Broadwind Inc (BWEN) 2011 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 Broadwind Energy, Inc. first quarter 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. Mr. Segvich, you may begin your conference.

Thank you. Good morning, and welcome to Broadwind Energy's first quarter 2011 earnings conference call. With me today are Broadwind's President and CEO, Peter Duprey, and Broadwind's Executive Vice President and CFO, Stephanie Kushner. Second slide, please.

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, our Form 10-Q, which will be filed later today, and the attached news release. We assume no obligation to update any forward-looking statements or information. Next slide, please. Having said that, I will turn the call over to our President and CEO, Pete Duprey.

Thanks, John. Good morning, everyone. I think, clearly, we had a good quarter compared to last year. Our revenue doubled over Q1 of last year. Out order intake for the quarter was $45 million, compared to $18 million for the same period last year, which shows that we're building an order base for the future. As you look at slide three, our order intake looks like it's been relatively flat, but, in a very difficult market, and a lot of the OEMs have been shifting from long-term frame agreements to short-term, almost orders by project. So I think even though the order line if relatively flat, I think it's a good sign.

Turning to our business segments, our [tower] revenue was up more than 200%. Our gear revenue was up 76%, and services was down about 10%. Our cash and marketable securities on hand was $22 million, which was $6.6 million higher than at year end, and our lines of credit remain undrawn. So I think this provides us a reasonable liquidity position for the business. So, in summary, our revenue was up, our orders were up, and our EBITDA was up, which is very similar to the fourth quarter of 2010.

For the remainder of my comments, I'd like to outline some of our key initiatives for 2011 and how we're doing against them. Please go to the next slide We have four key commercial initiatives for 2011 -- to diversify our customer base, improve our profitability, have a better mix of revenue between our wind and industrial customers to ensure we're not too dependent on one market, and to orient the business to be more customer centric.

Please start with our customer base. Today, five customers make up 89% of our revenue stream. As a long-term risk management strategy, we need to diversify our customer concentrations. We'd like to keep these customers and develop new ones to reduce the concentration. To this end, we've added three new additional sales people in our gearing business to focus on, primarily, the industrial sector.

In our tower business, winning the Goldwind tower order helps us diversify our customer mix. We're also quoting towers with other OEMs that we traditionally haven't done business with. We also continue to work with some of the new OEMs in the North American market to build relationships in the hopes of growing with them. On the services side, we've added two additional sales people in Q1. Their focus is to sell our drive train services and to win additional work on the OEM side.

Now, looking at profitability. On the profitability side, I think the quarter reflects a good effort to bring the business to profitability. In our gearing business, we continue to drive productivity to reduce labor hours. Over the last year, our gearing team has lowered the scrap rate from 7% a year ago to less than 2%. This resulted in a savings of $320,000 in Q1 compared to the prior year.

In our tower business, we continue to drive down labor hours per section. We continued to work with our customers to look at the tower design, with respect to the internals, to help lower cost and installation time. And in Q1, this year, we consolidated some of our accounting activities, and we're beginning to look at ways to optimize our system infrastructure across the business.

With respect to our revenue mix between wind and industrial, we're always going to be servicing the wind market. As I mentioned on our last call in Q4, we want to increase our industrial revenue in gears and specialty weldments. Our gearing business in Q1 2011 -- our industry revenue doubled from $3.5 million, Q1 2010, to $7 million in Q1 2011. So we're making good progress on diversifying our revenue mix in gears.

We also want to shift some of the revenue from a onetime new turbine installation to begin to focus on large installation base of wind turbines in North America, focusing on O&M revenue and non-routine maintenance services, which will provide a more consistent and predictable revenue stream.

The specialty weldment business has been winning smaller contracts in the $200,000 to $400,000 range that will start to feed future businesses -- future business in the mining and medical markets. Our belief is that some of these relationships could grow into multimillion dollar accounts in the future. Now, these relationships aren't going to happen overnight, but we're clearly going in the right path.

And finally, on customer intimacy, we're very focused on ensuring that we know what our customers expect and delivering to those expectations, adding more sales people as a start. We are focused on ensuring that we are capturing what is critical to the customer and measuring our processes against it. We are not perfect, but we are starting the journey to try to get closer to their expectations.

So, I believe that we're making good progress in a challenging market. We're very focused on growing the business in a profitable way. I continue to be pleased with the positive feedback I get from our customers on our quality and responsiveness. I will now turn the discussion over to Stephanie Kushner, who will discuss the financials in more detail.

Thanks, Pete, and good morning. I'll start with comments about the consolidated results. Next slide, please. Revenue, at $43.5 million, was double last year and consistent with our guidance. EBITDA of $100,000 was well up from last year's first quarter $7.2 million EBIDTA loss.

Q1 is our traditionally weakest quarter for services, so earnings will improve in Q2, sequentially, as that revenue rises. Our loss per share from continuing operations was $0.04. Including the discontinued operations raises that to a $0.05 net loss. In the prior year quarter, the net loss from continuing operations was $0.11, plus a further $0.03 loss from the now divested logistics segment.

Moving to segments and on the next slide, we produced towers supported -- supporting 193 megawatts with new wind energy in the quarter, including significant shipments to both Gamesa and Vestas, two longstanding customers. We generated $3.6 million of EBITDA from this segment, a real contrast with the situation a year ago.

As we said last quarter, our objectives for this business include achieving more consistent capacity utilization, further broadening our customer base, and improving our profit margins. With over $100 million in orders on the books or already shipped for 2011, towers will have a strong year with high utilization in our Manitowoc plant.

Having said that, orders for our Abilene plant have remained weak. We've scaled back our labor force at this plant and are still aggressively trying to fill gaps in our schedule there for later in this year. We see that the Texas wind market will be challenging for new turbine installation demand until the transmission infrastructure catches up, probably, within 18 to 24 months. Therefore, we are now planning to use this plant for manufacturing a blend of wind towers and specialty weldments for other heavy industries, at least in the medium term.

On the next slide, gearing also had an improved quarter, generating $100,000 of positive EBITDA on $13.6 million of revenue. We shipped 157 megawatts of wind gearing in the quarter, down from the prior year, but, as Pete noted, our industrial sales were nearly double a year ago, in line with the sales focus shift Pete described.

A year ago, Brad Foote's revenue run rate was about half this year's level, and the EBITDA loss totaled $2.6 million for the prior year first quarter. Our Q1 2011 financial results were adversely impacted by a $500,000 standard cost inventory adjustment. With improvements in their cost structure, we are capitalizing less overhead. This charge will not recur during the rest of the year.

Looking forward, we are projecting quarterly gearing sales in the $12 million to $14 million range and some strengthening results. Our wind customer shipments are likely to decline, however, as one of our large customers is apparently increasing the share of gearing purchased from Asia.

Our focus for this segment remains restoring our industrial business, improving our capacity utilization, leveraging our drive train service business, where Brad Foote will be the replacement gear manufacturer, all, of course, with the goal of improving margins and becoming profitable. Next slide.

In services, where the first quarter is cyclically the weakest, we reported revenue of $1.8 million, down 10% from the prior year quarter. Our precision repair and engineering and blade services product lines were a little stronger than last year. However, we are only now starting to book meaningful revenue from the drive train service center, which was launched during the first quarter, and our technical services revenue was down, due to lower construction support demand from one key customer. On a positive note, despite the weak revenue, our cost control focus resulted in smaller EBITDA and operating income losses.

Looking forward, in addition to gaining traction with the drive train service center, as Pete said, we are working on building our portfolio of turbines under O&M contract, in order to generate a more stable baseline revenue stream. Improving margins remains an important focus as well.

For the Company overall, we are forecasting modest year over year improvements in all four quarters. In the second quarter, we expect revenue to be up about 30% from 2010, with increases in all operating segments and positive EBITDA, which will increase sequentially from this quarter.

The next slide summarizes our operating working capital position, which actually turned negative at the end of the quarter, due to the benefit of receiving some significant customer deposits. Versus year end's 2010, customer deposits were up nearly $12 million. This low working capital situation was anomalous. In general, we would expect a normal run rate of operational working capital to be in the range of 8% to 10% of sales.

And turning to the final slide, we continue to make progress with debt reduction and increasing liquidity. At quarter end, our net debt was again negative. Cash balances exceeded debt and capital leases outstanding by nearly $9 million, and we have not yet tapped our $10 million credit line.

Looking forward, we expect our cash and marketable securities balances to be in the $10 million to $15 million range. In addition to the normal volatility related to customer deposits, our working capital needs are expected to grow, as we successfully change our sales mix within our gearing business, where the growth in our industrial customer base adds both receivables and inventories.

And in our services business, we are adding inventory of spare gear boxes to support growth of our drive train remanufacturing business. We believe our liquidity situation is adequate, although we will look for opportunities to add to our liquidity cushion to support growth and the shift in our business model. Thank you, and now, I will turn this over to Pete to moderate questions.

(Operator Instructions)

Our first question is from the line of Chris Blansett from JPMorgan.

Good morning, everyone. Just wanted to touch base on the industrial side and thought process on how we should expect this to evolve over the year. Maybe some commentary on how long it takes to bring new customers online and, in general, maybe the overall size of that industrial gearing market today versus, maybe, a few years ago when you exited it.

I would say the cycle time on getting a new customer can be anywhere from six months to, probably, 12 months. Have to go through a first article qualification and then -- so it will vary from customer to customer.

As far as the size of the market, we're going through a process right now of really digging into the market size of oil and gas, particularly, with the exploration of shale gas. I think that market is growing quite a bit, from data we had previously. And so, the main focus is oil and gas and mining. Those are the two markets we're seeing a lot of interest and a lot of demand coming from our previous industrial customers. So we're going through a process of winning those customers back. As I mentioned on -- earlier on the call, we're expanding our sales force, and we see good prospects. We can probably give you more market data in the -- on the next call.

Okay. And then --

Chris, I would add that back in '08, we were selling into this market at a quarterly rate in the $12 million, $12.5 million range, and today we're at about $7 million. So just that alone -- to get back to that level alone would be $20 million worth of incremental sales, and, as Pete said, we think the market has grown materially.

Okay. And then, I wanted to kind of ask about the gear box refurbishment or the drive train refurbishment facility. When should we start to see revenue come out of that facility, and what are your thoughts about potential revenue opportunity this year for it?

We've got about 15 boxes down there now, in various stages of being refurbed. As far as -- I think -- we're off to a good start. It takes a while to get the boxes in, make the gears, rebuild them, paint them. So it's hard to predict exactly what the revenue will be from that this year. We're out marketing that facility, and we're getting very positive feedback from both OEMs as well as owner operators. It's hard to put a number on what it will be for this year.

I guess, how do we think about -- it's -- if it is running at 100%, what kind of revenue -- annual run rate we would expect? And then, the second thing is what kind of level of interest have you received, now that the facility is open?

Well, if that facility is running at its capacity, it's probably $25 million to $30 million worth of revenue.

Okay.

And he's asked about what kind of interest we're seeing.

Yes. I mean, essentially a [remand] box will be anywhere from $30,000 to $40,000 cheaper than a new one. So, particularly, some of the owner operators are very interested in a remand box, and the fact that we're running it on a test stand for eight hours, I think, kind of burns that box in so that the buyer will feel more comfortable that it's kind of run through its paces.

Okay. I just didn't know if you have a lot of older turbine owners out there, kind of really looking for this type of service or if word of mouth hasn't quite spread across the industry. Just to kind of get a feel for -- now that you've got this facility open, and it's the only one that can do these multi megawatt boxes, thought process on demand versus -- anticipation versus what you maybe thought, initially, when the project was undertaken?

I think it's too early to tell, particularly on the wind side. I think one surprising thing is we're actually getting some oil and gas boxes in there, which, I don't think was originally in the plan at all. So, particularly, as we talk to oil and gas customers, and they find out we have that facility, they seem to be as interested as wind owner operators. So I think we still feel pretty confident that we can get the facility up to full capacity. I don't think it will be this year, but I think we still feel that it was a good investment, and if we can't fill it up with wind, I think we can fill it up between wind and oil and gas.

All right. Thank you. Appreciate it.

Okay.

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

Great. Thank you. Good morning, guys. First question, on the wind market side. So, how do you guys -- you guys have done a great job of, here, dealing with the five to six gigawatt kind of an annual wind market, but how do you really think about the growth of the wind market here in North America? What do we have to see for that growth to come back?

And two, can you talk about how you guys really think about going into the international market, whether it's Asia or further traction in the European market, as a way to further leverage that growth opportunity?

Okay. Relative to the market size, I think the market has been hit by two things, the -- both the financing market, where we've -- the wind market shifted from a PPA/merchant market to almost entirely PPA.

PAA

Natural gas prices are at a historic low, so, given the fact that wind will tend to compete with natural gas --

Yes.

I think we're -- in certain parts of the country, I think wind is struggling to compete with fossil fuels. So, I would say, as we look at, certainly, the first quarter, wind installations was a little over 1,100 megawatts.

Yes.

That was up about double last -- in first quarter of 2010.

Yes.

Which is encouraging, so I think we're still thinking the market is somewhere between 6,000 and 7,000 gigawatts -- or megawatts for the year. And then, for 2012, I think, with the expiration of PTC, there will be a push, so I wouldn't be surprised if it was at a comparable level in 2012.

With respect to international markets --

Yes.

We're really not focused on that right now. We're focused on the domestic market, getting our tower and gear and services business --

Okay.

Growing, focused on profitability. I think once we achieve those goals, that we can look to international markets, but right now, we're very focused on delivering on the domestic market.

Okay. Okay. That's great. One quick follow-up for me. So, when we think about your gearing business, outside of the wind market, clearly the -- so, what is the competitive landscape like? Who is serving those markets right now? When you guys strategically decided to put less focus back in '08 and going back in again, especially with the shale gas opportunity and the mining opportunity that lies ahead of us, who has been serving this market, and how -- I don't know if easy is the right term, but how -- so, when you go about gaining those customers, how do you see that dynamics unfolding?

If you look at the competitive landscape in the gearings side, some of the gears are made internally, so -- like Caterpillar will make some of their gears internally, and then, the market is relatively, I would say, fragmented.

Yes.

So smaller players, who might be selling $100 million worth of gearing a year --

Yes.

It's -- and then, it 's -- I would say you'll have a regional focus, so you'll have US players, you'll have European players. So I think, with -- what we're seeing, though, is on the mining and oil and gas side, there seems to be a need for additional gearing supply.

Yes.

And so, we're going back to some of the customers we had in the 2007 timeframe, and we've upgraded a lot of our equipment. We've upgraded a lot of our processes, and we're starting to win those customers back. And I think we're actually making good progress in that line, and I think by adding a few sales people, touching the customers more, we'll be able to win some of that back more quickly.

Okay. That's great. Thank you, guys.

Sure.

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

Thanks very much. First, just on utilization. You mentioned that it's currently significantly higher in Wisconsin, as opposed to Abilene, and just curious, what accounts for that?

It's really transmission in Texas. So, the Texas market really went through a boom over the last four years, and really, I would say that wind installations outstripped the capacity for transmission to be able to move that power out of West Texas. So, the development in West Texas has kind of ground to a halt, and so, the Abilene facility is -- it's -- the tower business is all based on transportation in the towers. So you're not going to be shipping these towers a thousand miles. So, since West Texas is kind of dried up, we're finding a challenge to keep the Abilene facility full.

Now, on the flip side, the Midwest -- we're seeing quite a bit of demand in Iowa, Minnesota, Illinois. So we can be very competitive on a delivered tower basis coming out of Manitowoc, and I think that's what is driving this regional phenomenon in the tower business.

Okay. And then, turning to gross margin, it was down, I guess, by, roughly, 600 basis points, sequentially, even though revenue was only down pretty modestly. And I guess, [the] -- what needs to happen, other than improving utilization, to get that up into the, let's say, mid to high teens -- kind of your long-term target?

First, sequentially, part of the issue is the services business. That is -- does have a higher gross margin profile. So, Q1 is weak. As we build that, that's going to be a significant contributor to margins. Other than that, mix certainly is a phenomenon, and utilization -- I mean, the big issue for us continues to be to get a higher capacity utilization, particularly in our gearing business.

Okay. And what is the long-term, kind of -- at full utilization, theoretically, what is the state margin structure that you're striving for, and how has it, perhaps, evolved over the last 12 to 18 months?

Maybe it's easiest to talk about gearing, specifically. So, gearing, in '06, '07, had margins in the 28% to 30% gross margin range. Since then, we've put a lot of capital in, which has some depreciation profile -- significant depreciation. But still, that business, even with the higher depreciation, should be north of 20%.

The services business -- again, we're shifting that business model fairly significantly to get into some of the higher value added activities. So that, too, should contribute to an improving margin for them as well.

Okay. It's helpful. Thanks, guys.

(Operator Instructions)

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

Thank you very much. Two questions. First, on the gearing segment. You mentioned that one of your largest customers is starting to procure more and more gearing from Asia. Could you actually explain what is the driver here? Just the simply pricing? Because if I recall correctly, a while back, you guys mentioned that, given the type of steel and the precision of manufacturing, Asian manufacturers were not a big competitive threat to your gearing business.

The customer that we're talking about is GE, and what we're seeing is a reduction in the share of gear boxes that they manufacture in the US, and that's what drives the demand for our gearing. We know they also procure overseas, so, looking at their totals, we can see that those -- that overseas purchase is higher. I think the quality of gearing steel is improving in Asia. I think it's still -- there are still opportunities to produce gears in the US to ship into Asia, so I don't think -- I wouldn't say that it's ample, but I think it's probably improving.

Okay. Okay. And now, for the services side of your business, I understand that the first quarter was weak, and that's just the seasonal weakness, but could you talk some more about competition you're facing? We're hearing that OEMs are extending their warranties or adding pretty lengthy maintenance packages to purchases of new wind turbines. How does it -- how will it impact your business going forward?

We still are very confident about the -- on that market. Yes, I think you're right, that some of the OEMs are offering long-term warranties, but there's still an awful lot of equipment that -- of older equipment that is coming off of warranty. And some of the feedback that we get from customers is that they haven't been too pleased with some of the performance of the OEMs.

I think, in part, maybe, during the boom, some of the OEMs simply didn't want the ongoing maintenance revenue stream, and I think, in some respects, at least some OEMs have alienated the owner -- some of the owner operators. So, I think, being an independent can be a competitive advantage. Certainly, we're not going to get all of the market, but I think -- of the market that is out there, I think there's enough for us to grow significantly over the next three to five years.

[Did] you consider maybe teaming up with the -- some of the Asian OEMs that seem to be lacking on the -- on those warranty packages or those O&M or service packages, when they tried to market their turbines in the US? It seems like that's one of the weaknesses of their offerings, that they're not offering pretty strong maintenance or warranty packages.

I think that is part of our strategy. On the tower side, we tend to focus on some of the smaller, new entrants into the North American market, just because that's how we grew the business over time. So, to the extent we have some of these new Asian, as well as European, players, from the tower side, we can then go into them and say we can also offer you O&M services and monitoring services until they maybe will build up enough scale where they might want to in source that themselves. So I -- that is part of our growth strategy in our services business.

Okay. Thank you.

There are no further questions at this time.

Okay. Just in some closing remarks, the wind industry is still navigating through a difficult period. We are leveraging our experience in the wind business to grow some of our industrial side. We do want a better balance there, as we continue to say. I'm still very optimistic about our services business. We have some very talented people. I think we have the right building blocks between services in the field and our gearing business. No one else has that in the marketplace.

Financially, I think we're on our way to rebuilding the financials of the business. We're getting stronger financially, and I believe that our future is bright. So I'd like to thank everyone for your interest in Broadwind and participating in this call. Thanks very much.

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