Broadwind Inc (BWEN) 2010 Q2 法說會逐字稿

Good morning. Welcome to the Broadwind Second Quarter Earnings Conference Call. I would now like to turn the call over to John Segvich. You may begin.

Good morning, and welcome to Broadwind Energy's Second Quarter 2010 Earnings Conference Call. Joining me today are Broadwind CEO, Cam Drecoll, and 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 new release. We assume no obligation to update any forward looking statements or information.

With that, I will turn the call over to Cam.

Thank you, John, and good morning, everyone. As you read in this morning's release, Broadwind's second quarter revenues of $36.6 million were up sharply over our first quarter results. However, when we compare these quarterly revenues to 2009, we show a year-over-year decrease of 30%. Q2 revenues show the sequential improvement in our businesses that we talked about in our last call. This improvement was shared by all our operating segments.

Now, we will shift to the overall wind market in the United States. AWEA recently reported that year-to-date additions to wind farm capacity was down 71% from last year and that first half installations were at very low 1.2 gigawatts. These wind turbine installation numbers are comparable to 2007 levels.

One significant positive note in the AWEA report did show that 5.7 gigawatts of wind is now under construction here in the US. For now, the broad wind industry recovery we anticipated is moving forward, but at a lower rate. Based on the current outlook, we do not anticipate positive year-over-year comparison in our revenue until the fourth quarter of this year and have reduced full-year guidance in accordance.

In general, the economic headwinds remain a challenge and specifically, in the alternative energy industry, continues to be impacted by a lack of meaningful legislation here in the US. As we have all seen recently, the federal government has failed to move forward on either an actionable, renewable energy standard or any carbon cap initiatives.

These important legislative initiatives are needed to stimulate and stabilize the long-term markets for the wind energy business here in the US. Based on this lower outlook in new turbine installs, we have continued our focus on five key initiatives; increased capacity utilization, stringent cost controls, diversification, continuous improvement in our operation, and the repositioning of our service model.

Now, I would like to share where we are in these programs. As we have stated in the past, it is essential that we increase capacity utilization in our manufacturing operations. We have made significant progress in the past quarter to fill our tower operations.

Our Wisconsin plant will approach full utilization beginning in the third quarter and will remain so through the first half of 2011. Also, our new Texas plant is operating at 50% capacity. We continue to hold our South Dakota capacity on the sidelines until a sustainable long-term agreement is in place.

The gearing operations have made less progress as we are running at about 25% of capacity. We are aggressively looking to other customers and markets to reach an acceptable operating level here.

Next, as you would expect, we continue to operate under very stringent cost management controls. We have targeted costs in both our operations as well as our administrative -- administration. An example is a corporate office cost, where we have seen a 20% reduction for the first half of 2010.

On diversification, we realize that customer concentrations will always be a challenge in our market due to the limited number of turbine OEMs. I'm happy to tell you that we continue to make progress here. Our towers plant have now completed production of towers for six different turbine OEMs, including a new Asian manufacturer, as well as delivering the tallest tower design in North America.

Additionally, while our gearing is currently (inaudible) only two wind OEMs, we are actively pursuing three additional wind customers, and we have now completed the prototyping phase for the Chinese supply for one of our existing customers and have received the first production order worth approximately $6 million.

We also have intensified efforts to supply gearing into oil and mining industries, which have been a past area of expertise. Our dependence on the new turbine installations will also be lessened with the repositioning of our service company into precision repair and engineering, which I will discuss in a moment.

The next initiative of continuous improvement in our operations is best highlighted by our power plants. We believe our new built-for-purpose power plants will become the most efficient in the industry. Several lean projects are underway to drive labor hours out of the manufacturing process to become first in class. This, combined with our turnkey delivery solution, will help us continue to gain market share.

Finally, we are continuing to work to position our service offering away from the new turbine installation cycle, which centers on selling technician hours, toward value-added services that we call precision repair and engineering, as we refer to it as PRE.

These services include repair and refurbishment of complex wind components such as control systems, gearboxes, turbine blades and full kilowatt-class turbines. PRE services seek to extend the lifetime of expensive components by identifying root causes of failures and carrying out engineering repair procedures.

Field PRE services include inspection of tower repairs and the component replacement. The PRE services performed at regional operation centers include refurbishment and testing of control systems, gearboxes, drive shafts, blades -- an entire kilowatt-class in itself.

In June, we announced the expansion of our wind turbine blade services capabilities. Our enhanced offering of blade services now include blade inspection, maintenance and repair services, including borescope inspection, erosion and crack prevention, and rapid in-air repairs that extend the life of wind blades, and provide cost of ownership advantages for our customers. We plan to continue to strengthen our service offerings here to tap into this promising segment and have seen increased order intake for this offering.

Progress also continues on our drive train refurbishment center based in Abilene, Texas. When the facility is on-line late this year, Broadwind will be the first independent supplier of wind energy products and services to offer enhanced multi-megawatt gearbox repair and refurbishment capabilities in North America, and expands our kilowatt refurbishment expertise.

Extensive renovations are currently underway in Broadwind's 300,000 square foot regional operations center in Abilene, where the new drive train refurbishment center will be co-located with the megawatt blade operation. We are pleased that the Abilene Development Council has announced plans to support our efforts with a $900,000 incentive package.

To summarize, the market is growing again, albeit at a slower pace than we would all like to see, and Broadwind continues to refine its business model to compete effectively, regardless of the number of turbines installed.

With that, I will turn the call over to Stephanie, who will comment further on our Q2 results and discuss our financials in detail by business segment.

Thanks, Cam, and good morning. I'll start with some comments about our orders and backlog and then summarize Q2 financials by segment. I'll conclude by addressing our cash flow and liquidity position.

During the quarter we booked new orders of $36 million, essentially the same as our revenue. This represents a 91% increase from the Q1 order rate. All four of our businesses saw significant increases from the first quarter. Notable in the new order intake were a couple of highlights, including $6 million for gear sets going into a Chinese turbine and some initial blade work orders for our EMS production site in Abilene, Texas.

One quarter ago we had expected to be reporting growth in our backlog at June 30th, but we have seen delays on the part of key turbine OEMs to sign new framework agreements given the relatively more uncertain legislative environment for wind in the US.

Additionally, because our backlog contains forecast 12 month purchases under our multiyear gearing framework agreements and the offtake rate of one of our gearing customers has decline, we have revised the backlog figure down to $221 million. Similarly, as noted in our press release, we've reduced our full year revenue outlook to $140 million to $160 million.

As Cam stated, our consolidated Q2 revenue was $36.6 million, up sharply from the first quarter and in line with our expectations. Gross profit was near breakeven, down from a year ago because of the relatively lower volumes and some pricing compression.

Importantly, this gross profit reduction was more than offset at the operating income level, where cost containment of SG&A and lower amortization expense drove a net improvement in the year-over-year operating loss of $1.3 million.

Our per-share loss of $0.13 included a $4.6 million charge to write off the goodwill booked in conjunction with the 2008 EMS acquisition. Although the future of this business remains encouraging, the weak performance during the past three quarters triggered impairment. This charge, of course, has no cash impact and will have no impact on future earnings.

Excluding this charge, the Q2 loss would have been $0.09, a marked improvement from the first quarter, but below prior year, which included a $5.1 million gain associated with the release of escrow funds from a prior year acquisition.

Excluding both the unfavorable goodwill impairment this year and the one time gain from the prior year, provides a more appropriate indication of the progress we are making in a weak market. By this measure, second quarter EPS would have improved by $0.02 from the prior year, despite a 30% revenue decline. This speaks to our efforts to improve manufacturing and cost control, given our relatively weak end markets.

Now, I'll talk about our segments. Every segment delivered higher revenues and improved performance versus the first quarter. Second quarter tower revenues totaled $16.5 million, up from $12 million in Q1. We continue to rebuild production momentum as our 2010 deliveries are skewed to the second half of the year. We have been recalling hourly workers at our Manitowoc, Wisconsin plant, which is scheduled to operate at full capacity from the beginning of next month and will run at that rate through at least the first half of next year.

The Abilene plant continues to run on one shift and its operating performance has improved under new plant leadership versus last year because of improved operational performance and despite 25% lower production volume, our operating loss narrowed. We expect our tower segment to return to profitability in the final two quarters of the year.

Our forward view for this business remains directionally unchanged. We expect full year shipments to trend up during the year and in megawatts to be flat with last year, just under 500 for 2010.

Reported full year revenue will be lower, down about 20% due to lower steel prices which are passed through, and a higher proportion of fabrication-only tower production, where we don't take title to the steel or include it in our reported revenues. We are still looking for year-over-year improvements in operating income and EBITDA.

Regarding gearing, Q2 revenues recovered to $14.3 million, nearly double the Q1 rate. The gearing leadership team is making progress son key workflow improvement and pricing initiative which are leading to smoother production flows and improved financial results, but there is still a significant challenge ahead to return this business to profitability.

Versus the prior year the operating loss improved to $2.8 million on 19% lower revenues. This reflects the $1.8 million reduction in amortization expense and, more importantly, better production performance. Additionally, in the quarter we took a $700,000 non-cash charge to write off a machinery deposit that is being released given the current production outlook.

Looking ahead, as I said, offtake levels from our key wind gearing customers have been volatile and overall the outlook for purchases has declined from a quarter ago. We now expect gearing revenues to be flat in the back half of the year. We will continue to focus on operational improvements and stringent cost management so as to improve financial performance in the second half of the year.

Our service businesses improved in Q2 from the prior quarter, but remained weak, reflecting the still-low level of new wind turbine installations reported by AWEA and summarized by Cam. On a positive note, for our tech and precision repair segment, business trended up over the quarter and June sales totaled $1.5 million, so our revenue run rate continues to improve.

As part of our strategy to widen our focus from new wind turbine installation, we are bidding on significant new wind farm O&M opportunities, have already seen benefits of the expansion of our blade services team and capabilities, and are having success with refurbishment and resale of kilowatt turbines for community wind applications.

The $6.5 million operating loss reported for the second quarter included the $4.6 million goodwill impairment charge and also reflected the low revenue run rate at the beginning of the quarter. Looking forward, our second half revenues should be at a $4 million to $5 million quarterly run rate and we should see sequential earnings improvement.

Second quarter revenue for logistics recovered to $3.1 million, up from $500,000 last quarter. By May, we had the majority of our trailers hauling on a key project. Unfortunately, we sustained an operating loss due to more competitive pricing and some weather and regulatory delays which made for less efficient hauls. We expect results for this business unit to improve in the back half of the year.

Turning to cash and liquidity, our operational cash flow remained negative in the quarter due to the $4 million EBITDA loss and further build of our working capital balances. At quarter end our operational working capital, including trade receivables, inventories, net of payables and customer advances, totaled $18 million or 12% of quarterly annualized sales.

As I said last quarter, we believe 12% is about the right level of working capital for our business mix. However, it will be variable month to month. At quarter end, outstanding debt, including capital leases was $18 million at an average interest cost of 7.7%. And we had cash and short term investments on hand of $13.3 million.

With the working capital build substantially behind us and positive second half EBITDA, we are projecting year-end cash balances to remain in the $10 million to $15 million range. Additionally, to further support liquidity needs, we expect to have a $10 million Broadwind level credit line in place by the end of the third quarter.

That concludes our prepared remarks. We'd now like to take your questions. We'll turn it over to the operator to open the lines.

(Operator Instructions)

Your first question comes from the line of Chris Lancet with JPMorgan.

Good morning. Cam, I wanted to dig a little more into your reduced outlook for the year and I wanted to see if you could provide a little bit of color on the primary reasons. Is it simply broad-based demand decline from your customers, or was there anything else out there, share-shift or anything like that? Inventory build already that's causing those issues or that decline in the outlook.

Morning, Chris. I think the backdrop of the overall wind market is what's driving our revenue outlook in the second half. We had thought we'd be looking at a 6 gigawatt to 8 gigawatt year and I think we'll fall toward the bottom end of that. So, our customers are tending to downgrade their turbine outputs.

As far as market share, we've actually done very well. On the tower side, we'll produce approximately the same megawatts of towers, and if you compare last year to this year, that would give us a substantial market share increase. And we see similar things in our gearing side; we'll actually be up a little bit on megawatts produced in a down market.

Okay. And then I guess, so following up with that line of thought, you think you're actually gaining share throughout the year because your current -- your revised revenue guidance does seem to have revenue down less than the overall wind market.

Correct. We're going to do very well in back half on towers. As you saw, we're actually adding headcount in the tower plants to keep up. And we still continue to work for opportunities to open that Brandon plant, but the other two plants will be -- the utilization will be quite good.

All right. One more quick question from me is, when you think about your order velocity here, looking forward, do you expect your backlog to actually start building again in the second half of the year?

Well, the larger incoming turbine manufacturers, Siemens will do very well, it appears, in the back half, but they're being very cautious on frame agreements.

Okay.

So the backlog may be flat, but will exit the year at a run rate back to the $200 million a year rate or near there.

Okay, thanks. I'll come back in the queue for some more questions. Thank you.

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

Thanks for taking my question. Could you please elaborate on your prior comments to service business, especially as it relates to some of the new initiatives which you're undertaking -- the blade repair business, the gearbox refurbishment business? And how should we think about the revenue contribution of these businesses in 2011? And, what are the typical sort of the sort of customers you're in negotiations with in this business?

I think we've talked about service a lot in the past, and you'll see us talking more about it. What we've seen in the past is a competition with the turbine OEMs. When the construction cycle's robust, they take the technicians into new installations, when it slows down they push them back into maintenance where we compete with them.

So, we've completely re-looked at the business and we're repositioning that. And when we look forward, we see the service model being a operation and a maintenance guarantee where you go in and guarantee the power producers availability or uptime. And we never felt like we were in a good position to do that because to do it you need to take on all the major components that have control of those.

So by being able to do the blades and gearboxes and later on, to a lesser extent, the generators, that puts us in a good position. So, we're negotiating O&M contracts where guarantees become more and more critical.

Got it. Thank you.

Your next question comes from the line of Angie Storozynski with Macquarie.

I want to talk about margins -- what's happening in different segments of your business from a margin perspective. We're seeing that wind is -- wind power is getting less and less competitive versus conventional power and to bridge the gap you simply have to have lower prices of wind turbines. So I'm wondering, are you feeling pressure on margins or is -- or who is accepting lower margins? Is that OEM companies, or you guys?

Well, Angie, we are feeling more compressed margins and I think it -- began with the meltdown in 2008. Electric usage decreased for about a year and a half and that was definitely a structural problem for wind. Since the power producers had excess capacity, they didn't have the need to invest in new capacity, so put them in a great position to negotiate the upfront capital costs with wind.

That's begun to change, thankfully, and I think year-to-date we're seeing about a 4% increase in electric usage. And then when you start to take that down the stream, of course coal plants have the inherent risk of what's going to happen over the life of a project on carbon. So, we start to see natural gas as our number one competitor for new installations.

And, of course, the low price of gas doesn't come without complication. The extraction techniques are not without their inherent risks. So, I think going forward you still see wind being a major contributor to the new outputs.

With that said, we went into 2009 with a lot of new capacity online and that was a huge issue for us, and we've worked that down by reducing our cost structure. So we feel we're in a very good position to compete effectively in the marketplace, even with the price pressure.

Okay. You mentioned some new contracts or initial contracts with Asian OEMs. Could you talk a little bit more --? Do you really think that they are entering the market -- the US wind turbine markets aggressively? How do you, well, hope to grow these relationships?

Well, the tower contract was with a Korean turbine OEM. And the nice thing is it's their first entry into the US market, so their tower relationship then becomes a Broadwind relationship as that grows. We continue to work -- we're not quite sure if the Texas project that was announced is real or not at this point, but we continue to work to try and take those towers. And then we are working to export into China through one of our relationships and so far that's going quite well.

And my last question will be about cash grants. Are you hearing any updates on the expiration of cash ITCs, and does it have any impact on wind projects? Are you seeing any pickup in activities as an attempt to capture those cash grants before the year end?

We've been able to capture a couple small ones. One you saw for the gearbox refurbishment. We also have one in the gearing sector. But through our work with AWEA, since we participate, we fully expect the investment tax credit to be extended into next year.

But as a cash ITC or ITC? A cash ITC, I guess.

Our expectation is the cash ITC will go forward and be extended, but as we've seen with the government, it's always difficult to predict.

Okay. Thank you.

(Operator Instructions)

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

Hi, and thanks for taking my question. About six months ago, you talked about US installation run rate of about 13.5 gigs as sort of full utilization for you guys -- close to 500 million a year. Given the competitive dynamics in terms of your market share evolution and so forth, do you still think that's a reasonable target?

I think that based on what we see today, an 8 gigawatt year would be a very good outcome for Broadwind. We would get very good utilization in anything about the 8 gigawatts now.

And what's changed in the last six months to -- kind of to evolve your view on that?

Well, the period that we've just gone through, we have seen some competitors try to enter the market, but we've also seen a lot of people that we thought would enter back off because of the uncertainty.

So we believe in towers -- we're very well positioned. We are gaining some ground in the gearing with the kind of hiatus in being able to penetrate some other gearbox manufacturers. So, we feel pretty good about our position in even a [lessened] marketplace.

Makes sense. I appreciate that. And then on -- in terms of your CapEx -- probably a question for Stephanie, it's about $4 million in the first half of the year. How should we think about that heading towards 2011?

It'll finish this year at probably $8 million to $10 million and then next year I would expect it to be very modest, low single digits, unless we move forward with Brandon. If we were to open the Brandon plant, we'd have a few million dollars there. But at the end of the day, Pavel, we have lots of new equipment that's underutilized, so we don't have a lot of capital requirement.

About $7 million of that $10 million goes into the Abilene facility and the gearbox refurbishment center.

That's this year.

This year.

Okay, great. And then just last quick one for me, on the Gearbox Refurbishment business, how have orders been trending in that segment?

There's a little bit of a wait and see attitude toward the new test stand -- customers want to see it operating. So while we continue to do kilowatt and 1 megawatt and 1.5 megawatts out of our Howard facility, people want to actually feel and touch the thing, so we have had some visits.

We've also hired a gentleman named Mark Simon. He comes out of the wind business, very good operational leader that will run that. And I think we'll see some momentum once he starts at the end of this month.

Great. Thanks, guys.

There are no further questions at this time.

Okay, thanks, everybody, for joining us. Have a good day.