Broadwind Inc (BWEN) 2010 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 Energy, Inc. fourth year and year-end 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 conference over to Mr. John Segvich, Director of Investor Communications.

Thank you, Angelia. Good morning, and welcome to Broadwind Energy's fourth quarter and full-year 2010 earnings conference call. With me today are Broadwind's President and CEO, Peter Duprey, and Stephanie Kushner, our Executive Vice President and CFO.

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 8K, filed with the SEC today and via cached news release. We assume no obligation to update any forward-looking statements or information. Having said that, I will turn the call over to our President and CEO, Pete Duprey.

Thanks, John. Good morning, everyone. Let me start by outlining what I'd like to cover today. We'll start with the highlights of Q4, and we'll move into sort of the general trends that we're seeing in the wind market, as well as the regulatory environment. I'd like to talk a little bit about the Company's strategy and our strengths, what's going well, what are some of the challenges we're facing -- sort of my observations after three months on the job. Then I'll turn the meeting over to Stephanie Kushner, who will talk about our strong results in Q4 and full year results for 2010. And then we'll open the meeting for questions.

So in starting, the wind energy market continues to be a challenging market, particularly as a result of low natural gas prices and a weak but recovering economy. With that said, our operating results in the fourth quarter were strong and in line with guidance that we provided on the last conference call, excluding impairment charges.

Our Q4 revenue was up 50% over the same period in the prior year. Order intake for Q4 was $64 million, which was an 8% increase over Q3 and triple Q4 in 2009. EBITDA generated in Q4 was $3.7 million, which represented a $6.8 million increase over the same period in 2009. So in a downwind market, where roughly half the megawatts were installed, we were able to almost double our market share in both Towers and Gears.

Our cash on hand was $15 million, and undrawn lines of credit were $10 million at the end of the year, which provides the Company with a reasonable level of liquidity. We also had a non-cash write-down of assets of $36 million for our [IO] tower facility in Brandon, South Dakota, and some intangibles in our Service business. In summary, Q4 revenue was up, orders were up, and liquidity is up.

So as we look at Q1 2011, we continue to see significant improvement over Q1 2010. I'm very excited about the trends I'm seeing in all of our businesses. In our Gear business, we're seeing strong demand on the industrial side, which is really the mining and oil and gas segments. In our Tower business, our focus on multi-megawatt and taller towers is really starting to pay off. It's still a very competitive market, but we're winning deals. In Services I'm very impressed with the breadth of capabilities in this area of the business, and I'm spending considerable time on Services.

In Q1, our revenue will be in the range of $40 million, which is an increase of $84 million -- or 84% compared to Q1 2010. I would expect order intake to be in the low $40 million range, which would be roughly a 160% increase over Q1 2010. On an EBITDA basis, we expect EBITDA to be slightly positive, which is a significant improvement over Q1 2010, where it was negative 7.2%. So things are looking up.

Moving into the discussion on the environment in which we operate, we'll take a look at the wind industry. According to AWEA's most recent statistics, there was about 5,600 megawatts in construction at the beginning of the year, which exceeds the total amount installed in 2010. The drivers of some of this activity are the expiration of the 1603 Treasury grant that will expire in 2011.

Looking forward, we see a significant driver being the state RPSs, as well as an increase in demand for electricity. We're seeing electricity demand coming back, and also we would expect that some coal plants would be retired. So between now and 2015, state RPS goals should generate about 25 gigawatts of new renewable demand, most of which, roughly 70%, would come from wind. So this means there should be a base of about 6 gigawatts of renewables just on state legislation in place. We still see a long-term need for an energy policy for the country to start to diversify our energy mix away from coal and gas.

So for Broadwind, this should generate a reasonable base-load of demand for gears and towers. And then, when we add in other industrial customers to the mix, we should have a strong platform for growth. And that really leads me to our next topic, which is our strategy. Going forward, we would like to see a rebalance in our revenue mix. It may take some time, but eventually I would like to see a balance between 50% wind and 50% industrial customers company-wide. Each business will transition at a different pace.

In our gear business, 59% of the revenue came from the wind industry in 2010, which is comparable with 2009. We are finding strong opportunities in oil and gas, mining and steel, and other industrial applications. We have realigned our sales organization and created a VP of Sales position that works with all of the sales staffs and identifies customer opportunities across the businesses. Wind is still important, but we need a better mix than we've had historically. Lessons learned in the wind gear business regarding tighter tolerances and more stringent quality standards can provide a competitive advantage in the industrial segment.

Our gear box remanufacturing center is a key differentiator, which links our strong gearing capability and our ability to mobilize a service team to quickly swap out an old gear box for a new one. Now as a former owner and operator of wind turbines, I see the strong value proposition in these services. We see remanufacturing gear boxes as a further way to drive down service costs and improve wind turbine up-time for owners of wind generation assets.

We also see strong interest in this capability both on the wind side and for gear boxes that are used in other industries like oil and gas and mining. Another initiative is to leverage our experience at performing non-routine maintenance for customers and apply this experience providing long-term O&M services. This will provide a more predictable revenue source going forward.

On the wind tower side, we continue to work with our long term customers, like Vestas and Gamesa, and are finding opportunities with some of the new market entrants on their tower needs and helping them design tower internals and designing solutions to reduce costs. The tower business is greatly driven by the manufacturing location, and our flexibility helps us win incremental business as the wind industry goes through a difficult period of low energy prices. Over the past year, we've increased our market share from 5.4% in 2009 to 10.8% in 2010. The business is very regionally oriented due to the cost of shipping these components. Our Wisconsin factory is well-loaded, and our Abilene facility is challenged due to lower installations in the Southwest.

One business that doesn't get a lot of discussion is our small specialized welding business, where we're seeing some unique opportunities in mining and medical. We are now calling this Broadwind Heavy Industries. It's part of our tower business, and this will allow towers to diversify into industrial-oriented customers. We are finding this core competency in specialized welding is in demand, and we are uniquely positioned with our quality and safety record.

So let me now turn on to what's going well. Well, as we talked about in our fourth quarter, I think the team did very well in achieving the results. Also, you may have seen recently our Badger Transport sale. As we looked at this business and we talked to customers, they really were not interested in a bundled product and transport solution. It's a highly competitive business, and the railroads were targeting the heavy-haul market. The business was consuming $6 million in cash in 2010, and at the end of the year we came to the conclusion that it wasn't core, and we could focus better on gearing, tower, and services.

Another win is, recently, we received an order from Goldwind for 70 towers for some of their Midwestern projects. I think Goldwind is very well positioned for the US market, and we would like to grow with them as they grow.

On the gearing side, as I mentioned, we're seeing significant customer demand mainly on the industrial side in mining and oil and gas. Our industrial gear business represented $50 million prior to the shift into wind energy in 2007. We are working hard to win this business back. Quality processes established in the wind gearing side are helping us win business on the industrial side. We are seeing some demand for our gears outside of the US, which is a very good data point.

And finally, on the positive things, it was great to have President Obama visit our tower facility in Manitowoc, Wisconsin. We were able to demonstrate some of the innovation and precision that goes into welding towers. For our employees, having the President visit the facility was almost as exciting as having the Packers win the Super Bowl.

Now let me turn to some of the challenges. Now moving on to some of the challenges side of the business. By now, everyone knows that a class action suit has been filed, with numerous litigation firms trying to pursue plaintiffs. Also we had four derivative suits filed on behalf of Broadwind Energy. We have reviewed these suits with outside counsel and believe they are without merit, and we will vigorously defend ourselves. It's somewhat surprising to me to see all the attention around these suits, but I guess that's the process we have to go through with these firms for them to drum up plaintiffs. There are a lot of things I'd like to say about our judicial process, but counsel has advised me that it is best that I don't.

Turning to another challenge, in February of this year, the US EPA commenced an investigation of our Cicero gearing facility regarding potential violations of federal environmental laws. As part of that investigation, we have also received two grand jury document subpoenas. We intend to fully cooperate with government officials in connection with this investigation, and we are conducting our own investigation as well. We immediately engaged an environmental consulting firm, and they are currently evaluating our practices and working with us to establish any necessary processes and procedures to ensure we are fully compliant. I want to stress that we are especially committed to putting in place the appropriate programs to protect human health and the environment, and we take our responsibilities seriously.

And finally, I'd like to turn attention on the regulatory environment. You know, I think we were very fortunate to have the 1603 Treasury grant extended through the end of 2011. This is a hard stop that should generate a push to start projects in 2011, and should translate into orders in Q4. Certainly there's concern regarding the expiration of the PTC at the end of 2012, and trying to understand the specifics around the clean technologies initiative proposed by the President. We would hope that, with some of the instability in the Middle East and the continued demand for energy in China and India, this would be a call to action for a long-term energy policy for the nation.

Now I'd like to turn to my observations after being on the job for three months. I've been spending some time with customers, and what I've heard is very encouraging. Our precision gearing customers see us as a high-quality provider with a strong process capability. They like the fact that we have grinding, finishing, and heat-treat all in-house. In towers, customers feel we have a quality product and we are flexible to work with. The fact that we've been making a multi-megawatt tower since 2005 -- in fact, more than 800 -- I believe is a real strength of the company.

On the services side we have a very unique position with the remanufacturing of gear boxes and strong gear expertise. We are well-positioned to be a strong non-routine service provider around gear boxes, bearings, main shafts, and blades. We have recruited some very good talent, and I'm hopeful that we will be making further announcements in Q2 regarding services in the drive train business.

I hope my comments convey some of the very positive initiatives that are going on around the company, and they show my excitement for and belief in the future potential of the Company. I believe this is a very exciting time for Broadwind. Now I'd like to turn the meeting over to Stephanie Kushner, our CFO, who will talk about our results in more detail.

Thanks, Pete, and good morning. I'll cover orders and backlog, the background behind the impairments, and the segment financials. And I'll also provide some comments on our liquidity. To help you follow my comments better, I'll reference some slides that we've posted on our website. The slides have also been filed as part of an 8K.

Please refer to the first slide. We had strong orders in the quarter, totaling $64 million. This is our highest quarterly order rate since early 2009. Orders exceeded sales by 33% for a book-to-bill ratio of 1.33. We ended the year with backlog of $226 million, of which about $116 million will ship this year. As Pete mentioned, in the first quarter of the year, we will have booked an additional $40 million. So at this point, we have about $150 million of 2011 business in hand or already shipped. We're confident of an up year.

We took two non-cash impairments in the quarter -- one for our Brandon tower facility and one for our Services business. Regarding Brandon, the decision to make this investment was made in a very strong wind market when tower capacity was scarce and we were preparing to ink a significant purchase contract for tower production in the region. With the late-2008 financial collapse, that tower contract was not signed, but we had committed to the investment, and therefore went forward with an expectation of future improved tower demand in the region. We see today that in current market conditions, the industry does not need this additional capacity. Broadwind can deliver better margins and financial results with good capacity utilization in its existing operational plants. Therefore, we've taken a $13.3 million charge to write this asset down, and will consider other options for the facility.

We also impaired our investment in our services business, with charges totaling $22.9 million, mainly focused on our customer intangibles. This charge arose from our annual impairment testing and reflects the lower current run-rate of service revenues in a weaker wind market. A portion of the write-down also related to the EMS trade name we'd acquired. As part of our commercial reorganization, we're now going to the wind market as Broadwind Services in order to present a single face to our customers. We acknowledge that these are significant charges, but the accounting rules in a weak market with little operational history leave us little room for interpretation.

A couple of comments on our company-wide results. Revenue, at $47.6 million, was slightly below our $50 million guidance. But that shortfall was due to reclassifying Badger as a discontinued operation in the quarter. EBITDA of $3.7 million was at a record level for the company. Our EPS loss from continuing operations of $0.36 would have been a $0.01 loss, excluding the impairment charges.

Moving to segments and turning to slide two, we've produced towers supporting 554 megawatts of new wind developments during 2010. In a 5,100-megawatt year for the industry, our market share has moved into the double digits for the first time. Also, as you can see, half of that production fell in the fourth quarter, when our Manitowoc plant operated at record levels. And nearly all of our EBITDA was in the final quarter.

Looking forward, we are focused on achieving more consistent capacity utilization, further broadening our customer base, and improving our profit margins. With $99 million' worth of orders on the books or shipped already for 2011, Towers will have a strong year. Having said that, orders for our Abilene plant have been weak, and we are aggressively trying to fill gaps in our schedule there.

Gearing also had a stronger quarter, generating positive EBITDA on $13.9 million' worth of revenue, despite about $700,000 of unplanned environmental compliance expense. The management team at Brad Foote continues to make steady progress, improving production flow, lowering scrap rates, and reducing warrantee expenses, and their efforts are starting to flow through the income statement. We expect 2011 to show significant additional progress.

Looking forward, as Pete indicated, we are expanding our sales effort to grow, particularly in oil and gas and mining markets. But we're not abandoning wind. As you can see from our megawatt data, our market share rose from less than 10% in 2009 to about 17% in 2010. For 2011, we have $47 million' worth of orders either on our books or shipped, which gives us confidence for an improving year.

On to the next slide. In Services, Q4 was weak relative to the prior year, with revenue of $3.5 million and negative EBITDA of $400,000. In the quarter, this business carried $300,000 of cash expense associated with the new drive-train service center, which only went into service earlier this year. Additionally, leg repair activity has been weaker than anticipated.

Looking forward, we expect the top line to improve as our drive-train repair investment gains traction. However, we have recently reduced our overhead expenses in this business to help us get to a cash-positive position more quickly. Looking forward, in addition to gaining traction with the drive-train service center, we're working on building our O&M portfolio to generate a more stable baseline revenue stream. On a positive note, during the fourth quarter, we received a $900,000 development grant in support of our drive-train service center investment.

The next slide summarizes our operating working capital position at year-end. We continue to have success managing our working capital tightly via good collection practices. Our DSO, net of customer advances, stood at 24 days at year end. Our inventory balance is up from prior year end because of our higher activity level. We're shipping twice as much in Q1 of 2011 as we did in the first quarter of 2010, and our payables balance has risen, both because of our higher activity level and because many of our larger suppliers have moved us to 60-day payment terms due to our improved financial position.

So our operational working capital as a percent of sales was very competitive at just over 4% at year-end. We expect this figure to vary significantly from quarter to quarter during 2011, but would not expect to see it exceed 8% to 10% for the foreseeable future.

Turning to the eighth slide, we're continuing to make progress with liquidity. At year end, with the discontinuation of Badger, our net debt was negative. Cash balances exceeded debt and capital leases outstanding. And we have not yet tapped our $10 million credit line.

Pete and I agree that, until our margins improve and we can deliver consistent and sustainable positive EBITDA, and, more importantly, positive earnings, a very conservative debt position is appropriate for Broadwind.

Our final slide shows the progress we've made with revenue and EBITDA. As you can see, both revenue and EBITDA troughed during the first quarter of 2010, and have been improving since that time. Looking forward, we are projecting positive quarterly revenue and earnings comparisons through at least the first three quarters. And as Pete said, we are forecasting nearly double the prior year revenue in the first quarter, and small positive EBITDA. Cash balances should remain in the $15 million range at quarter end, depending on the timing of customer receipts.

One final comment before closing. Grant Thornton has completed the review of our internal controls, and I'm happy to report that we will file our 10K tomorrow, in full compliance with SOX 404. Thank you. And now I'll turn it over to Pete to moderate questions.

(Operator Instructions)

Our first question is from the line of Bryan Lee with JPMorgan.

Hi, guys. Thanks for taking the question. I had two on gearing to start off, I guess. First off, how much of the gearing business today, I guess in Q4, was non-wind-related? And you mentioned a $50 million revenue base historically. Do you think it's reasonable to get back to those levels? And if so, what's a realistic timeframe to expect that?

The mix on wind to non-wind is about 60 -- roughly 60-40 at the end of the year. So 60% wind and 40% industrial.

And then the second question is, realistically, how long do we expect it to take to get back to that $48 million-type run-rate for non-wind? And I think our view is that we would actually expect to go beyond that within probably the next year or two.

Yes, I think what we're seeing in the industrial side is, if you look at oil and gas and mining, those industries are going through a bit of a boom. So I think from our high point in 2007, those markets are actually up. So we're seeing a lot of activity. And I think with the dollar where it is, we will have an opportunity to have some exports. So it's hard to say how big that market is, but we're very optimistic about it.

Okay. And maybe as a follow-up, I know the markets there are -- you know, the customer base is a lot more fragmented. But did you have any, I guess, sizeable new customers in the quarter from the non-wind segment?

I would say that, on the gearing side, it's a fairly diverse group of customers and we're getting small to medium-size wind each month. You know, there is a bit of winning these customers back, and there's also a qualification. So to get back in, we have to get requalified in some cases. And that takes a bit of time.

Okay. Last one from me. Then I'll jump back in the queue. On the Goldwind business, do you know if there are other US projects in the pipeline for 2011 for those guys, and are you involved in the bidding for those projects?

We really don't have visibility into their pipeline. But I would say that I think Goldwind is very well-positioned for the US market. I think they've done quite well in China -- fairly low cost-base, and a direct-drive machine. So we really believe they are going to grow well in the US and be successful, and as I said in my remarks, we'd like to grow along with them.

Okay. Thanks, guys.

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

Great. Good morning, guys. But first of all, good quarter. A couple of quick questions here. First off, maybe it's for you, Peter. So how do we think about sort of growth of your service business? Because, obviously, this has been a focus and, you know, I think it will take time to really see the benefits of sort of the focus within the segment. But can you talk about that a little bit, as to how do we sort of think about the growth trajectory for that segment of your business?

Well, you know, I'm very optimistic about the service business. Partly because I used to be an owner/operator. I think we've got the right building blocks. So the drive-train service center -- you know, gear box is the number one item to be replaced in a wind turbine, and now that we have this drive-train service center, I think that is a core building block. And then I think the other core building block is our blade services. When we brought that group over -- and, I must say, it's probably been a little disappointing for us -- with that being said, I think as owner/operators start to realize the cost associated with ongoing maintenance of blades and start implementing ongoing [railer] maintenance programs on blades, that that will pick up.

So it's hard to say -- you know, it was a down year in 2010. We think we're going to see very good growth in 2011. But it's hard to predict exactly when the drive-train center is going to kick in. Working with -- we use the dedication as a way to start selling those services. We're getting a lot of positive feedback. We've got seven gear boxes down there now in various stages of being remanned, and I think we'll be able to give you probably a lot better visibility on the next call at the end of Q1.

Got it. Okay. And one quick follow-up for me. So you guys have done a very good job of sort of right-lining the business (inaudible) cost, and it seems like you're getting pretty good traction here on the gearing side with your industrial customers as well. And so how do we now -- and that's a high-margin business for you. So how do we think about sort of the over all levels of profit for the company as we sort of think about flattish-type for the US market and a potential uptick, I guess, in '12 and '13? So can you talk about that a little bit?

Well, on the gearing market, I would say we had one fairly large what I would call anchor tenant. And as we pump more volume through, we're getting good margins on that additional volume. I think as we look at some of the industrial space, the margins are actually pretty good. So I would expect that the growth margin in that business will continue to climb over the next few quarters.

Okay. Great. Thank you.

(Operator Instructions)

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

Thank you very much. I actually wanted to continue the discussion on margins. First of all, if you could provide a bit of a breakdown of your backlog, that's one. And secondly, any guidance about the margins for your different types of businesses for 2011, and how you see the impact of low natural gas prices and conventional (inaudible) prices on your margins in the wind business going forward.

Angie, I'll start that one. In terms of our backlog, it's probably a comparable margin to the business we've been reporting, but it's more -- we have a much stronger -- we're starting the year with a much stronger position. So we'll have much better capacity utilization. So that would enable us to report better growth margins on sort of a similar mix of business. Because, for us, so much of it is about efficient capacity utilization and spreading our fixed costs. I'll let Pete --

The margin's similar to the ones that we saw in the fourth quarter?

Yes, we tend to look at our -- the margins on our business excluding our fixed costs, all right? So we looked at our variable margins. So our backlog is kind of a comparable variable margin business, but it's going to allow us to produce more efficiently.

And then, with respect to low natural gas prices, you know, I would say that's a challenge for the entire industry. With gas being down, PPAs are down. So then, to make the projects work, we've either got to drive costs out or developers will have to move to higher cost electric markets like California and the Northeast. And, frankly, I think we're seeing both. So we do work closely with the OEMs on trying to drive costs out of gears as well as towers. You know, we -- for example, we'll help them design the internals to the tower to wring out some costs. So the whole industry, I think, is going through what I would call a cost-out process. We're helping them in that and there's certainly pressure on pricing. There's no doubt about it.

Yes, and if you were to just give us an indication, how much better are margins for the non-wind industrial gearing versus the wind gearing? Are we talking about twice as high margins? Or the difference is smaller.

Of course, every customer is different. But, in general, they are materially higher at the gross profit level. But then there's a little bit more SG&A and engineering that has to be done, because you don't get necessarily the same long run of a homogeneous gear.

Okay. We appreciate it.

Thanks, Angie.

Any other questions?

There are no further questions at this time.

All right. I'd like to thank everyone for joining the call. I think certainly we're on the right track. There are a lot of positive things going on in our gear, tower, and industrial products and services business. We're going to continue to diversify, but wind is going to be part of the core of the company.

Again, thanks for joining the call, and we look forward to giving you another update in the next quarter. Thanks very much.

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