Broadwind, Inc. (BWEN) Q1 2020 Earnings Report, Transcript and Summary

Greetings. Welcome to the Broadwind First Quarter 2020 Results Conference Call. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to your host, Jason Bonfigt, CFO. Please go ahead.

Good morning and welcome to the Broadwind first quarter 2020 results conference call. Leading the call today is our CEO, Eric Blashford, and I am Jason Bonfigt, the Company's CFO. We issued a press release before the market open today detailing our first quarter 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 a 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 the 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 Eric.

Thank you, Jason and welcome to those joining us today. In a matter of a few short months, the novel coronavirus, or COVID-19 has emerged as one of the most consequential public health crisis in modern history, while disrupting global economic activity in ways that remain yet to be fully understood. In the midst of this crisis, we've witnessed uncommon courage from professionals risking their personal wellbeing for the greater good, people committed to going above and beyond to ensure the health and safety of their communities. To that end, I'd like to take a moment to recognize and thank all of the first responders, the medical professionals, the essential workers in factories, transportation, grocery, infrastructure, and so many others, who are doing amazing work in the communities in which we work and live. Here at Broadwind, I'm incredibly proud of our workforce, as they continue to perform admirably in spite of challenging circumstances. We are grateful for you and appreciate your continued efforts. Turning to Slide 4 of the conference call presentation. As for our response to the COVID-19 pandemic, we are closely monitoring the potential impact of the virus on our operations, customers and supply chain. In response to the virus, we've adopted all necessary and appropriate protocols, as recommended by the U.S. centers for Disease Control and Prevention, to ensure the continued wellbeing of our employees. Given that all of our businesses are considered central and critical infrastructure, as defined by the U.S. Department of Homeland Security, our facilities remain open and operational. Should it become necessary, we are prepared to enact a business continuity plan to ensure the continued production and shipment of products to meet our customer's needs. We applied for and received a loan as part of the SBAs PPP program given our status as a small company employer. This loan is necessary to protect our valued employees, all of whom are based here in the U.S. during a time of significant economic uncertainty caused by the virus. We conducted various stress test scenarios in each of our businesses following the COVID-19 outbreak. While it is difficult to quantify the full impact of the virus on our business and in markets at this time, we anticipate the current availability under our credit line and the proceeds from the PPP loan will provide adequate liquidity to support our business during this period of uncertainty. Turning now to our first quarter results on Slide 5 and 6. We generated net income of $1 million or $0.06 per share, representing a year-over-year increase of $2 million in our first profitable quarter since 2017. Revenue increased 17% year-over-year to $48.6 million due to improved demand from our customers in the wind, mining and gas driven markets. Wind industry sales increased by more than $9.2 million versus the first quarter of 2019 with tower section volumes up 66%. Improved plant utilization and operating efficiency supported year-over-year improvements in gross margin and operating margin of 420 basis points and 470 basis points respectively. Our first quarter EBITDA was $3.6 million, an increase of $1.9 million over the prior year period. Our total backlog increased to 57% from the first quarter 2019 to $127.4 million primarily due to the wind tower and industrial fabrications product lines. Orders in the first quarter were $33.8 million, an increase of 41% year over year. Gearing segment orders were up $5.3 million year over year to $12.4 million, and Heavy Fabrications orders were up $3 million year-over-year to $15.5 million. I'm pleased to report that our customer and end market diversification efforts are progressing as planned, with the addition of a new wind turbine OEM to our customer list this year. With this customer addition, we now serve three of the top-four Global Wind Turbine OEMs in the U.S. market. At this time, our mining and gas turbine end markets also remain strong. Turning to a deeper dive into our segment performance, Heavy Fabrications revenue increased by 36% year-over-year, supported by an acceleration in wind power demand and increased diversification. For the full year 2020, we now have more than 80% of our 2020 tower production capacity in backlog. Gearing revenue dropped by 38% year-over-year, primarily due to customers in the oil and gas market, pushing orders from March until the second half of 2020 in response, at least in part, to COVID-19 impacts on their businesses. We are currently taking actions to align our Gearing Segment cost structure with a current demand environment. Industrial Solutions revenue was up 21% in the first quarter when compared to the prior year period, supported by increased penetration of both new and existing customer accounts consistent with our ongoing diversification strategy. Most of the year-over-year growth in revenue within this segment continues to be driven by strong demand in the natural gas turbine market. We had total cash of $3 million and availability under our line of credit of $16 million as of March 31, 2020. At this time we have deferred all merit increases, reduced compensation for all Executives and our Board of Directors, while further reducing working capital and discretionary investments. Given current market uncertainty, we remain focused on conserving liquidity to maintain continued balance sheet optionality. As I indicated at the outset of the call, the full implications of the COVID-19 pandemic on our customers, supply chain, and operations, cannot yet be fully quantified. To that end, we have chosen to withdraw our full year financial guidance issued in February 2020. We continue to monitor the situation and work closely with our customers and suppliers to promptly respond to business opportunities as they arise. Although we had strong first quarter performance and remain focused on delivering a strong full year performance, current market conditions warrant conservatism. As the economy reopens over the coming weeks and months, and we have a better sense of the full implications of the crisis on our business, we will look to reinstate formal guidance. With that, I'll hand the call over to Jason for a financial review of our first quarter results.

Thank you, Eric, and good morning. As expected, we delivered strong first quarter performance, resulting in our first profitable quarter since 2017. Although significant uncertainty remains evident in our markets, we are encouraged by the operational and commercial progress achieved during the past year, together with the improved TTM trend and EBITDA generation at current production levels. First Quarter consolidated sales were $48.6 million, up from $41.7 million in the prior year quarter, due primarily to improved plant utilization in our Heavy Fabrication segment, which benefited from increased tower demand. Demand for wind towers, fabrications for mining equipment and gas turbine components more than offset weakness in gearing demand. Our TTM consolidated sales were more than $185 million exiting the first quarter versus $137 million in the prior year period, as we further diversified our customer and end market exposure. We experienced significant margin expansion during the first quarter with gross margins reaching 12.7%, up from 8.5% in the prior year quarter, due primarily to improved operating leverage, specifically in our Heavy Fabrication segment. We continue to aggressively reduce operating expenses as a percent of sales. In the first quarter operating expenses as a percent of sales was 9.2% and below our long-term target of 10%. And we expect to manage operating expenses near these levels throughout 2020. We generated $3.6 million of EBITDA in the first quarter, an increase of $1.9 million versus the prior year period. On a TTM basis, we have generated $9.1 million of EBITDA, a significant improvement when compared with our performance in the previous 12 month period. Turning to Slides 8 and 9, for discussion of our Heavy Fabrication segment. First quarter sales were $38.4 million, a $10 million increase on a year-over-year basis, primarily due to increased demand as the industry ramps up activity levels to support higher expected U.S. wind turbine installations. As Eric noted earlier, we continue to experience positive momentum in our order book. First quarter orders for $15.5 million, an increase of $3 million versus the prior year period. During the first quarter, we booked $8.5 million of industrial fabrication orders, a 2.7 book-to-bill ratio, while continuing to see strong activity in the mining and material handling markets. On a TTM basis, this product line has booked over $25 million of orders compared to just several million a few years ago. As Eric mentioned earlier, we booked a new tower OEM customer in the first quarter, which represents another nice win from a diversification standpoint. As a result of the timing of tower orders that we expect to book in the second quarter, our backlog declined to $97.4 million sequentially. We are encouraged by our conversations on other tower orders and expect to fill additional 2020 capacity in the next few months. Following Q1, we booked a $19 million order for towers to be produced in Q4 and early 2021. However, in our Industrial Fabrications product line, we have seen a meaningful decline in order since the end of Q1, partly due to general market uncertainty, and the other component is timing related as customers booked large orders in Q1. We remain confident in our backlog and, to-date, have not seen customers delay or cancel orders. Our full year financial performance will likely depend on our relative stability of our supply chain, our ability to maintain production at our plants and the number of production spots we're able to sell in the fourth quarter of this year. Turning to Slide 9. We sold over 300 sections in the quarter, with six unique tower designs produced, translating into operating above 75% plant utilization, compared to approximately 50% in the prior year quarter. We were encouraged by the ability of the team to manage through multiple tower designs, and during a period impacted by delays within our supply chain. As a result of our operating leverage, segment EBITDA improved $4.5 million from $1.1 million in the prior year. First quarter segment EBITDA margins expanded near 12% which are much healthier on a both year-over-year and sequential basis. Turning to Slide 10, for discussion on gearing. Our Gearing Segment orders increased to $12.4 million from $7.1 million in the prior quarter and up from averaging $6 million over the past three quarters. We recorded a $4 million order for wind aftermarket gearing. This demand is typically lumpy and is placed by our customer to reserve future capacity. Additionally, we have strengthened oil and gas, steel, and mining markets. Book-to-bill was 2.0 in the quarter, resulting in an increase in our backlog to $20.5 million, up from $14.3 million at 12/31/2019. And roughly 80% of this backlog has scheduled delivery dates in the current year. With that said, order activity declined rapidly following the COVID-19 outbreak, together with the recent collapse in oil prices. We have seen this through the delay of new orders and deferred deliveries of scheduled backlog into the second half. We expect oil and gas gearing demand to be weak in the near to medium term and are focusing our sales efforts towards alternative markets. We have and will continue to pursue cost actions that rightsize our cost structure to align with anticipated demand levels. First quarter segment sales declined to $6.2 million from $10 million in the prior year, which was well below our previous estimate, as oil and gas customers deferred more than $1 million of scheduled purchases to later in the current year. Although sales declined to the lowest level since 2017, the business continued to generate positive EBITDA. Turning to Slide 11 for discussion of our Industrial Solution Segment. First quarter segment sales increased to $4 million from $3.3 million in the prior year, mostly driven by higher new gas driven content and from our diversification efforts. First quarter EBITDA improved to $300,000 from a small loss in the prior year. As a result of effective cost management, the business has improved its operating leverage, resulting in TTM EBITDA approaching $1 million. Industrial Solutions recorded the highest quarterly order volume since its acquisition in early 2017. First quarter orders increased to $5.9 million from $4.4 million in the prior year quarter and segment book-to-bill ratio was 1.5 to 1. We are continuing to see strength in orders for natural gas turbine content. 2019 was a strong year for the gas turbine industry and a recovery in our primary customers market share. Orders into our business lay our customers' turbine awards by several quarters as the remainder of the supply chain and timing of projects are determined. Importantly, we are seeing continued traction with both new and existing turbine OEM customers. As a result, TTM segment orders are approximately $18 million, up roughly 25% over the prior year period. Segment backlog is up to $9.5 million or $1.8 million sequentially, with the majority of the scheduled for delivery in 2020. Following a strong first quarter, orders are down slightly in April, given COVID-19 related delays. Turning to Slide 12. At March 31, 2020, operating working capital was $8.8 million or 4.5% of sales, a comfortable range when compared to historical performance. Cash conversion declined to 21 days in the first quarter, compared to 28 days on average in 2019. Our DSO declined slightly to 30 days from 34 days at year-end, due to continued focus on receivables management. And we are continuing to monitor AR carefully for signs of customer distress. Inventory balances increased to $40 million as a result of the timing of steel deliveries to support second quarter production and the impact of several customers delaying purchases. As a result, DIO increased to 88 days in Q1 versus 64 days at year-end 2019. We expect inventory turns to improve gradually throughout the year, barring any further impacts from COVID-19. While customer deposit balances were flat sequentially at $23 million, this remains a positive story as demand for towers remain strong and customers are securing production slots. Total cash and liquidity remained flat sequentially at $19 million and continues to be well above 2018 levels. We had $14 million drawn under our $35 million credit facility and had $2.7 million of cash on our balance sheet. That concludes my remarks. I will turn the call back over to Eric for an overview of conditions within our end markets in addition to some concluding remarks.

Thanks Jason. Despite the challenges we've all faced since early March, our leadership team has continued to execute on the strategic priorities we first introduced last quarter, which include targeted expansion into both our legacy wind markets as well as nonwind sectors. As before, we remain disciplined in our pursuit of opportunities for our unique value proposition and proven industry experience position us to win. Turning to Slides 14 and 15, for a review of demand conditions within each of the six end markets we serve. Let's begin with the wind sector, which represented approximately 68% of TTM revenue. The outlook for this sector continues to be positive, driven by various economic forces such as the PTC, including the recently announced one-year extension, the competitiveness of wind power versus other sources and the nation's desire for clean energy. While underlying demand conditions continues to support a positive outlook for this sector over a multi-year period, our customers acknowledge that some projects scheduled for this year could be delayed due to the pandemic. In 2020, we expect that nearly 15 gigawatts of wind power will be installed in the U.S. this year, a significant achievement. However, this is 500 megawatts or 3% below previous predictions., an acknowledgement by forecasters of potential project delays. Furthermore, tax equity and other forms of financing remain available to fund projects. Looking ahead, Wood Mackenzie continues to forecast significant near-term strength for onshore installation through 2021, with growing demand in the out years after the PTC term from the combined installations of both onshore and offshore turbines. This long-term projection includes 19 gigawatts of offshore installations consistent with Wood Mackenzie's prior forecast. Although some projects have moved to the right of the forecast, the industry still expects 2023 to be a strong year for offshore wind development. We generated 6% of our TTM revenue from the industrial sector, which has an outlook of positive to neutral. Much of our revenue in this sector comes from customers in material handling, with ultimate end users in defense and other vital applications, which are less cyclical. Our deepwater port in Manitowoc, Wisconsin, heavy lifting capacity, very large paint boost, and unique manufacturing capabilities, including the large machining centre we added early in Q1, continue to drive strong customer interest. 8% of TTM revenue came from the power generation sector where we see positive demand outlook. Our primary customer is regaining share and we've expanded our customer base and now provide content for each of the top three OEMs in the new gas turbines space. The mining sector drove approximately 10% of TTM revenue, and our customers report a neutral outlook. Overall, we had strong orders in Q1 from this sector, but saw some weakening late in Q1, which has extended into Q2. The oil and gas sector, which comprise 6% of our TTM revenue, has seen a significant decline in demand as frac economics have become less attractive with the recent pullback in crude oil prices. The outlook for this sector is negative, with customers deferring shipments and new orders, as North American frac fleets are taken offline and customers are quickly cutting CapEx in response to the current market dynamics. Construction drove about 2% of TTM revenue, and we see the outlook for this segment as negative in the near term. However, if the government introduces infrastructure spending into an upcoming stimulus package, that would be a definite catalyst for this segment. Turning to Slide 16. Our key initiatives for Broadwind remained consistent, as our near- and medium-term strategy for the business remains unchanged in spite of the challenges of COVID-19. In the Heavy Fabrication segment, we are working to sell the remaining 2020 tower capacity as we continue to expand our customer base. We will prudently add production capabilities and upgrade systems to maximize throughput and profitability. We're developing a strategy to address the upcoming demand for offshore wind towers as we continue to grow and diversify our industrial fabrication customer base. We will strengthen our engineering and supply chain organization to support our expanding market opportunities and execute our continuous improvement actions to ensure our zero-defect quality program. In the Gearing Segment, we remain focused on accelerating our efforts toward end market diversification by leveraging our specialized engineering and sales teams. Further, we intend to grow our custom gearbox business and expand our service and repair offering geographically as discussed last quarter. Lastly, we need to leverage the system improvements we've made over the last several quarters to improve our throughput, quoting efficiency, quality and profitability. With regard to our Industrial Solutions segment, we continue to primarily focus on our core product line of new gas turbines and the aftermarket for those turbines. As we expand our customer base in that line. We continue to pursue the solar energy installation market, as we see it as a large untapped opportunity for us. And we will leverage Broadwind's overall engineering and business development resources to identify and serve new market opportunities, especially those which leverage the combined manufacturing power of all of our divisions. As for our investment thesis, we are a diversified precision manufacturer, serving clean tech and industrial applications. Our heritage is in the renewable sector, which requires very precise manufacturing and handling of large heavy components. But our future includes not only renewables, but also mining, power generation, material handling construction, oil and gas and other industrial applications. We're executing a multiyear diversification plan to leverage our core process capabilities into other markets and have achieved revenues of nearly $65 billion outside of wind, even as we improve our customer concentration within wind. Our backlog is up 57% year-over -year, reaching $127 million, while order growth remains strong across our key end markets. The extension of the PTC for a sixth year and favorable preliminary trade case findings provide a catalyst for growth in our Heavy Fabrication segment. Thank you for your interest, and we look forward to providing updates throughout the year as our business navigates through this period of uncertainty. With that said, I'll turn the call over to the moderator for the Q&A session.

[Operator Instructions] Our first question is from Justin Clare from ROTH Capital Partners. Please proceed with your question.

So I guess - I wanted to start out. So in Q1, your plant utilization was the highest level since 2017 despite the disruption caused by the coronavirus here. I was wondering if you could quantify how much your margins may have been impacted in the quarter by this disruption. And what could margins have been in a more normalized environment?

Sure. Not a significant impact from the Coronavirus in Q1 just because of all the stay-at-home orders came in very at the back end of the quarter. What I would say is we had to continue to have supply chain I guess delivery issues that impact production. And then we also had six different tower designs going through the plan. So that always creates some disruption as you bring new tower designs on you go through that learning curve. I would say that approximately, I think we lost one to two margin points based on some of those disruptions. So looking at our gross margins for the quarter, we still had near record gross margins at 12.7% for the consolidated business, but I think there was. So if we look at an optimized quarter, you maybe, you're into the mid-teens for gross margins.

Okay, great that's really helpful. And then I know there is a lot of uncertainty still, but looking into Q2, given the different safety measures that you have taken and the disruption that you've seen. How would you anticipate margins trending is there enough of a headwind there where we're going to see a decline sequentially?

I think in the heavy fabrication business, we know - unless if we have any major disruption here towards the end of the quarter, I would expect that to be about in line. I would expect continued pressure in our gearing business just because of the reduced volume and some - frankly some uncertainty with customer offtake in Q2.

Okay, got it. And then you talked about you're planning to fill additional 2020 capacity for the tower business in the coming months here. What is the potential that you could actually get to booking 100% of the capacity? And then do you have the ability to actually deliver all of the towers, if you were to reach that level given the potential supply chain constraints and potential issues with production that maybe could arise?

Justin, this is Eric. Thanks for the question. At this point, supply chain within the tower specifically the tower business can be anywhere between 20 to 26 weeks even a little bit shorter in some cases. The supply chain around the world is starting to come back up. But there certainly is a risk Justin on that supply chain. But as a reminder, due to the truck tariffs [ph] that were put in a couple years ago, that supply chain has become very diversified around the world. So as COVID impacts, normal parts of - and usual parts of the world, other parts of the world become opened up. So with that diversity of the supply chain, as long as we get the orders here within the next I would say two or three months, hopefully shorter than that. We should be able to fill that capacity at the end of this year.

Okay, great. And then you've had success in customer diversification, you're now serving the top three wind OEMs in the U.S. So just wondering, based on the discussions you're having with those customers, can we anticipate consistent orders from all three? You know, given that demand is strong this year, should be strong next year. What are your expectations there?

Well, we're certainly excited to be dealing with those top three of the four, and they all have projects that are talking with us about. Justin it really depends on where they win their projects and when they win their projects depending on how that balances with our open capacity. Yes I do expect that we should be - signed all three of those customers yet again in 2021.

Okay and then maybe just one last one from me. For the tower orders that you're recently booking, how is the pricing and unexpected margins for those bookings evolving? Are we seeing kind of flat pricing relative to what you saw in Q1 or has there been any meaningful change there?

I think the best we can share is, if you look at Q1 versus Q4 in heavy fabrication business, there was a nice improvement in EBITDA. A lot of that was driven by frankly by the tower pricing. And I think for now, I would hold the assumption that - following the hold the Q1 pricing assumptions constant throughout the year.

Okay.

I think it’s always a challenge to talk through that as we're dealing with these supply chain constraints and introducing new tower model but always just puts pressure or can put pressure on margins.

Right, yes it's understandable. Okay, that does it from me. Thanks for the questions.

Yes, thank you, Justin.

And we have reached the end of the question-and-answer session. And I will now turn the call back over to Jason Bonfigt for any closing remarks.

Yes, thank you. This is Eric. I'll just put some closing remarks. And again, thank you for your interest in Broadwind. This is a crazy time we're all going through, but we remain committed to our people and our customers and our communities. We’re excited about our business and our strategy and look forward to updating you on our performance in July. Thank you very much.

This concludes today's conference and you may disconnect your line.