Broadwind, Inc. (BWEN) Q2 2021 Earnings Report, Transcript and Summary

Greetings, and welcome to the Broadwind Second Quarter 2021 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] As a reminder, this conference is being recorded. It is now my pleasure to introduce Jason Bonfigt, Chief Financial Officer. Thank you. You may begin.

Good morning, and welcome to the Broadwind second quarter 2021 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 2021 results. I would like to remind you that management's commentary and responses 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 the historical non-GAAP financial measures discussed during our call in the press release issued this morning. 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. After a challenging first quarter, our business and global supply chain began to stabilize in the second quarter. As expected, we delivered a sequential increase in revenue but were impacted by year-over-year decline in wind tower sections sold, as higher raw material costs dampened near-term investments by wind tower customers. The net result was that towers we expected to ship in Q2 have been pushed into the second half of the current year. We have now booked approximately 50% of our 2021 optimal wind tower capacity for the second half of 2021 and through July 21, have received orders for about 15% of our 2022 tower production. As I mentioned on our last earnings call, in December 2020, Congress approved an additional year of the production tax credit, or PTC, at the 60% subsidy level, together with a new 30% ITC for offshore wind, creating the potential for increased tower demand over the medium term. In June 2021, the U.S. Treasury Department published the Biden administration's tax proposals for the fiscal year 2022. These proposals include a provision for an extension of the PTC, including onshore and offshore wind projects from 2022 through 2026. If passed into law, the company expects the administration's planned multiyear extension of the PTC would provide a significant catalyst for tower demand. As a result of the favorable policy backdrop and continued decline of the levelized cost of wind energy with Mackenzie, a leading provider of commercial intelligence for the world's natural resource sector, recently raised its onshore wind installation forecast by nearly 30% to over 100-gigawatts installed over the next decade. As we have done throughout the pandemic, we continue to produce and ship products that meet and often exceed our customers' precise fabrication requirements. Pandemic-related supply chain constraints while still present, eased in Q2. Cost inflation on key materials remains a headwind for our customers and one that has dampened near-term capital investment in wind. This is particularly acute with respect to the cost of steel, which has increased significantly in the past year. While Broadwind absorbs only minimal direct commodity price risk, we believe some customers are waiting for raw material costs to normalize. This, when balanced against wind developers efforts to align projects with a potential PT extension has pushed tower orders into next year. Our diverse end market strategy performed as intended during the quarter as growth in non-wind markets helped to offset softness in tower orders. Our Gearing segment generated significant year-over-year growth in both revenue, orders and backlog supported by demand from energy and steel markets. We believe our non-wind end markets are recovering as our industrial and energy customers are placing orders to replenish their inventories. Our total orders declined by a third year-over-year, primarily attributable to the delay in the tower orders I previously mentioned. Quoting activity in our non-wind markets continues to be strong, and we expect good order flow for the remainder of the year, especially from gearing and industrial fabrications. The full impact of the pandemic remains uncertain at this time as the world deals with new variants, but we continue to take actions to keep our people safe and our facilities open. We anticipate that our current cash and availability under our line of credit provides us with adequate liquidity to support our business through this period of uncertainty. Within our Heavy Fabrication segment, revenue declined $7.8 million. We continue to quote and produce from multiple turbine OEMs in the US, but she gives us good customer diversification in the tower market. Within Gearing, revenue increased 7% year-over-year, while orders more than doubled to nearly $8 million as the anticipated improvement in customer activity continues, particularly in the energy and steel sectors. Revenue for our Industrial Solutions segment declined 19% on a year-over-year basis, driven by lower demand for gas tubing components and a delay in the delivery of an international order due to global logistics delays. In summary, I'm pleased with how our business stabilized between the first and second quarters. I'm pleased that how our team is responding to the still present, albeit reduced supply chain challenges we've seen in recent quarters to achieve better factory throughput, all while keeping our people safe and our customers' needs met. We fully expect wind development activity to ramp up materially over the next 24 to 36 months, particularly should we see a multiyear extension of the PTC, which looks as if it has a solid chance of being passed into law under the current administration. As before, we continue to actively evaluate bolt-on acquisitions and joint venture partnerships that seek to leverage our existing manufacturing expertise and exposure to clean tech markets. We continue to consider opportunities for accretive acquisitions of assets or businesses with high revenue and/or cost synergies, complementary product lines and a well-established diverse customer base that further support our diversification strategy. With that, I'll turn the call back over to Jason for a discussion of our second quarter financial performance.

Thank you, Eric. Turning to slide 5 for an overview of our second quarter performance. Second quarter consolidated sales were $46.5 million compared to $54.9 million in the prior-year quarter. On a year-over-year basis, sales declined due to a number of factors, including lower wind tower demand, a lower average selling price on the mix of towers sold and less demand for industrial products across our segments, which is driven by reduced orders in the second half of 2020. Q2 adjusted EBITDA was $12.8 million, which includes forgiveness of $9.2 million of PPP loans and a $3.6 million benefit associated with the employee retention credit. As we highlighted on our last conference call, the ERC is a component of EBITDA in our segment financials as the credit will be utilized to offset increased payroll costs resulting from pandemic-related disruptions experienced throughout the year. As we highlighted on previous calls, we received approximately $9.2 million of proceeds under the Paycheck Protection Program. We submitted our forgiveness application to our lender and the SBA in Q1 and has subsequently received forgiveness on all loans. PPP loan forgiveness amounts are also included in non-GAAP adjusted EBITDA in our segment financials. Second quarter operating expenses increased $100,000 year-over-year, primarily due to increased legal fees associated with our tower coalition trade case. Interest expense declined to $300,000 from $500,000 in the prior year quarter due to lower debt levels and a reduction in our borrowing rate. Turning to slides 6 and 7 for a discussion of our Heavy Fabrication segment. Second quarter sales were $35.8 million compared to $43.6 million in the prior year quarter, driven by the aforementioned factors in our consolidated results. Second quarter orders were $14.8 million with new tower orders from two turbine OEMs. As of this call, we've approximately 50% of our second half 2021 optimal tower production capacity sold versus 85% during the same period in 2020. As Eric mentioned, we do not see material upside to our full year tower capacity utilization as the industry pauses in anticipation of a likely PTC extension later in the year. Further contributing to the pause of new orders across the industry is the impact of rising steel costs. While we do not assume steel pricing risk in our tower contracts, significant increases in steel prices often influence project viability. Recall that steel prices typically represent approximately half of the cost of a wind tower. For the second quarter, we sold 302 tower sections resulting in segment adjusted EBITDA of $10 million or $4.2 million after excluding the impact of the PPP loan forgiveness. As we discussed earlier, we continue to sell towers to multiple turbine OEMs, which has been a key strategic objective over the past several years. This customer diversification as well as expansion of our industrial fabrication product line, which is now at a $20 million annual order run rate and success in several trade cases has allowed us to improve our plant utilization over the cycle. Turning to slide 8, I'll cover our Gearing segment. We are encouraged by the economic recovery and our position within energy and industrial markets. Following a challenging year for orders in 2020, the commercial environment has dramatically improved in 2021 with $7.9 million of new orders in Q2 compared to $3.7 million in the comparable period last year. Year-to-date orders have rebounded to $17.8 million, double the last six months of 2020. The Energy and Industrial customers are restocking inventory levels and resuming capital spending in response to the economic recovery. Year-to-date book-to-bill is approximately 1.4 times, resulting in a recovery of our backlog to nearly $20 million. Second quarter segment sales increased to $7.4 million versus $6.9 million in the prior year, primarily a result of increases in demand from energy customers. We generated $2.9 million of segment EBITDA in Q2 or $400,000 in EBITDA, excluding the benefits associated with the PPP loan forgiveness. We expect a gradual recovery in top and bottom line performance throughout 2021 as we begin to execute against our elevated backlog. Industrial Solutions recorded $3.8 million of new orders in Q2, down from $4.4 million compared to the prior year period, primarily a result of the timing of orders from its largest customer. Our pipeline of opportunities remains healthy, including quoting activities of new customers and end markets, and we are encouraged that the business is now leveraging its global supply chain expertise that can execute against its first towers internals order. Second quarter segment sales declined to $3.5 million from $4.4 million in the prior year given order timing and global supply chain challenges. Segment adjusted EBITDA was $700,000, which includes $500,000 related to PPP loan forgiveness. Turning to slide 10. Operating working capital increased $5.3 million sequentially to $17 million or 9% of sales. late quarter deliveries to our customers and subsequent invoicing led to increases in accounts receivable balance at quarter end. Customer deposits declined modestly due to order timing. As we indicated in our last call, inventory balances had expected to normalize in the second quarter, and they did decline by $8 million. Total cash and availability under our credit facility remains healthy and above historical levels, with nearly $24 million of liquidity at quarter end, which includes approximately $5 million of cash on our balance sheet. As mentioned previously, we qualified for $7 million of ERC cash benefits in the first half of 2021, netting $5.3 million of cash proceeds to date, with the balance to be collected in Q3. During Q2, approximately 800,000 shares of common stock was issued under an at-the-market offering, which netted $3.2 million of cash proceeds. And as we previously announced, the authorized $10 million ATM offering was completed in Q2. As a result of the PPP loan forgiveness, our net debt and finance obligations declined to approximately $6 million with net leverage declining to 0.4 times trailing 12-month EBITDA as of June 30. And on a year-over-year basis, we reduced debt by $17 million, providing us with increased balance sheet optionality. As noted in our press release issued this morning, we expect third quarter revenue to be in the range of $38 million to $42 million, with EBITDA expected to be between $0.5 million to $1 million. Additionally, we anticipate fourth quarter sales to decline by 25% on a year-over-year basis given the pause in new tower orders. As a result of lower anticipated sales, we will likely qualify for the ERC benefit again in Q4. That concludes my remarks. I'll turn the call back over to Eric for an overview of end markets in addition to some concluding remarks.

Thanks, Jason. Turning to slide 11 for further discussion of our outlook for the domestic wound market. And there are some encouraging signs here. We have a renewable friendly administration that has already taken steps to drive investment, including the recent PTC extension in consideration of a much longer-term PTC incentive through 2026. In addition to those considerations, the bipartisan infrastructure framework, presently working through Congress includes a provision for thousands of miles of new transmission lines to facilitate the expansion of renewable energy. Broadwind supports this legislation and believes it has a high probability of getting passed as it represents both an engine for new job creation and a foundation upon which to modernize our aging energy infrastructure with lower cost renewables. In this revised forecast, Wood Mackenzie is anticipating the extension of the PTC which drives a significant upgrade to their prior onshore forecast. It's worth noting that Woodmac expects year-over-year growth in installations for each of the next 9 years through 2030, consistent with expectations for continued growth in demand for wind energy. Offshore remains an attractive growth area for wind capacity additions in the US, primarily off the coast of the eastern states with nearly 32 gigawatts of new installations forecasted to be put into service during the next decade. This new source of clean power is key to meeting individual state mandates designed to move away from fossil fuels in the medium to long term. Furthermore, as ESG mandates increase, commercial and industrial buyers will continue to be a major driver of the wind power demand in our view. As we look outside of wind, we continue to make exciting progress across a number of diverse end markets while staying mindful of our long-term strategy to proudly support the world transition to a cleaner energy future. Our customer diversification initiative remains central to our overall plan, one that allows us to optimize our production facilities and leverage our skilled workforce as wind tower orders may vary from quarter-to-quarter, wind, renewables and other forms of clean power remain core to our business, even as we continue to expand our non-wind revenue streams. Today, our fastest-growing non-wind segments include power generation, mining and the industrial segment, which includes our penetration into the material handling and marine markets. In our Heavy Fabrication segment, we are working to sell 2022 capacity and add capabilities to improve our asset utilization and throughput. We continue to evaluate the offshore turbine market in the US for possible points of entry as we continue to expand our mix of complementary industrial fabrication customers. We also continue to innovate, leveraging our precision manufacturing expertise. In July, we unveiled our new proprietary pressure reduction system at an energy trade show in Texas with a very positive customer response. This system is designed to support the growing virtual pipeline infrastructure, which uses cleaner burning natural gas to replace the less carbon-friendly fuels such as coal and fuel oil. In our Gearing segment, we are working to shift our sales mix toward markets which tend to be less cyclical and offer a more balanced revenue stream and have added some new capabilities to bring more value-added content in-house while improving throughput. And we will continue to grow our custom gearbox business through more emphasis into the repair and upgrade categories. In our Industrial Solutions segment, we will continue to expand our market share, both domestically and internationally by increasing content with existing customers and focusing on new opportunities in the EPC space. We've delivered our first internal component order for the wind industry and are actively quoting additional opportunities in both the new build and repowering wind spaces. In summary, our business remains an active participant in the development of technologies integral to the ongoing clean energy transition. We see a long-term growth path forward within the domestic mid market, given that more than 140 gigawatts of installations are planned over the next decade, including both onshore and offshore opportunities. This growth is driven by three primary factors: first, the cost of wind energy has dropped dramatically in the last decade, making it one of the most competitive energy technologies available on the market. Second, we have policymakers providing incentives to encourage investments in wind, including the PTC and ITC announcements and the reintroduction of the GREEN Act supported by a pro-renewables administration, which is the Paris Climate Accord. And finally, growing ESG initiatives, both mandated and voluntary will certainly continue to drive demand for wind. We are committed to being a vital participant in the world's transition to a cleaner energy future. And given the continued strength of our balance sheet, we are well capitalized to pursue both organic and inorganic opportunities that further support our growth strategy. With that said, I'll turn the call back over to the moderator for the Q&A session.

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] One moment please while we poll for your questions. Our first question has come from the line of Justin Clare with ROTH Capital Partners. Please proceed with your questions.

Hey, guys. Thanks for taking the questions.

Hi, Justin. Good morning.

Good morning. So, first off, you've talked about the delays you're seeing in wind tower orders. I wanted to see - do you expect these delays to potentially lead to a stronger 2022? I know you indicated that 15% of 2022 production is already booked. How does that compare to where you would typically be this time of year? Is that ahead of schedule here?

We're actually a little bit ahead of schedule. We certainly like to have more than 15%, we're head of normal schedule order patterns.

I think something to consider is that the likelihood of the PTC extension, if that's extended at the end of the year, that could trigger some additional projects. But given the lead times for components typically can be at four to five months. So you might see a really strong back half of the year or Q4. But it's probably a little bit too early to read into the 15% at this time.

Okay. Got it. And then turning to your guidance here. You've talked about second half tower production for this year at 50% of optimal capacity. Are you currently 50% booked for the back half right now? Or do you need to add additional bookings? And then, I know it's getting late in the year, but is there opportunity to potentially add bookings to get you above that 50% level? Or is that unlikely at this point?

I'll start with the first part of the question. We do have that 50% in our backlog today. There's more weighting towards Q3 for production. So, Q4 is going to be a little bit lighter, and we indicated that in our press release this morning.

Yes. I would say, Justin, it's technically possible. But given due to lead times of steel and especially internals, as we've talked about before on calls, the likelihood of point things into Q4, it would be difficult at this time.

Okay. Okay. Got it. And then just one more on margins. We've seen margins for your customers get squeezed a bit as a result of the increased pricing for raw materials and steel, in particular. I know steel is a pass-through, but wanted to see are your customers looking for you to share some of the margin impact from the higher steel pricing? Any change to the contracts? And yes, so any change there?

Yeah. I would say, Justin, our customers are always looking for us to optimize our factories to make sure our conversion costs are as effective as they can be. We are working with them to try to optimize their designs to make sure that, again, our conversion costs are as best as possible. But no, we haven't been asked to take steel risk or compress margins directly a result of the steel increase.

Okay. Great. Thanks, guys.

Thank you. Our next questions come from the line of Eric Stein with Craig-Hallum. Please proceed with your question.

Great. Thanks for taking the questions. It's Aaron Spychalla on for Eric.

Hey, Aaron.

Hey, Aaron.

Maybe first, I mean, you gave a lot of great detail on the backdrop for onshore. It sounds like it's actually strengthening despite how the back half and kind of current orders and backlog look. But can you just provide a breakdown roughly on the push out of demand between the policy uncertainty and materials costs? And then just confirm that this is mostly all pushouts and no real loss business on your end?

Yes, I certainly do believe it's push out. If you take a look at the PTC, Aaron, yes, the price of steel is certainly a bit of a tailwind to our consideration, but the PTC itself has a lot more value to the developer and ultimately to the project than an increase in the price of steel. When you take a look at these PTC scenarios, some of them buy and suggesting a Green Book 100% PTC for projects from '22 to '27. And even in Woodmac's assumption, they're having 60%. And that really has provided a significant lift in onshore, which is obviously very material for us. So kind of reiterating the question, steel, the price of steel and commodities and PTC uncertainty is they're both impacting, but I think the PTC uncertainty has a greater impact.

Understood. Thanks. And then maybe second on offshore. You touched on it a little bit. We've been seeing some nice increased activity there lately. Can you just give a little more color on how you're getting positioned there and when we can maybe start to see that contribute to results?

Yes. We're monitoring the activity off the East Coast. And even if you take a look at what's in our presentation, that tends to shift a little bit to the right because these things are - the timing of these things, they're such major projects, they tend to be delayed. We're still determining how best to service this market as it firms up. We've got multiple avenues for growth and offshore wind is definitely one of the ones that remains on the table for us. But as a reminder, we've - previous calls, I've talked about, we're evaluating multiple ports on the East Coast. We've got viable alternatives for both our customers and developers. And we're in discussions with stakeholders in this space, but we just - in order to support an investment of this size, we need firm contracts from OEMs and/or developers in order to make the project pencil in.

Understood. And then one more for me, maybe on the Gearing segment, nice rebound in activity there. Can you just kind of talk about the outlook for margins? You mentioned a pickup as we go through 2021. Can that get back to some of the margins that you've seen in the past few years from an EBITDA perspective?

Yes. So, the history has been when we operate above $8 in the $8 million to $9 million of revenue range per quarter, we have generated greater than 15% EBITDA margins, and that's how we are focused on the business today. There's been some mix changes within our products, and there's new products that are being introduced by our customers. So we're always working through those start-up related issues. But over the long term, we are still targeting that business or that segment to be greater than 15% EBITDA margins.

Yes. And the only thing I would add to that, Aaron, is as we penetrate new markets and we want to take positions in those markets, sometimes that may come at a temporary a bit of a pressure on margins, especially for new product for us. But that's designed to increase our diversification and expand our base.

Great. Thanks for taking the questions.

Thanks, Aaron.

Thank you. Our next questions come from the line of Sameer Joshi with H.C. Wainwright. Please proceed with your questions.

So just a little bit of clarification on this 15% capacity that is booked. Is it mainly because of shifting to the right because of maybe the steel price pressure and PTC prospects? Or is it...

Yes, we absolutely...

I'm sorry, you had a second part to the question?

No, no. Just on...

Yes. I think, again, if you take a look at the forecast, it definitely is increasing. So we're definitely very excited about that increase, but there is this pause, this hesitation as customers and developers evaluate what level of PTC is going to be at and maybe when steel starts to rationalize. So I firmly believe it has a slide out and no longer-term impact to the market.

And just another bit of clarification. In terms of steel price - steel prices, is it impacting your profitability in the gearing segment? Or are there other factors?

Outside of towers, all of our - well, I should say all of our projects within the company are all our POs within our company are project based, including gearing. So what we are doing is we are sort of locking in steel prices at the same time that our customers are securing contracts. So we're not taking that steel price risk. So a long way to say, we are passing steel cost increases on to our customers.

Yes. Said a different way. Because of the uncertainty the price of steel now, if you are a customer of Brad Foote gear or any of the Robin divisions, you would see that your - the duration of your quote where it might be 30 days or 45 days is now it could be two weeks or less because we want to make sure that the price of steel we quoted is the prices that we can receive.

Understood. And - in terms of your discussion about the acquisition and expansion into non-wind, I think I heard you talk about repairs and upgrades and EPC as well. Do those buzzwords indicate that you may be diversifying into services? Or will it be still product focused?

No. As far as the M&A, the M&A, no, certainly, we're focused on clean tech or smaller bolt-ons that would be accretive to our existing businesses. But when I mentioned upgrades and repairs and maintenance, those are active targets for us in the gearing market. That tends to be how some new customers first know and learn about Brad food gear because they have a problem with their existing box that may or may not be our brand. then we get in and help them with that and then it helps them learn bad foot and more often not, they'll buy new Brad Foote gearboxes after the fact.

Got it. And just one last one. In terms of the trade case, what level of expenses are you incurring now, meaning maybe this information is in the queue, but if you could just tell us and how long do you expect that expense to be there on the statements?

Yes. We don't provide that level of disclosure. But I would say that a majority of those expenses have already flowed through our financials. There might be some residual SG&A in Q3 and Q4, but largely, it's complete.

Understood. Thank you.

Thank you.

Thank you. There are no further questions at this time. With that, we do thank you for your participation. This does conclude today's teleconference. You may disconnect your lines at this time. Have a great day.