s hard to say about the operating expenses. We think – we have said that, that segment would be giving us something like $30 million of revenue and $4 million to $5 million with EBITDA and there is a little – we are carrying into that maybe a very small loss from our CNG business. So for the most part, that will be Red Wolf. In terms of capital, it’s fairly light. Probably right now, we are looking at a capital spending. We are upgrading some IT systems and making a few investments there, but it’s still south of $0.5 million. And I think it’s probably premature to start talking about revenue synergies, so just give us a little more time to work on that, if you would, Chris.

Sure. No problem. And then lastly, could you provide a bit more info on kind of the CapEx for the Abilene tower in the first half? Is kind of that CapEx run-rate that you guys have discussed mostly in the first half and then kind of the lighter second half? Could you just provide it?

Yes, yes. It will be loaded more towards the first half. I think the overall number for the year is going to be in the $6 million to $7 million range. Again, I don’t really – I am going to guess that $4 million to $5 million of that’s in the first half.

Perfect. Thanks so much for taking the questions there. I will hop back in the queue.

Thank you. Thanks for your interest.

[Operator Instructions] Our next question will come from Angie Storozynski from Macquarie. Please go ahead.

Thank you. So, just going back to the acquisition, it looks pretty good, right. So based on what you just quoted as EBITDA of the business, I mean the acquisition was down at around 4x EBITDA. Is this – I mean should we just basically assume that every time you accumulate more cash in the balance sheets, you will try to have similar bolt-on acquisitions?

Well, as I said, we are trying to move from say $180 million to $360 million. I said, half of it roughly would be through acquisitions. So, this is obviously the first big piece of that. So, it’s maybe a third of it.

Okay, okay. And can you just maybe help us with the decision-making process about how much you pay for these assets? I mean, is there – are you looking at free cash flow, are you looking at EBITDA multiples? I mean, is it just basically the seller quotes the price and you either take it or not?

We probably have looked at a dozen opportunities before making the decision to pursue Red Wolf aggressively. And we are looking for something a business that we can understand and we had some very nice connections here, because we have got a board member who understands that gas driven business and we actually – our Head of Business Development worked in that business. So, we wanted to be a business that we understand. We wanted to have some connection to our other businesses, I am thinking it’s right – we have a grid of acquisitions parameters. We have a big fat NOL. We would sure like it to be immediately accretive and allow us to start beginning to chip away at that. We are looking for a business that’s well-run. Sometimes when you look at kind of – in the hunting ground where we are, we are looking at some pretty small businesses and sometimes it’s privately – it’s been privately held for a long time and then the business practices, there will be a pretty big leap to get alignment with public company requirements. So, we have shied away from some of those. Red Wolf is well-managed. The management team has come out of successful public companies. So, that has been one of the other pluses. So, it’s a mixed bag, I guess at the end of the day. And this one cleared the radar screen and we were able to get it that what we would like to see, we would like to see the business be successful and have a earn-out paid over the next couple of years and then be able to grow that into some other areas.

Now, can you say as the main customer of Red Wolf as the same OEM that you have framework agreement on the wind turbine side?

Sorry. I probably– reducing our customer concentration was – is also one of our key acquisition criteria for now.

Okay, that’s all I have. Thank you.

Thanks, Angie.

Ladies and gentlemen, this will conclude our question-and-answer session. I would like to turn the conference back over to Stephanie Kushner for any closing remarks. Well, pardon me, we do have someone who has entered the queue. We have a question from Keith Rosenbloom of Cruiser Capital. Please go ahead with your question.

Thanks so much. Stephanie, great job here on controlling costs and increasing margins, it looks really fantastic.

Thanks, Keith.

I wanted to make sure I was understanding some of the metrics correctly you called out what level of CapEx for the year?

It will be in the $6 million to $7 million range, because we are completing the – that Abilene expansion. And then I think it will revert back to the sort of 2% to 2.5% of revenue.

Okay. And the share count looks like it went up maybe because of options getting included, but is the total share count now $15.2 million?

I was thinking $15.1 million.

$15.1 million. Okay, so at today’s price, roughly you have an $80 million market cap. Your – at your midpoint on your EBITDA, you are doing $15 million plus the CapEx, that’s about – that’s over $8 million of free cash flow. So that puts your free cash flow yield today at over 10% for the company. I just make sure my math is correct.

It sounds right to me.

Yes. And the debt, the company is essentially debt-free now, right, because the $2.6 million is not a corporate obligation after next year, is that right?

That’s correct.

Got it, okay. The margin profile of the business seems to be doing well. On your guide – on your goals for this year, you said that you needed to – you wanted to sellout all the slots for ‘17. Does your guidance at $14 million to $16 million of EBITDA, does that assume that you do sell out all the slots or would you get there if your backlog was where it is about today?

I would say to hit the $16 million, probably not at the $14 million range, I think that’s a number that we can deliver to.

Even if you don’t do anything else from here?

Well, we are – no, I wouldn’t say that. We are in some advanced discussions. So, I would say the $14 million assumes we don’t get everything completely sold out in both plants.

Got it. Okay. Well, keep up the great work. This looks like they have really cheap security, so you guys are doing…

Nothing [ph].

Thank you.

Alright, very good. Take care.

[Operator Instructions] And having no further questions, this will conclude our Q&A session. I would like to turn the conference back over to Stephanie Kushner for any closing remarks.

Thank you very much. It’s great to have a solid year behind us and we look forward to spending our time working now on 2017, so thanks for your interest and we will talk to you next quarter.

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