Broadwind, Inc. (BWEN) Q4 2018 Earnings Report, Transcript and Summary

Good morning, and welcome to the Broadwind Energy Q4 2018 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. Please note that this event is being recorded. At this time, I would like to turn the conference over to Jason Bonfigt, Vice President and CFO. Please go ahead, sir.

Thank you, Denise. Good morning, and welcome to Broadwind Energy's fourth quarter 2018 earnings conference call. With me today are Broadwind President and CEO, Stephanie Kushner; Broadwind COO and President of Broadwind Towers, Eric Blashford. 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 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 10-K and our Form 8-K in the attachments we filed with the SEC this morning. We assume no obligation to update any forward-looking statements or information. Having said that, I'll turn the call over to Stephanie Kushner.

Thanks, Jason, and good morning. In a difficult year, we achieved our targeted $40 million in diverse orders, which helps position us to be a stronger less concentrated company. We reduced our net debt by 18% and at year end had $11 million drawn on our $25 million credit line. And we announced last night that we've expanded our line of credit with CIBC from $25 million to $35 million and extended it for another three years. They have been a good partner for us. The added capacity will support our significant sales recovery in 2019 and also help us with financing a more complicated supply chain due to the ongoing steel tariffs and expansion of our customer base. 2018 proved to be the first profitable year for our Gearing segment, I am proud of the way the team took control of the business, improving productivity and on time delivery, while reducing manufacturing variances and adding important new customer diversification. Full year results were depressed by supply chain and equipment difficulties in the first half. However second half results with sales of $21 million and EBITDA of $2.6 million are more representative of where we now believe we can operate systematically. Broadwind's fourth quarter revenue of $27 million was up from last year and in line with our guidance, while our tower plants were running at low production levels, our Gearing and Heavy Fabrications performed well. Our EBITDA loss of $1.7 million was similarly in line with guidance and improved from last year when our tower plants were all bit [ph] shutdown. The headwinds introduced by the imposition of steel tariffs last March have boosted U.S. steel prices about 50% and import prices have risen to match. We're fighting the advantage this gives to foreign manufacturers of wind towers. Our margins are being impacted and customers in 2018 were slow to place orders when their steel contracts expired late in the year. Having said that, as momentum builds for completion of wind farms in the next couple of years, we're seeing that the supply chain has adjusted in the market for domestic towers has improved somewhat whereas our tower plants operated on average at about a third of capacity last year, we expect to be at least double that this year. I can confirm our previously communicated 2019 outlook for quarterly sales of $40 million or more and full year EBITDA of about $8 million. On the next slide, full year orders were $83.2 million last year, with encouraging progress in gears and for heavy fabrications. Tower orders were low, but we have recently received our first qualification order from a new customer and are in detailed discussions with the second. So we're increasingly confident that we will be building towers for three or more customers in 2019. Gearing orders totaled $41.6 million, up 13% from the prior year and giving us a book to bill of 108%. Our backlog of custom gear boxes a focused growth area is double a year ago. Process Systems orders of $18.1 million were up slightly, reflecting the full year impact of the Red Wolf acquisition and stronger orders for other industrial equipment. These factors offset the impact of the weaker new gas turbine orders we've been seeing for several quarters now. Encouragingly, the order intake rate for the gas turbine aftermarket has recovered somewhat and this is an area where we have added a couple of new accounts as well. The backlog chart on the right shows $96 million essentially all of which is scheduled for 2019 delivery. Adding additional bookings since the first of the year, we have shippable backlog of $115 million to support 2019 revenue growth, which positions us well for recovery this year. As I said, we closed out the year with $40 million booked from diverse customers. This continues to be one of our highest priority and we've set a target for 2019 of $60 million as we grow these accounts and add others. Customers are responding to our mature manufacturing processes, our stringent quality standards and a very capable workforce. All of our core plans are now ISO 9001 2015 certified. The chart on the right side shows are trailing 12 months order intake rate for customers outside of wind, which is hovering in the $65 million range. The development pipeline remains very strong for U.S. wind projects. At year-end, there was 35 gigawatts in the pipeline, either under active construction or in advanced development stage. The Q4 dip is typical, because many projects closeout in the fourth quarter to hit tax benefit milestones. As shown on the right, 2018 completions totaled 7.6 gigawatts, a little below to 8-gigawatt figure that had been forecast. As some projects have rolled forward to subsequent years, I think, it is notable that the 2021 bar continues to raise the cliff that was once forecast at year-end 2020 is tapering down as the economics of wind energy continue to improve with technology advances. It was just reported that the industry actually qualified an additional 6.6 gigawatts of projects in 2018, which will qualify for 60% of the base level PTC. So this is encouraging for the year 2022. We are of course also watching the activity surrounding the green new deal and realize that the production curve could be significantly altered in a non-tariff green new deal environment. Turning to the U.S. gearing market, the market for domestically manufactured gearing remain strong approaching $3.5 billion in 2018, although, the growth outlook has moderated. We currently participate in about half of this market with concentration and power, oil and gas and mining, but demand from steel customers has been increasing recently as well. This is really the flip side of the sharp steel price spike and we are also increasingly winning new orders in the material handling space. 2018 was challenging, but we are highly energized with the 2019 outlook. We are continuing to focus on customer diversification. We have increased our sales resources by 50% and are gaining traction towards our $60 million target. To deal with the diversity, we continue to invest in updating our systems and processes. There is a lot more complexity dealing with producing 10 to 15 different large fabrications in one plant and growing our gearbox business. Both are more complicated than just producing wind towers and lose gears our legacy business. But we've made tremendous strides including implementing a new labor tracking system in 2018, selecting a new maintenance system and beginning implementation of a new scheduling system for both gears and heavy fabrications. Continuous improvement remains critically important to improve our production flow and to offset some of the margin pressure we are seeing for steel. And we are adjusting our steel procurement strategy to support higher 2019 production. We've launched a corporate wide initiative to reduce our cash conversion cycle by about 20% in 2019 and have tied one quarter of our incentive compensation to this objective. We are focused on further boosting our inventory turns, reducing our outstanding receivables and improving management of our supply base. Now I'll turn the call over to Eric Blashford, our COO to discuss our businesses in more detail.

Thank you, Stephanie and good morning, everyone. Orders for the - I'll first talk about our Towers and Heavy fabrication segment. Orders for the quarter were $2.4 million and were comparable to Q4 2017. Fourth quarter tower orders remain depressed, reflecting delays in wind tower project releases. Our heavy fabrication line, which operates in mining, construction and other industrial markets, continues to see increasing demand. We are considering further capital investments to support our growth and diversification. We sold 64 tower sections during the quarter, more than double the prior year quarter, but still only about 20% of our capacity due to the timing of steel deliveries. As a result, Q4 sales were $10.7 million versus $4.2 million in Q4 2017 with an EBITDA loss of $1.3 million versus $3 million loss in Q4 2017. While we're now pleased with any EBITDA loss, the Q4 2018 versus 2017 improvement reflects our progress in growing the heavy fabrications product line, the impact of our operational improvements and our cost reduction efforts. Furthermore, we incurred certain cost in Q4 to maintain the critical core of highly skilled workers needed to support sharply increasing tower production levels at both of our plants through at least Q2 of 2019. Our 2019 priorities remain consistent with the previous call. We are working with our primary tower customer to win additional orders, collaborate on cost out efforts and support their development of new models. As we've discussed on previous calls, the pricing pressure resulting from the PTC run-off, competitive PPAs and tariff driven cost increases on steel and other components continue. We have been able to pass through most of these steel cost increases on to our customers, but given that it's just a pass through there is no incremental margin benefit, especially with the continuing threat of imports driving tower prices down. We continue to have key resources focused on offsetting this pressure through process improvements in welding, assembly, coatings and first class quality. Our efforts to expand our business with existing customers as we add new ones continue. We are confident that these efforts will be successful. Building activity is robust, with customer seeking capacity at both our Wisconsin and Texas facilities the new tower production and for repower projects. We are excited to have recently received about $8 million of orders from tower customers, including an initial order from a new wind turbine entrant in U.S. Looking forward to 2019, we believe it shaping up to be a much stronger year from a capacity utilization standpoint. We are ramping up production at both tower plants, are operating at about 40% capacity for Q1 with an expectation of continued increases throughout the year. Accordingly, we expect to be operating at an average of about 60% to 70% capacity utilization for the full year 2019 as we have much greater production visibility through Q of this year versus last combined with the increasing coating activity I mentioned earlier. The fabrication product line continues to expand, and we have added sales and project management resources to boost that growth. We will begin the implementation of our new production scheduling software in Q1 and look forward to the improved visibility of all projects running through our plants. The large horizontal machining center we implemented last year, which with an X axis travel 60 feet, Y axis travel 16 feet and Z axis travel 6 feet is the largest of its kind in the region. It remains fully booked over multiple shifts. So we are purchasing auxiliary equipment to further increase its capacity. To support continued growth and to increase value add to our customers, we have added engineering resources and are evaluating additional capital investments and plant optimization actions. In the first quarter, we expect revenues to be in the $24 million to $26 million range, reflecting higher tower production with an EBITDA range of $1 million to $1.3 million. Q4 2018 orders exceeded Q4 2017 by 15%, including expanding position in the mining and industrial sectors. At $41.6 million of gear orders for the year we were up nearly 13% versus 2017. Oil and gas markets have softened a bit recently, primarily due to temporary constraints in the Permian pipeline, which are expected to be resolved in 2019. However from an incoming order standpoint, our expanding oil and gas customer base limits the impact of this temporary softness to us and we are excited to be bringing on a significant new customer in this segment. Additionally, we are pleased with the results of our diversification efforts as we're seeing nice volume orders coming in from some major OEMs in the mining and industrial sectors. As you can see on the graph that highlights our revenues by market, Q4 oil and gas revenue increased to a near $7 million quarterly pace. Reflecting shipment of the strong orders we received earlier in the year. However, our new order intake and the resulting backlog has a more diverse and balanced mix, but notable increases in the mining and industrial segments. We want to avoid an over dependence on any one sector and thus prevent a repeat of the revenue drop we saw in 2016. So we seek a balanced blend of customers and markets with a special focus on steel and other industrial applications and are adding direct sales and project management resources to support this objective. Q4 revenue was up 28% as compared to Q4 2017. And we earned $1.6 million of EBITDA and $1 million of operating income on $10.9 million of revenue. For the full year 2018, we earned $2.6 million of revenue - of EBITDA on $38 million of revenue, and were OI positive. As Stephanie mentioned earlier, it is notable that our performance in the second half of 2018 was much improved over the first half. And we're confident that this positive momentum will continue. In Q4 CI resources were focused on reducing machining time required for our OEM gearbox products to reduce lead times, free up critical machine capacity and improve productivity. Additionally, later this year, we will implement a new computerized maintenance management system or CMMS to increase machine uptime by improving data collection, preventative maintenance scheduling and critical spares tracking. We expect revenues in Q1 to be in the $9 million to $10 million range, with less than half of that revenue coming from the oil and gas sector. We expect EBITDA to be in the $1.2 million to $1.4 million range. Moving on to Process Systems. Orders for the quarter, which include Red Wolf plus other industrial equipment were $5.8 million, more than double Q4 2017. Although demand for new gas turbines remains weak, we are pleased to have won an increased share from our largest customer, as we are now supporting their new gas turbine production in France in addition to the U.S. Furthermore, aftermarket orders have returned to 2017 levels. In Q4, we recorded a non-cash impairment to a customer intangible, which was established when Red Wolf was purchased. This reflects a reduction in the overall new gas turbine market, its impact on our largest customer and a subsequent impact on us. However, we are confident that we have maintained and in some cases grown our share of that customer's business. Therefore, we expect our orders and revenue with this customer to grow as their business recovers in the new gas turbine market. Our efforts to diversify our business are gaining momentum as seen in the graph on the lower left hand side of the slide. Diverse orders for 2018 grew to nearly one-third of our total orders, and we have added resources in business development and engineering to accelerate this trend. We are excited to deploy our core competencies of supply chain management, kitting, fabrication and assembly to customers and markets that are growing quickly, especially those with remote field operations where the value of getting the right part in the right place at the right time and packaged in the right sequence is of optimum value. We've launched several continuous improvement actions at Red Wolf to reduce costs and improve profitability. This includes some surgical pricing adjustments to better align our product prices with sourcing and packaging costs, which vary based on order size. Initial results of this effort are favorable. Going forward, we will leverage increasing aftermarket opportunities in the substantial installed base of natural gas turbines serviced by our largest customer and others. We will work hard to expand our new gas turbine share with existing customers, while being very deliberate in our efforts to diversify our customer base. We expect Q1 revenue to be in the $3.4 million to $3.8 million range with near breakeven EBITDA. Now, I'll turn it over to Jason for his comments.

Thanks, Eric. Q4 consolidated sales were up nearly $9.4 million year-over-year and in line with our guidance as sales were up in each of our businesses. The year-over-year improvement was a relatively easy comparison for us as a major tower customer was rebalancing inventories in the prior year and our plants were nearly idled. We continue to see improved performance in the Gearing business, also driving the top line improvement is the result of our diversification efforts notably in Gearing and in our other fabrications product line. Our backlog to support 2019 production is much stronger than in past years Gearing backlog is diversified and provides solid visibility into the first half of production. Orders for our fabrications product lines in 2018 exceeded $15 million and we expect further growth in 2019. And tower purchase orders received for 2019 production are markedly improved over the visibility we had this time in 2018. In Q4 year-over-year gross margins improved from negative 17.4% to negative 1.8%. This improvement was driven by higher tower plant utilization, including both tower and fabrication production and greater leverage in our Gearing business. The Gearing business demonstrated consistent operating results in the second half of 2018, with notably improved productivity, better material management, and overall improved operational manufacturing variances, including lower maintenance, scrap and rework. These areas continue to be managed well and are a testament to the continuous improvement efforts to-date and we are seeing the benefit of our ability to flux our manufacturing resources between producing towers to other fabrications. This not only allows us to offset margin pressure to increase the lower tower production, but also helps us to retain our core workforce and leverage our competencies in adjacent markets. Recurring operating expenses were $4.1 million during the quarter, down from $4.3 million in the prior year. In Q4 we assessed the carrying values of our asset groupings relative to their fair values. At the time of the Red Wolf acquisition sales were predominantly with a single customer and much of the intangible value was ascribed to that customer. However, those sales have come down significantly as a result of their lower sales in a declining natural gas turbine market and subsequent right sizing inventory levels as part of their restructuring. Consequently, we identified a triggering event in the customer relationship intangible. A discounted cash flow valuation approach was utilized to determine fair value. This approach utilized lower recent cash flows generated from this customer including the impacts of a softer market and the customer managing their inventory levels down to generate future cash flow expectations. Given that the analysis is based on the value of this customer relationship, we do not include any cash flows from the diversification efforts. Since the acquisition we have expanded our relationship with this customer on new product lines and have recently begun to see an increase in aftermarket activities, which suggest our customer's excess inventory levels are shrinking. Although these positive factors exist and we believe 2018 was a trough year for the Red Wolfe business the fair value to carrying value calculation indicated the $7.6 million impairment. Our EBITDA loss was $1.7 million during the quarter in line with our guidance and a $2.3 million improvement year-over-year driven by the factors I discussed earlier. We had a $0.79 loss during the current year quarter after recording a one-time $0.49 loss associated with the Red Wolf intangible impairment. Our cash conversion cycle dramatically improved in Q4, decreasing to 17 days at year end. The reduction from 54 days was primarily driven by customer deposits received to support scheduled 2019 production. Our DSO increased 9 days sequentially due to the timing of payments from certain customers, a dynamic that is typically more pronounced near year end. Inventory turns were essentially flat year-over-year, however as we mentioned last quarter we purchased plate steel at pre-tariff prices under an expiring agreement for a tower design that is expected to be produced near year end. If we adjust for this factor, our revised inventory turns are much healthier, seven turns. Our days payable outstanding declined to 39 days, during the quarter. Operating working capital improved by $13 million during the quarter and $6 million compared to Q4 2017. Our operating working capital improved to $0.047 per dollar of sales during the quarter and to our lowest point in two years. We are planning for some significant growth throughout our businesses in 2019 and are estimating to be back into the yellow range as indicated in the chart on the right side of the slide. A factor influencing a build in working capital is our focus on optimizing our supply chain. In a competitive tower market, we are focused on procuring the lowest cost steel from a global supply base. Lead times, pricing and terms are all factors that are driving our coating and procurement decisions. We believe that optimizing a more complex supply chain will competitively position us to win tower orders in an environment where tariffs are in place. However, in some cases, we have seen requirements for letters of credit or lower credit limits set on new orders. So in the short to medium term, we expect an adverse working capital impact. Somewhat offsetting this factor is that several of our larger customers are now offering supplier finance programs, which in general were view as positive as cash receipts are generally more consistent and are often in lower cost of capital than our borrowing rate. We recently completed a working capital management training event with over 100 employees whom influence our cash conversion cycle. Our approach centered around opportunities and decisions that are made on a daily basis that can drive improvements in each functional area. Furthermore, we have embedded cash diversion cycle targets in our incentive compensation programs in 2019 to drive further accountability and focus. As we mentioned last quarter, we were reviewing alternative debt instruments to more efficiently utilize our collateral base and to support growth in our business. In lieu of a new instrument, we are pleased to announce yesterday that we expanded our credit line with CIBC from $25 million to $35 million and extended the term of the agreement for three years. Compared to the original agreement, we have similar advanced rates in AR and inventory except for the increase in availability of our property, plant and equipment increased to $12 million. A notable feature that will offer more flexibility although at a higher borrowing rate. We view this incremental credit capacity adequate to support our growth and to counteract the impacts of supply chain complexity, I noticed - I noted earlier. We also view the expand a line of credit as a better alternative to our ATM which we did not use in Q4. Although the ATM provides flexibility, we do not have plans to utilize it at this time. Moving to our balance sheet and CapEx. Our 12/31/2018 balance sheet had $1.2 million of cash assets and debts of $14.9 million. Our net debt balance declined 18% in 2018 down to $13.7 million due to the maturation of the new market tax credit and the improvement in operating working capital, I noted earlier. Our line of credit balance declined to $11 million at 12/31, down from $18.8 million at 9/30, driven again by the improvement in operating working capital. And we had an additional $10.3 million of availability under our $25 million credit line with CIBC. In 2018, we were more stringent with capital investments as a result of lower demand in our tower business. Comparatively, in 2016 and 2017, we're investing in a tower plant expansion and optimization project. Our 2018 gross CapEx was $2.3 million, as we continue to make investments to support our fabrication product line, notably with adding a large machining center, which is effectively been operating at capacity and investing to improve the operating flow in gearing. Our net or un-financed CapEx was only $200,000 as we finance the majority of our capital projects during the year. the Gearing business demonstrated solid returns in the second half of 2018. Following the improvement in core business processes, our backlog is healthy and the market outlook is strong. As a result, we expect to make higher capital investments in 2019 to support growth and upgrade critical machining centers. And we are encouraged by the growth in our fabrication business. This is a product line we plan to grow organically in the short run, and we are developing plans to expand our offerings. With that said, future CapEx should remain in a normalized range in 2019 between 2% to 3% of sales. Lastly, we announced in early February that our Board of Directors had approved a second amendment to the company's Section 382 rights agreement, which is designed to preserve Broadwind's greater than $250 million of tax assets associated with net operating loss carry forwards, which can be utilized to offset future taxable income. The rights plan is similar to plans adopted by other public companies with significant NOLs and is being recommended by management for shareholder approval at our upcoming annual meeting. If approved, the amendment would extend the rights plan through February 22, 2022. In summary, Q4 was as guided, we made solid progress in Gearing, which offset rescheduled tower production. Our order intake piloted by the increase in customer deposits was strong in Q4 and positions us well for 2019. We expect quarterly revenues to exceed $40 million and generate consistent EBITDA. Our summary Q1 guidance is revenue of approximately $40 million and EBITDA in the $1 million to $1.5 million range. Thank you. And I'll turn the call back to the operator for the Q&A session.

Thank you, sir. [Operator Instructions] And the first question will come from Justin Clare of Roth Capital Partners. Please go ahead.

Hi, everyone. Thanks for taking my questions.

Hey, Justin.

Hey. So first off for 2019, you expect quarterly revenue of $40 million or more. I was wondering, if you could share what you expect in terms of the mix of revenue by segment and how that might evolve as we head through the year?

I think most of the growth - I'll let Jason follow-up on this, but most of the growth we're expecting is going to be in the towers, just bringing our capacity utilization from as low as it's been up to something that's a more normal level. Having said that, our Gearing business, we expect that to be fairly flat. Right now we're being pretty cautious about oil and gas for the overall year. So we think we're going to be running that business in the approximately $10 million quarterly run rate. We expect to see some recovery in Red Wolf. And then our Fabrications business that product line, we expect that to be up a little bit as well. But I would say overwhelmingly that the growth will be on the tower side. Jason, I don't know if you want to add to that.

Because, just to note that the heavy fabrications product lines were approximately $12 million of revenue. We've booked orders of $15 million in 2018, so pretty healthy book to bill there. So we expect that to grow as well in 2019.

Okay, great. That's helpful. And then for 2019, you've mentioned approximately $8 million of EBITDA. I was wondering, if you could just talk through, do you expect to all segments to contribute to positive EBITDA in the year? And do you expect the EBITDA to be front half loaded or back half loaded, what should we expect there?

So our Q1 guidance.

Sorry. Go ahead, Jason.

Our Q1 it's been more of a building scenario adjustment throughout the year as we have the tower plants become more full. So Q1 we're projecting to be at $1 million to $1.5 million and then we'd expect to build on that to be above $2 million starting in Q2. The Gearing business generated $2.6 million of EBITDA in 2018, essentially all of that was generated in the second half of the year. So we would expect that to nearly double in 2019.

Okay. And then, just when you look at your Tower business, you expect the utilization to improve in 2019. How much of that is being driven by an increase in orders from your primary tower customer where you have a long-term contract versus potential new customers? Like if you hit utilization of 60% to 70% is that from just seems Gamesa [ph] or is there any expectation for other customers in there?

Yes, I can take this maybe, Stephanie can elaborate. But that would be - Justin, that would be a blend. We do expect consistent orders from our largest customer, we continue to work very closely with them. But as I mentioned coating activity is robust, and we're in active discussions with several others. And they're all interested in capacity at both plants for the remainder of the year. So I would say definitely that's a blend.

Okay. And then it seems like imports are a greater concern here given the steel tariffs. Can you talk about how much market share you think maybe being taken by imports now versus what it was last year? And are you seeing greater competition for imports in in land areas in the U.S.? It seems like historically it's been primarily confined to coasts where you'd see competition from imports. Are you seeing that move Inland at this point?

Well as far as percentages it's very difficult for me to estimate a percentage. But definitely we are seeing - so freight is a component, ocean freight is definitely a component for these towers especially as they get taller and the sections per tower increase. So the competition on the cost is much more fierce than in land. But again with the price of steel, the price of U.S. steel that's required for towers, those imports are becoming more competitive, more near the central U.S. But certainly, we've got a much greater advantage or we're much more competitive when the farms are away from the coasts. And that's both the South Coast and also even coming south of like for instance like superior because some of those imports can come through the Great Lakes as well.

Okay, all right. That's it for me. I will pass it on.

[Operator Instructions] And in showing no additional questions, we will conclude the question-and-answer session. I would like to hand the conference back to Stephanie Kushner for her closing remarks.

Thanks, Denise, and thanks very much for your interest. We look forward to updating you further in 2019 as you can tell from our tone, we feel like we're positioned for a much stronger 2019. And look forward to telling you about it. Thank you.

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