Broadwind Inc (BWEN) 2010 Q1 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 Quarter One 2010 Broadwind Energy 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 John Segvich, Director of Investor Communications for Broadwind Energy.

Good morning, and welcome to Broadwind Energy's first quarter 2010 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 measure.

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 10-Q 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, like last quarter, I would like to address the state of the overall wind market in the United States. This month, the WEA reported that the US wind energy industry installed 539 megawatts of new capacity in the first quarter of this year.

This total is the lowest level of commissioning since the first quarter of 2007. When we contract this total with the 4,000 megawatt commissioned in the fourth quarter of 2009, it highlights the challenges that face our industry at the start of this year. Industry analysts' projections have been revised down and are quite divergent ranging from just over 4,000 megawatts up to 11,000.

We have adjusted Broadwind's expectations for 2010 down to an anticipated level in the 6,000 to 8,000 megawatt range. These projected installations are still anticipated to be heavily back-end loaded. Despite this market uncertainty, there are two significant positive aspects that I would like to point out.

First, the low level of installation is the lag effect of the broad economic slowdown that began to impact out industry in late 2008. The hiatus in new wind development did not subside until the late summer of 2009. This is when financing began again to become available thanks in part to the federal stimulus money.

The effects of these new investment decisions have just now started to trickle down to the wind energy supply chain. Also encouraging is the large buildup of component inventory seems to have been depleted. Therefore, this year's installations will require new component manufacturing.

With the anticipated rebound in the US wind market now starting to materialize, we are focused on increasing capacity utilization in our manufacturing plants. This is critical for Broadwind to realize the value of the significant capital investment we've already made.

We entered this year with critically low capacity utilization rates due to the back-end loaded purchase commitment from our key customers. However, our volumes are now building and we have called back or rehired an additional 25% of our workforce since January 1. The first quarter of 2010 represented a low point and we anticipate sequential growth in our quarterly sales as the year progresses.

With the completion of our common stock offering in January, we raised about $54 million in proceeds to repay a significant portion of our debt, fund general operating needs and to finance key capital investments to help us grow our revenues and become profitable.

To this end, we completed construction of our third wind tower manufacturing facility located in South Dakota. When it is fully operational, our three plants will offer the industry more than 1,500 megawatts of annual tower capacity and in heart of a wind-rich market.

At the same time, we have commenced our Texas-based projects to create a megawatt gearbox refurbishment center. This is part of our strategy to invest in new equipment that will support the expansion of our precision repair and engineering capabilities. We are very excited about this investment, which will enable Broadwind to combine its unique gearing capabilities with our technical service talent to support the growing number of gearboxes coming off warranty.

A large portion of the approximately 35,000 megawatts installed base of wind turbines in the United States has or will shortly come on the warranty, creating a growing need for megawatt gearbox refurbishment. We expect these investments to come online by the end of this year. This will be the independent drive train refurbishing center and gearbox test stand capable of performing full load testing of megawatt class equipment. Since our announcement of this investment earlier this year, we have seen positive feedback from both OEM and wind farm owners.

Now, I would like to discuss the market effect on Broadwind in the first quarter of 2010. As you saw in this morning's news release our results were, again, weak as expected. We reported revenues of $22.2 million and EBITDA loss of $8.2 million. This resulted in a loss of $0.14 per share. Revenues were lower in all segments of our business.

In our Product segment, this was due to reduced purchasing under the Company's key framework agreements. Our service revenues were also lower due to the reduced wind farm installations and delayed maintenance projects.

Next, I would like to offer some insight into what is currently underway in each of business segments. In our Towers segment, we have made a couple of important tower deals during the first quarter. While neither contract was materially large, they did represent strategic wins for Broadwind. One of these contracts, in fact, represents the first US tower purchase for a specific Asian turbine manufacturer.

Client utilization rates at our tower facilities are anticipated to increase in the remaining quarters based on planned delivery schedule. I would like to mention that we know of no significant frame agreement for US Towers that has been awarded during the first quarter despite significant RFQs from the major turbine OEMs.

Next in our Gearing segment, we have seen schedule increases from our wind customers during the quarter, and have also seen new business in both the Oil Field Equipment as well as Natural Gas Production segment.

In our Technical Engineering and Services segment, we were heavily affected by the downturn in construction of wind farms for the first quarter which in turn diverted OEM technicians into maintenance functions normally served by third party providers like us. We continue to work at building out our precision repair and engineering plan since they are less susceptible to this issue. We have recently seen an increase of the number of our technicians returning to the wind site indicating a positive resumption of activity.

Finally, our logistics subsidiary has (inaudible) a significant transport order and will be at full strength by the end of this month. Quoting activity for logistics remain strong for projects throughout the remainder of 2010.

With that, I will turn the call over to Stephanie who will comment further on Q1 results and discuss our financials by business segment.

Thanks, Cam, and good morning. I will start with some comments on our orders and backlogs, then summarize the Q1 financial site segment including the revenue outlook for our businesses. I'll also touch on our cash flow and liquidity position.

As Cam outlined, despite closing no large framework agreements this quarter, our backlog was relatively unchanged declining $3 million to $244 million. We booked two strategic spot orders for towers, saw some increased purchase requirements from our key gearing customers, and logged in some additional industrial business.

Also, we booked a $4 million turnkey logistics order which has started our Badger trucks up and running this month following a very quiet Q1. We look forward to reporting growth in our backlog as the year progresses and key new contracts are awarded.

Now, I'll provide some details on our segments. First quarter tower revenues totaled $12 million down sharply from $20 million a year ago. However, this fell only $1 million below our plan for the quarter due to problems with tower completions in March because of a quality issue with one of our suppliers.

We haven't solved the quality issue, for which our supplier is taking full responsibility, and are increasing our throughput level as planned this quarter. We called back a number of employees at both plants, and we are planning to be at full staffing levels in Manitowoc, Wisconsin by July 1 to fulfill a strong second half order book.

Based on existing backlog and contracts under negotiation, we expect revenues to increase with each quarter this year. The operating loss for the quarter was $1.3 million, a sequential improvement from the fourth quarter when we had higher revenues, but took significant inventory and intangible write-offs.

Our forward view of the Tower business is broadly unchanged from our comments following year-end, but is probably moved out a quarter. The second quarter will improve from Q1 with momentum growing in the back half of the year.

Reflecting the less robust industry outlook for 2010 installations that Cam discussed, we have seen delays in awarding multiyear contract volumes that were under negotiation just two months ago. Consequently, our backlog will likely contain a larger mix of smaller spot orders.

We now expect tower revenue to be down 10% or more for the full year, but with higher operating earnings and EBITDA, due to improved performance and the absence of some of the one-time items that impacted us in 2009. We continue to expect a strong 2011.

Gearing revenues totaled $7.7 million in the first quarter, down significantly from $23 million in the prior year. Following our extended holiday shutdown, we had expected and forecast the sharp reduction. However, reported revenue fell a further $3 million below our plan due to production problems which caused the delayed shipments. These problems are largely behind us, and we are off to a good start in the second quarter.

Our new Brad Foote President, Dan Schueller, joined us about a month ago and brings strong operational expertise and leadership skills. We believe he will successfully establish a more consistent production cadence, which will enable this plant to improve reliability and profitability.

We recorded an operating loss of $5.1 million, about $1.3 million worse than the prior year on significantly lower volume. A more appropriate comparison is EBITDA which was down about $2 million -- about $3 million from the 2009 first quarter. Q1 should be a low point for Brad Foote in terms of both revenue and profitability, and we are confident of significant improvement in the balance of the year.

Both of our Services businesses had very weak first quarters in line with the low megawatt installation levels reported by WEA of about 500 megawatts, which is only 15% of the level reported for the first quarter a year ago.

As we discussed at year end, Paul Seppanen who leads our Tech and Precision Engineering business, is focused on shifting his business model away from the historically heavy focus on technical assistance in support of new wind farm installation and towards ongoing O&M contracts and precision repair and engineering services to operational wind farms.

This should help the business transition to a more consistent quarterly revenue model. We expect to make some key announcements in this business in the next couple of months. In the meantime, Q2 will improve slightly but remain weak and we expect the second half revenue and profitability to be significantly improved.

However, as I said last quarter, we are unlikely to make up for the weak first half and are projecting a strong finish but a down year for this business unit. As Cam mentioned, we expect our megawatt Gearbox Rebuilding business to come on stream later in the year which should add a nice layer of additional revenue and profitability as 2011 progresses.

Our Logistics business recorded revenue of $500,000 and a $1.7 million operating loss, in line with our expectation because we did almost no wind hauling in the quarter. Based on the significant new contracts, our second quarter revenue should be about $4 million and the balance of the year should show strength with an overall up year revenue and profit forecast for the business.

With all four businesses moving into higher gear this quarter, we are forecasting Q2 revenues to exceed $35 million, with further sequential increases in the third and fourth quarter. Let me comment briefly on our cash flow and balance sheet status, we had negative operational cash flow of $11 million in the quarter, as we funded our operating loss and rebuilt our operational working capital.

At quarter end, operating working capital comprised of customer receivables and inventories, net of payables and customer advances totaled $10.4 million, about 12% of annualized sales. We believe this is about the right working capital percent for the Company, and expect the balance to increase with sales between now and year end to about $20 million.

At quarter end, our outstanding debt including capital leases was about $19 million at an average interest cost of 7.5% and we had cash on hand of $26 million. We believe our cash balances are sufficient at present, but are in discussions to add a credit line to support working capital that will be required if and when we land one or more new framework agreements later in the year.

That concludes our prepared remarks, we'd now like to take your questions and we will turn it over to the operator to open the line.

(Operator Instructions)

Our first question is from the line of Chris Blansett from JP Morgan.

Thank you. Cam, I have a question related to a couple of big picture themes out there, one is obviously we have had a pretty weak cyclical trough here for the wind industry but at the same time, we are coming out of a major inventory correction.

So when you think about the magnitude of these two forces, how does this imply -- how does this affect your outlook? Because obviously, even though we're going to -- we're now expected to have a down year versus next year -- just put into context the magnitude that the inventory correction went through and how you see your steady-state -- you know, the outlook going forward relative to that.

Good morning, Chris. When you look at the lag time, for instance, gears, we talked last quarter about it -- the gear production started about nine months ahead of the cycle. We finished up 2009 and it looked like a strong market but we were already seeing a correction.

We're now seeing just the opposite, it was a weak first quarter, but our gear customers are now expediting increases in our serial production. And since we are just in time to their factories, these parts are going directly into the assembly lines.

And if you take the same thing on our towers side, it's very encouraging to us that our tower customers are probing us to have us document our maximum capacity which bodes very well going into 2011. And in fact, right now, we are negotiating on a good sized spot order for one of our customers that is outside the frame agreement. So, there are some very positive outlooks for growth as we go forward.

Another question I had is obviously on the gearing side, you have two major customers, how do you contrast the -- the past say, six to 12 months for those versus the four or 12 months? Because I believe one of them, I don't want to have you getting to specific customers, wasn't probably not shipping a lot of equipment and now that they have a big capital infusion, that may change their outlook.

I'd say both customers are very similar in their increases and their push for product so I think it's an overall trend in the marketplace.

All right, and then the last question for me is -- you kind of touched on this a little earlier, but the inventory levels of gears and towers to your customer sites -- are we depleted on both sides? Is gearing lower than towers -- how do you view that versus say six months ago?

On the tower side, we are more diverse in our customer base so really the inventory level depends on the customer and the location. We do have some inventory, for instance, in Texas that's now being moved down site at Texas to a different project. So, we are seeing the tower inventory decrease as the projects come on line finally.

And then on the gearing side, is it simply -- just to go along with your comments that now, there is almost expediting going on to get your gears into turbines that are being built on the floor?

Yes, for our customers, the inventory is fully depleted.

Okay. Thank you, I appreciate it.

Okay.

Your next question is from the line of Sanjay Shrestha from Lazard Capital.

Okay, thank you. A couple of quick questions, guys. First off, given the benefit you guys have being sort of vertically integrated I guess in the wind market, can you go into some more detail as to how should we think about the growth of your O&M and the service business and what are you guys sort of doing right now?

And I think, Stephanie, you had a comment in your prepared remarks that we might hear something incremental here. Can you guys sort of paint a path for us as to how should we really see the progression of that business?

Well, as you know and as we've talked about, we got a precision repair and engineering is what we call it and with that initiative, we continue to build technology driven projects and our push is to elevate our business above the routine maintenance issues that tend to be cost-plus mentality. And we want to get into a more asset based model to do the overhauls -- we've done blade projects, we are pushing very hard to get in to more large blade refurbishment projects and of course, the gearbox refurbishment is a very big initiative and then we expect with those that we'll draw in the secondary equipment --

Okay.

It would be like the pitch bearings and the drives for those hydraulic systems so it will pull through the smaller complex items also.

I think I would just add to that, at the end of the day, we want our EMS business to be levered to the installed base of wind turbine --

Exactly.

Our Products business are so leveraged to the incremental installation.

It's kind creating a bit of a natural hedge, if you would, in some sense. Right? Or it's a big cyclicality. Okay, great.

One quick question then, guys. So when you talk about sort of the more spot volume, which given the low levels of inventory certainly should help you in the second half of this year but again, I kind of want to touch on it one more time. So given you guys are arguably a leading indicator of uptick in the market -- so can you maybe talk again in some more detail as to why -- is there a level of comfort better or worse versus three or six months ago in terms of '11 in fact being a pretty nice uptick in the North American wind market?

Well, it's definitely better and we are much more optimistic and you will see as we go through the second quarter, the sequential build is based on real deliverables that are now scheduled out. If you went back after the financial meltdown at the end of 2008, it was six months before we saw any new project developments announced.

Okay.

And it takes time to get through to us so we are finally through our trough and seeing those come to realization.

Okay. Okay, that is very helpful. Thank you, guys.

Thanks.

Our next question is from the line of Angie Storozynski from Macquarie Capital.

Talking about the additional employment at your facility for the 25% (inaudible) is it driven by your -- your expectations about the future, or is it driven by the orders that you have in place?

Angie, I'm sorry we have a technical problem, we weren't able to hear your question.

Could you repeat?

Can you hear me now?

Yes.

Yes.

Okay. You mentioned that you are raising your employment numbers by about 25% and I was just wondering is this because you have bullish expectations regarding the second half and the orders that will come, or is it already driven by orders that are in place?

Angie, a lot of the people being brought back are production workers and so -- absolutely, they are brought back, you know, as we need to schedule the hours and the product flow. In addition, we are calling back -- we have had some EMS technicians who have been on the bench and we are starting to call those back and deploy them as we are getting increased orders from our customers. So, it's broad based.

All right. Now, the weakness in the first quarter numbers, do you feel that the weather had any impact for instance, for the lack of (inaudible) delayed services on maintenance for a number a wind farms?

Well, we do have -- on the service side, it is a bit cyclical. In the Northern states, you don't do a lot of installations. But it was more driven -- I believe there was a large rush in the fourth quarter to commission turbines, so you saw that 4,000 number that I think surprised the industry, and then that pulled units out of the first quarter so you had a combined effect there.

Stuff that you are seeing or expecting in the second half of this year, do you think it has something to do with those tax benefits potentially in the environment for wind farms?

As we go forward, right now, the way it's set up, the fourth quarter this year should be a large rush of turbines, but it's a two-edge sword because the government is talking about extending those which would spread the load a little bit.

So we'll have to wait and see what the government does with the conversion from the cash back to the credits at the end of this year.

I think there's also probably still some uncertainty about what constitutes the start-up of a project. I think there is some ambiguity about how that is being defined whether it could be something as simple as placing an order, or how far along the production process the developer needs to be.

I see, I know you mentioned that so far, very few of our projects have been rewarded for -- I think you mentioned towers. But in any other -- for instance, for the gearbox or services, do you see any pricing pressure from both competitors and also from your main customers?

Yes, I think there is pricing pressure that -- the trick for a supplier like us is to try and get the right balance between long-term commitments which sometimes, you have to give up a few margin points versus spot orders which may or may not be better kind of depending on the location and the urgency of the need of the purchaser.

But, I think, in balance, in a weak market like this, there is some pricing pressure for us. The positive thing is that we do have a reasonable base load of contracts that were negotiated in a different market.

Okay. Any other questions?

(Operator Instructions)

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

Hey. Thanks, guys. First, just a question for Stephanie. You mentioned guidance for Q2, $35 million plus, can you give us an approximate breakdown between the product side and the services side?

Let's see -- yes, our tech and logistics will be up a little bit but not very significantly, they're going to be much stronger in the second half, so less than $1 million increase. Our Logistics business on the other hand, because they're starting to haul aggressively on this new order, they should be $3 million to $4 million and then the balance would be on our product side.

Traditionally, we've been about 80/20 products and that shouldn't be far off.

Okay, that's helpful. And then the second thing, you tried to get into the European market where it seems like things are evolving better this year than in the states, any progress that you can report on that front?

We have had some progress on the gears side and the thesis here is that we get qualified in Europe and then as the gearbox manufacturers move to the US to follow the turbine manufacturers, we are already established.

So it will be interesting for us to watch as the exchange rate has changed pretty significantly in the past few months to see how robust our sales to Europe will be, but the real underlying motivation for them is to pre-qualify us so when they move here, they have a source of supply.

On a more tactical level, I think we will have our European sales office opened up during this quarter.

So would you expect any revenue from Europe in the second half?

If we do it's probably a prototype type volume of revenue, so small numbers, because it would be gearing and the lead time on gearing is pretty long.

That makes sense. And then the last question for me, I know it's obviously a fairly meaningless market just in terms of size, but is the ramp up in Canada this year following roughly the same progression as the US?

Yes. You know, our president of technology serves on the CanWEA board up there so we have a pretty good view and I say, very similar to the US.

Thanks very much, guys.

Okay, thank you. To conclude our call, I'd like to finish with a few comments. First, in view of the low revenue, we have continued to focus on managing down our fixed cost and streamlining our business processes. And secondly, we are directing our resources to the areas of the business that hold the most promise to drive long term stockholder value, and our megawatt gearbox refurbishment center is a prime example of this.

Thirdly, we have the assets in place and the liquidity to grow and we have the management team to execute on these opportunities. And finally, I'd like to leave you with the fact that we continue to prepare Broadwind for the expected upswing in wind turbine orders and installations.

So with that, thank you everyone and that concludes our call.

This conclude today's conference call, you may now disconnect.