Broadwind, Inc. (BWEN) Q1 2019 Earnings Report, Transcript and Summary

Good morning, and welcome to the Broadwind Energy Q1 2019 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. I would now like to turn the conference over to Jason Bonfigt, Vice President and CFO. Please go ahead.

Thank you. Good morning, and welcome to Broadwind Energy's first quarter 2019 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-Q 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.

Good morning. We made solid progress during Q1. We recorded revenue of $41.7 million, up 39% from the prior year and 54% sequentially. All segments where higher than the prior year quarter. I'm particularly proud of our Gearing team. They delivered an outstanding quarter with $10 million of revenue from a diverse range of customers and industries, $1.4 million of operating income and a nearly 20% EBITDA margin. The team has really gelled during the past year and despite a complex product mix is delivering consistent production, strong productivity, low waste and strong financial result. Broadwind's adjusted EBITDA was $1.7 million, a sharp improvement from the prior year, when our tower plants were restarting and Gearing was struggling with supply chain challenges. On the tower front, our plants produced at just under 50% of capacity rising as the quarter progressed. Our order book has strengthened, despite the steel tariff headwinds, although high steel prices continue to depress our margin. On a positive note earlier this month, the International Trade Commission extended until the year 2023 the antidumping duties that apply to towers from China and Vietnam, which is helpful for our industry. We are reaffirming our full year outlook for revenue at or above $160 million and EBITDA of $8 million. We booked 24 million of orders in the quarter. For Towers and Heavy Fabrications orders of $12.5 million were up from a year ago but still below shipments. These orders are lumpy as you know and Q2 will be materially higher including the $19.5 million order we announced earlier this week. For Gearing, the first quarter of last year was unusual as oil and gas fracking customers were rushing to secure capacity. So $11 million was booked for that industrial alone contrast that with this year when only $3 million was booked from oil and gas customers. We believe this reflects the fracking pause in the Permian Basin due to pipeline constraints, which should be alleviated by mid-year. Together with the recently higher oil prices, we expect orders for oil-filled gearing to grow in the second half of the year. For Process Systems after a hiatus last year, orders for new gas turbine content recovered somewhat in the quarter. At the quarter end, our backlog was $81 million. Including April orders to date, we have more than 90% of our $160 million full year target shipped or in backlog. During the past 18 months, I've spoken increasingly about our focus on diversifying our customers and industries. This slide shows our recent progress. In 2015 and 2016, our revenue was dominated by a single industry and in 2016 a single customer. We've worked hard to achieve some much-needed diversification growing our sales to mining oil and gas and other industrial customers. This has added complexity to our production processes, which we have supported by investing in our manufacturing quality and customer support system. As we look ahead, we can see that wind turbine installations will be very strong for a few years, but there is uncertainty beginning in 2022. We've added resources to support growth and diversification of industries customers and products as a high priority. As I said, the medium-term outlook for wind energy is very strong. The capacity additions in the U.S. shown on the left will spike this year and next and remain strong through at least 2021. Today there are 97 gigawatts of wind energy in operation in the U.S. producing 6.5% of our nation's electricity. Importantly, more than 39 additional gigawatts of projects are today in advanced development or construction. This is a record development pipeline and will support installations over the next several years. Beginning in 2022 most forecasts call for a dip in installations, because projects will have been brought forward to capture PTC economics. Following a brief correction, the experts predict a recovering stable but lower demand, supported by the fundamental economics of wind even excluding any special tax incentive. This considerable uncertainty in the out-year forecast much of which I believe is to the upside. The bold case for wind post 2021 is quite positive. The chart on the right highlights a key driver increasingly supporting the industry. It is the demand from commercial and industrial customers, which reached a high last year. Industries are increasingly investing in wind energy, because it is economic and also because it helps them reach sustainability goals they have committed to their stakeholders. Moreover, countless states and cities are setting their own clean energy targets responding to the preferences of their own citizens. Adding in the emergence of an offshore wind market, the upside case could be significant. Nonetheless, given the volatile political environment and the likely expiration of the production tax credit although, we're hoping for the best, we are reasonably planning for the worst, hence our accelerated focus on diversification. On the next slide, our other markets are generally healthy. We supply large welded fabrications and gears for mining and construction, which is strengthening. Oil and gas was mixed. Orders for frack gearing were down in the quarter, mainly because demand was so strong a year ago, as customers were locking in capacity for the year. We did add an important new customer in the quarter, so our market share in this segment has continued to expand and is well over 50%. Gas turbine component demand was a little stronger in the quarters as we grew our share with a European-based manufacturing operation, for an existing customer. Steel demand is growing, which for us is currently concentrated in producing custom gearboxes. As steel plans to reinvest, and even bring on new capacity, we are successfully expanding our presence in the industry. We recently added more feet on the street to feed our custom gearbox manufacturing line which is performing well. Other industrial demand is also strengthening for us with orders this quarter from shipping, material handling, pulp and paper and other industries both for gears and for heavy fabrications. Our priorities are unchanged. First, customer diversification with a target of $60 million this year. We're bringing our new maintenance scheduling and productivity tracking systems to support the growing complexity of our product mix. We have a number of CI projects underway to help mitigate margin pressure coming from tower imports. We're adjusting our steel procurement strategy to be more global and we're on track to reduce our cash conversion cycle by about 20%. Now, Eric Blashford, our COO will review the segments in more detail.

Thank you, Stephanie. Moving onto our Towers and Heavy Fabrications segments. Tower orders are strengthening as OEMs are filling projects to meet the rise and scheduled turbine installations. Quoting activity is also increasing with strong interest at both plants. Our heavy fabrication line, which operates in mining, construction and other industrial markets continues to see increased demand. We are making capital investments to support this growth and diversification, while providing a more complete solution for our customers. We sold 188 tower sections during the quarter, 31% more than the 143 we sold in Q1 2018 and nearly three times our volume in Q4 2018. This volatility of production is evident on the graph at the lower-left hand of the slide. We are pleased with our ability to quickly scale our operations to meet this increase in demand all while maintaining our safety, quality, productivity and delivery at or above expected levels. This reinforces our decision late last year to maintain the critical core of highly skilled team members we needed to successfully execute our ramp-up plan. As a result, Q1 sales were $28.3 million versus $18.2 million in Q1 2018 generating $1.1 million of EBITDA versus a $500,000 loss in the first quarter of 2018. As previously reported, the pricing pressure resulting from competitive PPAs and tariff-driven steel cost increases and other components remains, while we have been able to pass much of these cost increases onto our customers, the overall impact on our margins is negative. A threat offshore competition continues and more than 25% of the 2018 U.S. tower installs came from offshore producers where the cost of steel is much lower. We have key resources focused on process improvements in welding, assembly, coatings, quality and delivery. We are using best practices such as video process mapping, Kaizen events, and internal NCR actions to identify areas of waste and optimize first-pass quality. I'm pleased to report that even with the spiky nature of our tower production our on-time delivery has been nearly 100% for several years now. We continue our efforts to expand our business with existing customers as we work to add new ones. We are confident that these efforts will be successful as quoting activity remains strong with tower and heavy fabrications customers seeking capacity at both our Wisconsin and Texas facilities for 2019 and 2020 volume. Looking forward to the balance of 2019, we are pleased that it's looking to be a much stronger year than 2018 from a capacity utilization standpoint. We have ramped up production at both plants and are operating at greater than 50% of tower capacity with the expectation of further increases. Accordingly we expect to be operating at an average of greater than 60% tower capacity utilization for the full year 2019. The fabrication product line continues to expand and the commercial resources we've had this year are providing benefit. We're excited to see our diversified sales efforts yielding orders in the transportation and marine segments, in addition to the continued growth from our mining and construction segments. For example, we recently won an order for a very large boom assembly for our Great Lakes barge. This is a type of large, heavy and very precise weldment that demands our expertise plus it's so big that it must ship via water. So the fact that we're on a deepwater port at Manitowoc, Wisconsin makes us ideal for this type of work. We will launch our new production scheduling software this quarter and look forward to the improved visibility of all projects running through our plants. A large horizontal machining center installed last year continues to be fully booked and we will add a new rotary table to this machine late this quarter to increase its capability and throughput. To support continued growth, we are adding more flexible manufacturing sales to our Abilene, Texas plant. Furthermore, our Board just approved a second large machining center for the Manitowoc, Wisconsin plant, which we will implement as soon it's available as we know the customer demand is there. In the second quarter, we expect revenues to be in the $28 million to $30 million range, reflecting higher tower production with an EBITDA range of $1.5 million to $1.8 million. Next slide please. Gearing. As stated last quarter, oil and gas markets have softened a bit recently, primarily due to temporary constraints in the Permian pipeline, which are expected to improve later in 2019. We are pleased that the orders we are receiving from new customers in the sector were offsetting some of this temporary softness. Additionally our diversification efforts are working as we're seeing nice volume orders coming in from major OEMs in the mining, industrial sectors just as we're seeing on our heavy fabrications line. As you can see on the graph that highlights our revenue by market, the reduction in revenue from the oil and gas sector was replaced by increases in the mining, wind, industrial and steel sectors. We are really pleased with this trend as it demonstrates the positive impact of our diverse sales efforts. As we previously stated, we want to avoid an overdependence on any one sector and thus prevent a repeat of a 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. We have added direct sales and are expanding project management resources to support this objective. Q1 2019 revenue was up 14% as compared to Q1 2018 and we earned a $2 million of EBITDA and $1.4 million of operating income on $10 million of revenue. We are pleased that our efforts to improve operational performance are yielding these strong results. This continues the favorable momentum that began driving our improved financial results in the second half of last year. Additionally, our initiative to focus and expand our custom gearbox business is working and has yielded a 40-plus percent increase in revenue over Q1 2018. Turning to other priorities for Q2 and beyond. We will continue to grow our custom gearbox business and are adding two horizontal milling machines to improve throughput and reduce lead times for this line. We are also refining our first auto production process to speed up the introduction of new products and we will implement our new computerized maintenance management system or CMMS to increase critical machine uptime. We expect revenues in Q2 to be in the $9 million to $9.5 million range with $1 million to $1.5 million of EBITDA. Next slide please. Process Systems. Revenue was up 13% versus Q1 2018, reflecting increased order activity. The targeted price adjustments made earlier this year to better align our prices with sourcing and packaging costs began to positively impact our margins late in Q1. We expect this trend to continue. Our efforts to diversify our business remain a key priority and quoting activity for our diverse customers is increasing. 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. We're getting the right part and the right sequence to the right place at the right time is vital. Our Q2 operating priorities include increasing our opportunities in the gas turbine aftermarket and progressing our customer diversification while growing our share with existing customers. Concurrently we are directing our continuous improvement team to optimize plant flow and packaging costs. We have added experienced commercial resources to support our planned order growth and diversification efforts. We expect Q2 revenue to be in the $3.8 million to $4 million range with near breakeven EBITDA. Now I'll turn it over to Jason for his comments.

Thank you Eric. Q1 consolidated sales were up $11.7 million year-over-year, as each of our businesses made meaningful progress. Towers and fabrication sales represented a majority of the improvement, up $10 million year-over-year, driven by a $5 million increase related to tower sections sold, $4.5 million related to steel price escalation, and a residual balance tied to increased fabrication sales. Our Gearing business has made significant traction including its operational performance, which led to higher throughput during the quarter. And the products mix sold during the quarter was well diversified across customers and end markets. Our Process Systems order book is improving and we are beginning to see top line growth. Gross profit margins improved to 8.5% in Q1, a significant improvement year-over-year. Approximately half of the improvement was volume related and the remaining increase was driven by notable improvements in operational performance and lower manufacturing variances year-over-year. In Towers and Fabrications, we managed through the challenge of ramping up our plants more effectively. In the prior year, we had learning curve costs associated with several fabrication orders. And as you may recall, we completed a multi-year 50% reduction of our manufacturing footprint last year, following the exit of a leased property in Abilene, Texas. The consolidation of the product lines into our Abilene tower facility has been successful and we are seeing improved performance. In 2018, Gearing was restarting the supply chain, which introduced complexity into the business, and raw material flow was inconsistent. We have resolved the supply chain issues experienced in the prior year, and our organizational structure change to form a custom gearbox division is beginning to drive improved operating performance. And the Gearing team's focus on continuous improvement efforts, reducing scrap, managing machine uptime and productivity has expanded our margins. Operating expenses were $4 million during the quarter, down from $4.4 million in the prior year. Lower amortization of the Red Wolf intangibles of approximately $300,000 and a self-insured reserve benefit of approximately $400,000 was partially offset by increases in our incentive compensation expenses. Our operating expenses are now below 10% of revenue. Our EBITDA was $1.7 million in Q1 was ahead of our guidance, and represented a $3.3 million improvement year-over-year. We had a $0.07 loss during the quarter compared with $0.32 loss in the prior year quarter. As expected, our cash conversion cycle, which is highlighted in the table on the left-hand side of the slide increased to 41 days from 16 days at year-end. The 16-day calculation at year-end was unusually low, following a significant amount of deposits received that supported scheduled 2019 production. This benefit could be reversed in Q1 as the cash outflows for materials were processed and due to the runoff of deposits of tower production, as tower production ramped up during the quarter. Our DSO improved 10 days sequentially due to the improved cadence of receipts from customers and ongoing emphasis on credit terms and receivables management. Inventory turns declined slightly during the quarter, mostly driven by the rebuilding of a tower, material supply chain, as our production volumes recovered. We discussed on our last call that we procured steel at pre-tariff prices in the second half of 2018 at our customer's request. We now have a production schedule for this customer to reuse a majority of the steel over the course of the second half 2019. As a result, we should expect our inventory turns to improve gradually throughout the second half of 2019 to normalized levels near seven turns. Our days payable outstanding increased to 48 days during the quarter. Our cash conversion cycle in Q1 was 26 days, compared to a 45-day average in 2018. We are continuing to prioritize optimizing our cash conversion cycle, as a key organizational focus and incentive compensation is tied to our performance. We are making progress against this initiative. We believe we can make -- we can achieve a significant improvement year-over-year. Operating working capital rose by $12.6 million during the quarter, driven by the same cash conversion cycle changes I described earlier. Our working -- our operating working capital increased to $0.105 per dollar of sales during the quarter, and according to the historical performance on the graph on the right-hand side of the slide back in the more normalized range. Although, we expect fluctuations throughout the year, we expect to be within this yellow band throughout 2019. Moving to slide 13 our balance sheet. Our line of credit balance was $22.2 million at 3/31, up from $11 million at year-end. This debt level increase was solely attributable to the rise in working capital during the quarter. We had an additional $7.5 million of availability under our $35 million line of credit, after netting out letters of credit. The rise in operating working capital levels in Q1 was as planned. This expectation of working capital build was paramount and the decision to increase our line of credit with CIBC in February. Our line of credit and the underlying borrowing base, which includes accounts receivable, inventory and property and plant equipment, now offers more liquidity and flexibility to support our growth. Cash was near zero at quarter end ,as receipts were applied to the line. This is a customary practice and is an effective mechanism to minimize interest expense. The increase in our other assets and other liabilities in the quarter was a result of the adoption of new lease accounting standards, ASC 842. The new accounting standard requires companies to capitalize the present value of minimum lease payments for operating leases. Our operating leases consist of various manufacturing facility and equipment leases. The adoption of this accounting standard does not impact our P&L, interest expense or debt covenants. The 10-Q that we will file later today will have a dedicated footnote describing the details of a lease accounting change. Although, we continue to invest in capital projects in 2018, we are more stringent than in prior years. And to preserve cash we financed most of our CapEx projects. Our capital budget for the current year is approximately $5 million and we are targeting financing a portion of these projects. Our capital allocation focus is on expanding our Fabrications product line and capabilities and Gearing's up financial performance warrants a larger share of future investments. In summary, our Q1 was in line with guidance and our EBITDA was noticeably improved year-over-year. We continue to make solid progress in our diversification efforts. Our Heavy Fabrication product line is growing, Gearing and market diversification has vastly improved and we feel confident that a strengthening wind tower market will support further growth. And we are excited about the turnaround in our Gearing operating performance. Following the announcement of the $19.5 million tower order we received earlier this week, we have $105 million of our remaining 2019 guided revenue in our backlog. Our summary Q2 guidance is, revenue above $40 million and EBITDA to be approximately $1.3 million to $1.8 million. Our full year outlook is unchanged. We expect revenues to above $40 million each quarter and we expect to generate $8 million EBITDA in full year 2019. Thank you, and I'll turn the call back to the operator for the Q&A session.

Thank you. We will now begin the question and answer session. [Operator Instructions] The first question comes from Justin Clare with Roth Capital Partners. Please go ahead.

Hi, everyone. Thanks for taking my questions.

Hi, Justin.

Hi. So first off, yesterday Siemens Gamesa announced a 241-megawatt project in Texas and then another 246-megawatt project in New Mexico. It looks like with your Abilene facility, you should be very well positioned to potentially win the orders for the towers for those projects. So I was just wondering, if you could speak to the potential for you to win those orders. And just generally, how much visibility is Siemens Gamesa giving you into order flow right now?

Justin, thanks for the question. We work with Siemens Gamesa on a monthly basis to work through what they think their order lines is going to be and the demand from us is going to be. We're happy to do that with them. We are aware of these two projects. We know they're active with them and we're certainly in the running to win those projects from them.

Okay, great. Have you already produced the specific models that they highlighted for those projects in your Abilene facility? Or would you need to do a prototype to -- before winning an order?

The models are constantly being kind of tweaked and adjusted, so we're not always aware. We don't usually -- we often don't have a stable design until three months before the actual production starts up. One of the things that's been a real accomplishment for towers is that, we've gotten very accustomed to switching designs on a very regular basis and producing multiple designs through the plant at any point in time so the prototyping in process has become much more, I guess, I would say, perfunctory.

Okay, okay. Good. And then can you just talk a bit more about, how discussions are progressing with other tower customers? Is there a potential for an additional customer this year? How likely is that?

Yeah. Justin what I will tell you is they are very active. They are robust. We are in discussions with multiple OEMs in addition to the one you mentioned earlier for both our Abilene and Manitoba projects, our plants, projects near those plants. I feel that we've got a real shot at winning those orders depending on if the customer wins them and where the project ends up being, Justin. So, yeah, we are definitely in deep conversations with multiple OEMs. I do feel like we're going to be getting diverse orders this year.

Okay, great. And then turning to your Gearing segment, it sounds like there could be a pickup in equipment ordering for the oil and gas segment in the second half. Given that potential, could we see the Gearing revenue move up beyond like a $10 million run rate at that point in time?

Yes. However, the lead time for Gearing tends to be about eight weeks or so, so there will be a little bit of a lag. But yeah we don't want to stop at kind of a $10 million quarterly run rate. This is a business that we think over time, we should be able to continue to grow to be a $50 million, $60 million business.

Okay. And then -- so in the Gearing segment, your EBITDA margins improved to -- close to 20%. And it looks like in Q2 you're expecting around 14%. How should we think about the EBITDA margin for Gearing moving forward? Like if you achieve $10 million in revenue, can you achieve a 20% EBITDA margin? And could it move higher from there with higher levels of revenue?

So we think a 20% EBITDA margin is probably top quartile performance from a competitive perspective, so we think that's a good margin for this business. The mix shifts a lot quarter-to-quarter, so I think we're being a little more cautious about Q2 just because of the mix of some of the production that we're doing in the quarter. But certainly we would expect that number to bounce around as the year progresses.

Okay. That does it for me. I will pass it on.

Thank you, Justin.

Thanks, Justin.

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

Thank you. So I have a -- first question, somewhat random. Given the -- some acceleration in contracts for offshore wind in New England, is there any chance that you guys would play any role in that seemingly new sector of the U.S.?

Yes, Angie. We attended an offshore conference recently but certainly participating in discussions and the information gathering. Several OEM customers that are participating or want to participate in that market have been discussing our ability, our capability to produce such large wind towers in our plants especially our Manitowoc plant, which is on the water. We do know that some individual states have local content requirements, which is a challenge for anyone who's considering producing these wind turbine towers. But we also know that there are some manufacturers on the coast of Europe that actually are quite proficient in producing these offshore towers. But the answer is yes. We are in communications; I would say capacity and capability communications with several OEMs that are interested in our Manitowoc facility for producing these.

Okay. Because that could be a game changer for you guys right given that this could be a really big industry. Okay. Now maybe I missed it. But do you guys provide any update about the Red Wolf business, how that one is progressing?

So that's Process Systems. And we've seen some stabilizing I guess, I would say. As you know we're concentrated with one large customer there. We've seen some stabilization in the demand for gas turbine components as well as the aftermarket. Our focus continues to be, however, on diversifying that business. And that's really where we're putting a lot of our energy.

Awesome. And then lastly, so you mentioned that you are looking at global procurement of steel. So how does that work given the steel tariffs? I mean, just give us a bit more of a sense where you would be procuring this deal from.

So Angie this is Eric. Thanks for the question. We are -- whenever we have steel projects, we first actively quote with four or five major mills in the United States to get competitive quotes from them, because obviously their -- the lead times would be the lowest from a U.S. mill. But concurrently we have used some steel from as an example the Far East from countries that wouldn't be maybe not subject to tariffs, but quotas. And so what we're doing is we're engaged in conversations quoting activities with these global mills to see if in fact they can supply with the quality steel we need at a competitive price even with tariffs considered. And also in the event that tariffs might be lifted we want to have the relationships there. Great to leverage that supply chain.

Okay. And lastly so you mentioned that there could be some pickup in orders -- gearing orders from the oil and gas sector in the second half. But why is that? I mean, I'm mostly asking is this just in response to higher oil prices. Is it -- because I always felt that there's some sort of financial that sits in that investors are trying to exert on all of the producers. And as a result, there should be less than -- rather than more drilling.

There's really two factors and probably the biggest one is the Permian which is where the most fracking activity has taken place. There's a bottleneck-ish -- a shortage of pipeline capacity. And a lot -- and so -- and I know you're not normally in the space a lot. Oil and gas equipment manufacturers have seen a pause and we've been the same. But that pipeline capacity is coming on beginning in the middle of this year so that is going to break loose. And then on top of that, of course, the oil price has gone up very significantly over the last couple of months. So that's also boosting that demand.

Okay. And then just going back to the onshore wind development. So to your point that there could be some meaningful slowdown in new wind onshore weather installations beyond 2021. So are you seeing that the discussions that would suggest to you that you'll have some meaningful spike in those tower orders between now and say -- I don't know maybe 2021 as the demand is being brought forward? Or is that being suppressed by again those towers coming from offshore producers?

Well, certainly, the offshore producers that is a risk and that's a continuing risk. But even in spite of that we are experiencing an increase in quoting activity with interest from both plants in 2019 and what I would say through 2020. We haven't had a lot of inquiries after 2020, but there's discussions that -- this pause or this PTC generated pause will occur after the year 2020.

Okay. So when you say, discussions through 2020 meaning that's sort of towers to be delivered before the end of 2020?

Yes. Exact, yes. Because the OEMs what would need to optimize the PTC value -- a lot of those OEMs would need to have their projects completed by the end of 2020.

Yeah. I was just trying to get a sense of how much of a lead time you have and how much time does an OEM actually need between when the tower is delivered and when the project actually hits a COD. Is it like three months?

Yeah. It tends to be several months, Angie, yes.

Okay.

It could be depending on crane availability or transportation. That's why we expect strong orders through much of 2020 to satisfy this demand.

Very good. Thank you.

Thanks.

Thank you.

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 for listening to the call. We're working hard to continue to improve our operational and our commercial success and we look forward to updating you again next quarter.

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

Thank you.