Greetings, and welcome to Broadwind's First Quarter 2023 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. I would now like to turn the conference over to your host, Mr. Tom Ciccone. You may begin.

Good morning, and welcome to the Broadwind First Quarter 2023 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 the market opened today, detailing our first 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. I would like to inform you that Broadwind filed its definitive proxy statement and related proxy materials with the SEC in connection with the 2023 Annual Meeting of Stockholders and in connection therewith, its directors and certain of its executive officers are participants in the solicitation of proxies from our stockholders in connection with such annual meeting. Stockholders of Broadwind are strongly encouraged to read such proxy statement and all other related materials filed with the SEC carefully and in their entirety when they become available as they will contain important information about the 2023 Annual Meeting, including the identity of the participants in the solicitation and their direct or indirect address by security holdings or otherwise. At this time, we will make no further comment on the nominations made by WM Argyle Fund or any matters or discussions related to WM Argyle Fund or its nominations. 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. Our first quarter results demonstrate a strong start to the year as sustained demand across diverse end markets, improved margin realization and consistent operational execution contributed to significant year-over-year growth in profitability. The green shoots first evidenced as we exited last year continued into the first quarter. As indications of interest from OEM customers, together with continued stability across our diverse, non-wind markets, have contributed to improved visibility and optimism across our business in 2023 and into 2024. We've recently announced several significant new business winds, including the $175 million in new tower orders followed by a record $8 million order for our proprietary mobile Pressure Reducing Systems, or PRSs, and related accessories in April. These orders reflect positive business momentum within our legacy wind business, together with significant traction within new, higher-margin adjacent markets that leverage the unique intellectual property we are developing here at Broadwind. Importantly, this performance reflects meaningful progress on our strategic plan, which emphasizes profitable growth across a broader spectrum of energy transition and clean tech opportunities. As we further expand our product and service capabilities, we expect to drive improved asset utilization and unit economics consistent with our focus on driving improved margin realization through the cycle. We booked $40 million in orders in the first quarter, down about 25% from the prior year quarter as expected, given the pull forward of the large multi-year tower order we received in December 2022. The timing of these tower orders was partially offset by a more than 100% increase in our industrial fabrications orders, which include of our proprietary PRS product line. Entering the second quarter, we continue to operate on plan both at a commercial and an operational level. Commercially, we are staying disciplined on price…

Thank you, Eric. Turning to Slide 5 for an overview of our first quarter results. We had a strong first quarter performance with consolidated revenues of $48.9 million compared to $41.8 million in the prior year quarter. The 17% increase was primarily reflective of the sustained demand strength and strong operational execution across our diverse end markets. Each of our operating segments generated year-over-year growth in both revenues and operating income. In Q1, we recognized $4.1 million of EBITDA compared to breakeven EBITDA in the prior year first quarter. Our strong EBIT performance and improved margin realization is primarily attributable to the higher overall volume level and the benefits attributable to the advanced manufacturing production tax credits or AMP credits. We are, in this quarter, associated with our wind tower production. The AMP credits were introduced as part of the Inflation Reduction Act, which was enacted into law in 2022. The IRA provides for manufacturing tax credits associated with eligible wind and solar components. Manufacturers qualify for these credits based on the electricity output for each component produced and sold in the U.S. starting in 2023. It is also important to point out that we generated GAAP net income of $800,000 or $0.04 per diluted share in the first quarter. After adjusting for the $700,000 of proxy contest-related costs, we generated $1.5 million of net income or $0.07 per diluted share. Turning to Slide 6 for a discussion of our Heavy Fabrications segment. First quarter orders were comparatively limited at $20.2 million, a decrease from the prior year period and sequentially. This decrease is attributable to the timing of the large multiyear $175 million tower order that was received late in 2022. Based on the timing of this order and the resulting near-record backlog that we've carried since year-end, we…

Thanks, Tom. In the near to medium term, we continue to view the Inflation Reduction Act of 2022 as a significant positive catalyst for the wind sector, as it provides the long-term policy certainty long awaited by developers. We believe that the IRA, supported by rising commercial and industrial demand, will support ratable growth in new wind installations beginning in 2024. Even as we await final IRS guidance, we are seeing renewed confidence at our wind customers given expectations for a more stable industry growth over the next decade. The AMP credits included in the IRA create a new production credit for domestic manufacturers of the components relating to clean energy, including our wind tower products. As we look forward to the balance of 2023 and into the next year, we have increased visibility and a strengthened backlog in each of our operating segments as we build on our legacy in wind to expand into new adjacent clean tech markets such as clean fuels, solar and power and infrastructure. As mentioned earlier, in our Heavy Fabrication segment, we are adding coatings 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 for 2023 and beyond. The line of proprietary Pressure Reducing Systems introduced last year is progressing as per our strategy, and we're pleased with the favorable market response and order activity we've received for the new high flow model released this year. We've also introduced a rental option for these units in response to customer demand. Given our current capacity, we expect to generate approximately $20 million in annual incremental revenue from this product line by 2025 at attractive margins. In our Gearing segment, we are seeing success with our efforts…

[Operator Instructions]. Our first question comes from Eric Stine with Craig-Hallum.

Eric and Tom. So curious if you could talk a little bit about the large wind contracts, presumably the business that you did in Q1 is really business secured in what, mid-'22 or potentially in early '22. So I just want to confirm that, but then also just think about any more clarity as the year progresses on when you expect that large contract to start up? And when it does, is it still the view that it would be ratable through the end of 2024?

Yes. On orders against that particular larger order will be in producing in Q3 and they'll last all the way through the end of 2024. Ratably, to your point, yes.

Got it. And then you talked -- I guess in the past, you've guided into the forward quarter. And I know that you've talked about having better visibility, better than you've ever had. Just curious, any color you can provide on Q2 and maybe just linearity versus Q1? And then also, any chance you can talk about the mix of winds, since that's obviously going to dictate the credit that you would recognize in the quarter?

I think for Q2, we're going to see consistent with Q1, the mix, the mixture also be consistent. We were able to pull a little bit of towers into Q1. This robot, this coatings automation that we are putting in this year, we elected to put that in Q2 instead of Q1 so it pulled some orders into Q1. But I do expect it to be consistent with Q1.

Okay. With a little less wind, just to be clear.

Little less wind, yes.

Okay. All right. No, that's fair. I appreciate that. And then maybe just sticking with wind, it sounds like in your commentary, you're talking about '24 in terms of maybe an uptick in orders there. I mean, so does that kind of imply that for the Manitowoc facility that it's still early in the wind recovery? That that's kind of the time frame when you might expect some orders that would fill up that facility?

Yes, I would say we're -- I would call it the early innings. As I mentioned before in previous calls, the south has been harder than the north. And the north is starting to heat up, but it will take some time. So I think you're correct. In '24, we'll start seeing some orders consistent with the overall growth in installation expectations of the wind market.

Yes. No, understood. Great color, I guess. Maybe just last one for me. Just for Tom, on working capital. Given kind of what you're talking about in terms of free cash flow and $6 million of CapEx for the year implies that not only does it going to stay flattish or that you actually start to get a working capital benefit as the year progresses. So I mean, any color you can provide in terms of how that might hit throughout the year?

Yes. No, I think we've seen the significant increase in working capital that we projected kind of plateau now at the end of Q1, so I don't expect a lot of significant movement for the balance of the year. There may be some ebb and flows within the quarters, but I think it will be pretty stable throughout the balance of the year. I think the balance of our free cash flow will come from our earnings. So there might be some small benefit to working capital, but I think it's mostly on the cash that we'll generate.

Our next question is from Justin Clare with ROTH MKM.

So just to start off here on the manufacturing credits, it looks like you secured just over $3 million in the advanced manufacturing credits in Q1. I know we're still waiting on treasury guidance there, but I was wondering if you could just talk about how you might monetize the credits? Are you looking at transferring those credits near term? Or is it more likely that you would receive the cash in 2024? And then maybe if you could just talk more broadly about where you might need more clarity from the treasury on those manufacturing credits?

Yes. Thanks, Justin. So at this point, if we do nothing, we won't be able to monetize those into -- until 2024 when we file our year-end tax return for 2023. So we've talked to several people about the potential monetization of these credits. There's just an unwillingness to do anything until the IRS comes out with their guidance regarding this. We don't know what it's going to look like, what the transfer, there's some certificate that's issued, so everyone is kind of in a waiting game to see when that comes out. But this is a long-term credit, so the market is going to be patient and we'll be transferring -- we think this market will develop over time.

As far as the -- Yes, Justin, this is Eric. Add on. The clarity that we expect from the IRS guidance, I don't expect much change in what's specific to the component manufacturers. But there is this question about domestic content, from some labor contributions that I think overall could impact developers. And I think that's what is causing a bit of a pause.

Okay. Got it. Yes. So maybe you can speak to that a little bit more. We are waiting on domestic content and the manufacturing credits in terms of the guidance from treasury. Is that having a meaningful impact on your customers and developers? And are we seeing developers maybe put a pause on projects until there is more clarity?

Yes. I think the answer is a little of both. I mean the market is seeing increased activity as evidenced by some of the orders announced by us and by others. But I do believe there's still some hesitancy as we await the final guidance, Justin. There may be projects that are just kind of on the bubble, if you will, and this guidance might help justify a little bit more than others. So I think it's -- the answer is a little bit of both. We're definitely seeing some exuberance in the market, but there could be some pause, some waiting.

Got you. Okay. And then I know you've spoken a good amount about cash flow through the year and your working capital here. But just wanted to ask, is there a potential that you may need to build inventory as we move through the end of this year here in anticipation of pickup in early 2024? What kind of visibility do you have right now into potentially increasing utilization in the early part of the year in 2024? Or is it more likely that we see a greater ramp later in 2024 and into 2025?

I think the latter. I think we're not -- inventory will ebb and flow, again, our working capital will ebb and flow. But we just don't think it's going to be a significant factor for the balance of this year at least. That may be more of a factor towards the end of 2024, I would think.

Our next question is from Amit Dayal with H.C. Wainwright.

Good to see the execution on [indiscernible] So just on the credits topic, right? Are you expecting to accumulate these credits at a similar run rate that you saw in the first quarter for the remainder of the year?

I would say, yes, they're ratable. They do -- as a reminder, they're calculated based on the capacity factor of the turbines we're building for, but there is a range that we think we're going to be building within. So I think, yes. Given that range, it should be ratable for the rest of the year.

Amit, the only thing I would add to that is that some of the tower designs that we're producing, we won't know about right away. So they are subject to the megawatt rating of the tower that we're designing as well as whether they're 3 or 4-section towers. So there is some uncertainty going forward about -- regarding those.

Understood. Understood. That's fair. And then you guys came in a little bit stronger on the gross margin front relative to our expectations. I'm just wondering if there is room for further upside on the gross margins given the new product mix? Or is this the level at which you probably will be for the rest of the year?

Well, I think we saw a little bit of enhanced capacity utilization because we're able to pull orders in, production in to the -- into the quarter through good execution. But I think from a gross margin standpoint, it would be relatively stable for the rest of the year.

Okay. And then just last one for me on the $8 million PRS order, could you talk a little bit about what type of customers you cater to with this offering? And what the opportunity looks like for you?

Yes. Those units go into what we call the virtual pipeline, which is the process of taking fuel gas, natural gas, from its point of origin source, compressing it and then taking it to a point of use where it's -- where it would be not subject to pipeline service, and then decompressing on the other end. And that's -- and we support the equipment for the decompression or the pressure reduction at the end. So we are selling these things to purveyors of natural gas. They tend to be working -- they sell the gas to users of the gas at the point of use, and they use our equipment to do that.

We have reached the end of the question-and-answer session. I'd now like to turn the call back over to management for closing comments.

Yes. Thank you. We appreciate your interest in Broadwind. We're excited for the way, you're started, and we look forward to coming back to you after Q2. So give a report then. Thanks, everyone.

This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.