Broadwind, Inc. (BWEN) Q1 2017 Earnings Report, Transcript and Summary

Good morning and welcome to the Broadwind Energy First Quarter 2017 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 first quarter 2017 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’ll 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. It was a busy first quarter for us, starting with the successful acquisition of Red Wolf, LLC, which adds both scale and diversification to Broadwind. Our financial performance was strong with first quarter revenue at $56.1 million, up 20% and at the top end of our guidance. Our gross profit rose to $6.4 million, 11.4% of revenue and up nearly 300 basis points from last year. And we reported EPS of $0.43, including a $0.34 one-time tax benefit. Excluding this one-timer, $0.09 EPS was up sharply from the $0.02 loss in the first quarter of 2016. EBITDA of $3.9 million exceeded guidance and the 7% of sales. Importantly, we saw the first tangible evidence of a recovery in the markets for years, following four down years for mining and more than two weak years for oil and gas. On the next slide, we booked $40 million of orders in the quarter, up slightly from last year. Despite high levels of enquiry activity, from turbine manufacturers, we’ve not closed the tower orders we need to fully utilize 2017 production capacity, particularly for our Manitowoc plant. The IRS deadline for securing qualification for 100% PTC was mid-April. And developers and turbine OEMs scrambled to ensure they could meet the 5% minimum spend threshold required to qualify their advanced stage projects. Like other tower manufacturers, we were producing full out to support this demand. As the last several weeks have unfolded, it has become apparent that some developers have now paused, filling their supply-chain pipelines after meeting these initial purchase requirement. Although we anticipated this somewhat when we established our operating plan for the year, the impact has been more severe than we expected. At the same time, we have seen an increasing number of towers being imported. That number has risen steadily and was back to almost 1,000 last year. The net effect of these factors is that we have had to react quickly to remove headcount and weekend shifts at our Manitowoc plant in order to reduce production in the near-term. Our customers indicate that order flow should normalize as the year progresses, providing us better visibility later in the year and into 2018. On the positive note Gearing orders rose sharply to $7.3 million in the quarter, double last year and far in excess of our intake rate during the past two quarters. And we booked $3.6 million for our new segment, Process Systems. Including the addition of $9 million of opening backlog from the acquisition of Red Wolf, we ended the quarter with $182 million in backlog. Next slide. Despite the short-term hiatus in tower orders we have experienced recently, the U.S. wind market remains fundamentally strong. During the first quarter, 2 gigawatts of projects were placed into service and 4.5 gigawatts of new projects moved into construction or advanced development, bringing the total active projects to nearly 21 gigawatts. As shown in the pie chart on the right, 80% of those projects are located in Texas and the Plains states or in the Midwest in reasonable proximity to our plants. Turning to Gearing, I mentioned already that we have been seeing the first tangible evidence of improved Gearing market. This slide prepared by IHS for the American Gear Manufacturers Association confirms an inflection point in gearing demand in late 2016, with a growth rate forecast for the entire market in the range of 7% per annum for the next several years. The table on the right highlights the forecast for the markets where we participate, where the larger very high precision gears are used, with strong near-term growth rates in the double-digits. We reported strong Q1 gear orders, double the prior year. And that trend has continued in April. So for the four months our orders totaled $13 million, or nearly triple our 2016 level for the same four-month period. Now, I don’t think we can necessarily annualize this four-month number since there is often an early surge as supplier pipelines get refilled after an order drop. But we are cautiously optimistic that 2017 orders will be nearly double 2016. And we’ll approach the $30 million annual run rate we now need to be profitable in this business. On the consolidated financial results, I already highlighted several of these numbers. I would say in general, the Red Wolf acquisition will help increase our gross profit margin, but will also increase our operating expense. We’ve not fully finalized our purchase accounting, but booked preliminarily an intangible amortization charge of $240,000 for the two months, which flows into operating expenses. As I said, our adjusted EBITDA was $3.9 million for the quarter, more than double the 2016 level. I’d like to provide a little more detail about the one-time $0.34 tax adjustment associated with the Red Wolf acquisition. Basically, this arises because Broadwind have not tax affected our losses since startup, and we have over $200 million in that operating loss carry forward. Therefore, we have a full valuation allowance against our deferred tax assets, which will reverse and be taken into income when we and our auditors are confident that we will be profitable for the foreseeable future, generally following three years of profitability. The reason that this $5 million was taken to income in the first quarter is that purchase accounting on Red Wolf dictated that we established our deferred tax liability on the acquisition, because of book tax timing differences associated with the purchase. Once established, because Broadwind can immediately shelter that liability, the deferred tax assets and liabilities were netted in consolidation, and part of the valuation allowance was released and taken into income. Turning to Towers, we sold 133 towers in the quarter and had revenue of $48.9 million. We did better than planned, managing our labor costs and also our variable overhead. We hit all customer deadlines and navigated through a complex product changeover in Abilene. This is the testament to the progress our operations and supply chain have made during the past 12 to 18 months. The year-over-year comparison also benefitted, because the first quarter of 2016 had some residual cost associated with production problems in Abilene during 2015. The net effect was to increase segment earnings to $5.8 million in the current quarter or 11.9% of sales. EBITDA was also strong at $7 million or just over 14% of sales. I already mentioned our reduced production level in Manitowoc. We are expecting Q2 revenue per towers of about $30 million to $32 million, and operating income of $1 million to $2 million. As you can see in the chart on the left, we now expect 2017 to be a down year for us in terms of tower volumes, the first break in our steady growth trajectory of recent years. We’ve demonstrated our ability to produce consistently and reliably, and we expect to get past this market correction by late 2017 or early 2018. We are completing several capital investments, so it’ll further improve our product flexibility and give us additional capacity at Abilene, Texas market, which is particularly strong at this time. In addition, we continue to focus on taking costs at our production processes to improve competitiveness. Next slide. Our first quarter in Gearing was weak as expected, due to low order intake during the back half of 2016. We shipped $3.9 million of gears, and incurred an operating loss of $1.5 million. In addition to lower sales, the quarter was impacted by higher compensation expense associated with the order growth, and the absence of asset sale gains experienced in 2016. We expect this to be the low point for the year, given the recovery in orders, Q2 sales should exceed $6 million with an operating loss of about $0.5 million and positive EBITDA. Quarterly sales should then increase in the back half of the year to $7 million or more per quarter. We expect full-year revenue in the $24 million to $25 million range with positive full-year EBITDA. Gearing organization has made solid progress since the beginning of last year, raising on-time delivery rates, improving labor productivity and streamlining core business processes. We are well positioned to deliver improved financial results as our markets recover. Tuning to Process Systems, just a reminder, our new segment includes the CNG business we started up recently out of Abilene, plus Red Wolf, which was acquired on February 1. First quarter results were low due to relatively lower shipments from Red Wolf, following strong January shipments prior to the transaction close, also no CNG unit sales which are intermittent. Impacting income for Red Wolf was the adverse one-time impact of $230,000 revaluation of inventories due to acquisition accounting, and adverse purchase price variance of $130,000, and $240,000 of intangible amortization expense. This last item is subject to change, because we are still finalizing the purchase accounting on this transaction. Q2 should be of more normalized performance. We expect $5.5 million to $6 million in sales in Q2, with positive EBITDA and breakeven operating income. Our full-year outlook is for about $28 million to $30 million of sales for the segment, and EBITDA up $3 million to $4 million. This is lower than the $4 million to $5 million EBITDA estimate provided at the time of the acquisition, because both CNG and the gas turbine, new unit order intake have started the year lower than anticipated. We remain very enthusiastic about the opportunities available to us because of this acquisition. Expansion into the global utility gas turbine equipment market adds breadth of product, customer and geography. Turning to working capital, our operating working capital, which was essentially zero at year-end, returned to a more normal run rate during the first quarter. As shown on the left, DSO rose back to over 30-days reflecting that some of our tower shipments were skewed toward the end of the quarter, and also incorporating Red Wolf payment terms, which are generally longer. Inventory turns declined slightly, but we are still a very healthy 7.7 turns. Our customer deposits declined slightly during the quarter as well. All of these factors contributed to pushing our cash conversion cycle up to 28 days. And our operating working capital back up to $0.07 per dollar of sales. As I’ve said in the past, due to volatility in material receipts and customer deposits. We generally plan for working capital to be in the range shown by the yellow band on the right chart, between $0.07 and $0.15 per dollar of sale. We’ve been outside that band from time to time, due either to unusual operational factors like the tower production issues we used to experience or the West Coast port strike. We’ve improved our supply chain management very significantly and our production processes. So the remaining volatility is more typically market and customer driven. On the next slide, our balance sheet, our cash assets dropped as expected due to the $16.5 million initial purchase payment for Red Wolf, and the increase in our operating working capital. As you can see here, receivables rose sharply due to the high tower production rates and our customer deposit balance decline. At quarter end, we had $10.5 million of debt and capital leases outstanding, including $6.5 million drawn on our credit line with The Private Bank, and $2.6 million New Markets Tax Credit, which is scheduled to be forgiven next year. Following the Red Wolf acquisition, we exercised our option to increase The Private Bank facility to $25 million, so we can borrow against the Red Wolf working capital. At this size, we believe the credit line is adequate to meet our operational liquidity needs. As you can see in the right hand chart, our CapEx continues to be elevated to about 5% of sales, about double our normal run rate. In addition to the investments to improve our coatings process and expand the Abilene tower plant, we have initiated the rebuild of our crane systems in Abilene to improve product flow in that plant. We are now on track for full-year capital spending of about $8 million, which is up slightly from what I said at year-end. Coming off a very strong Q1 we are now expecting a flat year-over-year comparison in the second quarter, with weaker tower segment financials offset by improved Gearing, Process Systems and corporate result. For the full year, we’ve lowered guidance to revenue of $180 million to $185 million, EBITDA of $11 million or more, and EPS of $0.44 million to $0.46 million, including the one-time tax item. Our focus today is on selling tower capacity, completing our large capital projects, completing the Red Wolf integration, and gaining traction with the market expansion initiative, and successfully managing through the recovery of the Gearing business. We are continuing to look additional growth opportunities to support our strategy. This now completes my prepared remarks, and I’ll turn it over for questions.

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Chris Morgan of Macquarie. Please go ahead.

Good morning, Stephanie. It’s Chris, how are you?

Good morning, Chris. Great, thanks. How are you?

Good. So I heard about the rebound in Gearing that we’re seeing. What are you hearing from your customers? Do you think it’s more related to an expected rebound in oil prices after the sell-off we’ve had over the past few weeks? Or do you think customers are talking more about Trump optimism with regards to the tax plan and how it might impact industrial companies?

I think it’s more oil and gas, because of where we are in the food chain, we are making gears that go into gearboxes that go into make frac pumps and mud pumps, right, that go to developers. We tend to get a little more whipsawed. When things go down, we go down faster, and when things come up, we come up faster. So I think that’s what we are seeing. We are seeing the recovery and the supply chain has been pretty much emptied over the last year-and-a-half or so. So I think that’s sort of a natural rebound.

Okay. Fair enough. And then my second question would be, if you could provide a little bit more color on the change in full-year guidance. I was wondering if there has been any changes since the last update on your Red Wolf outlook or this is purely a function of tower orders being pushed into 2018.

So the big driver is tower orders. The tower business is just not going to be operating at the 95% of capacity whatever that we’ve been at for the last couple of years. But I’m also being a little more moderate on Red Wolf. So when we did the acquisition, I said, I thought the segment would be $4 million to $5 million. And I’m probably coming off that just a little bit for both Red Wolf and for our CNG business. It’s probably too early to make much of conclusion on Red Wolf. I have to say, if you looked at their 2015 numbers, they generated about $3 million of EBITDA. If you look at their 2016, they were at $6 million, but there were some big campaigns of turbine retrofit. So we kind of knew they would be somewhere in between. And it’s probably too soon to say where that is going to go. We do see a lot of upside in terms of new market entry and some new products that we are bringing online. So we think it’s a very good fit for us longer term.

That’s great color. I really appreciate. That’s all I have. Thank you.

Okay. Thanks.

[Operator Instructions] The next question comes from Jeff Osborne of Cowen & Co. Please go ahead.

Hey, good morning, Stephanie, a couple of questions from my end.

Sure.

One is just can you talk about at this point what level of coverage you have for 2018 in terms of towers, visibility into that year by location?

Yes, so we still - we have a base-load contract that basically gives us a minimum of a third of our capacity with kind of optionality up to two-third. So that’s still in place; that would be in place for several more years.

And that’s for both facilities or just in Abilene?

It’s for both facilities.

Got it. And then, you mentioned some headcount and staffing changes both personnel as well as overtime, is there any one-time charges that we should be factoring in for GAAP accounting purposes for the upcoming quarter?

No, nothing material. We’ve incorporated that in our projection.

Got it. And then CNG is not a business that you’ve talked about historically. Can you just ground us in, A, what exactly is the strategy to grow that business and then put it in perspective about how big that segment was for 2016, for last year?

So we shipped our first units. Basically, we have a partnership with an Italian compressor manufacturer, SAFE. And who has a very strong market presence outside of the U.S., so we’re their U.S. partner. We shipped our first unit about a year ago, so we’re basically making compression skids that would be used in a fueling station. And I have to say, we made the decision to enter the business, when the gap between oil and gas prices was considerably wider, so there was a stronger economic driver. And the business has been pretty - has grown pretty slowly. We did make a little over $2 million of revenue last year. We’ll probably do maybe $5 million this year. Where we are seeing some growth opportunity now is more in basically what we call kind of a mother/daughter system, where you’re taking compressed gas and you’re trucking to users particularly on the East Coast. So that is something where this economics is still pretty strong.

Got it. Tell us…

It’s a natural combination with Red Wolf, because of what we do in terms of kitting and making these skids is very similar to what they do. So I think ultimately those businesses will be combined.

Got it. That’s helpful. And maybe just the last question is can you talk about on the Gearing side, any repowering for wind activity? Is that something you’re seeing either from a tower perspective or gearing?

No, I can’t say we’re seeing anything material. On the Gearing side, we are selling - we sell maybe $6 million to $8 million into the - it could be more than that, it could be closer to, let’s say, $8 million that go into rebuilding gearboxes. And we can’t really tell necessarily whether that’s part of a repowering or whether that’s just normal wear and tear, but it’s probably more the latter.

Got it. Thanks so much. That’s all I had.

Okay. Thanks.

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

Thanks. Thanks, Andy. Thanks for your interest. We delivered a very strong quarter. Our tower results show what we can do when production is flowing consistently at both of our plants. The Gearing market is gaining momentum. The contribution from gears and process systems will grow as the year unfolds. We believe the downward adjustment in our near-term power shipments represents a market correction and is not in line with the fundamental strength of the U.S. wind energy market. We remain focused on the strategic goal of doubling our revenue and EBITDA margins over the next three years. And we’re working on a number of organic and inorganic opportunities to deliver that growth. So in summary, I look forward to updating you again on our progress next quarter. Thank you.

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