Broadwind Inc (BWEN) 2010 Q3 法說會逐字稿

Good morning. My name is LaTonya, and I will be your conference operator today. At this time, I would like to welcome everyone to the Q3 2010 Broadwind Energy Conference Call. All lines have been place on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

(Operator Instructions)

I will now end the floor to John Segvich, Director of Investor Communications. Thank you. Mr. Segvich, please, go ahead.

Thank you, and good morning. Welcome to Broadwind Energy's Third Quarter 2010 Earnings Conference Call. With me today are Broadwind's CEO, Cam Drecoll, and Broadwind's CFO, Stephanie Kushner.

Before we begin today, 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; having said that, I will turn the call over to Cam.

Thank you, John, and good morning to everyone. I will begin by addressing the status of the wind market in the US. AWEA has released their third-quarter report on turbines commissioned during the period. These totaled a disappointing 395 megawatts, and represents a 75% drop from the prior year. And AWEA projects final 2010 numbers at approximately 5,000 megawatts, with a flurry of completions in the fourth quarter.

This total falls significantly below the 6,000 to 8,000 megawatts that was widely expected in 2010. I would like to note that AWEA reports that there are over 6,200 megawatt turbines under construction at present. This is the largest number since 2008.

We, and all of our turbine customers and competitors, are feeling the impact of the weaker wind market. Low natural-gas prices, an unusual drop in electrical consumption during 2009, combines with the stalled US Renewable Energy Policy -- and that has resulted in the reduced demand for wind projects.

A positive note is that electrical consumption has, again, begun to decline, and is expected to continue to grow next year. As you saw in our earnings release this morning, Broadwind has been able to continue the sequential growth in revenue that we have been discussing this year, and that growth will continue through the fourth quarter.

Our revenue of $38.2 million results in a decline of 36% as compared to 2009, but is up 4% from Q2. Our year-over-year comparison will turn positive in Q4, as our revenues approach $50 million, and we expect positive year-over-year comparisons will continue into 2011.

In September, we approved our liquidity with the closure of a secured borrowing facility. Stephanie will comment on that in a few minutes. This is an important step for the Company, as it provides us the option to take advantage of additional working capital as necessary. Additionally, with Q4 revenues improving, we expect to end the year with strong results and an improved cash position.

In the midst of these challenging industry headwinds, we continue to make sustained progress on our strategic and operational initiatives. As I have discussed on prior calls, these initiatives include increased capacity utilization, stringent cost controls, diversification, continuous improvement in our operation, and the repositioning of our service model.

I am pleased to report that our tower utilization has substantially improved. Our Wisconsin plant has reached full utilization, and we expect this level to continue well into 2011. Our Texas tower plant will also reach good utilization during Q4. We do, however, continue to hold the capacity of our South Dakota plants on the sideline, and will do so into the foreseeable future, due to excess capacity in the market.

Our gearing operation continues to operate at lower level, but it has begun to gain momentum with stable wind volumes. The recently announced acquisition of Clipper Windpower by United Technologies is a positive opportunity for our gearing operation. We have also seen recovery in industrial markets where we have also traditionally done business. This includes products produced for natural-gas fracing, oil and mining. These markets are currently quite active.

During Q3, we continued to make progress on reducing our costs, and you will note a further reduction of 11% in SG&A. This remains one of our top priorities going forward.

Next, on diversification -- this remains a challenge in a slow wind market, and we look to every opportunity to further this effort. We have made inroads with several OEMs and developers during the quarter, and will look forward to discussing these opportunities as firm orders are obtained. Our initiative on continuous improvement continues to bear fruit. And while they are not clearly evident on our current results, we believe they will provide long-term benefit to the Company.

Finally, the repositioning of our Precision Repair and Engineering services offerings remains an important area of strategic focus. Our Abilene, Texas based megawatt drivetrain service center remains on-time and on-budget. It will be fully operational this year. It will be an important asset going forward.

With the addition of key managers in the area of blade refurbishment, drivetrain remanufacture, and technical services, we have strong leadership in place in this segment to help realize the full potential of this investment. Once the drivetrain service center is operational, we will pass a significant milestone, and we can increase our focus on execution.

To summarize, although we remain bullish on the long-term future of the wind industry, we are coming to grips with the less-vibrant medium-term US wind market. We are seeing our market share increase and are diversifying our offerings. These changes will reduce our reliance on overall wind-market growth rates.

We continue to believe in our business model, and will adapt it to the new wind-market expectations. Several internal forces and external forces and policy initiatives could brighten the near-term outlook, but we remain focused on the issues that we can control.

With that, I will turn the call over to Stephanie, who will comment further on our Q3 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 Q3 financials by segment. I will conclude by addressing our cash-flow and liquidity position.

During the quarter, we added $27 million to our order book, about 71% of the value of our revenue shipped, resulting in a decline in our quarter-end backlog to $210 million. The significant shortfall was at Tower Tech, where orders tend to be very lumpy. During the fourth quarter, we expect to finalize additional tower orders, which should boost backlog for this segment significantly by year end.

As Cam stated, our consolidated Q3 revenue was $38.2 million, up sequentially about 4% from the second quarter. Our internal expectation had been for revenue in excess of $40 million, but we encountered difficulties at our tower plants in processing some very heavy-duty 100-meter towers, which slowed down production. This is just a matter of timing.

And on a consolidated basis, we expect to catch up and record revenue approaching $50 million in Q4, which will represent our third quarterly sequential performance improvement and our first favorable year-over-year quarterly comparison in 2010.

We continue to experience gross-margin compression, particularly in our Gearing and Logistics segment, due to low capacity utilization and competitive pricing pressures. We are focused on improving our operational performance and reducing our selling, general and administrative expenses in order to compensate in a difficult competitive environment. Our per-share loss of $0.08 represented a sequential improvement, but fell short of the $0.05 loss recorded in the third quarter of last year.

Now, I'll talk about the segments. Third-quarter tower revenues totaled $17.3 million, up slightly from $16.5 million in Q2. We sold 132 megawatts of towers, bringing year-to-date megawatt sales to 271. As I said last quarter, our 2010 deliveries are skewed to the second half of the year, and Q4 deliveries should exceed 200 megawatts, bringing us in line with the volumes we delivered last year in a much smaller overall US market.

Our Manitowoc, Wisconsin plant is operating at full capacity, three shifts, and our Abilene facility is running on 12-hour shifts currently. Because our shipments didn't quite reach the level we projected for the quarter, we did not turn profitable in this segment as we projected one quarter ago. However, our loss narrowed to less than $300,000, so we did make progress.

With the high capacity utilization in Q4 and a more consistent population of towers scheduled for production, the business should be solidly profitable in the final quarter of the year and enter 2011 strong.

Regarding gearing, Q3 revenues totaled $13.1 million, down about 8% from last quarter and third quarter of 2009. The reduction from Q2 is due, mainly, to lower off-take from one of our wind-gearing customers. During the quarter, the gearing leadership team continues to make progress with all their operational initiatives, including on-time delivery, reduced scraps, and improved labor productivity.

The operating loss was slightly worse than last quarter, due to some one-time charges, including higher warranty costs and expense to R&D design costs for a project that had been canceled. We expect to see favorable year-over-year comparisons next quarter, as we successfully rebuild our industrial order book and benefit from improved operations.

Our Tech and Precision-Repair segment reported Q3 revenue of $3.6 million, up from the prior quarter, due to increased precision-repair business. Despite an improved run rate for revenue, we reported an operating loss of $2.1 million, slightly worse than the prior quarter, if you remove the one-time goodwill impairment charge we took at that time.

As we build staffing for startup of our new Gearbox-Remanufacturing business, we are incurring some incremental expenses, of which about $250,000 per quarter are now impacting our operating income.

Versus last year, our revenue remains below the run rate we were enjoying at this time in 2009, reflecting a relatively weaker market for new turbine installations. We are still bidding on O&M contract opportunities, and booked our first new full-service contract win this month. However, this first success is a small win, and we expect this important revenue stream to build slowly.

Q4 revenue will remain in the $3 million to $4 million range, but we have taken some expense reductions, which should help narrow the loss. Third quarter revenue for logistics rose to $4.2 million, up from $3 million last quarter. We narrowed our operating loss to $1 million. With the low number of new turbine installations occurring this year, we are seeing increasing margin pressure in this business, and have taken further cost action to improve financial performance.

Corporate expense totaled $1.9 million, down $2 million from the prior-year quarter. The improvement reflects the absence of a $1.2 million charge incurred last year associated with the settlement of a customer dispute, and also lower stock-compensation expense. Cash expenses continue to be managed closely, and were down $238,000 from the prior-year third quarter, and $340,000 from the second quarter of this year.

Turning to cash and liquidity, our operational cash flow was modestly negative in the quarter -- less than $800,000, due to our reduction in working capital, which largely offset our $3.4 million EBITDA loss. At quarter end, our operational working capital, which includes trade receivables and inventories, net of payables and customer advances, totaled $14.8 million, about 10% of quarter annualized sales.

We continue to believe that 12% is about the right level of working capital for our business mix, although as turbine OEMs are experiencing lower customer advances in the more competitive environment, we, too, are seeing our customers pressing for longer payment terms.

We invested $1.5 million in capital in the quarter, mainly for our drivetrain remanufacturing center, which is progressing well. The project is on-schedule and within budget. We will be remanufacturing our first gearboxes in January of 2011.

At quarter end, outstanding debt totaled $13.7 million, or $17.3 million, including capital leases, at an average interest cost of 7.6%, and we had cash and short-term investments on hand of $10.3 million. We expect positive EBITDA in the final quarter of the year, and will end the year with cash balances in the range of $12 million to $15 million, excluding any advances against the $10 million Wells Fargo line. Having put the line in place, we are now centralizing our cash-management activities across the corporation.

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

Thank you.

(Operator Instructions)

And your first question comes from the line of Chris Blansett with JPMorgan.

Good morning. First question is related to seasonal trends you're seeing, and also the impact of the ITC cash grant. Obviously, it expires at the end of this year, but many of your customers have the ability to complete projects next year that were started this year -- and maybe how you think this translates into demand over the next few quarters. Do you think we'll see some above-seasonal impacts in the first half of next year?

Good morning, Chris. The market is seasonal. As you look at the AWEA numbers, the fourth quarter is always very strong with people trying to get their commissioning done. And then you go into the winter in the Northern, it's a little bit more difficult to do commissioning.

As far as the cash grant, we have seen some movement in Washington. We'll have to see what the changes in the House do to it, but there was a pretty good consensus that it would be renewed early next year. But right now, we have to just wait and see what the new Congress looks like.

And having said that, we do have, for example, some tower orders where there's a real focus on our customers to get the completions done by the end of this year, because their customers want to make sure that forms part of their investment, for purposes of the ITC.

Okay. And, then, a couple more -- you guys talked a little bit about refocusing on the industrial business. How do we view a re-engagement, as the number of months or quarters it takes once you win some business, to actually start ramping that? I guess, how should we look at the industrial markets for you, for next year, especially on the gear-cutting side?

On the gearing side, prior to getting involved in wind around 2004/2005, the base at Brad Foote was oil, natural-gas fracing, mining, and then steel mills. So we think it's very compatible and good to hedge on the wind with other energy markets. So we've got a large push to re-engage those customers. And we've already been quite successful with one major fracing-equipment customer.

So, we're looking at the gear plant to return more to 50% wind, 50% industrial base.

I guess, is there kind of a timeframe you're willing to put on that? Is it middle of next year, sooner rather than later?

We're having good successes this summer, into the fall. So, I would think that it may take a year to a year and a half to get a pure 50/50 mix.

Okay.

But there's good acceptance. It's much more difficult, obviously, on the tower side, since those assets are designed around wind towers.

Okay. And, then, last thing for me is -- the Canadian wind market seems to be doing pretty well. They obviously -- they have a different subsidy program. I wasn't sure if there was opportunity for Broadwind up there -- is Wisconsin close enough -- maybe any discussion on that?

There has been. The difficulty is the local content. And there's only one steel-plate mill that really supplies the wind towers, but we are working on it. We continue to work on it to see if we can get orders up there. On the gearing side, some of our gearing does migrate up to Canada, through our relationships with the OEMs.

All right, thank you. I appreciate it.

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

Thank you. Can you hear me?

Yes.

Yes, Angie.

Good morning, Angie.

Thank you. Maybe it's an unfair question, because I thought that the -- your towers and gears operations, as well as logistics, are, in fact, somewhat interlinked. And so, if you have a pickup in orders for your towers, your logistics business should be doing pretty well as well. And then, if there's demand for towers, clearly there's demand for wind turbines.

Why aren't we seeing a similar pickup in those businesses?

In the logistics? We have had some instances where our tower sale has been linked to logistics or transport. But it's a relatively recent initiative, and there just are not that many opportunities yet where we -- where our tower customer does not already have a logistics provider. So, it's definitely an initiative that we've been pursuing. In fact, we've got -- in the first quarter, we're going to have some nice logistics business because it's linked to a tower order. But, I'd say we're still some ways from having the two closely linked.

How about gears? I mean, should we simply assume that the wind turbines that are being installed right now are somewhere in stock, or simply that the two key OEMs that you guys go up right with are losing their market share, and that's why you're not seeing any orders coming from them?

I'm basically trying to figure out -- I understand that the wind market is slow. But if there's demand for power -- if there's demand for wind turbines as well -- and I'm just trying to figure it out this -- does it mean simply that other OEMs operating those wind turbines decides that they are in need of towers?

There's another aspect to the logistics that we're watching very carefully. Due to the low industrial output the last couple years, the rail industry has focused very heavily on wind components. So what we're seeing on logistics is, instead of hauling from the manufacturers' sites to the site of the wind farm, we're tending to haul -- very short hauls -- from rail depots to the site. So there's a structural change that we're watching very carefully in logistics.

I think it's fair to say we believe, based on the installs this year, that we're gaining share in both our towers and our gearing, but we're gaining them at different rates, I think -- to your point. So, we did 500 megawatts of towers in a 10-gigawatt market last year -- so, roughly 5%. We think we'll still be at about 500 this year, on a 5-gigawatt market. So we've kind of -- as we look back, we will have basically doubled that share.

If you look at our Gearing business, we were about 900 megawatts last year, in a 10-gigawatt market -- so, say 9%. This year, we're looking at probably being at about 800 on a 5-gigawatt market. So gaining, but not doubling the way we are in towers.

Good. One more question, now, about services -- I understand that there is pressure from OEMs who are trying to deploy their staff on the services side. How can you adapt to the situation now? Do you just wait for the wind market to pick up, or are you trying to extend some of your maintenance contracts? Are you feeling pressure from OEMs? We're hearing about longer warranties -- some of them as long as ten years. How does this impact your business model and your strategy?

As we've talked before, we did anticipate this change in the competition with the OEMs on the routine maintenance. And this is still the largest installed base in the world. The Chinese will probably take us over in the fourth quarter -- take over the market lead. So of the 37 gigawatts out there, about 30 gigawatts are on a warranty today.

So what we have done -- and we're just about complete with it -- is completely transitioning from being dependent on new installs, where we do compete with OEM labor, into major asset management. And that's why you saw the announcements this summer and fall, where we've added three top-line managers to break our service into the blades, the drivetrains, and the up-tower technicians, with very good experience levels.

Okay. Thank you very much.

Thanks, Angie.

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

Great, thank you. Good morning, guys. I guess challenging times appear in the near term. A couple of quick questions -- so you guys have seen some pretty good traction in your tower segment of the business -- improved visibility next year. So can you tell us a little bit more about your strategy there in terms of -- how do you go after bidding on some of those large bids out there, as well as talk a little bit about the overall competitive landscape and what are you seeing there?

Well, as we've discussed in the past, we entered the market somewhat later than the number-one and number-two players. We've concentrated on the larger turbines. And you continue to see the new turbine designs go larger and larger. For instance, we work on a 3-megawatt design for two different OEMs.

So as that changes, we have what we believe is a good competitive advantage from our long experience, based on heavier towers. And, in fact, the towers we talked about before, that kind of slowed down the tower plants for a couple months -- they were 100-meter, 3-megawatt towers with the thickest plate that's been used in the US market.

And if you look at the earnings report of the other two tower manufacturers, they're struggling to bring on these multi-megawatt towers.

Okay, that's great.

And one last question for you guys -- so I think, given the environment we're in -- so, I think -- Stephanie, I think you touched no it a little bit, as to sort of focus on cash, cost reduction, and things along those lines to create a bigger leverage as the end market returns -- so what are some of the areas where you guys could potentially take out the fixed cost here as we sort of look at the near-term market dynamics to sort of right-size the business, if you would, for the current market, while keeping some cushion to see a big leverage as things sort of revamp -- I'm sure which will happen, probably, in some point -- a year or two out?

There are a couple of things that we are working on right now. One is going to be some centralization of some of our back-office activities, just to reduce some of that overhead cost, another is our footprint.

We have a fairly large footprint for this revenue size. So we are looking at opportunities to reduce the number of office, reduce the number of square footage -- because it does drive some amount of our fixed cost. Some of our -- just our public-company costs are high as well; so all those areas are getting focused right now.

The other area -- I said we're holding the South Dakota capacity on the sidelines -- now there's overcapacity of towers in the US. And we see competition and what we believe is dumping from the Asian suppliers. So until we see some results -- you read that the steelworker union is challenging China on the dumping. And it comes, to a great extent, through wind towers. If there is success there, we'd probably go ahead and open South Dakota. If we don't see a change in the next few quarters, we'll probably rationalize that plant.

Okay. That's very helpful. Thanks a lot, guys.

Thanks, Sanjay.

Thank you.

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

Hi, guys. First, to follow up on the earlier question about Canada -- I wanted to get any color on opportunities in Europe. I know you opened an office in Germany. Any update on that?

Well, the European market, I'm sure, is pretty saturated. And you see customers such as Gamesa, where the Spanish market is down significantly -- they're really looking at the worldwide market and moving away from Europe. The hotspots in Europe are more Eastern Europe, Turkey, Romania. And there's such an oversupply of on-shore, I don't think it's a very viable market.

When you move to the offshore in Europe, that's a whole different market, and we're -- continue to do our homework in the offshore in the US, because there's a lot of opportunities -- the pilings, the transition platforms that we'd be good at. And then, of course, the conventional towers.

Your office in Hamburg -- is that potentially up for closing, as part of your rationalization?

No, it's worked out very well for us to stay at the edge of the technology and the communications with -- the European turbine manufacturers have improved dramatically since we opened. Our general manager over there is also in charge of Asia. So he makes trips into Asia. And although there's literally just a handful of Asian turbines in the US, I think we all feel, in the coming years, that will increase dramatically. So we want to have those relationships.

If you remember, Pavel, that office was never about selling into Europe. That office was about being close to the headquarters of all the big turbine OEMs, because so many of them are clustered right in that area.

Okay. That's useful. And, then, on CapEx -- so $5.5 million in the first nine months of the year -- how should we think about that in Q4 -- and, then, any sense of the budget for 2011?

We'll spend another $3 million to $4 million in Q4 completing the gearbox-remanufacturing investment -- to bring that on. And then we have -- we're still working on our budget for next year, but we don't have any big capital-spend items that are flagged for next year. It's going to be about increasing capacity utilization and putting that gearbox investment to work.

Okay. That's great. Thanks very much.

Thank you.

(Operator Instructions)

And we do have a follow-up question from Chris Blansett with JPMorgan.

I had two follow-ons here. One was tied to these 100-meter towers -- and, maybe, if you can give us some color on the mix of towers going forward -- are you seeing a lot more of these very large, very difficult towers in your outlook for the next six to 12 months?

We do. We see one of our OEMs going strictly to a 3-megawatt. Another OEM is working, probably, to start at 2012, into a 4.5-megawatt machine. So, the trend will continue. The average size of the towers we work on now is probably pushing 2.5 megawatts. And I think you'll see the US average in 2011 will be above 2 megawatts for the whole industry.

And generally speaking, when you think about the competitive environment, you do have some US-based tower competitors, plus you have some offshore. How does this move to larger towers impact both sides of that? Obviously, some may have to retool. But does this, in any way, provide any additional barriers to entry by offshore tower makers?

It does. When you go to the 3-megawatt or 4-megawatt, then it is very difficult to transport. So it helps our competitive situation as it grows.

Okay.

And then the last question I had was really just -- wanted to ask about cash -- thoughts on cash for next year. You may not be ready to give this out, but just initial viewpoint of need for additional cash sometime next year? Is that -- or -- and, then, maybe this ties back to your gear refurbishment, because you're spending some money on it, but do you see a pretty strong business trend for that, which will help kind of bring up your cash flow for next year?

As I said, we're kind of still in the relatively early stages on planning for next year. We don't have any specific plans that would say we will need cash next year. We think fourth quarter will be generating cash. And, then, unlike this year, where we used a lot of cash in the first quarter, we think we're going to start strong in the first quarter of the year. So, that should help us again build a little bit of a cash cushion.

The biggest wildcard is always the payment terms. I talked about us being down to 10% of sales in terms of our operational working capital. A lot of our customers are pretty steady at 20%, 25%. And, as you can imagine, they are pushing to stretch out some of their terms with us. So, that's the thing that we're watching very closely.

And one last question for me -- and this is tied to currency, foreign exchange. Obviously, the dollar is weak and, at this time, looks to remain weak. And you guys had talked earlier about potentially winning some gearing business from European gearbox makers. Any kind of update on that?

At this point, there's overcapacity on gearing also. So the exchange rate works to our favor. And it's at a point where if there was larger demand I believe that we would be exporting to Europe, but until some of the capacity gets soaked up, it's a little difficult.

Okay. Thank you. Appreciate it.

Thank you. And at this time, there are no further questions.

Cam, I return the floor to you for closing remarks.

Thank you. To close, I would like to emphasize that we still believe in the fundamentals of the US wind market. Wind power will continue to be a key component of added generation capacity, and Broadwind will play an important role in that.

We appreciate your interest in our company. Thank you, and have a good day.

Thank you for participating in today's Q3 2010 Broadwind Energy Conference Call. You may now disconnect.