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Broadwind, Inc. (BWEN)

Q4 2019 Earnings Call· Thu, Feb 27, 2020

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Transcript

Operator

Operator

Greetings. Welcome to the Broadwind Fourth Quarter and Full Year 2019 Conference Call. At this time all participants are in a listen-only mode. [Operator Instructions] Please note that this conference is being recorded. I will now turn the conference over to our host, Jason Bonfigt, Chief Financial Officer. Thank you. You may begin.

Jason Bonfigt

Analyst

Good morning and welcome to Broadwind fourth quarter and full year 2019 results conference call. Leading the call today are CEO, Stephanie Kushner; COO, Eric Blashford and I am Jason Bonfigt, the company’s CFO. We issued a press release before the market open today detailing our fourth quarter and full year results. I would like to remind you that management's commentary in responses to question on today's conference call may include forward-looking statements which by their nature are uncertain and outside of the company's control. Although these forward-looking statements are based on management current expectations and believes actual results may differ materially. For discussion of some of the factors that could cause actual results to differ, please refer to the Risk Factors section of our latest annual and quarterly filings with the SEC. Additionally, please note that you can find reconciliations of the historical non-GAAP financial measures discussed during our call in our press release we issued today. At the conclusion of our prepared remarks we will open the line for question. With that, I'll turn the call over to Stephanie.

Stephanie Kushner

Analyst

Thank you, Jason and welcome to everyone on the call. Our fourth quarter results came in line with expectations, capping off our strongest annual performance since 2016. Orders were robust in 2019, more than double the prior year, with a book to bill ratio of 1.24. We finished the year with backlog of $142 million, up 80% year-over-year. The majority of the increases in our heavy fabrication business, where both the tower product line and the industrial fabrication business book expanded significantly. Alongside the evident growth in wind, we continue to expand our business across a diverse range of industry and customers throughout the year, including those in shipbuilding, mining, solar farms and even wave energy. Fourth quarter revenue of $49 million was up 81% from the prior year with big growth in Tower volume. Demand for Gearing to support fracking remains subdued. Although we are seeing some resurgence in early 2020. Our Heavy Fabrication segment was up 76% year-on-year for the full year. We've ramped up our production to meet strong multi-year demand for towers, while dedicating specific satellite plants and production base to support our growing industrial fabrications product line. Fourth quarter gearing revenue was down 30% due to the pullback in frac gearing. But notably we remained profitable at the lower production volume because margins were higher and we continue to benefit from the process improvement and cost reductions that have been implemented in recent years. The Gearing segment posted record total operating income for 2019 of $3.2 million, 9.2% of revenue and EBITDA of $5.6 million, 16% of revenue. Industrial Solutions, previously Process System, had flat revenue, but significantly improved EBITDA. The delivery of a $700,000 order to support solar farm installation represented a notable entry point into a new entity. Broadwind’s total adjusted EBITDA of…

Eric Blashford

Analyst

Thank you, Stephanie. And good morning to those joining us on the call. Beginning on slide six. Order activity reached a multi-year high in 2019 with total orders up more than $138 million year over year to $222 million, as we continue to capitalize on improved demand condition within the U.S. onshore wind market. While total wind energy installations increased by approximately 9% in 2019 to 9 gigawatt, Wood Mackenzie projects total installation to grow to 15 gigawatts in 2020, driven mainly by increased activity ahead of the PTC phaseout. Further, as Stephanie mentioned earlier, a trade case was filed against tower importers from several countries, alleging that towers are being imported at less than fair value. As a result of the stronger demand environment and this trade case, we recorded $152 million of tower orders in 2019, most of which will replace by our customers to secure 2020 production slots. Absent any anomalies that we have in 2016, were a three year framework agreement with a major tower customer triggered record orders, we expect that our future orders will be a better representative of annual revenue. The yearend backlog is up 48% and our plants are not operating at vastly improved utilization levels as a result. Moving on to Slide 7. Fourth quarter consolidated sales were $49.3 million, up from $27.2 million, due primarily to improved plant utilization in our heavy fabrication segment both for towers and industrial fabrication. This was our fourth consecutive quarter of exceeding the $40 million per quarter guidance we committed to early this year. Full year sales increased to $178.2 million, a 42% year over year change, again driven by increased plant utilization, the expansion of our customer base into new markets and increased content within our existing customers. Fourth quarter gross margin expanded…

Eric Blashford

Analyst

Thanks, Jason. Welcome to everyone on the call. On March 1st, I have the privilege of assuming leadership of Broadwind as the company's incoming CEO. In the years leading up to this plant leadership transition, I've been fortunate to work closely with Stephanie and our Board of Directors, together we've developed a long term strategic plant for our company, one that positions us with profitable growth in the years to come. Central to this growth strategy is to carefully invest in the right people and process, so we can capture the new and existing market opportunities that are uniquely qualified to serve. We've made early progress on this plan, and as we continue to execute we believe we'll create value for our shareholders. Today, Broadwind is a leading precision manufacturer of structures, equipment and component, serving the clean tech and other specialized industrial application. We've made some great progress in improving our position within the wind energy space, while expanding into other market. However we will stay disciplined in pursuing opportunities where our unique value proposition and experience position us to win. Our strategic focus is supported by a number of tactical priority, diversification of our products markets and customers is vital to our long range plan and we're dedicating a lot of attention to these effort. Additionally we experience good operational leverage when our plants are running at higher volume, so we're expanding our manufacturing capabilities and taking continuous improvement actions to optimize throughput. And finally our company wide focus on cash conversion and prudent balance sheet management will ensure that we have the resources available to capitalize on growth opportunities when they arise. Moving on to our priority. First let's discuss the heavy fabrication segment, which includes two primary product line towers and industrial fabrication. In that business…

Eric Blashford

Analyst

Thanks, Jason. Welcome to everyone on the call on March 1st. I have the privilege of assuming leadership abroad when the company's incoming CEO. In the years leading up to this planned leadership transition, I've been fortunate to work closely with Stephanie and our board of directors. Together, we developed a long term strategic plan for our company one that positions us for profitable growth in the years to come. Central to this growth strategy is to carefully invest in the right people and process, so we can capture the new and existing market opportunities that are uniquely qualified to serve. We've made early progress on this plan. And as we continue to execute we believe we'll create value for our shareholders. Today Broadwind is a leading precision manufacturer of structures, equipment and component, serving the clean tech and other specialized industrial application. We've made some great progress in improving our position within the wind energy space, while expanding into other market. However we will stay disciplined in pursuing opportunities where our unique value proposition and experience position us to win. Our strategic focus is supported by a number of tactical priority, diversification of our products markets and customers is vital to our long range plan and we're dedicating a lot of attention to these effort. Additionally we experience good operational leverage when our plants are running at higher volume, so we're expanding our manufacturing capabilities and taking continuous improvement actions to optimize throughput. And finally our company wide focus on cash conversion and prudent balance sheet management will ensure that we have the resources available to capitalize on growth opportunities when they arise. Moving on to our priority. First let's discuss the heavy fabrication segment, which includes two primary product line towers and industrial fabrication. In that business our…

Operator

Operator

Thank you. [Operator Instructions] Our question first question comes from Justin Clare with Roth Capital Partners. Please state your question.

Justin Clare

Analyst

Hi, everyone. Thanks for taking my questions. So I guess first off orders for heavy fabrication they seem to slow in Q4 relative to very strong order flow in Q2 and Q3. Just wondering if you could help us understand the slowdown. Do you expect this to be a brief pause and then how long do you think it would take before things kind of pick back up here?

Jason Bonfigt

Analyst

So to Justin, its Jason. Good morning. So we're in discussions with our customers to secure the rest of our 2020 production. And in the prepared remarks we did we did comment that we'd expect that to be kind of have that resolve of the next two to three months. So we'd expect to be announcing more orders shortly.

Justin Clare

Analyst

Okay. And then for your 2020 guidance, can you help us understand what utilization level you have assumed right now I'm estimating it could be around 75%?

Jason Bonfigt

Analyst

Within the US industrial machinery sector, we’re focusing primarily on the material handling OEM and making good progress. That sector is expected to shrink slightly in 2020, we're experiencing a multi-year growth cycle. However even though that sector is expected to weaken a bit. The addressable market is so large there is ample room for us to increase our position with existing customers as we are a new one The construction sector is expected to retract about 9% in 2020. Some of the business we've enjoyed last year will be in-sourced by our customers. However growth in other markets combined with customer expansion should more than offset this expected reduction in peak shape work. The turbines and power transmission sector includes natural gas turbine in a [indiscernible] by our Industrial Solutions business, but the total sector is expected to decline in the short term before recovering, we are expanding our position with our primary customer which in turn is also growing its market share. Additionally we are now providing content for turbine made by the other two primary OEM in that segment once again this is evidence that our customer product and market diversification efforts are working. We are a diversified manufacturer serving clean tech and other industrial application, our roots are in wind energy with customers to be in high precision and very high quality requirements for large and complex product. They are using these process capabilities to expand into the mining, oil and gas, power generation and material handling market among others. A multi-year revenue diversification plan has shown success, is gaining momentum. We entered 2020 with a strong backlog of $142 million on a very strong order intake. Our PTC extension and favorable preliminary trade case findings open the door for continued growth of the heavy fabrication business, these tailwind combined with a disciplined management of working capital and the overall balance sheet have us well positioned for growth in 2020 and beyond.

Justin Clare

Analyst

Okay. Got it. And then related to this or did you have more?

Jason Bonfigt

Analyst

Yes. One of the things which is kind of interesting is we are seeing a resurgence of in-sourcing into the U.S. as a result of trade wars and also this event. So we think that can also be beneficial to us in the overall U.S. manufacturing base.

Justin Clare

Analyst

Okay. Okay, great. And then in terms of the internals for the towers, I think you mentioned there was a margin headwind there. Can you quantify how big a headwind that might be?

Stephanie Kushner

Analyst

Basically what happens is that we start producing kind of out of sequence, so instead of having your towers blow right through the - right through the plant -- you're stopping you're pulling them off line and you're installing your internals later when they come in. I think in 2019 we had very little production that was just exactly in process as it should be. I think the impact that we're seeing is probably in the hundreds of thousands of dollars I don't think this bunch is a million dollars in the quarter but we look we're enjoying right now a much smoother production level.

Justin Clare

Analyst

Okay. Thanks very much for taking my question.

Operator

Operator

Thank you. There are no further questions at this time. I'll turn it back to Stephanie Kushner for closing remarks.

Stephanie Kushner

Analyst

All right. Well thank you very much for your attention. As I'm moving off into retirement I have to say I'm really excited about the progress we've made with all of our core business processes. We've got a strong and capable manufacturing workforce which actually grew about 50% last year. We positioned ourselves with our branding change. We positioned ourselves in the market we're getting some good momentum with our diversification. And at the same time we've strengthened our competitive position in what is still our largest market for wind towers. I've got confidence in the management team, it's a strong team, we're well positioned for a multi-year revenue and earnings growth. So thank you very much for your attention.

Operator

Operator

Thank you. This concludes today's conference on parties may disconnect. Have a great day. Thank you.