Broadwind, Inc. (BWEN) Q2 2019 Earnings Report, Transcript and Summary

Good day and welcome to the Broadwind Energy Quarter Two 2019 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions]. After today's presentation, there will be an opportunity to ask questions. Please note 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 and good morning and welcome to Broadwind Energy's second quarter 2019 earnings conference call. With me today are Broadwind President and CEO, Stephanie Kushner; and Broadwind COO, 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 8-K in the attachments we filed with the SEC this morning and our Form 10-Q that we will file later today. We assume no obligation to update any future-looking statements or information. Having said that, I'll turn the call over to Stephanie Kushner.

Thanks, Jason. Good morning. We booked $105 million of orders in the second quarter. The strong bookings boosted our backlog to $145 million. Revenue was $41.2 million in line with our guidance and all of our segments showed revenue growth. Gearing remains a bright spot despite some weakness in demand from our oil and gas customers, revenue was $9 million. We reported a 10% operating margin and a 16% EBITDA margin for this segment. Total EBITDA was $1.9 million and again all operating segments generated positive EBITDA. Our balance sheet continues to strengthen. At quarter-end, our liquidity had risen to $8 million and will continue to improve in the second half as we convert steel inventories and bank customer advances. Our plants are running well and our safety performance is better than both industry averages and our performance last year. I'm proud of our operations team. They're delivering this result despite the fact that we're stepping up our production level. We do see some supply chain risk in our Tower business as the industry ramps up for a couple of strong wind farm development years. Demand for raw materials is tight particularly for the inner components that we install inside our wind towers. We are managing shortages and timing aggressively and expected to work through the issue. Assuming we can navigate through these problems, our outlook on the year has not changed. We expect total revenue in excess of $160 million and EBITDA of approximately $8 million. Turning to orders. We booked $96 million in Towers and Heavy Fabrication. This brings our first half book-to-bill up to 1.9 times. Heavy fab orders continue to grow steadily as both existing and new customers recognize the quality, welding, and manufacturing engineering capabilities we bring. In Towers, the spike in orders reflects a couple of factors. The three-year Tower supply agreement we've signed in 2016 has now been fulfilled. So that backlog is largely run-off. And the industry is ramping up for higher wind farm installations over the next two plus years. So it was time to get those orders placed. Additionally, our diversification efforts are bearing fruit in a stronger market and we booked a large order with a new customer. Gearing orders were relatively weak at $5.6 million bringing first half book-to-bill to 0.7. In general, we are seeing lower demand from oil and gas customers and there's been a recent falloff in demand from the steel mills as well. Process Systems was about flat at $2.7 million. Encouragingly we are seeing some recovery in demand from our largest customer for materials to support the build of new gas turbine and we have started to book some small orders for other gas turbine OEM. The next slide updates our progress along the path to diversify the company and reduce reliance on wind power demand. The dark blue or the top portion of the chart shows revenue from sales to the wind industry which is mainly wind power. Although wind power production will be high during at least the next couple of years, we want to continue to make steady progress in growing our sales into the other industries so that we're less vulnerable to any potential wind industry slowdown. The other colors reflect other industries we serve. As you could see these revenues have been built up to about a $65 million annual run rate, our medium-term target is to grow this non-wind share of revenue organically to about $100 million. A few comments on our markets. As I said the U.S. wind markets should remain strong for at least the medium-term as developers work to meet the requirements of the PTC, which is phasing out. The outlook for the 2021 drop-off, which has long been expected, has improved. So the market decline could be less rapid than we planned for. Mining remains strong we are broadening our gear and heavy fabrication customer and product base in this market. And as I said, oil and gas has been somewhat weaker. The fleet of frac pumps has not been growing as quickly this year as in the past two years and also the utilization of the existing fleets have fallen off which has impacted us. We anticipated this coming into the year and realigned our sales resources accordingly. However we anticipated recovery in the second half which now appears to have been pushed out until year-end. We've also seen some recent softness in demand from steel customers who have deferred some of their capacity expansion. However the demand for rebuilt gearboxes, which we do in both Cicero and Pittsburgh has been growing. And other industrial customers also have been growing because we've been adding some new accounts. So in summary, we continue to focus on customer diversification with a $60 million target for bookings from diverse customers this year. We are on track with this goal at mid-year. We continue to invest in systems to support our changing sales mix and improve our execution. Our continuous improvement initiatives are largely aimed at offsetting margin compression due to competition from offshore manufacturers. We're modifying our steel procurement strategy to support the strong market and we're on track to reduce our average cash conversion cycle by 20% or more this year. And with that, I'll turn it over to Eric to talk a little bit more about our businesses.

Thanks, Stephanie. Moving to our Towers and Heavy Fabrication segment. Q2 Tower orders of $96 million were strong as several OEMs placed orders with us to meet scheduled turbine installations. Coating activity continues to be robust with customers expressing interest in capacity at both tower plants. Our Heavy Fabrications line which operates in mining, construction, marine, and other industrial markets continues to grow. As a reminder, orders for this business have grown from less than $2 million in 2015 so they should approach $20 million this year. We continue to make capital investments to grow this business and to provide a more complete solution for our customers. We sold 201 tower sections during the quarter consistent with Q2 2018 and up 7% sequentially. The volatility of our production over the last eight quarters is evidenced on the graph at the lower left hand of the slide. We are pleased with our operation team's ability to flex production to meet this choppy demand and are encouraged to have relatively stable production levels for two consistent quarters albeit lower capacity. We are proud that our safety metrics and employee retention levels are improving, while our quality, productivity, and delivery remain at or above expected level. Our decision late last year to maintain a critical core of highly skilled team members during a period of low production was sound. Given that we are now seeing the anticipated rebound in demand. During the quarter we started producing a new Tower model on our Abilene Texas plant which is taller and heavier than previous runs and is indicative of a market trend toward taller towers. Producing these larger heavier Towers require requires careful process planning, and equipment modification, and production is on track. This quarter our CI team improved the throughput of our weld line and is working on increasing weld deposition rates. This is especially necessary as towers get larger and the place used to make them get sicker. This means that they require more welding. Specifically in the Heavy Fabrication business, we added two large flexible weld cells in our Abilene Texas plant; they are well equipped to handle the continuing influx of orders for that plant. Additionally, we are pleased with the capacity that our new rotary table adds to our large machining center in our Manitowoc, Wisconsin plant. We have key resources focused on cost efforts in welding, machining, assembly, and coatings. And I'm pleased to report that even with the choppiness of our tower production and the resulting impact to our workforce, our on-time delivery has remained near 100% for several years now. Q2 sales was $29 million versus $25.6 million in Q2 2018 generating $1.5 million of EBITDA versus $2.2 million in the second quarter of 2018. Downward pricing pressure from competitive Power Purchase Agreements or PPAs and imported towers persists. Looking forward to the balance of 2019, we're pleased that it's shaping up to be a stronger year than 2018 so far as production is concerned. The fabrication product line continues to expand and the commercial resources we've added this year are providing benefit. We're excited to see our diversified sales efforts yielding orders in the transportation and material handling markets in addition to the continued strength from our mining and construction markets. We're also seeing increased interest in projects that are so large they must be shipped via barge which leverages our deepwater port onsite at our facility in Manitowoc, Wisconsin. This is a strategic advantage for us. We're going live with our new production scheduling software this quarter and look forward to the improved visibility of all projects running through our plant. As I mentioned during our last call, we are adding a second large machining center to our Manitowoc Wisconsin plant which I expect to be operational in early 2020. In the third quarter, we expect revenues to be in the $32 million to $34 million range reflecting higher tower production with the EBITDA range of $1.8 million to $2.2 million. Moving to Gearing. I stated last quarter oil and gas markets have softened recently. Our diversification efforts are working as we are seeing orders coming in from major OEMs in the mining and industrial sectors just as we're seeing in our Heavy Fabrications business. Our efforts to cross-sell the full broadened capability offering gears, gearboxes, heavy fabrications, assembling, and kitting are bearing some early fruit as more customers are purchasing from both Brad Foote Gear and Heavy Fabrications. As you can see on the graph that highlights the revenue by market, the reduction in revenue from the oil and gas sector was largely replaced by increases in the mining, wind, and industrial sectors. We're really pleased with this result as it reinforces our conviction that our diverse sales efforts are both necessary and effective. We seek a balanced blend of customers and markets with a special focus on mining, steel and other industrial application such as material handling. The direct sales and project management resources added in Q2 remain focused on the diverse markets and we're seeing some nice early traction. To support our growing custom gearbox business, we have added two horizontal milling machines to improve throughput and reduce lead times for this line. We implemented our new Computerized Maintenance Management System or CMMS to increase machine uptime and I'm happy to say that our maintenance team is really embracing the change and things are going well. Additionally our initiative to focus and expand our custom gearbox business this year has been effective with revenue doubling in the first half of 2019 versus last year. Furthermore we are now offering a quick turn in emergency gearbox repair service to get our customers back in production on a more permanent solution is developed for them. Q2 2019 revenue was up 8% as compared to Q2 2018. We delivered $1.5 million of EBITDA and $900,000 of operating income on $9.3 million of revenue. We continue to be pleased that the operational improvements put in place last year are yielding consistent results. As a reminder, the improved financial results for Gearing began a year ago in Q3 2018. So going forward, our comps will get tougher. We expect revenues in Q3 to be in the $8.8 million to $9.2 million range but lower margin mix yielding EBITDA of $900,000 to $1.2 million. Moving onto Process Systems. Revenue was up 12% versus Q2 2018 reflecting increased productivity. Our Q2 sales were $2.9 million yielding $200,000 of positive EBITDA versus a $200,000 EBITDA loss for the same quarter last year. The targeted price adjustments made earlier this year to better align our prices with sourcing and packaging costs continue to favorably impact our margins. We expect this trend to continue throughout the year. Our efforts to diversify this business remain a key priority. And coding activity for diverse customers is encouraging. We are confident that our supply chain management kitting, fabrication, and assembly services will benefit customers outside the gas turbine business. In fact, we recently booked several small orders for the solar power industry a target market for us. Our Q2 operating priorities include increasing our opportunities in the gas turbine aftermarket and expanding our share within existing customers as we execute our customer diversification strategy. Concurrently, we have resources focused on upgrading our supply chain through improved delivery performance and support diverse market opportunities. The business development resources we added last quarter have identified coding opportunities that we believe are a good fit for our business. And we are confident that those opportunities will yield orders. We expect Q2 revenue to be in the $4 million range with near break-even EBITDA. Now I'll turn it over to Jason for his comments.

Thanks, Eric. Q2 consolidated sales were $41.2 million, up 12% year-over-year and driven by increases in each of our business unit segments. Towers and fabrication sales represented the majority of improvement up $3.4 million year-over-year. The revenue increase was driven by heavier, more complex tower designs, and attributable to steel price escalation. We continue to deliver higher throughput and improved operational performance in our Gearing business. And the Gearing product mix sold in the quarter was well diversified across customers and end markets. Gross profit margins improved to 9.5% in Q2, a significant improvement year-over-year and approximately 100 basis point improvement sequentially. The Q2 year-over-year change was primarily driven by the operational improvements reflected in the Gearing segment results. Our focus on continuous improvement efforts centered around quality, plant throughput, supply chain execution, and strong cost management have transformed this business. And our ongoing investment and focus on the Heavy Fabrication product line has also driven improvement in gross margins. Partially offsetting the year-over-year gains was continued margin pressure on our Tower product line. Our Tower and Fabrication segment EBITDA margin declined by 320 basis points driven by increased competition from imports. In many circumstances, we have had to lower our conversion pricing to become competitive and ultimately to retain our workforce and not temporarily idle our plants. Operating expenses were $4.1 million during the quarter down from $8 million in the prior year quarter. Prior year quarter included a $3.8 million non-recurring charge which was then net of $5 million impairment of goodwill and the release of a $1.1 million earn-out reserve. Lower amortization of intangibles of approximately $300,000 was partially offset by increases in incentive compensation expenses. Our operating expenses continue to trend below 10% of revenue. Our consolidated EBITDA was $1.9 million in Q2 and was ahead of our guidance range, and was $900,000 improvement year-over-year after netting out one-time items. We had a $0.06 loss during the current year quarter compared to a $0.40 loss in the prior year quarter which included a $0.25 adverse impact from the non-recurring operating expenses I mentioned earlier. As expected, our cash conversion cycle which is highlighted in the table on the left hand of the slide increased to 53 days from 41 days at the end of Q1. This increase was primarily driven by our version of DPO to historic norms down to 38 days from 48 days at the end of Q1. DSO improved slightly quarter-over-quarter by four days and more significantly compared to year-end due to our heightened focused on credit terms collection processes and overall less delays of customer payments at period ends. This improvement was mostly offset by reduced inventory turns primarily due to several delayed projects that will ship in Q3 and as we continue to rebuild the Tower supply chain. As I have noted on previous calls, our inventory value has included approximately $7.5 million of steel that we procured last year on our customer's behalf. Most of this inventory will be utilized over the balance of this year, and as a result, our inventory turn should normalize to healthier levels in 2020. Operating working capital rose by $4.4 million during the quarter driven by the same cash conversion cycle changes I described earlier. We expect it to have a substantial working capital build in 2019 as we rebuilt our Tower production levels and as Tower deposits was scheduled to run-off. Our operating working capital increased to $0.13 per dollar of sales during the quarter and according to our historical performance on the graph on the right hand side of the slide continues to be within an acceptable range. We are continuing to target cash conversion cycle improvements. As a result of recent order announcements, we are estimating an increase in our deposit balances and a corresponding improvement in operating working capital and our cash conversion cycle. We estimate that operating working capital will improve by $14 million to $18 million in Q3, lowering operating working capital cents per dollar to year-end 2018 levels. Our line of credit balance was $26.6 million at 6/30 up from $22.2 million last quarter. This debt level increase was solely attributable to the rise in working capital despite the line of credit balance increase, our availability under the credit line increased $8 million compared to $7.5 million last quarter as fewer letters of credit which reduced credit line availability were outstanding at 6/30. The rise in working capital levels was as planned, rebuilding our Towers business has required investments in inventory amounting to $17 million build in operating working capital since the end of last year. As I noted previously operating working capital improved in Q3 as deposits are collected, resulting in a sizable line of credit repayment, and a further improvement in liquidity. Cash was near zero at quarter end. Cash receipts were a positive line which is the customary practice in this effective mechanism to minimize interest expense. Our capital budget for 2019 remains at approximately $5 million and we expect to finance a portion of these investments. Our capital allocation philosophy remains focused on expanding our Fabrications product line and Gearing's financial performance warrants for a larger share of future investments. Additionally, we plan to make capital investments to support the impact of the evolving sizes and weights of new Tower designs. In summary, we had a solid quarter for new tower orders that begin to provide visibility into 2020, customer and end market diversification has been a key focus for us and we are encouraged by the booking of sizable orders from two new Tower and Fabrication customers. Our Gearing segment continues to generate healthy returns. This business has generated $3.5 million of EBITDA this year compared to break-even results in the first half of last year. We are proud of the businesses progress over the past year and look forward to further diversification of our customers and products along with sustaining our strong operational performance. Our summary Q3 guidance is revenue above $45 million and EBITDA to be approximately $1.4 million to $1.8 million. Although revenue was up sequentially, our EBITDA estimates do not rise as expected. We have a number of headwinds in Q3 including lower margin Tower production which was driven from intense pricing competition from foreign manufacturers along with a less profitable mix in our Gearing business. Our backlog supports a majority of our revenue target this year and we continue to target $8 million of full-year EBITDA. However as Stephanie said, we are seeing supply chain constraints and extending lead times given the higher activity levels in the wind industry. We are working to mitigate this risk and provide more updates on our progress in Q3. Thank you and I'll turn the call back to the operator for the Q&A session.

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.

Everyone thanks for taking my questions.

Hey Justin.

Good morning.

So I guess first I just wanted to start out with your Tower orders given the large increase that we saw this quarter can you give us a sense for how you see revenues trending in Q4 and then into early 2020. Do you anticipate revenues moving higher from Q3? And then I know you mentioned some supply chain risk. So I'm wondering if you could just elaborate on that a bit and could that limit the growth in say Q4?

I'll start that and Jason may want to add. So I think basically, we would expect our revenue to grow sequentially. The supply chain question is really if we're unable to get the internals that we need for the Towers, so we wouldn't be able to invoice some portion of them. So that could mitigate some of the Q4 growth but if it doesn't come Q4, it would just be that much stronger in 2020. And we do expect 2020 to be up in a meaningful way, we'll know better. We've only got about 40% or so of our capacity is booked at this time, so. As the -- over the next quarter we'll have more confidence about that.

I think we still expect -- I think we still expect to be about $40 million for above revenue.

Yes, even with that risk we would be above $40 million I think we will do better if we are able to ship them.

Okay, okay that's helpful. And then you mentioned that there's some headwinds to tower margins in Q3. Could you talk more broadly about your backlog and the orders that you won, do you anticipate those orders -- like all of the orders that you've recently won to also have that margin headwind associated with it. Or do you see some potential for improvements or can you mitigate the headwind?

Well Q3 not only is that competitive pressure it's also just may be a less favorable mix. What we're seeing is we're booking now is it’s going to be a busy market next year. So our Tower prices are firming maybe not as much as we would like to see but there is a little bit of an upward trend.

Okay. Okay, great. And then, so earlier this week the Department of Commerce announced the initiation of ADCVD investigations into imports of utility scale wind towers. So given your experience with the 2012 wind trade case, I was wondering if you could talk about the probability that tariffs are actually implemented there and what that could mean for the domestic market?

I guess I don't really like to handicap it except to say we wouldn't be pursuing it if we didn't think there was good evidence of dumping and damage -- of dumping up on the part of these countries and also damage that we've sustained and others in the industry have sustained as well. I think I'll stop there. Time will tell, it's obviously a relatively fast process. There will be some determinations and initial determination in 45 days then there will be a determination by the Department Commerce maybe four or five months after that. But the whole process will be over in about 13 months, so there's a lot of detail on the Department of Commerce website.

Right, right. Okay. So one thing I have been trying to understand is just -- is it possible that the tariffs could be retroactively applied. So and if that is the case do you anticipate any changes in market conditions in the near-term?

I think that the application of the tariffs would not be any earlier than about six months out. And obviously it adds some uncertainty to making a purchase from these countries which is helpful for the domestic manufacturers.

Right. Right. Okay and then shifting gears a bit. You mentioned that you are increasing your efforts in cross-selling products from your different business segments to the same customer. I was wondering if you could talk about the type of customer that you're targeting there and then maybe just give a little bit more detail on how much progress you're making?

Yes, thanks for the question. This is Eric. Well we do have a broad offering. If you think about the target -- the target products such as a very large mining dump truck or a piece of mining equipment or even a material handling piece, a large material handling equipment for port, you have a lot of heavy structures there, a lot of precise welding required plus a gearbox and some assembly. So what our sales people are doing is being cross trained on the capabilities of the other divisions, so they can competently go out there and not only sell their primary product line but remind the customers that we have this -- this additional service that we can provide and that's starting to gain some traction. We've had a couple. I wouldn't say it's mature enough to announce but certainly it's encouraging that customers frankly they say [indiscernible] I'm glad you mentioned that because we do have a need for that particular service. And let them talk about that. We have had some wins in material handling and construction and mining industry where they buy from both Brad Foote Gear and Heavy Fabrications.

Okay, great, that's helpful. And then maybe one final one from me in terms of your Heavy Fabrications business, you talked about $20 million of orders this year, I believe versus I think was $2 million in 2015.

Correct.

Can you talk about what the potential is for this business? How big could this business be and what kind of growth can we expect here because obviously it's been fairly meaningful so far.

I think the trajectory can continue. I think we're looking at things like the markets and even our plants, what we could do within our plants to expand our capacity. But I think the trajectory could continue and could possibly be a $50 million or even $100 million business over the next three to five years.

Okay, okay.

That’s certainly our objective.

Right, okay. I think that's will do it for me. Thanks for the questions.

Yes, thank you, Justin.

[Operator Instructions]. This concludes our question-and-answer session. I would like to turn the conference back over to Stephanie Kushner for any closing remarks. Please go ahead.

Okay. Thanks for your attention. We feel like we're making some very encouraging progress and we're positioned well to exit this year strong and particularly -- particular strength in 2020 and beyond that. So we look forward to updating you again next quarter. Thanks and bye-bye.

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