Greetings and welcome to the Broadwind Third Quarter 2022 Results Conference Call. [Operator Instructions] And as a reminder, this conference is being recorded. It is now my pleasure to introduce Tom Ciccone, CFO. Thank you, sir. You may begin.

Good morning and welcome to the Broadwind third quarter 2022 results conference call. Leading the call today is our CEO, Eric Blashford; and I'm Tom Ciccone, the company's Vice President and Chief Financial Officer. We issued a press release before market opened today, detailing our third quarter 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 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, Tom and welcome to those joining us today. I'm pleased to report that demand conditions improved materially during the third quarter as both orders and backlog increased to multi-quarter highs. We booked $85 million of new orders in the third quarter, more than double the prior year period, with all segments posting significant increases. Most notably, our wind orders more than doubled from last year as the recent passage of the Inflation Reduction Act or IRA, together with a decline in select raw material prices from recent elevated levels, have led to early indications of recovery within the sector. Our Gearing and Industrial Solutions businesses continued to show strength in orders during the quarter, with both segments posting 34% increases versus last year. While operationally, labor remains a challenge, we've taken steps to improve our recruiting and retention efforts while continuing to offer a competitive benefits package in the markets where we operate. We are managing the impacts of cost inflation and are collaborating with our customers to share these higher costs while introducing strategic pricing actions as we ensure stable margin capture. We are effectively managing our cash and expect to have liquidity remaining near current levels by the end of this year. We generated revenue of $45 million in the third quarter, a year-over-year increase of 11%, led by growth in our Gearing segment and industrial fabrication product line, posting gains of 35% and 95%, respectively. We generated $1.9 million of EBITDA in the quarter, a year-over-year increase of $1.5 million. We are encouraged by the passage of the IRA and its significant support for renewables which we see as a major catalyst for our wind business for years to come. We are currently seeing increased quoting activity with our wind customers expressing interest in tower capacity…

Thank you, Eric. Turning to Slide 6 for an overview of our third quarter performance. Third quarter consolidated sales were $44.8 million compared to $40.4 million in the prior year quarter. Versus the prior year, Q3 sales increased within our Gearing and Heavy Fabrication segments but decreased within Industrial Solutions. The 11% increase in consolidated sales was primarily driven by increased gearing demand within its energy and industrial end markets. Within the Heavy Fabrication segment, we experienced a nearly 100% increase in industrial fabrication revenue, a result of strong recent order intake and was offset by a 26% decrease in tower sections sold. Industrial Solutions sales were also down marginally. In Q3, we recognized $1.9 million of EBITDA compared to $0.4 million in the prior year third quarter. The improvement in EBITDA is reflective of the higher overall volume level and the corresponding increase in plant utilization which contributed to improved operating leverage in the period. Turning to Slide 7 for a discussion of our Heavy Fabrications segment. Third quarter orders were $62.9 million, a 137% increase from the prior year period. The increase is attributable to a $40 million increase in tower orders as demand remains elevated for our Abilene production capacity due to ongoing or planned projects in that region. Third quarter sales were $30.6 million, up from $28.7 million in the prior year quarter. Weakness in Q3 tower sales was largely offset by a nearly 100% increase in industrial fabrication revenue which benefited from strong demand from industrial customers as well as for our natural gas pressure-reducing systems, or PRS units. During the third quarter, we sold 145 tower sections, down from 197 sold in the prior year period and reflective of the continued weakness in tower demand out of Manitowoc when compared to the Abilene facility.…

Thanks, Tom. In the near to medium term, we view the IRA as a significant positive catalyst for the wind sector as it provides the policy certainty long-awaited by developers. Now that the IRA is law, we believe that this supported by rising commercial and industrial demand will drive increased wind installations beginning in 2023. In addition to the positive developments of the PTC extension for wind and the ITC for solar, we await final IRS guidance on the precise treatment of additional incentives in the IRA Act such as the Advanced Energy Production Credit or Section 45X, this provides a new production credit for domestic manufacturers of the components relating to clean energy, including the wind towers we produce. As we look toward the remainder of the year and into 2023, we have increased visibility and stronger backlog across each of our operating segments as we continue to expand in new adjacent clean tech markets, such as solar, clean fuels, power and infrastructure, building on our legacy within wind. In our Heavy Fabrication segment, we are adding automation to improve our plant throughput, optimize labor and reduce costs as we continue to work with our customers to book capacity for towers and other industrial fabrications in 2023. The proprietary Broadwind pressure-reducing system product line introduced last year to serve the virtual natural gas pipeline market is progressing nicely and plans are on track to introduce a new high flow model to that line early in 2023. Given our current capacity, we have the ability to generate approximately $20 million in annual incremental revenue from this line. In our Gearing segment, we are seeing success with our efforts to broaden our sales mix into less cyclical markets, offering a more balanced revenue stream as shown by the accelerating bookings from…

[Operator Instructions] Our first question comes from the line of Amit Dayal with H.C. Wainwright.

Good to see backlog and order activity picking up for you guys. Congrats on that. One question around that, balance sheet perspective, are you comfortable in terms of your outlook to meet sort of the higher order activity, the bigger backlog, etcetera?

You're talking about our -- Amit, this is Eric. You are talking about our production capacity?

No, I'm just talking about the working capital liquidity situation. Are you comfortable with what your balance sheet looks like right now, sort of...

Yes. Thanks, Amit. Yes, I got you, Amit. Yes, I do -- we're about -- we have about $15 million in cash and availability online right now. And we feel that a lot of the operating working capital build that we've experienced has kind of moderated at this point. So we expect to go into Q4 with flat to maybe slightly improved operating working capital. So I think going into 2023, I think we feel pretty comfortable.

Sequentially, are you positive about how Q4 will shape up for you given all this increase in orders and backlog?

Well, I think a lot of the orders that we're taking are really for 2023 production. Our Q4 has been, I guess, firmed up prior to a lot of that order intake.

Okay. Understood. And then on the cost side, obviously, as you ramp revenues and add capacity -- or bring additional capacity online and -- how should we think about costs through 2023 and maybe even 2024?

We're seeing our cost increase pursuant to inflationary cost increases that you've seen kind of the 5% to 8% range with labor and whatnot and ancillary costs. But fortunately, we are able to get price realization to offset that, Amit.

Okay. So those have already been implemented?

Yes.

Okay, understood. And are you attributing a lot of the recent positive sort of order and backlog activity to the IRA or were there any other terms that supported these developments?

Yes. I would say the IRA has had some influence but the majority of the influence has to do with the order activity in our Southern region. There's a lot of projects in the Texas, Oklahoma, Kansas region that we are well located to be able to take advantage of. Subsequent to that, though, we are seeing order activity and interest, quoting activity and interest increase as a result of the IRA.

Our next question comes from the line of Martin Malloy with Johnson Rice.

Nice to see that order trends pick up here with respect to wind. First question, you mentioned solar a couple of times. What are you all doing with respect to solar?

Yes. Through our Industrial Solutions segment, we're doing things like inverter skids. There's a whole cycle of field replacement that's now coming online now that solar has had some years in the field. And our customers are asking us to help them design and manufacture replacement inverter skids to go out into the field that are used to upgrade and replace wearing inverter skids that are in the field. So it's a replacement cycle.

Okay. And then just with respect to the wind order trends, Abilene, that's facility -- my understanding that, that's been operating at a pretty high utilization for a while. But the Manitowoc facility, there just hasn't been the same demand in that region for wind towers. And one of the publicly traded wind blade manufacturers suggested on their call that it would really be second half of 2023 before you'd see a big ramp-up in orders. Can you maybe talk about what you expect in that region that the Manitowoc facility serves from a wind blade -- from a wind tower perspective in the time.

Yes, Martin, thanks for the question. Yes. Thanks for the question. We are seeing the same thing. And we're seeing that across the market, including some of my competitors in towers. We do think because of the length of the project cycle, it can take several quarters for the funnel to fill back up again. So we are maintaining our capability and our ability, including our workforce, to a large extent, to be able to ramp back up to meet tower demand in the north which we do expect to come back in the latter half of 2023 into 2024.

And our next question comes from the line of Eric Stine with Craig-Hallum.

So just coming back to solar a little bit. You detailed how you're involved now. It did seem and maybe I'm misreading it but it did seem from the presentation and also your remarks though that you do have some bigger aspirations. Is that fair? And if so, would that be utilization, things more along the lines of what you do in your non-wind segments? Or would that be potentially a related acquisition something along those lines?

We've got the ability to serve that market out of Industrial Solutions in a growing way, Eric. But I do think if we're going to be meaningful in participant in solar, it could come through an acquisition over the next several years.

Got it. But that's not -- it doesn't sound like that -- it does sound like you have bigger aspirations but not necessarily near term. Right now, it would be the existing business and growth through Industrial Solutions.

That's correct. Organic growth through Industrial Solutions, that's correct.

Yes. Okay, that's helpful. And then a lot of talk here -- well, certainly good to hear that some of the wind growth that it's not all IRA-related and that likely is to come. But I'm just curious, has there been any change just kind of OEM stance in offshore related to the IRA? I know that, that's a little bit longer term but OEMs are often thinking longer term?

We haven't seen any meaningful change. And in fact, we are seeing some developers renegotiate some of the PPAs with regard to offshore because of their increasing costs. So the interest is still there with our OEM customers and the developers we're talking to but it continues to push to the right, primarily because of permitting and interest rates and inflationary costs.

Yes. And I did see the one project that got some press off the East Coast, I think it was this week but okay. And maybe last one for me. I just noticed in the presentation, talking about working capital and you noted a decline in project deposits. Is that -- is there anything specific to that? Is that timing? Any color there would be helpful for me.

Yes. Thank you, Eric. I think it's just more due to the mix of customers that we're currently working with. So that tends to ebb and flow depending on who we're working with at the time. So -- and really, that's all that's related to.

And our next question comes from the line of Justin Clare with ROTH Capital Partners.

So I guess, first off here, just in Q4, it looks like you're guiding to a quarter-over-quarter decline in adjusted EBITDA despite the strong order flow in Q3. So I was wondering if you could just talk through what might drive the decline quarter-over-quarter that you're anticipating here? Is it lower sales? Or are you seeing margin compression? And then from Q4, as we look into 2023, how should we think about how things trend?

Yes, I'll take that question, Justin. That is directly result for -- from some really competitive tower orders we had to take to maintain our plant utilization, our Abilene facility. And that particular order has us going through Q4 into Q1.

Okay, got it. So after Q1, that order rolls off and we could see an uptick in margins beyond that point in time?

Yes, most definitely.

Okay. Okay, great. And then, just with the increase in the backlog for Heavy Fabrications that we've seen. I was wondering if you could just talk about how much of your capacity is booked for 2023? And you mentioned 2024, have you booked anything for 2024 at this point in time? Because it seems like it would be quite early but just wanted to see if your customers are looking really that far out in time now.

Yes. From a wind standpoint, if you're speaking to wind specifically, then no, we've not booked into 2024 any wind orders but there were discussions into 2024 with regard to wind. With regard to Gearing, we are booking into 2024.

Okay, got it. And then, I wanted to better understand the manufacturing tax credit here. Could you share what you're expecting for the value of that credit per tower here potentially? I know it's partly determined -- yes. Well, I'll let you go ahead.

Yes, it is -- we're still kind of figuring it out and we're waiting for the IRS guidance which we expect to come out in the next several months. We hope sooner rather than later. But the section you're referring to is called 45X and that calls for specific refundable credits for the domestic manufacturer of clean tech components, blades, nacelles and towers are specifically called out. And for towers, it's a $0.03 per watt credit. So, if you think about -- let's say there's a 3-megawatt turbine and we produce the tower underneath that 3-megawatt turbine, it's like 3 million watts in a 3-megawatt turbine. So that could be, quick math, about $90,000 credit for that tower.

Right. Okay. And then, I believe that kicks in at the beginning of 2023. So, just wondering...

That's correct.

How should we expect this to kind of flow through your financials? Or how you monetize this? Like will you get cash payments from the U.S. government on a quarterly basis? Or how should we think about that part?

Yes. Thanks, Justin. So what we know is that we will be able to monetize them. You don't necessarily have to be a taxpayer. It's for the first 5 years, for the statute, you could apply for a tax refund using the direct payment method. So we know for at least the first 5 years, we'll be able to get that. The timing and the transferability is really -- that's what we're waiting for. That's what's subject to IRS guidance. But what we do know is that it's transferable and that we will be able to monetize it.

Okay, great. And then, just one more for me. Considering the value of the credit here, has there been any change to your customer contracts, whether it's the structure or any meaningful change to the pricing? Is this being considered in those contracts? So just any update there would be helpful.

I think we're all discussing how that might occur in the future but it really is considered all in the future, Justin, nothing with any contracts that we have that would be in any way impacted with our backlog. The market is all trying to figure out what this means because the OEMs get some directly. They produce the nacelles, as you know, then there's the whole blade incentive and the power incentive. And then of course, the PTC is a great demand pool for the market. So we're all kind of figuring out what it means. But there's no doubt it's certainly what we've been waiting for as an industry. It really is a positive catalyst for this industry and we're excited about it.

There are no further questions at this time. And I would like to turn the floor back over to Eric for any closing comments.

Well, thank you, everyone. We appreciate your interest and look forward to coming back to you after our fourth quarter results. Thank you.

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