Broadwind Inc (BWEN) 2009 Q4 法說會逐字稿

Good morning. My name is Angelia, and I will be your conference operator today. At this time, I would like to welcome everyone to the Broadwind Fourth Quarter 2009 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

(Operator Instructions)

Thank you. I would now like to turn the call over to Mr. John Segvich, Director of Investor Communications.

Good morning, and welcome to Broadwind Energy's first quarterly earnings conference call. Joining me today are our CEO, Cam Drecoll, and our CFO, Stephanie Kushner. Before we start, I would like to caution you that this call will include some forward-looking statements regarding our plans and market outlook, and also will reference some non-GAAP financial measures.

Actual results may differ materially from these forward-looking statements. Please refer to our SEC filings, and consider the incorporated risks and uncertainties disclosed there, including our Form 8-K, filed with the SEC today, and the attached news release. We assume no obligation to update any forward-looking statements or information. With that, I will turn the call over to Cam.

Thanks, John. And good morning, everyone. First, I would like to address the overall wind market. 2009 ended stronger than expected with nearly 10 gigawatts of new wind power commissioned in the US. The year ended was a flurry of commissioning that resulted in four gigawatts added in the fourth quarter alone. This shows that the US continues to add the world's largest installed base of wind energy.

Also of particular note is that wind accounted for more than 40% of the new power installed capacity in this country in 2009. These (inaudible) contributed to the growing number of turbine manufacturers that have announced their move to establish turbine assembly plants in the US. This is great news for Broadwind as a supplier of critical components and services to the industry.

However, I do need to point out that despite the record number of turbines commissioned, we need to temper our expectations with the fact that many of these projects were initiated in 2008. As we go into 2010, only 2.8 gigawatts of installations were under construction versus four gigawatts at the start of 2009. This foldout in development stemmed from the financing challenges caused by the international banking crisis.

As we watched the progression of wind development in 2009, we saw a sharp downturn in Q1 and Q2 caused by the lack of financing and the wait and see approach by developers in anticipation of the much publicized stimulus package for our industry. This government assistance did not reach the market until we were well into the third quarter of 2009. The funding did spur a significant number of announcements of wind farm developments at the end of Q3 and the end of Q4. Based on that activity and several business indicators, we continue to believe that the wind market will bottom out during the first half of 2010 and grow into 2011. And I will assure those indicators in a moment.

I would like to add that of particular note to us at Broadwind is that Texas remained the largest market in the US with 2.3 gigawatts added during 2009, bringing the total to 9.4. This is important to Broadwind since this is the site of our new state of the art structural power plant. It is also the location we selected to establish our recently announced gearbox refurbishment center. This gearbox center will be able to service up to 3 megawatt turbines in the heart of one of the largest megawatt wind markets in the world.

Now, I would like to discuss the market effects on Broadwind in the fourth quarter of 2009 and how the market rebound will impact our future performance. First, let's discuss the fourth quarter. As you saw in this morning's news release our results were weak, as we expected, with revenues of $34 million and an EBITDA loss of $4.5 million. This resulted in a loss per share of $0.11. This excludes the non-cash impairment charge that we are taking and that Stephanie will discuss in a moment.

The $0.11 loss is close to our 2008 result, but with about half the revenues. This is significant because it was a result of our aggressive cost management initiatives during 2009. These initiatives, along with the absence of amortization of a large portion of our intangibles, will position Broadwind well for the expected recovery in the wind market in the back half of 2010.

While our results may look inconsistent with the large amount of commissioning recorded in the fourth quarter, they are not when one looks at the production and installation cycle of wind turbines. I would like to spend a moment to explain the wind farm construction cycles and how it affects each of our segments.

Approximately 12 months prior to commissioning a wind farm, manufactured components for the turbine itself go into the production cycle. This includes the gearing that Broadwind produces for the main drive gearboxes that need to be assembled into the turbine itself. About six to nine months prior to commissioning, the fabrication of our structural powers begin. Next, three to four months prior our logistics efforts begin with the transportation of major components, including towers, nacelles, and blades

Upon delivery our technical service personnel, assist in the erection of the turbine. Therefore, our revenue stream going into the final commissioning in Q4 was distributed over the prior three quarters. So, as we watch the slowdown of development caused by the financial situation, we saw a staggered effect on our businesses.

It is that unique view into the market that we feel allows us to anticipate the market rebound. The good news out of all of that, we believe, most turbine inventory were used up in the marketplace during the latter half of 2009. Now, let's talk about our view on the market recovery.

During the last few months, we have seen extensive quoting activity in each of our segments. This activity gives us insight into when and where the market will change. To share these insights with you, I will go through each of our operations. In the wind gearing systems, we saw inventory reduction by our customers during Q4, followed by resumption of firm ship schedules for 2010. We have now seen increases in those ship schedules during the first quarter.

We have also seen opportunities in Europe for gearing supply that is driven by the gearbox manufacturers and patenting entry into the US. Their intent is to establish gearbox assembly centers following their turbine customers' move to the US. In that regard, we will shortly begin prototyping gearing for a major European gearbox manufacturer and expect to receive initial orders before the end of the year. While this may only result in a minor revenue in 2010 due to the long and arduous process of prototyping, it will support diversification and growth of our gearing systems for the future.

Next, in the structural towers segment we have been involved in extensive quoting activities for later in 2010 through 2011 for large multi megawatt towers. I should note that Broadwind is a market leader in these heavier, more complex powers to support the larger megawatt turbines that the industry is converting to. In fact, we are now completing what we believe are the first 100 metered towers built in the US. Additionally, we recently received an initial small order from a new Asian turbine customer. By the nature of this business, the quotes are large and therefore somewhat lumpy.

But it is important that we secure base flows for our two plants that are in operation, as well as our new plants in South Dakota that we just completed. This is lean plant that mirrors our Texas facility brought online in 2009. And to be clear, while I say it has been completed, we will not commission it until we have adequate firm orders in place to bring in manpower and the last of the equipment. Our logistics business has also been involved in extensive quoting and has begun receiving firm orders for 2010 commencing in late April. Our Management feels that the third quarter will now be fully loaded and is working forward from there.

Finally, our technical services are anticipating much needed activity during the third quarter as the major components are delivered to project sites. This shows their current dependence on the construction cycle. And we therefore do not expect year-over-year increase from construction activities. To dampen the impact of this cycle for Broadwind, we have begun to work on our megawatt refurbishment center. This will serve Broadwind well in many respects.

It will increase revenues in our precision repair and engineering offering of our service segment, as well as move our technicians into up-tower work for moving in and replacing the major components.

And, finally, the replacement gearing will help elevate the utilization in our gearing segment. We have already gained traction from the announced plants of this center and are in negotiations with three key players in the market. These enhanced gearbox and drive training refurbishment capabilities will differentiate our wind energy services and enable growth in this area that is independent of turbine installation.

Finally, I believe as we begin looking back at the first quarter of 2010 it will show that we passed through the trough in the wind market, and 2010 will grow sequentially throughout the year and into 2011. Fortunately, I can say that we are well-positioned for this expected growth due to our cost cutting initiatives, continued improvements in operation, and enhanced liquidity position.

Managed prudently, we had the liquidity in place to build the working capital to support this growth. With that, I will turn the call over to Stephanie, who will comment further on Q4 results and discuss financials by business segment.

Thanks, Cam, and good morning. I'm going to start with some comments on our backlog and fourth quarter impairment, then summarize Q4 financials by segment, including the revenue outlook for our businesses. I will also touch on our liquidity situation.

We ended the year with $247 million in backlog. As typical, nearly all of this was for our products businesses, powers and gearing, largely associated with our multi-year contracts. At present, very little of our backlog is associated with our services businesses since these orders are generally given on a PO by PO basis. Having said that, as we get our gearbox and drive train refurbishment businesses up and running later this year, we're likely to build a backlog for this product line.

The $247 million figure was down slightly from $260 million at the end of Q3. Of the total backlog, about $120 million will be delivered in 2010. Our 2010 revenues will come from a blend of this backlog, POs for our services business, and short-term or spot orders for towers and industrial gearing and weldments.

As 2010 unfolds, we expect to see our backlog grow, given the strength of the current market and the heaving quoting activity. However, that growth is likely to be somewhat erratic due to the size of some of the contracts we're bidding on, especially for our tower capacity. For example, the orders we are bidding on today range in size from a $3.5 million order for eight towers to an order of more than $100 million for hundreds of towers over multiple years.

I'd like to provide some more color regarding the large intangible impairment charge taken in the quarter. As we completed our annual test of recoverability of our intangible assets, we determined that a portion of these investments, mainly associated with the Brad Foote acquisition, were impaired. At the time of the acquisition, we had placed a significant share of the purchase price value against key wind customer contracts.

Coming out of the year when these same customers almost unilaterally reduced or postponed their purchases, we had to recognize that especially in a weak market the contract value in practice was not in line with the balance sheet valuation. This resulted in a charge of $56 million.

In addition, due to market conditions we revised our cash flow projections regarding the business, and increased the discount rate to reflect the risks inherent in what today is an underutilized and therefore unprofitable business. This drove a full impairment of the $24 million of good will on our balance sheet. We also took a $2 million charge associated with our intangible investment in R.B.A., which has been merged with [Caltech], and is now reported in our towers segment.

Combined, these write-downs resulted in a non-cash charge of $82 million. As a result of this charge, our annual intangible amortization will decline from $10.4 million in 2009 to $4.3 million in 2010, which will have a favorable earnings impact of about $0.06 per share.

As a result of the impairment charge, we recorded a Q4 loss of $92.6 million or $0.96 per share. Excluding this charge, the fourth quarter loss was $0.11 per share. When we compare this with the prior-year quarter, we have to also consider a small impairment charge taken in 2008 of about $2.4 million. If you strip out these two non-cash charges, the relevant EPS comparison is a $0.10 loss in 2008 against an $0.11 in 2009.

As Cam noted, since our sales revenue was well below the prior year this underscores the success and aggressive nature of our cost reduction activities in 2009, which we achieved despite the additional expenses associated with capacity expansions in some of our businesses.

Now, I'll provide details on our segments. Fourth quarter tower revenues totaled $17.2 million, half the $33.8 million from the prior year. The comparison is distorted because a large portion of the Q4 2009 towers were manufactured under a labor-only contract where the customer supplies and retains title to the steel. As many of you know, steel plate accounts for upwards of half the revenue on a winds tower. So, excluding steel greatly impacts both the recorded revenue and margins since we generally earn only a relatively modest handling charge on the value of the steel plates.

Quarter-to-quarter, there was only a 9% reduction in physical tower productions. Looked at another way, the activity in this segment corrected for the steel accounting treatment would have been about $9 million higher than the reported sales figure or about $26 million. Our overhead absorption was low, however, because a year ago we had only one plant, Manitowoc, Wisconsin, operating. And now we have two. The operating loss for the quarter totaled $1.9 million for a break-even, excluding the intangible impairment charge for R.B.A., which I already discussed.

During the quarter we wrote off about $2 million of inventory value as we cleared out inventories associated with a couple of large contracts. In view of this charge, we have revised some of our bills of material and improved our inventory management practices, including the addition of periodic cycle counting and more frequent physical inventory counts. So the year-to-year comparison was mainly impacted by lower volumes, higher fixed costs due to our expanded manufacturing footprint, and some one-time charges.

Looking forward, we expect our tower business revenues to continue weak in the first half of this year as volumes on our largest current tower framework agreement are concentrated in the back half of the year. We have seen a loosening up of the market, and are negotiating on a number of sizeable orders, some of which will likely impact us this year in a meaningful way. We will know within the next few months whether this will be an up year or a down revenue year for this segment. Every indication points to a strong 2011.

On to gearing, gearing revenues totaled $9.7 million in the fourth quarter, down sharply from $28 million in the prior year. Both years were anomalous in terms of our large key wind customers. In the latter part of 2008, our two large customers were aggressively building turbine inventory and taking every gear set that we could produce.

Shortly after year-end, they cut back their orders significantly in response to the financial crisis, which caused a hiatus in new wind farm investment decisions. This break in the order pattern backed up into the supply chain and slowed the deployment of turbine inventory and ultimately the need for components, such as our gear sets, which get installed in the nacelle of the turbine.

We estimate that the orders for gear sets occur approximately 12 months ahead of the date a new wind farm is commissioned. As Cam described, this long lead time takes into consideration the time required to procure gear steel, produce gear sets, assemble gear boxes, assemble nacelles, transport components to the site, erect and commission turbines.

So, gear sets ordered from us today, we believe, will be in operational wind turbines in early 2011. Our wind gearing customers are now gradually ramping up their demands for the course of the rest of the year. So, 2010 should be a year of revenue growth.

Regarding operating income, if you strip out the $80 million intangible impairment, our operating loss for this segment was $5 million, about the same as the prior year. So, both operating situations hurt our margins. In 2008, we were using heavy amount of outside resources and incurring significant additional inefficiencies to achieve aggressive volume growth. And in 2009, we were underutilized and, in fact, extended our holiday shutdown from one week to three, which also caused inefficiencies and low profitability.

Looking forward, we are making organizational changes to better level load to plant for our serial wind gearing productions, which we believe will gradually improve our product flow, costs, and margins.

Our technical and engineering services business reported disappointing revenues of $5.4 million, less than half the prior year of $12.7 million. To understand the dynamics at play, it is important to understand the difference between our tech service versus the precision repair and engineering business.

PRE, as we call it, is focused on complex activities like component rebuilds, serial defects corrections for blades, and activities that are linked to the installed base of wind turbines. This business does not have a cyclical pattern. And revenue is dependent on our ability to win specific jobs and the overall growth in the installed base of turbines and their timing in coming off of warranty.

For Broadwind, PRE accounted for only about one-third of our business in 2009. But this is an area where we are focused for growth, for example, through the investment in a multi megawatt test stand, which Cam already described. For Broadwind, our tech services business has been historically concentrated on new wind farm erections.

Demand for these services remained very strong in the first three quarters of 2009, but dropped off sharply as Q4 unfolded. Since erection generally occurs two to three months prior to commissioning a new wind farm, we believe this drop off in activity lines up with (inaudible) reported low year-end balance of wind farms and construction.

Having said that, we're focused on reducing our exposure to the somewhat erratic construction cycle and increasing the number of technicians deployed to run the operations and maintenance activities at existing wind farms. Between this and our planned increase in PRE activities, we should develop a more stable revenue and earnings pattern for this business.

The Q4 operating loss for this business of $1.2 million reflected the low activity level, particularly in the back half of the quarter. The business remains weak and will rebuild slowly during 2010. But our expectation is currently for a down year in terms of revenue.

The fourth quarter was also challenging for our logistics business, with revenue of $900,000. This is a business with a hauling capacity that can easily support $10 million a quarter of revenue. We believe hauling activities generally precede new wind farm commissioning by about two quarters. In the fourth quarter, there simply were almost no contracts out there. And those we were bidding on in October and November slipped out of the year.

In view of this extremely weak order book, we cut costs very aggressively but still incurred an operating loss of $2 million. Looking forward, quoting activity has been extremely high since late 2009. And beginning in Q2, we have firm orders in hand. After a weak first quarter, we expect to demonstrate consistent growth for the balance of 2010 and into 2011.

Let me spend a few minutes on our cash and liquidity. 2009 was a very difficult year. We entered the year facing unilateral curtailments of volumes from many of our large customers, but still had commitments in place to purchase approximately $12 million in capital. With hindsight, I believe we managed the situation as well as we could, deferring cash outlays as much as possible and accelerating collections when we could.

Our operating cash flow was about $2 million for the year due to a reduction in inventories and accounts receivable. We invested $11.8 million in new capital, much of this to progress the new power plant in South Dakota.

Following year end, our stock sale provided $53.9 million of much-needed capital. We used $19.1 million to pay off our outstanding subsidiary level bank lines, and will use the balance to fund our operations and provide liquidity as our working capital begins to build during 2010. On February 28, our outstanding debt, including capital leases, was about $19 million at an average interest cost of 7.4%. And we had cash on hand of $32 million.

This concludes our prepared remarks. We'd now like to take your questions. So, we will turn it over to the operator to open the lines.

(Operator Instructions). Our first question is from the line of Christopher Blansett with JP Morgan.

A quick question related to the momentum as you put these three segments together. I think the fourth quarter results were below most people's expectations. And tied to that, utilization rates in the fourth quarter, how we should expect those to rebound. There's a few moving parts there, and just the trajectory of the rebound you expect throughout the year? Thank you.

I believe the downturn in the fourth quarter that we didn't expect was as turbine manufacturers completed their projects they started to ramp down their personnel very quickly, which affected our service business. At the same time, we've already seen the bottom in the gearing. And we see our firm ship logs increasing on the gearing side. As we say, this is a staggered effect on us. So, as we look at utilization we start out the first two quarters rather low on utilization.

And we believe that with the quoting activity we see, we're most likely to fill our tower capacity soonest, and our transport, also. We'd look a full order book by summer. The gearing, we have much more capacity than the market can take right now. So, that will take more time.

Just as a quick follow-up, I guess I'm looking for the momentum of your revenue stream going forward. You're obviously pretty confident that Q1 is going to be the bottom. As we see things pick up in Q2 and then farther out, do you expect a fairly linear growth in the outlook, I mean, all those different segments are coming online? Or do you still expect this to be relatively lumpy going for the next few quarters?

Hi, Chris. It's Stephanie. So, we expect to see quite a significant improvement in Q2 versus Q1. Probably the biggest driver there is we expect to have our logistics fleet starting to be utilized pretty well for a contract that we have in place. And also our gearing customers are increasing their purchases. Q3 and Q4 will both, again, be up pretty significantly from Q2. And that's really across all of our businesses.

Thank you. I'll come back on the queue later. I appreciate it.

Sure.

Our next question is from the line of Pavel Molchanov with Raymond James.

All right. Thanks for taking my question. First, your guidance for a sequential decline in Q1, can you help us get a sense of just magnitude? Are we talking 5%, 10%?

Actually, it's probably the services business are going to be a weaker [gat]. We're looking overall in Q1 at revenue numbers that could be $7 million to $9 million lower than Q4.

Okay. And the sequential improvement in the second half of the year versus Q2, is it going to be as back-end loaded as you would expect installations to be? Or, in other words, how should we think about timing relative to the pace of the overall wind market?

I think our Q2 will probably still be below last year, but will be up nicely from the first quarter. And then we would expect to have good positive comparisons versus the prior year in Q3 and Q4.

Understood. And, last question, given the current underutilization as it stands are you considering delaying the startup of Brandon?

Yes. We did go ahead and finish the factory floor, so that's complete. And we have all of the equipment basically being stored with final payments due. I think we owe about $3 million to $5 million on that equipment. And we will not bring that equipment or being staffing until we have firm orders.

Understood. Thanks very much.

I would just add to that there are a couple of significant contracts that we are bidding on that would support opening up that plant at the back -- toward the back of this year.

(Operator Instructions). Our next question is from the line of Angie Storozynski with Macquarie.

Thank you. Two questions. One, do you think that the bidding activity that you're seeing has to do with the potential expiration of cash grants for wind farms by the end of this year?

Some of the bidding relates more to the two major players in the industry, which would be GE and Siemens, who have announced large projects that they're using their balance sheet to support. So, I'd say it's a little bit independent. And I would suspect that UTC, now that their into Clipper, would also support their own developments.

Okay. And any update about the increasing local procurement of components for wind turbines, and if you're hearing of maybe new entrants into the wind turbine manufacturing and assembly in the US and how that would help you actually grow your business?

Well, definitely the "Buy American" that we're hearing helps us, being a domestic supplier. But the wind turbine market is truly global in nature. And we've created this business model feeling that we could compete with anyone in the world as long as the playing field is level, of course. You have those issues.

So, we feel very good about our position. And it just continues the shift to local manufacturing that we've seen not only in this market but in local markets around the world. The components are so large, it's very difficult to transport them and expensive. So, when all costs are taken into account it's natural that these components will be bought in a local market.

Okay. And do you have any indications, for instance, that some of your orders and some of the bidding that is happening right now is any way contingent on the level of conventional power prices in the US? Or do you think that this is just more to meet state renewable mandates and it's largely independent of, say, natural gas prices?

Well, PPAs continue, as you know, in the utilities. PPAs are difficult to come by right now. So, the projects we see going forward are somewhat independent of the energy costs. Next year continues to [invest] consistently year after year. But as oil and natural gas prices go up, it obviously helps our industry.

Okay. Thank you.

Thank you.

(Operator Instructions). Our next question is from the line of Chris Blansett from JP Morgan.

Hi, guys. And, Cam, I just wanted to ask you if you can provide any additional insight on the inventory levels that you see at your direct customer for them, towers, gears, and the like? And maybe if you can give some indications of how you think that's trended over, say, the last six months?

We have to look at two levels of inventory. We have to look at the turbine inventories because those an issue because when there are turbines in stock it tends to push out the components supply. So, on the turbine inventory side we think we've seen those fully depleted. And we feel that way because we see a direct correlation to our gears side. The gears we're shipping today into customers are going directly into gear boxes and shipping out on a lean, just-in-time basis. So, the gear inventory is down.

The tower inventory is a little bit more difficult because the industry has always built towers level-loaded. So, in the winter time when development is low, towers go into stock. And we do have towers in stock at both of our facilities. And their starting to move out now. And that's where we tie into the transportation. April is usually the good start-up time. And we have several projects that alleviate our tower inventory. But, to be clear, the customers own that inventory. But it will come out in the spring.

And then one other question I had is if you could talk about the revenue opportunity as these turbines are going to larger sizes. And I'm going to ask specifically about the new GE turbine design and, I guess, maybe some of your potential revenue opportunity turbine to turbine versus their 1.5 design. What's the upside on the tower-related revenue on a single turbine on the 2.5 versus 1.5 and also on the gear side? How do you look at that?

Let's start on the tower side. GE's first large announced project of 2.5 will start to be installed in the first quarter of 2011. I think that's up in Shepherds Flat in Oregon. And we are buying with everybody else for that. What it's done for us on the tower side is they had contracts for the 1.5 towers with the two largest supplier of wind towers. So, we could not enter into the 1.5. Going to the 2.5, it opens up the opportunity for us. And, of course, we've always been in the larger towers. So, we're quite good at those.

When we look to the gearing side, bear in mind that we sell our gearing systems into gearbox manufacturers. And there's yet to be a large production order for those 2.5 gear boxes. But we're now working through not only our traditional channel, but multiple gear box channels to participate into that.

So, what you're saying is on the tower side, you're going from no exposure to some. We'll have to determine what that is. And then on the gear box side or the gearing side, is it fair to say that you potentially could supply more than one gear box maker for that turbine design if you happen to win more than one contract?

We would deal through multiple gearbox sources. Yes. We're trying to expand our customer base.

Okay. And then that last question I had is related to the Brandon, South Dakota facility. The project that mentioned about GE is located, I believe, in either Oregon or Washington. I can't remember which. And your facility is in South Dakota. Is that close enough to make the economics of transport competitive with other tower production sites that might be closer? Or, kind-of give us the viewpoint on that and how you think that positions you for winning some of that business.

You know, Chris, for us to get into this level detail on a contract that we're currently competing on is a bit awkward. So, I think we'd rather let this one go. Okay?

All right. No problem. Thank you. I appreciate it.

There are no further questions at this time. I would now like to turn the call back over to Mr. Drecoll for any closing remarks.

Okay. Thank you. I would like to close with a few comments. First, I think Broadwind has weathered 2009 and the most difficult financial conditions we've seen in decades. Secondly, we have the assets in place and the liquidity now to grow. And we have the Management team to execute on the opportunities that we expect.

But, lastly, I believe that our Broadwind model is unique and will allow for both market share penetration, along with enjoying the anticipated growth later in this year. So, with that, thank you, everyone. And that concludes our call.

This concludes today's conference call. You may now disconnect.