Broadwind, Inc. (BWEN) Q3 2017 Earnings Report, Transcript and Summary

Good morning and welcome to the Broadwind Energy Third Quarter 2017 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation there will be an opportunity to ask questions. 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, Dennis. Good morning and welcome to Broadwind Energy's third quarter 2017 earnings conference call. With me today are Broadwind's President and CEO, Stephanie Kushner; and Broadwind's Vice President and CFO, Jason Bonfigt. 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 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.

Good morning and thank you. We reported reduced revenues of $30 million for the quarter, as we experienced the sharp drop at power production volumes caused by a reduction in second half demand from our largest customer. Sales for both gearing and process systems grew which partially compensated for the tower weakness. Although the fourth quarter is even more challenging, our tower revenue will begin to normalize beginning after the first of the year. In gearing, we continue to see strong demand from oil and gas customers, primarily for frac gearings. But there are early signs of other parts of the industry are coming back as well. And mining is clearly on a recovery path. So, we expect that to represent a growing part of our bookings going forward. We shipped $700 million in gearing and reported positive EBITDA for that segment, which fell short of positive operating income due to additional maintenance, tooling and training costs to support the ramp up. We will make further progress in the fourth quarter. Process systems achieved profitability in the quarter on $6 million of sales. Red Wolf results were accretive, but the business is being impacted by weaker than expected sales into the gas turbine after market. Therefore we are not likely to pay an earn out just to the sellers for at least the first year. We've been managing our costs proactively during the tower weakness and reduced our manufacturing overhead and operating expenses by another $1.1 million sequentially. Our liquidity remains sound as we navigate through this challenging period. We successfully reduced our working capital during the quarter, which reduced the borrowings on our line of credit to $8 million. We had $12 million of availability on the line at quarter end. Tower bookings continued very low in the quarter as our largest customer did not purchase volumes in excess of the multi-year base load agreement, which averages approximately $12 million per quarter. We did receive a prototype order from the new customer consistent with our focus on diversifying our customer base. As I said gearing orders remained strong. Our commercial organization has done a very good job expanding their customer base, not only in the strong oil and gas markets, but with other industrial customers as well. In process systems bookings totaled $5.3 million rebounding somewhat from $4.4 million last quarter. At September 30, our ending backlog was a $143 million. Next slide, the U.S. wind market continues to show significant momentum, as you can see in the left chart wind power capacity under construction or in advanced development between now and the end of the decade rose a further 27% in the quarter. Like last quarter more projects entered the development pipeline than were commissioned. So the backlog is building. We expect the normal Q4 completion surge to occur and the backlog to decline somewhat before year end, but remain strong to support the next several years of development activity. As shown in the right side diagram, following a dip this year installations are expected to surge between now and the end of the decade. However completions are backend loaded with more than 12 gigawatts expected to come online during 2020. Although turbine awards have began to accelerate, turbine model decisions have still not been awarded for about half of these projects. The domestic gearing market remained strong; following a low point in 2016 of about $2.8 billion overall market is growing at more than 5% per year. And as shown on the right, our areas of market focus power, oil and gas and mining are at the higher end of the growth spectrum. We have rearranged the flow in our gearing plant to produce various gearing configurations more quickly and efficiently, so that we can be more responsive in these strong markets. Turning to natural gas, Red Wolf predominantly sells into the gas turbine market, either providing components for new turbines or for repairs and retrofits. As shown here new utility scale gas turbine orders totaled about 42 gigawatts in 2016. Market forecast are projected about a 5% drop in orders this year, down to about 40 gigawatts. As you can see in the inside box. However, first half orders have run materially behind 2016. So either the sales are more backend loaded than usual or there is a larger than 5% year-over-year decline in 2017. Some of this weakness is being attributed to renewables garnering a higher market share. For Red Wolf year-to-date orders for content for new gas turbines have been about flat versus prior years. Although again lower in the U.S. market and higher overseas, however we continue to see a significant reduction in orders for the aftermarket which as historically represented about 2/3rd of Red Wolf sales. To-date these orders are down by more than 50% reflecting much lower rebuild and upgrade activity by our largest customer. I've not included an update for the CNG market as little as changed from last quarter. We continue to see very low activity in this market due to a tight spread between diesel fuel and natural gas prices. I'll turn it over to Jason.

Thank you, Stephanie. Turning to Slide 8, sales for the quarter were $29.6 million in line with our guidance 30% lower than prior year, primarily driven by a 63% decrease in tower sold. A result of our tower customers reduced purchases in order to draw down a component in inventories. Partially offsetting the tower segment decline with additional sales associated with the Red Wolf acquisition and continues to strength the end markets where our gearing segment participates in. Leading up to Q3, we had a favorable sales comparisons that were primarily driven by the tower demand to support the PTC qualification factors. However the lower tower production levels moved our year-to-date comparison down approximately 3% versus the prior year. Gross profit margins reduced to 3.4% from 12.5% last year primarily result of low tower facility capacity utilization. And we had an operating loss of $1.8 million in the quarter and a $900,000 of EBITDA. Both well below previous quarter run rates, but in line with the guidance we outlined last quarter. The EBITDA result included the release of the $1.4 million contingent earn out liability related to the Red Wolf acquisition which was based on our most recent EBITDA forecast being below earn out threshold levels. Conversely we had several unfavorable items that we are classifying as our other shift impacts or other non-recurring items. These included approximately $250,000 of tower material written off due to a discontinued tower design, $300,000 of adjustments related to increases in expected claims costs associated with the previous period self-insured workers' compensation programs. And the residual impact of the self-insured healthcare insurance associated with the reduction in workforce. Lastly we incurred an additional $300,000 to $400,000 of gearing and ramp up costs related to supporting the order growth we've have seen in 2017. Year-to-date EBITDA is $6.7 million versus $7.1 million in the prior year comparison. I would note that despite the tower volume decline EBITDA margins have only slightly declined year-over-year, highlighting the swift overhead reduction efforts made in response for the tower demand declined and the benefit of improved operating performance. Loss per share for the quarter was $0.14 again in line with our guidance. Year-to-date earnings per share is $0.25 which includes the $0.34 income tax benefit associated with the Red Wolf acquisition. Transitioning to Slide 9, as previously, as noted previously the multi-year base load tower order was received in 2016. We were only reporting orders on volumes exceed to minimum contract amounts. And for the quarter, we had a new customer order for a prototype tower being produced in Q4 and additionally on the Weldments side of the business we had an up tick in orders and are encouraged that the mining under industrial markets are gaining momentum. Tower sold for the quarter were less than half of Q2 down to 42 and down 63% compared to the prior year. This reduction was partially offset by more complex higher material content towers. And as a result, sales were $16 million in line with guidance and down 57% year-over-year. Our customers are continuing to leave excess inventory that is accumulative over the past few quarters. We have taken swift actions to reduce our overhead and operating costs in response to the following volume decline in both of our plans. However, we are balancing this against our need to support 2018 production level increases and using their production decline as an opportunity to improve the capabilities of workforce and complete our expansion project. Operating loss was $1.5 million and the segment had the small EBITDA loss during the quarter. Despite the Q3 softness, year-to-date EBITDA margins remain near 11%. Our objectives haven't changed as previously mentioned, we continue to focus on improving production processes and assisting our customers with cost out efforts. We are expecting to ramp up enabling expansion and efficiency investment in Q4. This is slower than originally planned, as we have intentionally slowed progress given our production volumes. But we continue to see this project has important to future performance as the expansion adds approximately 50 towers of capacity in a region of the country we are expected the strong near-term demand. The project will also improve plant flow and reduce future production risks. Let me continue to be focused on diversifying our customer base and building excess plant capacity. We are encouraged by a rebounding volumes in 2018, however our tower demand in Q4 represent a low point for the business and we expect revenues to be in the $4 million to $5 million range with the $4 million operating loss. Next Slide please, in our gearing business order growth continues to be strong with oil and gas customers with orders near $10.6 million up nearly 5 times over the prior year. Backlog is near $22 million and that will add up our year end 2016 amount. In Q3, we started to see the pull through of the increased order demand with revenue of $7.6 million up 65% year-over-year. The shipments levels were lower than previous guidance as you work through extended material lead times from our vendors and sizing the workforce to align with production levels. As a result of the volume increases and the productivity efforts, operating loss narrowed year-over-year to $400,000 from the $700,000 loss and generated positive EBTIDA. As I mentioned previously, we had a ramp up cost which we estimate at $300,000 to $400,000 of additional tooling, employee training and machine used support increased usage of sell manufacturing, which will enable further improvement in plant utilization. On the bottom left side of the slide, we show historical revenue by end market served oil and gas orders continue to be strong market for us and you can see that in 2014 at peak of oil prices, we shipped approximately $20 million of oil and gas gearing. Though we are leveraging our commercial organization and other markets and are generally seeing improvements across most end markets. The mining recovery is developing and we are seeing activities strengthen on our front end process and are optimistic for recovery next year. Our current objectives include the continued focus on CI events to improve our production flow, include the optimizing sales and improving our equipment uptime rates. We expected the EBITDA positive for the year and trending towards positive operating income. We've made steady progress on our environmental remediation of our ideal gearing facility. We are optimistic that our remediation efforts will conclude in Q4 which could result in a release of the portion of our environmental reserve. Following this remediation, we will look to complete our restructuring effort that was started in 2014 by starting the facility and knowing our operating cost further. Our Q4 outlook shows continued top-line growth with revenues in the $9.5 million range, leverage will improve on the additional sales and we expect to generate EBITDA in the 7% to 9% range and have positive operating income. Moving to Slide 11, our process systems segment which consists Red Wolf and our CNG business, took $5.3 million of orders, a 20% increase sequentially over last quarter. Orders from gas turbine customers are flat, however improvements in mining equipment demand and the addition of a new oil and gas customer led to the quarter-over-quarter improvement. CNG orders were zero for the quarter given the lack of diesel to natural gas spread, which is paramount to the economics of the CNG equipment demand. Sales were $6.1 million up from $3 million in Q2 as we had more stable deliveries of our natural gas content orders and the shipment of the stock CNG unit. And EBITDA improved during the quarter to $0.6 million, $1.2 million improvement over Q2 primarily driven by increased volume. Our focus continues to be on the integration of the Red Wolf business and how we leverage competencies further into the gas turbine and adjacent markets. And we are evaluating our procurement processes to support further scaling of the business. We expect Q4 sales to be in the $5.5 million to $6 million range with the breakeven EBITDA. Next Slide please. Our cash conversion cycle was flat with Q2 and is within and expected range given the lower level deposits that we receive from customers as of 930. DSO was down to 29 days from 45 last quarter, which is often driven by the timing of the customer receipts. And we are currently encouraged by our inventory management. Consistent inventory returns near 8 indicate strong performance by our segments given our typical production cycle times. Operating working capital decreased from $23 million last quarter to $15.5 million in Q3 primarily resulted the decline in volume levels. This is visible on the operating working capital historical trend chart on the right side of the slide, where operating working capital $0.01 per dollar sales was flat at $0.13. I'm expecting our $12.31 working capital dollars to be near Q3 levels and within working capital inventories, inventory levels are expected to rise to the increased Q1 tower production volumes, but that should be funded by increased customer deposits. Borrowings under our $25 million line of credit with CIBC totaled $7.8 million for the quarter down from $13.7 million at 630. Despite the lower inventory levels in the business we had an additional $12 million of availability into the line, primarily driven by $10 million of fixed assets that are included in our borrowing base. We expect our availability under the line to be sufficient as we manage through a challenging Q4 and the Q1 ramp up production. We expect to receive deposits from our customers in Q4; we would expect this deposit balance to increase three accent to year end. CapEx slowed to $1.7 million in Q3 and is approximately $6 million for the year. The Abilene expansion and efficiency investments are nearing completion and remain on track for full year CapEx in the $7 million to $8 million range. And as we look into 2018, we are managing the CapEx spending culture our historical norm near 2% of revenue and we're expecting the capital to be allocated based on further improving our production processes or supporting profitable gearing growth. That concludes my remarks and I'll turn the call back to Stephanie.

Our first quarter outlook is for very weak tower revenue and total Broadwind revenue of $20 million. At this curtailed production rate, we expect an EBITDA loss of $2 million to $3 million. Our visibility improves after the beginning of the year when revenue should begin to normalize. We should see sales back in the $30 million range in the first quarter and then above $ 40 million by the second quarter. This would have been a very difficult second half for Broadwind and our vulnerability to a change in production schedule for our largest customer reinforces for us the urgency we have to expand and diversify our customer base at every level of the business. In towers, we expect to add 1 to 2 customers next year. In gearing, we've done a nice job of diversifying and it's showing up in our numbers. Our commercial focus there is also to broaden our participation across industries. And our process systems business needs to grow outside of the gas turbine market and beyond our dominant customer. I'd be reporting back on the progress during the upcoming quarters. Looking ahead we are focused on achieving consistent profitability in gears and a $9 million to $10 million quarterly revenue run rate. And in process systems, we are launching a new cable product this quarter and also continuing to focus on customer and product diversification opportunities. We expect to enter 2018 with the wind that are back for all three business segments. I look forward to being able to report a return to profitability in the middle of next year. Thank you. I'll turn it over to Denise to moderate questions.

Thank you. [Operator Instructions] The first question will come from Justin Clare of ROTH Capital Partners. Please go ahead.

Hi, everyone. Thanks for taking my questions.

Good morning, Justin.

Good morning. So, first half we saw that Siemens Gamesa announced the turbine order for over 780 megawatts or 300 towers for the U.S. market today. Can you just update us on your discussions that are ongoing with the company post merger? And whether you expect to be able to supply the towers for this order, what the potential is there?

Certainly, the information for and our visibility have improved very significantly over the last several weeks. And although I can't say exactly how many of those towers we will be building certainly, backwards that's good news and many of those projects we've been discussing.

Okay, great. And then maybe turning to pricing, it appears that pricing declines for wind turbines in the U.S. may have recently accelerated. And Siemens, Gamesa also did announce write down of inventory as a result of pricing pressure. I don't know, if you could just talk about the pricing environment for towers, whether you are seeing an increased pressure from customers?

Yes. We began seeing increased pricing pressure probably earlier this year and something that we focused and then working on frankly for more than a year and that is two things. One, improving our production processes and our efficiencies and also working with our customers on the design of their towers to improve the manufacturability. So, we are working in both areas, our hope is to offset much or much or even all of the pricing pressure. And but definitely we are partnering with our customers, so that everybody wins what is a weaker pricing environment.

Okay. Got it. And then, as we look into 2018, you are expecting revenue growth in Q1 and Q2, can you share how much of that revenue growth is expected to be from the tower segment? Thank you.

We are just working on our operating plan right now. So, it maybe a little bit premature. I think I did talk about -- we think hearing will -- should go into the year and progress in that $9 million to $10 million quarterly level. So, we are starting to get some traction with our other welded fabrication. But, as you could imagine that much of an increase -- so, a lot of that increase is going to come from the tower business.

Okay, great. Thanks very much. I will pass it on.

Thanks.

The next question will come from Jeff Osborne of Cowen & Company. Please go ahead.

Hey, good morning, Stephanie. Couple of questions. The OpEx run rate, first of all, where was the $1.4 million, the reversal of the earn out, where is that in the income statement? Is that an offset to SG&A, we should think about much higher level of SG&A going forward?

Yes. Jeff that's flowing through SG&A under our corporate segment reporting.

Got you. So, there was that, and then, if I heard you right there was couple of hundred thousand dollars of extra training expenses as well that you had this quarter that probably isn't repeatable in the coming quarters, is that right?

That would have been in fixed over head because that was labor related.

That was in accounting.

Yes.

Okay. And then, I guess just following up on the last question from Ron. How do we think about, I guess the visibility something you still working on the operating plan, Stephanie but I guess what gives you the confidence that towers will return in Q1 and Q2 versus just for argument sake the middle of next year. Is it the improved discussions you had with your lead customer that gives you that line of site or something else?

Yes. We are starting to get visibility into production planning and operational expectations for 2018 and that's what have had given us that comfort.

Got it. And then, I found it intriguing that you mentioned one or two new customers as a goal for next year, certainly diversification would help. I guess what's the strategy and plan [indiscernible] there, I heard you talk about a prototype unit this quarter which is encouraging. But, I guess what's the evaluation process of that prototype and how quickly it can lead to greater level of orders?

Jeff, over the years Broadwind has sold towers for just about every turbine customer, every turbine manufacturers. So, for us it's about the communication, the bidding process and the dialogue with those potential customers.

And then, how long would that prototype take, how long would your customer evaluate that? Is that something that maybe in six months, you could see actual firm orders for, if they are pleased with the prototype?

It is probably too soon to say. I think we have more to say on that probably at the next quarter.

Okay. And then, the last question I had, if you don't mind, just on back on Red Wolf, I guess just how do you gauge the reduced activity at Red Wolf's historic primary customer versus potential just for argument sake lost market share or some other variable there. Is there a way that you've gotten visibility from them that, hey, things are a bit slow and you still are primary partner as we have these after market components that you could serve?

Yes. We spent a lot of time digging into that to understand. And we know the majority of the downturn is linked to lower activity in their part, although to be fair, we can see one area of that where there is a new competitor in that is taking some market share from us. But, I think it's something on the order of -- well, I don't know the number, I forgot. But, it's probably a quarter of the reduction.

Got it.

On the other hand, high areas where we are starting to make inroads and pull back share ourself. So, I think there is -- some normal market dynamics going on there.

Got it. Thank you. Appreciate it.

Okay. Thank you.

[Operator Instructions] The next question will come from Chris Morgan of Macquarie. Please go ahead.

Hey, Stephanie, congrats on the [Technical Difficulty].

How Chris, how are you?

Good. You had mentioned that the Red Wolf customer and product diversification might be going over a bit more slowly than previously planned? Could you please provide a little bit more color on that front, so it has the products you are hoping [indiscernible] by now that maybe you aren't quite yet?

Probably the -- we are proceeding on couple of fronts. One is, to do work with other gas turbine customers and we have discussions ongoing but that is not yet translated into a new order flow. And then, the other one is tower internals because the market has been weak, it's been a tough time to start picking up business, but again, we are persistent, we know that's not a very well served market. So, we expect to see some traction in the next year or so.

Okay. Now, do you have a sense of how much the tower demand [Technical Difficulty]

I'm sorry, you cut out -- you are cutting in now.

Okay. Do you have a sense of how much of the tower demand weakness is due to idiosyncrasy choose with a key customer versus the general industry weakness?

Well, I think maybe you can see, one of the graphs we showed you there was definitely a dip, there is definitely a dip in built this year. And also, there was some buy ahead as a result of the PTC qualification. So, we have trouble -- and then, on top of that our two largest customers merged. So, it's hard for us to separate those into pieces, but all three have contributed to some of our difficulties this year.

Okay. And then, on CNG, you had mentioned that diesel, gas spread there, whether is there any other color you could provide on progress and improving your CNG?

On improving our…

CNG product line.

I mean, we are definitely -- we are having a tough time with that product line because we are relatively a new entrant and the actual CNG station activity is down probably 80% from where it was when we entered the market. Well, we think we have got a good product and we've captured a couple of customers, it's just the level of activity is just not what we would have expected again in large part because of the economics.

Thanks Stephanie. I will jump back in the queue.

Thank you.

And at this time, we will conclude the question-and-answer session. I would like to hand the conference back over to Stephanie Kushner for any closing remarks.

Thanks Denise. And thanks your interest. This was a tough quarter for towers. But, I'm happy to report some solid progress on our other segments. We expect Q4 to be our low point. But, then for our revenue to normalize beginning in 2018 and we expect 2018 to be a stronger year for all three segments. Thank you again.

Thank you. Ladies and gentlemen, the conference has concluded. Thank you for attending today's presentation. You may now disconnect your lines.