Broadwind, Inc. (BWEN) Q2 2020 Earnings Report, Transcript and Summary

Greetings, and welcome to Broadwind Second Quarter 2020 Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note, this conference is being recorded. I would now like to turn the conference over to your host, Jason Bonfigt, Broadwind's Chief Financial Officer. Thank you. You may begin.

Good morning, and welcome to the Broadwind second quarter 2020 results conference call. Leading the call today is our CEO, Eric Blashford; and I'm Jason Bonfigt, the company's CFO. We issued a press release before the market opened today detailing our second quarter results. I would like to remind you that management's commentary and response to questions 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's current expectations and beliefs, 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 historical non-GAAP financial measures discussed during our call in the press release issued today. At the conclusion of our prepared remarks, we will open the line for questions. With that, I'll turn the call over to Eric.

Thanks, Jason, and welcome to those joining us today. Despite continued macro uncertainty related to the COVID-19 pandemic, our business performed well during the second quarter, guided by our long-term focus on end market diversification, lean manufacturing processes and disciplined capital management. This strong performance was supported by broad-based revenue growth across our core wind, industrials, steel and natural gas turbine markets during the period. Let's begin on Slides 4 and 5. We generated net income of $0.5 million or $0.03 a share, representing a year-over-year increase of $1.5 million and our second consecutive quarter of profitability. Revenue increased 33% year-over-year to $54.9 million, driven by demand from our wind customers together with customers in multiple nonwind markets. Wind industry sales increased by more than $11 million versus the second quarter 2019, with tower section volumes up approximately 60% year-over-year to the highest levels we've seen since early 2017. Improved plant utilization and operating efficiencies supported year-over-year improvements in both gross margin and operating margin up 40 and 240 basis points, respectively. Our second quarter EBITDA was $2.9 million, an increase of $1 million over the prior year period. Our total backlog decreased 12% sequentially to $112 million due to the timing of customer orders, which were delayed by COVID-19. Our oil and gas customers have delayed scheduled deliveries into the second half, and we expect this market will remain challenged in the near to medium term. I was encouraged by the team's ability to work through the COVID-19-related restrictions and supply chain challenges evident throughout the quarter, positioning us to produce several new wind tower models for both new and existing customers. Orders in the second quarter were $40 million, an increase of 17% sequentially as strength in the Heavy Fabrications orders offset softness in Gearing segment orders. Heavy Fabrication orders were $31 million, doubling sequentially. Looking forward to the full year 2020, we now have about 90% of our 2020 tower production capacity in backlog. Gearing orders were $3.7 million, down 33% versus the prior year, reflecting the COVID-19 impacted softness in the diverse markets we serve. Orders in our Industrial Solutions segment, which primarily serves the natural gas turbine market, continued the positive trend we saw last quarter, posting orders of $4.4 million, an increase over Q2 2019 of 63%. Turning to a discussion of our segment-level performance. Heavy Fabrications revenue was $43.6 million, an increase of 50% year-over-year, supported by an acceleration in wind power demand and increased diversification. We had $6 million of revenue from our industrial fabrications product line as we execute against our long-term diversification strategy. Gearing revenue fell by 25% year-over-year due to a general pause in new customer orders and weakness in oil and gas markets. COVID-19 impacted our customers' project timing and their capital investments. We're currently taking actions to align our Gearing segment cost structure with the current demand environment, including workforce reductions and a hold on CapEx. Industrial Solutions revenue was up 50% in the second 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 $2 million and availability of nearly $20 million under our credit line as of June 30. We're continuing to manage cash prudently with tight controls over discretionary spend and capital investments. Given current market uncertainty, we remain focused on preserving 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 are not yet known. To that end, we have chosen not to reinstate our full year financial guidance at this time. We continue to monitor the situation and work closely with our customers and suppliers to promptly respond to business opportunities as they arise. With that, I'll hand the call over to Jason for a financial overview of our second quarter results.

Thank you, Eric. As expected, we delivered our second consecutive profitable quarter in Q2. We generated net income of $0.5 million or $0.03 per share, with significant year-over-year revenue, gross profit and EBITDA improvements. Second quarter consolidated sales were $54.9 million, up from $41.2 million in the prior year quarter, a strong quarter notwithstanding COVID-19 challenges. The increase was driven by improved plant utilization in our Heavy Fabrications segment, which benefited from increased tower and industrial fabrication demand. Our trailing 12-month consolidated sales approached a run rate of $200 million exiting the second quarter, which now includes $65 million of nonwind revenue. Since launching our revenue diversification initiative, we've made significant progress into nonwind end markets and continue to focus building that book of business. The combination of increased wind tower demand, coupled with broad-based customer expansion across multiple end markets, contribute to significant year-over-year growth in the period. Compared to the prior year quarter, gross margins expanded 40 basis points to 9.9%. This continued margin expansion reflects the impact of the improved operating leverage resulting from higher Heavy Fabrication plant utilization. And this benefit was partially offset by lower demand levels in our Gearing business, given the challenges we are seeing in the oil and gas and other cyclical markets impacted by COVID-19. Gross margin declined sequentially in the second quarter, primarily due to higher material content in the current quarter, together with lower operating levels in our Gearing segment. Operating expenses as a percent of sales was 8% and below our long-term target of 10%, primarily due to the improved plant utilization I mentioned earlier, effective cost management, and higher material content on the product mix sold. We are prudently managing operating expenses as evidenced by a 7% increase year-over-year on a 33% revenue increase. Interest expense declined to $500,000 from $800,000 in the prior year quarter due to lower debt levels. We generated $2.9 million of EBITDA in the second quarter, an increase of $1 million versus the prior year period. On a trailing 12-month basis, we've generated $10.1 million of EBITDA, a significant improvement when compared with the performance in the previous 12-month period. Turning to Slide 7 and 8 for a discussion of our Heavy Fabrications segment. Second quarter sales were $43.6 million, a 50% 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. turbine installations. Additionally, we shipped nearly $6 million of industrial fabrications in the quarter, up from less than $3 million in the prior year quarter. This business has traditionally served construction and mining markets. However, our diversification efforts are progressing as we are beginning to leverage our deepwater port in Manitowoc, Wisconsin to sell into material handling and other industrial markets. Second quarter orders were $31.4 million compared to $96.3 million in the prior year quarter. Prior year order levels were abnormally high as turbine OEMs were securing capacity well in advance of historical lead times due to expectations of surging wind tower installations in 2020. During the second quarter, we booked approximately $30 million of new tower orders. Our backlog now provides visibility to 90% of our full year optimal tower production capacity. Orders in the industrial fabrication product line declined immediately following the COVID-19 pandemic as customers delayed CapEx and inventory purchases in this recessionary environment. We are encouraged by the status of our conversations with our tower customers to sell 2021 production slots. However, we did see lower-than-expected tower orders in Q2, resulting from various COVID-19 impacts, including permitting delays and tax equity challenges. To that end, we expect lower production levels in the fourth quarter of 2020. We sold 320 sections in the quarter, our third consecutive quarter in which we have sold more than 300 tower sections. To support this level of demand, our tower plants operated near peak utilization during the second quarter compared to approximately 60% in the prior year quarter. Average selling prices per unit were higher in the quarter, primarily driven by increased material content, which is typically a pass-through to customers, together with the benefit associated with the production of more complex tower designs. Given the strong operating leverage, segment EBITDA improved to $4.2 million from $1.5 million in the prior year. Second quarter segment EBITDA margins were 9.6%, much healthier on a year-over-year basis, but were down sequentially as Q1 benefited from lower material content on the product mix sold, less complex tower designs and the operating leverage achieved from the production of a tower adapter order in Q1. Turning to Slide 9, our Gearing segment. Gearing segment orders declined from $5.6 million in the prior year quarter to $3.7 million. Orders in Q2 declined sequentially with an almost immediate reduction in customer activity following the COVID-19 pandemic and from lower oil prices. Our backlog was $17.4 million as of 6/30, flat on a year-over-year basis. Within oil and gas markets, U.S.-based frac and rig counts continue to weaken. Should commodity prices remain at depressed levels, we anticipate further cannibalization of existing frac fleet equipment, which would reduce demand for our products. As the global oil and gas markets rationalize excess production capacity, we could see some level of recovery in the market over the medium term, similar to prior cycles, although our expectations are that these markets will remain unchanged and challenged. To that end, we will continue to focus our commercial efforts on these other markets. Second quarter segment sales declined to $6.9 million from $9.3 million in the prior year as oil and gas customers deferred nearly $2 million of scheduled purchases to the second half of 2020. As a result of the operating leverage profile of the business, the reduction in sales resulted in a small EBITDA loss during the quarter. We have and will continue to take action to preserve margins and cash, including rightsizing labor and deferring capital purchases, while we're in this challenging environment. Turning to Slide 10 for a discussion of our Industrial Solutions segment. Industrial Solutions recorded $4.4 million of new orders in Q2, up from $2.7 million compared to the prior year quarter as we continue 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. Trailing 12-month segment orders are approximately $19.4 million, up roughly 33% over the prior year period. Segment backlog was flat sequentially at $9.5 million, offering solid visibility to revenue over the next several quarters. Second quarter segment sales increased to $4.4 million from $2.9 million in the prior year, mostly driven by higher new gas turbine content and our diversification efforts. Segment EBITDA as a percent of sales is approaching 10%. EBITDA was $400,000, double the prior year quarter. The operating leverage associated with increased volume and effective cost management has resulted in trailing 12-month EBITDA of $1.1 million, a significant increase over the comparable trailing 12-month period. Turning to Slide 11. At June 30, 2020, operating working capital was $20 million or 9.2% of sales, an $11 million sequential increase, primarily due to higher accounts receivable, which is a function of the timing of customer payments. As a result of this, our DSO spiked to 43 days from 30 days in Q1. Accounts receivable balance have now declined in early Q3 and back into a more normalized range. Inventory balance declined sequentially to $37.6 million, a $3 million reduction. As a result, DIO improved from 88 days in Q1 to 69 days at 6/30. We expect inventory turns to improve and operating working capital to decline throughout the quarter and the rest of the year with the cash generated to repay our debt. Total cash and liquidity increased sequentially to $22 million and continues to be well above historical levels. We had $12 million drawn under our $35 million credit facility and $2 million of cash on our balance sheet. As we highlighted on our first quarter conference call, we received approximately $9 million of proceeds under the Paycheck Protection Program. We believe we met all the requirements set forth by the Treasury to apply for the loans and did so in good faith, ensuring continued employment for our employees during a period of widespread economic uncertainty, which continues today. For reference, these loans can be forgiven by the small business administration if borrowers can demonstrate that they use the funds on eligible expenses, such as meeting payroll, rent, mortgage interest and utility obligations over a 24 week period. As of July, we used 100% of the loan proceeds on these eligible expenses. We are planning to submit our forgiveness application to our lender and the SBA in Q3. The U.S. Treasury previously announced that all borrowers that received PPP loans in excess of $2 million will be audited. However, the time line for the audit is unclear at this time. To the extent the PPP loans are not forgiven, the company is required to pay the loans over a two year period at a 1% interest rate. Our leverage declined again in Q2, ending the quarter at 1.4x trailing 12 months EBITDA after netting out the PPP loans. That concludes my remarks. I'll turn the call back over to Eric for an overview of conditions within our end markets in addition to some concluding remarks.

Thanks, Jason. Our country has been confronted with a series of historic challenges this year. During this period of widespread volatility, our leadership team has continued to stay the course by focusing on the strategic priorities we discussed earlier this year. These priorities include targeted expansion into our legacy onshore wind and nonwind markets, combined with an entrance into the offshore wind space. On balance, we continue to pursue opportunities where our unique value proposition and industry experience position us to win. 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. We've implemented all necessary and appropriate protocols as recommended by the U.S. CDC to ensure the continued well-being of our team. Given that all of our businesses are considered essential and critical infrastructure as defined by the U.S. Department of Homeland Security, our facilities remain open and operational. Should it become necessary, we're prepared to enact a business continuity plan to ensure the continued production and shipment of products to meet our customers' needs. Our order rates have declined since COVID-19 outbreak as our customers are dealing with the overall economic uncertainty we're all facing. We've conducted various stress scenarios in each of our businesses. And while it's difficult to quantify the full impact of the virus on our business and end markets at this time, we anticipate that current availability under our credit line will provide adequate liquidity to support our business during this period of uncertainty. 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 nearly 70% 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. Furthermore, on July 30, the International Trade Commission issued their final affirmative determination in favor of the U.S. tower manufacturers coalition, finding that the U.S. industry has been injured by imports of utility-scale wind towers from Canada, Indonesia, Korea and Vietnam. While underlying demand conditions continue to support strength for this sector over a multiyear period, our customers acknowledge that some projects scheduled for this year and early next 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., followed by 14 gigawatts next year, both significant achievements. And as a reminder, the federal government has given an extra year to bring products – projects slated for 2020 online without jeopardizing important tax credits. Tax equity and other forms of financing remain available to fund projects, although some could be more difficult in this present environment. Looking ahead, in addition to the strength expected for onshore installations through 2021, Wood Mackenzie forecast increasing demand in the out years as offshore turbines gain trust in the U.S., adding to a stable onshore demand. This long-term projection for U.S. wind now has improved to include nearly 25 gigawatts of offshore installations for Wood Mackenzie. Although some projects have moved from 2023 to 2024 and 2025, the industry still expects 2023 to be a strong year for offshore wind development. We generated about 8% 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 similar vital applications, which are less cyclical. Our deepwater port in Wisconsin, combined with our heavy lifting capacity, unique fabrication capabilities and huge paint boost, continue to draw strong customer interest from this segment. 8% of TTM revenue came from the power generation sector, where we see a positive demand outlook. Our primary customer in this market is gaining share, and we continue to expand our customer base in the new gas turbine space. The mining sector drove about 9% of TTM revenue, and our customers report a neutral outlook. Orders from this sector, which was strong in Q1, softened in Q2. The oil and gas sector, which comprised 5% of our TTM revenue, has seen a significant decline in demand. Hydraulic fracturing economics are less attractive with the recent pullback in crude oil prices causing customers to defer their capital expenditures. Construction drove about 1% of TTM revenue, and we see the outlook for this segment as negative in the near term. An infrastructure bill, if introduced, would certainly benefit us as this would create demand for new equipment purchases to support road building, bridge construction and waterway projects. Turning to Slide 16. Our key initiatives for Broadwind remain consistent as our near and medium-term strategy for the business remains unchanged in spite of the challenges of COVID-19. In the Heavy Fabrications segment, we're in discussions with our expanded base of tower customers to sell our 2021 capacity. We will continue to evaluate and add production and system capabilities to maximize throughput and profitability. We continue to see progress around offshore, particularly given the recent announcement of multiyear projects on the East Coast, reflecting the growing demand for offshore in that region. We will leverage the investments made in our engineering and supply chain teams to better support the evolving tower market as well as other opportunities. And lastly, we will continue our built in quality continuous improvement actions to ensure smooth process flows and good throughput in our plants. In the Gearing segment, we remain focused on accelerating our efforts towards end market diversification by leveraging our experienced engineering and sales teams. Further, we intend to grow our customer gearbox business and leverage our newest service and repair facility in North Carolina to better serve customers in the Southeast. Lastly, we will continue the recent cost actions required to size our business in accordance with market demand. In our Industrial Solutions segment, we continue to focus on expanding our core product line of new gas turbines and aftermarket components, as we expand our customer base in that space with an eye toward the smaller turbines we don't presently serve. 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 diversified precision manufacturer serving clean tech and industrial applications. Our heritage is renewable energy, specifically wind, which requires very precise manufacturing and handling of large heavy components. We're excited about our growth potential in renewables and clean tech, but also the opportunity to grow in the other markets we serve, such as material handling, power generation and other industrial applications. We're executing a multiyear diversification plan to leverage our core process capabilities in other markets and have achieved TTM revenues of nearly $65 million outside of wind, even as we grow our position in wind. The extension of the PTC for a sixth year, which is a real benefit for our wind market, and the favorable trade case findings provide a catalyst for growth in our Heavy Fabrications segment. Thank you for your interest, and we look forward to providing updates through 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.

At this time, we’ll be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Eric Stine with Craig-Hallum. Please proceed with your question.

Hi, Eric and Jason.

Hey, Eric.

Good morning.

Good morning. So you mentioned in the release, looking at strategic alternatives for the offshore market. And just wondering if you could provide any details there, anything you're able to share, whether it's kind of the depth of discussions you're having, potentially how many parties you're having those discussions with and maybe next steps we should look for?

Well, we are having discussions with multiple parties. We're having discussions that include potentially producing on the East Coast and also producing in our Manitowoc facility.

Got it. And then, I mean, I would assume there's some urgency. I mean, there's – it's kind of a mix because you've got these opportunities, and they are off 2023, and as you said, some maybe pushing a little bit to 2024 and 2025. But there also are such substantial announcement gigawatts and such that it would seem like there's some urgency on the part of those OEMs.

Yes, right. There's 6.4 – as I mentioned, there's 25 gigawatts that are forecasted by Wood Mac. There's about 6.4 gigawatts already contracted, and those are due to be installed between 2023 and 2025. And 1.1 – I mentioned that some of it's shifting to the right a bit, but still, there's 1.1 gigawatts projected to be installed in 2023. So really, as far as timing, if we assume there's going to be a greenfield factory that might take up to 18 months to bring online. If we finalize our plans in Q1, we should still have plenty of time to act.

Got it. Okay.

Just to add, we're seeing more activities for gigawatt or project announcements coming. So that's certainly encouraging. And we just need to keep assessing the economics of that market and make sure that if we're going to make this investment that it meets certain hurdles for the company. So I think we're going to continue to assess that and optimistic that we can talk about that towards the end of the year or early next year.

Right. Okay. All right. And then we'll stay tuned for that. And maybe on the recent ITC case, I mean, certainly a positive. I know to some extent, that's the outcome that was expected. And I know it's helped your – the pricing and the margins in your backlog to-date. How do you think that impacts things going forward? I mean is that something where you think it will continue to help the margins in backlog and then in terms of just supply to the overall market? I mean, is this something that potentially makes it supply tight in the market? Or how do you see that playing out?

Just as a reminder, the Department of Commerce and the ITC determined that subject country imports they participated unfair trade practice into the U.S., the U.S. industry. We estimate that about one-third of the towers in the U.S. were from the subject import countries, Canada, Indonesia, Korea and Vietnam. The best result of this is a smooth production and stable production for the U.S. tower manufacturers going forward and capacity utilization, which is really important for all of us. I think the bottom line, though, is that Broadwind and the U.S. tower manufacturers can absolutely compete with anyone in the world on a level playing field, and our aim is to keep that playing field level going forward.

Got it. Okay. Maybe last one for me. Just I know last – on the last call, you had talked about that you've been – you were looking at some potential wind tower orders, whether it was from Siemens Gamesa or your two other customers potentially in the near term. And I guess that's something you're still targeting. Just thoughts on that or maybe status on that? And do you expect – I know you're at 90% of your functional capacity right now for 2020. I mean do you think that you will fill that – the remainder of that here going forward in the somewhat near term?

Well, as far as 2020 goes, Eric, typical lead times for towers are anywhere between four and six months. So it'd be a challenge for us to fill that remaining capacity for 2020. But certainly, regarding 2021, we are in active discussions with a number of the OEMs, and you know we sell to them all now for that capacity. So we're optimistic that we'll be able to fill that capacity through 2021.

We'd expect to begin announcing those orders in Q3 and into Q4. So we'd see more commercial activity happening here in the coming months.

Yes. So I think it's important to keep in mind that, that four to six month lead time, which is typical in our market.

Yes. I knew it was going to be tight but yes, just thought I'd get your thoughts. So I appreciate it. Thanks.

Sure. Thank you.

Our next question comes from the line of Amit Dayal with H.C. Wainwright. Please proceed with your question.

Thank you. Good morning, Eric; Hi, Jason.

Good morning.

So just could you help me reconcile the tower capacity booked at 90% for the year for – through the end of 2020 with potential softness you are anticipating in the fourth quarter. Is this because of the lower order activity in the second quarter? Or is there something else behind this?

Yes. I think – so Q2 was – we operated near our optimal production capacity and we're expecting that for Q3 as well. But I think the – what we did see throughout the quarter was just various – some COVID delays and so there was some weakening in the market. We didn't book the expected orders that we were hoping to fill out for the rest of the year. So I think there will be a little bit of a – somewhat of a downturn in plant utilization in Q4 that we'd expect to rebound in 2021.

Understood. And then I didn't catch some of the last part of your commentary, Eric. And I apologize if I'm bringing this up if you've already addressed it. The decision on the offshore wind, go, no go, I guess, is there something from an investment perspective that you are waiting for or sort of doing diligence on? What would be sort of the catalyst that you – get you over the hump? If there's any sort of challenges that you are looking at before making the call of entering this market.

Yes. I think we would certainly have to have appropriate contracts or orders from our – from various OEM customers to make sure that the investment was justified over – for the multi years. We are contemplating a 200,000 or 300,000 square foot plant in the East, which we think can satisfy a good part of that demand. But if you're asking for a catalyst, we'd have to make sure that our customers have secured orders to support that plan.

And I think that what we're going to be watching very closely are the new projects that are being announced and contracted and secured because that will then – that should drive a catalyst for decisions to be made for offshore tower production plans.

Understood. Got it. And with respect to sort of your backlog and order activity, did anything get canceled that has been in your backlog? Or was mostly everything just pushed out and…

Yes, this is a dynamic. Yes, it’s a great question. This is a dynamic I've heard on some of our customer calls and just general calls is I truly believe that it's a demand deferral and not a demand drop-off because of the uncertainty with COVID in the markets that we participate in. So the answer is no, we haven't any cancellations. It's more – it's deferrals.

And tower off-take from our customers has – we haven't seen – although there's been some supply chain constraints throughout the quarter, we didn't really – we still are delivering against our contracts. I think you're seeing more of a deferral in the oil and gas business that we have and gearing where customers are deferring purchases into the second half.

Okay. And just at a high level from a modeling perspective. So we probably are looking at sequential improvements in the third quarter and then maybe a little bit of a decline in the fourth quarter?

Sequentially, yes.

Okay, perfect. Yes, that’s all I have guys. Thank you so much.

Thank you.

Our next question comes from the line of Justin Clare with ROTH Capital. Please proceed with your question.

Hi guys. Thanks for taking the questions.

Hey, Justin.

Good morning.

Good morning. So I guess just on Q2, the operating margins for Heavy Fabrications moved a little bit lower to 7.3% from, I think, 9.2% in Q1, according to our calculations. I was wondering if you could just help us better understand the reason for the move lower in margins. I would have expected stable to potentially an improvement because sales were up a little bit in Heavy Fab. So any additional detail you can provide there.

Sure. What does move our margins from time to time are related to materials. So in some instances, customers supply materials to us and that would be excluded from our sales price and our material costs. So sometimes you get a bump because of that. And that – we did see that from Q1 to Q2. We had higher material content towers in Q1, and we procured all the materials for those tower contracts in Q2. So that drove quite a bit of a change in our gross margin for the company.

Okay, got it. And then looking into Q3, it sounds like you expect a sequential improvement. I'm expecting that the tower business sales will likely improve in Q3. So what are your expectations on margins there? And then looking further into Q4 with a potential softer quarter, should we see a step lower in margins?

We're thinking that we'll be in the 10% to 11% range with probably on the higher end of that in Q3 and then on the lower end of that range in Q4. That would get us closer to the year to 10.5% to 11% gross margins for the consolidated company.

Okay, got it.

And I think some of that's going to depend on the off-take in the Gearing business. We're making a lot of cost changes and rightsizing the cost structure. So that – our ability to deliver against that and also for customers to take product, I think that will be important on whether or not we can hit those gross margin targets.

Got it, okay. And then shifting to your customers. I know you recently added GE as a tower customer. I was wondering if you could just give us an update on how that relationship is progressing. Are you seeing follow-on orders with GE? Or how are discussions with GE as it relates to tower orders in 2021?

Well, what I would say is there's certain conversations I really can't share with – between Broadwind and customers, but I think the relationship is strong. The conversations are ongoing with all three of the tower customers we're producing for now.

Okay. And then one last one on the offshore opportunity. At this point, are you leaning towards a greenfield facility? Or are you considering supplying offshore from your Manitowoc facility at this point? And then if you are still considering the Manitowoc facility, what would be the timing on a decision you would need to make there? I'm imagining it would be a little bit later than what you might need for a greenfield facility.

Yes, you're right. Am I leaning one way or to the other? I'd say I'm probably 50-50 at this point, maybe a hedge towards the greenfield. I would say you're right. We would have more time for the Manitowoc facility since we already have the land. We have got the building, deepwater port. We just have to make sure some of the equipment was upgraded to handle the larger, heavier towers. So we probably have shoot maybe an extra six months or even more to get this 2023 installed base, Justin, if we elected to go through Manitowoc.

All right. I’ll pass it on. Thanks guys.

Yes. Thanks, Justin.

We have reached the end of our question-and-answer session. And I would like to turn the call back over to Eric Blashford for any closing remarks.

Yes. Thank you, everybody. I really appreciate your interest. We're proud of what we've done so far. We're looking forward to what we're going to do through the rest of this year. We really appreciate your interest and look forward to speaking with you all again. Thank you so much.

This concludes today's teleconference. You may now disconnect your lines at this time. Thank you for your participation, and have a wonderful day.