Broadwind, Inc. (BWEN) Q4 2017 Earnings Report, Transcript and Summary

Good morning and welcome to the Broadwind Energy Q4 2017 earnings conference call. All participants will be in listen-only mode. [Operator Instructions]. After today's presentation, there will be an opportunity to ask questions. And please note that 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 fourth quarter and full-year 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 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.

Good morning and thank you. 2017 was a challenging year for us commercially, although we did make some notable progress with our product and customer diversification plan. We booked revenue of $147 million for the year, down $34 million from 2016. Our tower business was down more than $57 million, but we saw healthy growth in gearing sales and we benefited from the acquisition of Red Wolf. We experienced serious commercial headwinds in two areas. In wind towers, after starting the year producing at full capacity, our primary customers merged and underwent an inventory correction and dropped down to minimum annual purchase volumes in the back half of the year. We are just coming out of that downturn and the business is positioned to be healthier in 2018. The gas turbine market, where Red Wolf is concentrated, was weak in 2017, in part because gas turbines are losing out to wind and the after market demand was soft as well. We are seeing some recovery in orders in 2018 and although it is too early to say for sure, we believe the low 2017 order rate represented, in part, an inventory correction on the part of our predominant customer. On the positive side, the gearing market remained strong following a 150% year-over-year increase in orders in 2017. The strength reflects a significant demand from oil and gas customers and some encouraging positive signs from our mining and construction equipment customers. We invested capital to complete the expansion of our Abilene tower plant and to enhance our broader coatings and manufacturing capabilities to reposition us to grow and diversify our heavy fabrications offerings. We renamed the tower and weldments segment, towers and heavy fabrications to reflect our improved capabilities and broader commercial strategy for this business. We booked $12 million of orders in the fourth quarter and $88 million for the year for a book-to-bill of 0.6. In towers, we booked $35 million, all in the early part of year before our customers began to curtail their purchases. As you may recall, our firm backlog includes about $50 million for each of 2018 and 2019 in terms of minimum tower quantities under the three-year supply agreement signed in mid-2016. Gearing orders were very strong last year with a book-to-bill of 1.42. Our gearing backlog has been stable at about $20 million or about six months of production for several months now and we are off to a strong start in early 2018 so that $9 million to $10 million quarterly revenue run rate looks solid for 2018. Process systems includes Red Wolf and our Abilene-based CNG business. The book-to-bill of 0.9 reflects the relatively weak gas turbine aftermarket and minimal CNG unit orders. In total then, we had $138 million in backlog at year-end. On the next slide, as you can see on the left, the wind development pipeline in the U.S. remains strong at just under 28 gigawatts at 12/31. As in prior years, the market typically experiences a dip in the development pipeline at year-end as developers scramble to put turbines into service for tax purposes. Just as a reminder, these wind development projects are either under construction or in advanced development. Advanced development means that one of the three following conditions is present. There is a purchase, there is a power purchase agreement in place or the turbines are on order or the project is being developed by a utility for its own portfolio. The graph on the right side shows the latest wind capacity installation projections through 2020. In 2017, seven gigawatts were placed into service bringing cumulative installations in the U.S. to 89 gigawatts. The forecast is for those annual installations to rise through 2020. We are showing the year-end 2017 forecast in purple in the chart on the right alongside the forecast from a year ago. As you can see the 2017 figure came down by about one gigawatts during the year reflecting some developer uncertainty in the face of changing tax policy and an uncertain regulatory environment. However, the expectation is that that volume is shifted out into the last part of the decade, raising the slope of this curve. All-in-all, this is a positive environment and we are actively quoting multiple customers to sell capacity in late 2018 and beyond. Despite the backdrop of a solid industry environment, we are seeing increased pricing pressures as wind turbine competition has intensified and U.S. turbine prices have declined about 10% during the past 18 months. Those price reductions are being passed through to the supply chain to the extent possible and we are working to improve manufacturing efficiencies and manage down costs to absorb some of this pricing pressure. Another source of pricing pressure has been imported towers that are generally fabricated using lower-priced Asian steel. In 2017, imported towers dropped encouragingly from 2016 levels but we believe they could represent a growing threat if the Section 232 steel tariffs under discussion are enacted and if wind towers are not included as a protected product. We are watching this closely as the widening steel price differential could increase pricing and margin pressure for U.S. tower manufacturers, particularly for wind projects in close proximity to U.S. ports. We also participating with a tower manufacturing consortium to petition to extend for an additional five years to antidumping duties on Chinese and Vietnamese towers which were first enacted in 2013, which would be a positive for our business. On the next slide, demand for U.S. gearing remains strong. The $3 billion plus market for gears manufactured in the U.S. remains strong, particularly in the cyclical oil and gas market. The composite 6% annual growth rate shown on the left-hand chart is positive, of course, but for us, because we make very large gears, the impact is more substantial. More than three quarters of our sales are in the power, oil and gas and mining markets. As shown in the chart on the right, oil and gas and mining markets are posting double-digit growth rates. In addition to recovering with these markets, we are expanding our customer list. In 2017, a third of our $36 million in orders came from about a dozen new customers. We have reconfigured our plant to put improved throughput and production efficiency to support larger high-volume contracts. Red Wolf sells into the global gas turbine market, both for new turbines and for aftermarket demand. The industry has softened since the 2015 peak and is predicted to remain level at approximately 30 gigawatts in 2018 as well. At Red Wolf, our focus is to grow our share with our existing customer who is consolidating suppliers and also to continue with our efforts to diversify outside of gas turbine since our kitting and fabrication capabilities can support other industries as well. And now I will turn the call over to Jason to review the financials and the segment performance.

Thank you Stephanie. Q4 was a challenging quarter for the businesses to manage through as historically low tower demand, supply chain disruptions in our gearing segment and continued weakness in the compressed natural gas market weighed on our topline in the quarter. Q4 consolidated sales were $17.8 million compared to $48.2 million in the prior year million, primarily driven by lower tower demand from our customers. Offsetting the year-over-year lower tower demand were the additional sales from the Red Wolf acquisition and higher gearing shipments. During the second half of the year, tower margins were compressed because we retained key personnel in the face of what we believe was a rapid but temporary slow down in purchases. We are seeing already that this has made it easier for us to ramp back up production in 2018. Q4 operating expenses were down $0.5 million year-over-year, or a 12% decrease. This highlights the swift cost reduction efforts we have taken to right size our cost structure. Our EBITDA loss for the quarter was $4 million versus $2.5 million generated in the prior year and EPS was $0.45 loss. Following a profitable year in 2016 and strong operating performance in our tower segment in the first half of the year, second half tower demand was limited by excess customer inventories. For the year, consolidated sales were $146.8 million compared to $180.8 million in the prior year. Plant underutilization led to a decline in gross margins to 5.6% and EBITDA was $2.8 million for the year. EPS was $0.21 loss compared to earnings per share of $0.09 in the prior year. I will note that the current year EPS includes a one-time $0.34 tax benefit associated with the Red Wolf acquisition. Moving to our towers and heavy fabrication segment. Orders for the year were $35 million, a reduction versus prior year when we recorded a three-year base load tower order which enabled our customers secure a portion of production capacity following the PTC extension. We sold nine towers during the quarter as customers continue to manage down their inventories. Inventories appear to be tapering and purchase orders under our framework agreement are beginning to be released on a more regular cadence. As a result, our tower production activity levels began to elevate in the quarter, supporting our customers Q1 demand as well as the production of a large prototype design tower for our customer that we haven't produced for in over five years. We sold 272 towers in the year of our stated 550 tower capacity, compared to 458 tower sold in the prior year. Our Q4 operating loss was $4.5 million versus an operating profit of $2.8 million in the prior year. Significant cost management activities to align cost structure and reduced production levels in the second half helped the tower segment achieve $2.7 million of positive operating income for the year. Despite the challenging second half, the segment generated $7.8 million of EBITDA, representing a 7.5% EBITDA margin. We completed our Abilene capital investments in Q4, which will not only expand our capacity in this facility to more than 200 towers per year, but it will also help the facility efficiently produce multiple tower designs and other heavy fabrications concurrently. We are focused on ramping up production to support rising tower demand from our customers. We are continuing to pursue diversifying our customer base, which will improve plant utilization and reduce volatility of segment performance. The wind turbine market has experienced significant margin pressures and we are certainly not immune to this. We are working with our customers to optimize tower design to reduce our cost, which will help offset margin pressure. Lastly, we are seeing growing demand for heavy fabrications in mining, construction and on the other industrial end markets. We like the diversity of these end markets and our ability to leverage our core competencies. We are investing capital and refocusing our organization to support this growth. In the first quarter, increased demand from our customers will generate revenue in the $16 million to $17 million range and we expect breakeven EBITDA. We wills still be operating well below full capacity with Q1 production of approximately 40 towers. In our gearing segment, we recorded $7.4 million of orders in Q4, down from the third quarter, but notably higher than the prior year as the rebound in oil and gas markets and the expansion of our customer base continue to drive year-over-year improvements. Full-year orders were up 150%, again because of the oil and gas rebound that we started to see in Q2. We have expanded our sales organization and have made good progress diversifying our customer base. As a result, backlog is $20 million, over double where we finished the prior year. Sales for the quarter were $8.5 million, a 44% improvement versus the prior quarter, but was limited by material availability and other supply chain disruptions. We are beginning to see our supply chain deliver on a more consistent basis and we have made good progress qualifying new suppliers. We are closely monitoring steel prices and in most cases are able to effectively pass through price increases to our customers. As you can see on the revenue by market graph, full-year oil and gas sales were $11 million compared to effectively zero in the prior year. Full-year oil and gas orders were $23 million. So we anticipate 2018 shipment levels to be closer to 2014 levels. And we remain focused on further diversification and expansion in other markets, notably mining and other industrial. We generated $600,000 of EBITDA during the quarter, a 20% year-over-year improvement. However several one-time items influenced our Q4 results. We have successfully remediated an environmental issue associated with an idle facility and we are really excited to have the project behind us and we were able to do so in a cost-effective manner resulting in $700,000 less than our reserve was established for. We are in advanced discussions to sell this property which would generate a small gain on sale and will reduce operating costs by $0.25 million annually. Probably offerings this favorable items was the impact of supply chain disruptions which led to underutilization of our plant and introduced production inefficiencies. Lastly, following our preannouncement, we identified product that was not manufactured to specification and as a result, we recorded $400,000 reserve for rework and scrap. Full-year sales were up 26%, which helped narrow the operating loss from $3.2 million to $2.6 million. The business made significant productivity improvements through various CI initiatives in plant layout optimization in 2017, but we see more opportunity for these improvements and we are continuing to focus on CI events that will improve our production flow, including optimizing sales and improving our equipment uptime rates. In Q1, we expect revenues to be $8.5 million to $9 million, generating positive EBITDA, but below our medium-term targets as we work through the compounding impacts of the Q4 supply chain disruptions. Our medium-term view is that further improvements in production flows and recovering supply chain should generate $9 million to $10 million of revenue per quarter, EBITDA margins in the 8% to 10% range and positive operating income. Moving to our process systems segment. Orders for the quarter were $2.4 million, down sequentially from $5.3 million in Q3 due to excess customer inventories and reductions in production forecasts, specifically in the natural gas turbine market. Revenue was below guidance at $5.1 million as we continued to see low demand for CNG equipment. As a result, we recorded a $350,000 impairment on certain CNG equipment widening the operating loss to $0.5 million. For the year, the segment had $17.4 million of shipments and generated a small EBITDA loss, solely driven by the operating loss in our CNG business. Economics of the CNG equipment continue to be challenging given the spread between natural gas and diesel prices. And given this factor, we have made the decision to exit the CNG market. As a result of exiting this business and consolidating our manufacturing facilities, we estimate annual cash savings of $1 million to $1.5 million. We are focused on diversifying our customers and end markets and we think Red Wolf's procurement practices and it's historical delivery performance positions the business to not only enter new markets but also expand its existing relationships. In Q1, we expect revenues to be in the $4 million to $4.5 million range, generating 8% to 10% EBITDA margins. Our cash conversion cycle ended the year at 48 days compared to zero at the end of 2016. Our Q4 statistics were distorted by the lower tower production and our DSO was above historical norms as certain customers delayed schedule payments into 2018. Our operating working capital cents per dollar of sales increased to $0.16 from $0.14 in Q3 and is indicated in the chart on the right above our historical norm. Operating working capital finished the year at $11.3 million. However it was a $4 million sequential improvement over Q3, primarily driven due to $8 million increase in deposits to support Q1 tower production. Operating working capital increased $12.1 million year-over-year from a negative operating working capital position in the prior year. This negative balance was driven primarily by high deposit balances at year-end 2016, which supported the strong tower production levels in the first half of 2017. We are expecting our operating working capital balances to be at the higher end of the range moving forward, as the industry and our customers tighten working capital practices. An example, prior to 2017, our tower deposits were received six months in advance of tower production. Recent purchase orders are being released by our customers with shorter lead times which in turn leads to receiving deposits closer to three months in advance of production. Moving to our balance sheet. As I mentioned before, operating working capital decreased by $4 million during the quarter as increased deposits offset inventory increases in our towers business. We had $16.7 million of debt and capital leases at year-end. This balance includes roughly $3 million of forgivable loans, $3 million of equipment notes and leases and approximately $11 million used under our $25 million credit line with CIBC. And we had an additional $12 million of availability at year-end. We had $23.7 million of other assets left on our balance sheet as of 12/31, a $15.7 million year-over-year increase. This was mostly driven by the intangibles and goodwill that was required as a result of the Red Wolf acquisition. For the year, net CapEx was $6.6 million or 4.5% of sales. As you can see on the capital expenditures graph, our CapEx investment has been elevated the last two years due to the now completed Abilene investment. We will continue to make investments in our heavy fabrications business and opportunistically in our gearing business to support its growth. However, we think that 2% to 2.5% of sales range will be adequate to support maintenance CapEx and growth initiatives moving forward. That concludes my remarks and I will turn it back to the operator for questions.

[Operator Instructions]. And our first questioner today will be Justin Clare with ROTH Capital Partners. Please go ahead.

Hi everyone. Thank you for taking my questions.

Hi Justin.

Good morning.

Hi. Morning. So first off, Siemens Gamesa has indicated they are seeing strong growth in the U.S. backlog in Q1 so far. And that's on top of solid bookings in Q4. I was wondering if you could just give us an update on the communications you are having with Siemens Gamesa and just give us a sense for how you see order flow progressing ahead?

Siemens is, I think the announcement came out today, they are actually the largest global turbine manufacturers. So they are a very critical partner for us, very, very important customer and I think they are gaining some momentum after a year of consolidation. So I think it's very positive and we remain their largest supplier for the U.S. market. So I think it bodes well.

Okay. Great. And then last quarter, you had talked about building a prototype for a tower customer in Q4. Can you just share how that relationship has progressed and whether you could see orders from that customer this year?

So the prototype was completed and I think it's actually just been shipped and I think it's a successful project. So we will definitely be under consideration for volumes that they would want this year. So that's a relationship that we would also like to develop and deepen.

Okay. And then moving to the steel tariffs. So U.S. pricing for steel has moved higher in anticipation of tariff. Just wanted to see if you could help us understand how that's affecting your cost structure right now? Are you able to pass some of that cost increase through to your customers? And then, is it becoming more challenging to compete with imports at this point in time because of the increased steel pricing in the U.S.?

It's kind of a complicated answer. So first of all, we don't take steel price risk when we sign a tower contract. Either the steel has been purchased in advance or we have a pricing commitment. But the more fundamental risk is that our customer could get that tower less expensively from overseas. And there you could enter the whole, the math that's relative steel prices versus transport costs. And the transport cost dynamics change depending on the amount of goods that are moving from Asia. So freight cost can increase and decrease. Steel prices increase, decrease. And of course, the proximity to the tower plant. But taken on its own, higher U.S. steel prices are the bigger gap between U.S. and Asian prices is a bad thing because on the margin it encourages more imports. Now the imports today, it's uneconomic for them to come from either China or Vietnam but there are other countries that will export towers. So that's why I said, it also depends on how close that wind farm is to the port since that defines how much overland transport cost is going to be. So it's a complicated equation and we are watching it really carefully because, of course the politics instance are pretty exciting.

Great. Okay. Well, thank you for the color. I will pass it on.

Okay. Thanks Justin.

[Operator Instructions]. Our next questioner today will be Angie Storozynski with Macquarie. Please go ahead.

Thank you. Okay. So two things. First on the balance sheet management, so your availability under the revolver. Should we be concerned if it will take a little bit longer for the tower orders to come in? How do you feel about the current availability under the revolver, the unused one? And how much time do you have, say what if it turns out the towers, orders really come in more like fourth quarter of this year versus the third quarter? Does this make a difference and should be concerned about the leverage?

We think we have adequate liquidity to support the business as the towers business volumes increase. And we still think we are going to have probably $20 million to $23 million, probably $23 million against availability on our line. Really the one benefit that we get as we have over $55 million of assets, so we are provided of $10 million of availability under our line for those assets. And certainly we could perform sale-leaseback transactions that could help us improve our liquidity, if needed. I think what we are also seeing in Q1 as we talked a little bit about some of our customers delaying payments into 2018, we are starting to see our DSO decline and our gearing and our Red Wolf business are generating cash. And then lastly, our CapEx requirements aren't significant in the first half of the year. So we are going to manage that pretty tightly until we have more certainty on the tower side.

Okay. The exit from the CNG business, that has to do more with cost efficiencies as opposed to any types of potential sales proceeds from asset sales?

I am sorry. Can you --

One of the slides mentioned that you are exiting the CNG business.

Okay.

And so I am asking if this is an attempt to cut costs? Or is it an attempt to raise funds from some asset sales that are currently related to the CNG business?

Yes. It's really a matter of changing our focus. It's not been a distraction. We have not seen very much traction on it. So it will reduce costs because right now we have got a facility that costs us maybe a $1 million, $1.5 million a year that's dedicated to that. So that will go away later on this year.

And then on the gearing side. Given this strong growth that you have been experiencing, are you looking at this market and thinking that there is a bigger growth potential or addressable markets within your current footprint that could meaningfully surprise to the upside as far as [indiscernible]?

I don't think it will surprise this year because we are trying to be consistent with this $9 million to $10 million we are booking to that level and make sure that it can be a profitable business. I do think though looking forward, we think this has the potential to take another leg off and be in the $50 million plus range. I think our customer diversification successes have been very significant and it's just opened our eyes to the size of the market and the range of opportunities out there.

Okay. Thank you.

Thanks Angie.

[Operator Instructions]. And we do have another question. It is from Al Shams with American Capital Partners. Please go ahead.

Yes. Stephanie did you are discuss how much cash you expect to generate from the sale of that facility you are shutting down?

It's actually a leased facility. So it's really a reduction on the expense stream.

Okay.

On the other side, the gearing plant, we do expect to close on the sale there probably early in the second quarter and that's on our books for about $0.5 million. We will get a little gain on there.

Okay. Now as Jason mentioned, you feel you have got adequate resources to carry forward during the year. And you have got some cushion built in if there are some timing issues?

Yes, we do.

Okay. Thank you very much. Good luck.

Thank you. The final -- I am sorry. Go ahead.

I am sorry. There looks to be no further questions at this time. So I was just going to turn it back to Stephanie Kushner for closing remarks.

Sure. So on the final slide, we are rebuilding our revenues in 2018. In the first quarter, we think will be in the $28 million to $30 million revenue with a small, less than $1 million, negative EBITDA. And then as we move back into the second quarter, we think that revenues will rise to about $40 million and we should start generating positive EBITDA again. So we made some progress in 2017, but certainly the extent of our customer concentration hurt us and this remains a key focus for 2018. In the towers and heavy fabrications, we do expect to build towers for multiple customers this year and we have invested in people and equipment to support sales growth in our other fabricated weldments. We added some key new customers for these products in 2017 and we think we will make further progress in 2018. In gearing, we are making progress stabilizing the supply chain situation and driving for consistent revenues and profitability. We were all disappointed that our gearing segment did not become profitable in Q4 as expected and we have redoubled our efforts to manage our processes more effectively in order to capitalize on a strong market. In process systems, as we have said, we are exiting the CNG market and we are concentrating on the kitting and fabrication business for Red Wolf and particularly to expand our customer base there. Despite the weak gas turbine market, Red Wolf generated nearly $2 million of EBITDA in its first full-year, which was masked by losses in CNG. With the exit of CNG, we are positioned to turn the segment results positive in 2018. So thank you for your interest. Tough 2017, but we planted some important seeds for future growth and diversification and I look forward to updating you on our progress as 2018 unfolds.

And the conference has now concluded. Thank you for attending today's presentation. You may now disconnect.